RESTRICTED FILE COPY Report No. P-614 Public Disclosure Authorized

This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views.

INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

Public Disclosure Authorized ON A

PROPOSED CREDIT

TO THE

REPUBLIC OF

FOR A

SECOND PORT PROJECT Public Disclosure Authorized

June 13, 1968 INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A FROPOSED CREDIT TO THE REPUBLIC OF TUNISIA FOR A SECOND PORT PROJECT

1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to us$8.5 million to the Republic of Tunisia to assist in financing improvements to the ports under the control of the Office des Ports Nationaux Tunisiens (OPNT).

PART I - HISTORICAL

2. The proposed credit would be the second lending operation for port development in Tunisia. The first $7.0 million Bank loan 380 TUN was signed on June 5, 1964 but did not become effective until June 1965 because of the difficulties encountered in meeting the condition that an autonomous port authority be established. Thereafter, the project was carried out satisfactorily and work was completed by November 1967. The loan was fully disbursed by its revised Closing Date of March 31, 1968.

3. In August 1966 OPNT approached the Bank group requesting financing for a number of supplementary items to improve the efficiency and capability of the Port of La Goulette. The project consisting of such items was prepareC and appraised in the course of discussions between the Tunisian authorities and Bank missions which visited Tunisia in March and November 1967 and March 1968. As a result of these discussions some of the original items were dropped from the project and others were added, in particular a grain storage silo and associated handling equipment. The credit as finally negotiated includes more items and, at $8.5 million, is for a larger amount than originally contemplated.

4. Negotiations took place in Washington on June 5-11, 1968. The Government of Tunisia was represented by Messrs. Ammar, Minister at the Tunisian Embassy and Ladjimi, of the Public Works Ministry, and OPNT by Messrs. Goucha, Director General of OPNT and Aouij, legal adviser.

Bank, IDA and IFC Operations

5. The proposed credit, the fourth for Tunisia, would increase the Association's total lending to Tunisia to $32.5 million, while the Bankts lending amounts to $34.0 million. Following is a summary statement of Bank loans and IDA credits to Tunisia as of May 31, 1968: 2-

Loan or (Amount US$ million) Credit Undis- Number Year Borrower Purpose Bank IDA bursed2

29 1962 Republic of Tunisia Education 5.0 - 380 1964 Republic of Tunisia Port Develop- ment 7.0 449 1966 Societe Nationale Development d'Investissement Finance Co. 5.0 2.0 94 1966 Republic of Tunisia Education 13.0 10.7 484 1967 Republic of Tunisia Cooperative Farms 12.0 10.6 99 1967 Republic of Tunisia Cooperative Farms 6.o 5.3 512 1967 Soci6t6 Nationale Development d'Investissement Finance Co. 10.0 10.0

Total 34.0 24.0 of which has been repaid 0.3 -

Total now outstanding 33.7 24.0

Amount sold 0.9 of which has been repaid 0.1 0.8 -

Total now held by Bank and IDA 32.9 24.0

Total undisbursed 22.6 16.0 38.6

6. In NIay 1966, IFC made an investment of D 300,000 (about $571,500) in Societ6 Nationale dlInvestissement. In addition to this, IFC has invested $1.5 million in, and lent $2.0 million to, NPK-Engrais, a phosphate ferti- lizer company.

7. The Bank is considering a $15 million loan for a water supply pro- ject that is expected to be submitted to the Executive Directors before the end of 1968. An appraisal mission for a proposed railway project is presently in Tunisia. The Bank is executing agent for a current UNDP Transport Survey, which is expected to lead to further lending in this sector. The Bank also leads the Consultative Group for Tunisia. - 3 -

PART II - DESCRIPTION OF THE PROPOSED CREDIT

8. Borrower: Republic of Tunisia

Beneficiary: Office des Ports Nationaux Tunisiens (OPNT)

Amount: The equivalent of us$8.5 million in various currencies

Purpose: Financing the foreign exchange costs of improvements to the ports under the control of the Office des Ports Nationaux Tunisiens

Amortization: 50 years, including ten-year grace period, in semi-annual installments beginning October 15, 1978 and ending April 15, 2018

Service charge: 3/4 of 1 percent per annum

Relending terms: The Government would relend the proceeds of the credit to OFNT at 6-1/4 percent per annum and to be repaid in twenty years, including a three-year grace period.

PART III - THE PROJECT

9. A report entitled "Appraisal of the Second Tunisian Port Project" TO-648a on the proposed project will be circulated on June 14.

10. Tunisia is served by a relatively well-developed transport system. There are four major ports, of which -La Goulette is the country's largest. The access routes to these ports are generally adequate even for growing traffic volumes, with the exception of the existing road linking Tunis and La Goulette and the access to La Goulette from the south, on which improvements have now been undertaken. The establishment in 1966 of the Directorate of Transport in the Ministry of Public Works with responsi- bility for formulating and recommending transport policies was a step forward towards establishing a coordinated national transport policy. Further improvement in transport policy can be expected from the implementation of the recommendations of the UNDP Transport Survey, now in the final stages of preparation.

