Documnt of

The World Bank

FOR OFFCIAL USE ONLY

Report No. 9488

PROJECT COMPLETION REPORT

TUNISIA

ELECTRICAL AND MECHANICAL INDUSTRY (EMI) PROJECT(LOAN 2113-TUN)

APRIL 19, 1991

Industry and Energy DivisioniCountry Department IIEurope, Middle East and North AfricaRegional Office

This document has a restricted distribution and may be used by recipients only In the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EO'JIVALENTS

Name of Currency: Dinar

1982 May 1990

US$1 D 0.59 D 0.89D US$1.69 US$1.12

ACRONYMS AND ABBREVIATIONS

BDET Banque de D6veloppement Economique de Tunisie

BTKD Banque Tuniso-Koweitienne de D6veloppement

CETIME Centre Technique des Industries M6caniques et Electriques

CIDA Canadian International Development Agency

EMI Electrical and Mechanical Industry

INNORPI Institut National de la Normalisation et de la Proprikt6Industrielle

PERL Public Enterprise Rationalization Loan

QR quantitative restrictions

SAL Structural Adjustment Loan

STUSID Soci6t6 Tuniso-S6oudienne de D6veloppement

FISCAL YEAR

January 1 - December 31

TH woto DM4S. FOR OFFICIAL USE ONLWaewnon. DC. 204)3

U4SA

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April 19, 199i

MEMONDUN TO THE EXECUTIVE DIpECTOS AND THE PRESIDET

SUBJECT: Project Completion Report on TunisiaElectrical and Mechanical Industry (EMI) Project

(Loan 2113.TUN)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Tunisia - Electrical and Mechanical Industry (EMI) Project(Loan 2113-TUN)" prepared by the Industry and Energy Division, CountryDepartment II, of the Europe, Middle East and North Africa Refional Office. Noaudit of this project has been made by the Operations Evaluation Department atthis time.

Attachment

This document msms a usd, dbuibunou and may be ued by rcpsu only is a e powmceof Sho Ofciul dub. Its mCOnUss May not othems be dfimsd wnt Wor ank as*=monun.

FOR OFFICMiL USE ONLY

PROJECT COMPLETION REPORT

TUNISIAELECTRICAL AND MECHANICAL INDUSTRY (EMI) PROJECT

(Loan 211.3--TUN)

1 BLE OF CONTENTS

PAGE No.

PREFACE ........................................................ iEVALUATION SUMMARY .................................................. ii

?ART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE

Project Identity .. 1........................... Background ........................................................... 1Project Objectives and Description .. 2Project Design and Organization .. 3Project Implementation .............................................. 4Project Results ..................................................... 7Project Sustainability .............................................. 9The Bank Performance ................................................ 10The Borrower's Performance .......................................... 11Consulting Services ................................................. 11

Project Documentation and Data ...................................... 12Lessons Learned .................................................... 12

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ................ 13

PART III: STATISTICAL INFORMATION

TABLES

1. Related Bank Loans and/or Credits ................................ 202. Project Timetable ................................................ 21

3. Loan Disbursemernts: Cum4lative Estimated and ActualDisbursements ............................ 22

4. Project Cost and Financing ....................................... 235. Project Benefits ............................ 246. Use of Bank Resources ............................ 25

ANNEXES

ANNEX 1 BDET's Operations in 1984-88 .............................. 26ANNEX 2 BDET's Loan Portfolio between December 1984 and

September 1989 ........................... 27ANNEX 3 BDET's Financial Indicators in 1984-1988 ..... ............. 28

ANNEX 4 Income Statements 1984-1988 ............................... 29ANNEX 5 Balance Sheets 1984-1988 .................................. 30ANNEX 6 Project Cost, Employment, Investment per Job .... .......... 31ANNEX 7 Project Analysis by Manufacturing Sector ..... ............. 33

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

- i -

PROJECT COMPLETION REPORT

TUNISIAELECTRICAL AND MECHANICAL INDUSTRY (EMI) PROJECT

(Loan 2113-ThLN)

PREFACE

The Bank approved a US$30.5 million loan in March 1982 to financepriority projects in Tunisia's electrical and mechanical industries (EMI)subsector. prepare a study on the effective protection of manufacturing anddesign a development strategy for two EMI subsectors. Disbursements of theloan amounted to US$20.9 million (68.6 %) and there was a cancellation.ofUS$9.6 million.