11. As required by the Bank under Loan 380 TUN, OPNT was established by law in 1965 as an independent authority responsible for the operation, development and maintenance of the ports of -, Tunis- La Goulette, and . OPNT is managed by a General Director who is responsible to a Board of Directors composed of three representatives of the Government and four representatives of port users and related interests. OFNT has a satisfactory degree of autonomy in both financial and adminis- trative matters; its organization has proved adequate to the tasks required of it and, with the assistance of consultants, its management and staff are capable of carrying out the Project.

12. The proposed project consists of dredging at the ports of La Goulette (Tunis), Bizerte-Menzel Bourguiba and Sfax; provision of a dredger and attendant tug for maintenance dredging; replacement of cargo-handling equipment, provision of additional equipment and rehabilitation of quay cranes; reconstruction of the island breakwater at Bizerte; construction of an additional berth for bulk cereals, bulk grain storage silo and associ- ated handling equipment; training of a financial manager and other senior staff; and the provision of accounting and engineering consultants. The project is expected to be completed within a period of four years. Total cost of the proposed project is estimated at US$10.7 million equivalent, and the estimated foreign exchange cost, to be covered by the proposed credit, is US$8.5 million; the rest would be financed by OPNT's internal cash genera- tion. Considering only quantifiable benefits of the project, all items included in it have internal rates of return ranging from 10 to 25 percent, which are considered satisfactory.

13. Contracts for procurement of equipment and execution of dredging and other works will be let in accordance with the Association's procedures for international competitive bidding. Disbursement of the Credit would be on the basis of actual approved foreign currency expenditures. Provision is made for the reimbursement of expenditures on the project since April 1, 1968. Since this credit is presented "subject to replenishment" and the date of its signature remains uncertain, it is not possible to estimate exactly how much reimbursement would be involved. However, up to the present time only $50,000 has been expended on the continuing employment of consultants already retained under Loan 380 TUN, and further disbursement requirements to the end of 1968 are estimated at only $150,000.

14. OPNT's net revenues are larger than those forecast at the time of the previous Loan 380 TUN. However the present financial rate of return on the recently valued net fixed assets is only 3.9 percent. OPNT would be required to raise its rate of return to at least 6 percent by 1971 and to 7 percent by 1973 and such rate above 7 percent as may be agreed upon between the Association and the Office from time to time thereafter. Such rates of return can be achieved through moderate tariff adjustments or an increase in traffic higher than anticipated or a combination of both. They would assure adequate coverage of debt service requirements by internal cash generation.

PART IV - LEGAL INSTRUMENTS AND AUTHORITY

15. The draft Development Credit Agreement between the Republic of Tunisia and the Association, and the draft Project Agreement between the Association and the Office des Ports Nationaux Tunisiens, and the Report of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement are being distributed to the Executive Directors separately. The draft Development Credit Agreement and the draft Project Agreement generally follow the usual pattern for port projects.

PART V - THE ECONONY

16. An economic report entitled "The Current Economic Position and Prospects of Tunisia" (MA-3a) dated M4arch 19, 1968 was distributed to the Executive Directors on April 1, 1968. In recent discussions with the Tunisian Government, broad agreement has been reached on the following eco- nomic policies: (1) curbing the growth of current expenditures; (2) restric- ting the use of external medium term credit; (3) emphasizing productive projects in the investment program; (4)improving the profitability of the public enterprises; (5) encouraging private investment; (6) promoting exports and export oriented investments. The Government has expressed its intention to act along these lines and, in many respects, it has already taken the appropriate steps.

17. Because of the relatively high burden of the service on its external debt and in the light of Tunisia's satisfactory progress in economic growth and performance, Tunisia can be considered as eligible for this proposed IDA credit. This is also in conformity with the consensus reached at the recent meeting of the Consultative Group for Tunisia to the effect that the country deserved substantial amounts of foreign aid at concessionary terms.

PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT

18. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.

PART VII - RECOMMENDATION

19. I recommend that the Executive Directors of the Association adopt the following resolution:

RESOLUTION NO. IDA

Approval of Development Credit to the Republic of Tunisia in an amount equivalent to US$8,500,000

RESOLVED:

THAT the Association shall grant a development credit to the Republic of Tunisia in an amount in various currencies equivalent to eight million five hundred thousand United States dollars (U.S.$8,500,000) to - 6 - mature on and prior to April 15, 2018, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1 percent) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Development Credit Agree- ment (Second Port Project) between the Republic of Tunisia and the Associ- ation, and Project Agreement (Second Port Project) between the Association and the Office des Ports Nationaux Tunisiens, which have been presented to this meeting.

Robert S. McNamara President

by J. Burke Knapp

Attachment

June 13, 1968