The Bank's Industry and Energy Division, Country Department II, of theEurope, Middle East and North Africa Regional Office prepared Parts I and IIIof this Project Completion Report (PCR).

The preparation of Parts I and III of this PCR is based on the StaffAppraisal and President's reports on the Project, the related Guarantee, Loanand Project agreements and Bank Project files. The Borrower, the Banque deDeveloppement Economique de Tunisie (BDET) prepared Part II.

ii -

9PSWECT COMPLETION REPORT

TUNISIAELECTRICAL AND MECHANICAL INDUSTRY (EMI) PROJECT

(Loan 2113-TUN)

EVALUATION SUMMARY

Background

i. By the late 1970's, the production of Tunisia's electrical andmechanical industries (EMI) sub-sector met only 10X of the local demand forcapital goods, one-third of that for intermediate goods and about half thedemand for consumer goods. Imports of EMI goods had become an increasingburden on the country's balance of payments. To address this problem, theGovernment adopted a development strategy for the sector, under the Sixth Plan(1982-86), which gave priority to the diversification and expansion of thecapital and intermediate goods subsector (e.g. agricultural and constructionmachinery) and of a few selected export-oriented lines of production (e.g.mechanical and electrical components). Furthermore, the Government recognizedthat certain policies hampered the development of the EMI sector (Part I,para. 5 ). The Government, therefore, formulated policies and institutions tohelp the EMI sector improve its performance (Part I, para. 6). The Bank loanin the EMI sector was part of this overall Government strategy.

Project Objectives

ii. The basic objective of the ;ect was to encourage the development ofEMIs, improve the efficiency and - .oductivity of their operations and increasetheir production of competitive capital and intermediate goods. At the sametime, the Project contained components to improve the development policy andinstitutional framework of the sector and continue strengthening BDET (Banquede Developpement Economique de Tunisie), the country's development bank. TheProject was to achieve these oojectives through a US$30 million loan to BDETapproved in March 1982 (Part I, para. 9).

Project Implementation

ii. The loan became effective in December 1982 and there was a slight delayin effectiveness due to administrative procedures for creating CETIME andINNORPI. Initially, commitments under the loan developed at a pace consistentwith that forecast during project preparation and appraisal. However, bymid-1984,commitments of the funds earmarked for EMIs had reached US$8 milliononly, while commitments of other funds made available to BDET were US$13million.

iii. Initially the slowdown in EMI financing seemed to be temporary, causedby the depressed investment climate in the country (Part I, para. 18).

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In response to the slowdown in commitments, the Bank extended the commitmentdate for the loan proceeds to end-1988. Neither the Bank nor BDET foresaw theeventual tapering off of demand for investment financing in EMIs. The Bankactually approved a second line of credit for EMIs in March 1985. Since thefinancial terms attached to this second line were more favorable than those ofthe first, BDET requested --and the Bank accepted-- that the uncommitted partof the first line of credit be cancelled when the second line of credit becameeffective. (Part I, Paras. 19 and 20). The amount cancelled under EMI I wasUSS9.6 million equivalent.

Project Results

iv. By EMI-1 completion, the Bank loan had financed 18 projects of which 10were new projects and 8 were extensions. Overall, Bank financing amounted toabout 19% of total investment in the related projects (TD 98.4 million). Theprojects financed created about 2.060 jobs, of which 34% were in newenterprises. Taking into account the cancellation of about one-third of theloan (34.3%, para 20). job creation still fell short of expectations (bynearly 50%) at the time of project appraisal (Part I, para. 28) The averagecost per job created was significantly higher than expected, even afteraccounting for the 1986 devaluation of the TD. This discrepancy may be tracedto the fact that initial estimates of the cost per job created were based oninvestments made in the sector that were not representative of investmentopportunities to come. A profile of the projects financed is given in Part I,paras. 26-29.

v. The other components of the Project -i.e the institution building ofCETIME and INNORPI and the effective protection study were successful but thestudy undertaken by BTKD on the platewurk subsector was never completed(Part I. paras. 33-36). The Project covenant pertaining to customs tariffs onEMI products was met. BDET was able to improve the management of its clientarrears problem and achieve better results in negotiating, with Treasury, tueGovernment's payments of its losses on account of foreign borrowings, andadjustments to interest rates. In the latter adjustments, the Bank was ableto play a significant role, using the results of the 1984 Financial SectorReview.

Project Sustainability

vi. The general purpose component of the line of credit to BDETproved highly justified, and was sustainable as well as replicable. The EMIcomponent proved to be significantly oversized (paras. 28-31); a componentabout half the size of that agreed upon would have been more reasonable. Thebasis of the overestimation was the assumption made, at the time of projectpreparation and appraisal that the demand in later years would be comparablein magnitude with that existing at the time.

Lessons Learned

vii. The main lesson the Bank has learned from the Project is to avoidlines of credit that are too specialized, since temporary or permanent changesin the demand for credit in a specialized subsector may result in a

- iv -

considerable underutilization of available funds. Instead it would be lessrisky to define a broader sub-sector such as export industries or small. andmedium-scale industries. Substantial changes in a specialized industry withinthese subsecto i would be less likely to have such a major effect on theprogress of the loan. Concerning Project supervision, the Bank should beconsistent in its monitoring activities, keep its analytical outlook afterproject appraisal, note causes of differentials from expectations. maintainawareness of competing lines of credit and help resolve important issuesrelated to supervision by financial intermediaries. Moreover, the Bank shouldnot begin a second operation of the same type in a subsector where commitmentshave been significantly below the original forecast, without an in-depthanalysis of the potential underlying causes.

PROJECT COMPLETION REPORT

TUNISIAELECTRICAL AND MECHANICAL INDUSTRY (EMI) PROJECT

(Loan 2113-TUN)

PART I: PROJECT REVIEW FROM BANR'S PERSPECTIVE

Project Identity:

Project Name: Electrical and Mechanical Industry (EMI)Loan Number: 2113-TUNRVP Unit: EMENACountry: TunisiaSector: IndustrySubsector: Electrical & Mechanical Industry

Background

1. In the 1970s. the shift to more liberal economic policies in Tunisia,with greater emphasis on labor intensive and export oriented activities,provided generous incentives to foreign and domestic private investors. As aresult, during the Fifth Plan (1977-81), manufacturing grew at 10.2% p.a.(from 6.4% in the 1960s), and accounted for 45% of total new employment (from33% earlier). The manufacturing sector, however, remained concentrated in twotraditional subsectors: food processing and textiles which, together,represented about 50% of the sector's total value added and employment and 60%of its exports by 1980.

2. Within the manufacturing sector, the engineering (electrical andmechanical, EMI) industries had experienced a significant development: fromalmost nonexistent in the early 1960s, they grew at 18% p.a. in the 190i0s and13% in the 1970s. Yet, they only contributed 1.9% of GDP, showed a valueadded/output ratio of only a'bout 30% and were the least developed subsectors(about 300 enterprises). By the late 1970s, most of them -about 70%- weresmall enterprises (less than 50 workers) and were dominated by a dozen largepublic enterprises (more than 100 workers).

3. While consumer and durable EMI goods were highly protected (withtariffs of 30-100%), all tariffs on capital and intermediate goods (with theexception of steel structure and platework) were lower than 16%. On thelatter category of goods, however, generous use was made of import licens'ngor quantitative restrictions (QRs) to protect local manufacturers. Thesubsector's concentration on end-product assembly resulted in a low domesticVA, poor competitivity of the subsector, and continued significant imports ofEMI goods.

4. By the late 1970's, the production of the EMI sector met 10% only of thelocal demand for capital goods, one-third of that for intermediate goods and

2

about half the demand for consumer goods. Correspondingly, imports of EMIgoods constituted an increasing burden on the country's balance of payments.To address this problem, a development strategy for the sector was adoptedunder the Sixth Plan (1982-86), which gave priority to the diversification andexpansion of the capital and intermediate goods subsector (e.g. agriculturaland construction machinery) and of a few selected export oriented lines ofproduction (e.g. mechanical and electrical components).

5. The Government, at the same time, recognizea three facts. First, thatthe development of the EMI settor was hampered by policies -whether protectionor pricing related- that did not foster cost effectiveness, rationalization ofproduct mix, or higher productivity. Second, that import duties were leviedwithout an adequate knowledge of the effective protection which resulted forvarious lines of production. Third, that the absence of standards and qualitycontrol was very detrimental to the use of domestic inputs, as well as to thegrowth of exports.

6. The Government, therefore, decided (a) to reduce a number of customstariffs in order to incite certain EMI enterprises to improve theirefficiency; (b) to undertake a detailed analysis of the effective protectionaffecting key subsectors (e.g. foundries and steel platework); and (c) tocreate institutions to establish standards and promote quality control (theInstitut National de la Normalisation et de la Propri4t4 Indlistrielle,INNORPI) and to assist EMI enterprises improve their production processes andthe use of their machinery (the Centre Technique des Industries M6caniques etElectriques, CETIME).

7. Since a number of the above decisions were made by the Governmentfollowing investigations carried out by, and discussions with the Bank, theproject under review was basically in support of the Government's new approachand strategy as regards the development of the EMI sector.

Proiect Objectives and Description

8. The basic objective of the project was to foster the development ofEMIs, to improve their efficiency and productivity, and to increase theirproduction of competitive capital and intermediate goods. The project alsoaimed (a) to improve the development policy and institutional framework of thesector. and (b) to continue strengthening BDET (Banque de DeveloppementEconomique de Tunisie), the country's development bank-.

9. These objectives were to be achieved through a US$30 million loan toBDET approved in March 1982, subdivided in (i) a credit line of US$28 million,of which half was to finance subprojects in priority EMI subsectors agreedupon with the Government, and half to help BDET meet its general resourceneeds; and (ii ) a US$2 million loan, to be onlent to the Government to helpestablish CETIME and INNORPI to undertake a study on effective protection ofmanufacturing, and to design a development strategy for two EMI subsectors.

aL The sole such institution in Tunisia until 1981, when another two suchinstitutions were created: Banque Tuniso-Koweitienne de Developpement(BTKD) and Societe Tuniso-Seoudienne de Developpement (STUSID), with a30% capital participation frorv. Kuwait and Saudi Arabia, respectively.

3

Also, under the project, as interim remedies until the above studies werecompleted, a series of policy and incentive measures geared to the developmentof EMIs were to be taken, in the areas -in particular- of customs tariffs, QRsand price controls. These measures were to consist essentially, for a periodof 3 years, in maintaining import controls and imposing a maximum pricedifferential between locally produced and imported RMI products: 18% for allsubsectors and 21% -exceptionally- for steel struc_.e and platework; beyondthis period, import controls were to be gradually lifted.

Proiect DesiAn and OrRanization

10. In the te 1970's, the Government recognized the relative importance ofEMI products in Tunisian imports, the development and export potential of thissector, as well as the detrimental impact of some of its protection policy andimport practices. As a result, the Sixth Plan gave a priority to thedevelopment of this sector (para 4-5). Also, the Government agreed, in theframework of th s Bank financed project, to take interim measured aiming atimproving the competitivity of the sector, and to undertake studies to designan appropriate policy framework (para 9).

11. Of significant importance to help the development of the EMI sector, wasthe creation of CETIME and INNORPI. Many industrialists in the sector, awareof inadequacies in their production processes and the need to improve theirmastering of technologies, welcomed the creation of CETIME to provide themwith technical assistance on a commercial basis. At the same time, some ofthem were increasingly sensitive to the need to provide clients with formalguarantees of quality. These favored the idea of adopting standards andcertification procedures, and they welcomed the creation of INNORPI. Suchinterests on the part of industrialists in the sector justified that theproject include a support to the creation of the above two irstitutions, inthe form of financing for technical assistance and purchase of equipment.

12. By the late 1970's, BDET had had access to Bank financing through sevenearlier lines of credit, and it continued improving its reliability as aprovider of long-term financing for investment purposes. BDET had beensuccessful in mobilizing domestic as well as foreign resources. It was alsogaining increasing access to the international capital market; as a result,Bank funds in 1980 represented about 24% of BDET's long-term resources,compared with 37% in 1974. BDET's capital had increased from TD 3 million in1971 to TD 10 million in 1978, and was scheduled to be increased to TD 30million by 1985.

13. BDET's organization, management and financial situation weresatisfactory. Its portfolio was diversified and sound. Lending to the privatesector rose from 85.2% in 1980 to 96.6% in 1990. Industry accounted for about60% of these approvals, down from 81% in 1977 as tourism financing experienceda significant increase in the 1977-80 period. Total assets amounted to aboutUS$236 million equivalent. Arrears affected 9.7% of total portfolio and debtrescheduling was kept within reasonable limits. Accumulated provisions forrisk exceeded the auditors' recommendations by nearly 20%. Its debt-equityratio remained well below the 8:1 ceiling required by its policy statement andits commitment to the Bank. BDET's spread on foreign currency borrowing wassecured through a commitment by the Government to maintain this spread at alevel (about 3%) sufficient to provide for appropriate provisions and reservesand an adequate return on capital. However, as the Government was considering

4

a gradual liberalization of long-term interest rates, it was envisaging -inpazallel- reducing its financial support to BDET. It was agreed that, underthe prcject, an annual review of the structure of interest rates (to ensurethat they remain positive in real terms), Government support and BDET's accessto lower cost resources would be carried out in consultation with the Bank.

Project Implemencation

14. The loan was declared effective in December 1982, seven months aftersignature. The delay in effectiveness was modest; it was due essentially toadministrative redtape for formally creating CETIME and INNORPI and fornominating their respective directors.

15. The effective protection study was undertaken with only minor delays.Its financing was eventually provided by the Canadian assistance program,CIDA. (Bank funds initially earmarked for this purpose were made availablefor CETIME and INNORPI). The development strategy study on the foundrysubsector was carried out and the platework stu'y was undertaken according toinitial plans.

16. CETIME and INNORPI promptly appointed the consultants needed to helpdesign their work program, initiate its implementation and establish theiroperational procedures. By the end of its second year of operation, CETIME wasable to start charging fees close to commercial rates, and demand for itsservices kept developing steadily. CETIME has reached a finaaLcial situationclose to initial expectations: about 85% of its resources to cover expensesother than investments now come from the fees that they charge for theirassistance; the remaining 15% still come from the State budget, as CETIME doesnot charge new client the cost of the first stage of its assistance, as anintroductory gratuity. INNORPI, considering the peculiar type of publicservice that it provides -preparing and edicting standards, and deliveringcertifications: after products are tested against these standards- is notexpected to generate revenues beyond 15% of its financial needs. As of mid-1989, INNORPI was still receiving a limited number of requests forcertification about 16 per year. Howeve , INNORPI organized several seminarson quality control and management, which improved its revenue generation. Theend-result, however, is that INNORPI has not yet been able to raise.ignificant revenues: about 8% of its budgetary needs in 1988.

17. Initially, commitments under the loan developed at a pace consistentwith forecast made during project preparation and appraisal: by October 1983,the equivalent of about US$6 million had been committed for each of the twocomponents of the BDET loan. However, by mid-1984, commitments of the fundsearmarked for EMIs had reached US$8 million only, while commitments of otherfunds made available to BDET were US$13 million.

18. The slowdown in EMI financing was perceived, at the time, as duebasically to the depressed investment climate in the country, as the end of apolitical era was approaching and uncertainties about the country's futurewere increasing. It was not seen by the Bank nor by BDET, as a sign of atapering off of demand for investment financing in EMIs. To take into accountthe above slowdown, the Commitment Date of the operation was postponed by ayear. to end-1988. Had a more careful assessment been made of the sector'sevolution at the time the second line of credit was appraised, sufficientsigns would have been found of the upcoming dryout of demand for iwvestment

S

financing for the sector, as well as of the important difficulties alreadyaffecting part of the sector -i.e. SOFOMECA, STIA, CMT-, and the feasibilityof following up promptly with a second line might have been questioned.

19. As the earlier use of the line of credit appeared to confirm theappropriateness of the priority given to EMIs in the Sixth Plan, discussionswere initiated in early 1984, between the Bank, the Government, BDET as wellas BTKD and ST'JSID, on a second line of credit, as a follow-up to thatextended under the project. Preparatory work on the new line started inmid-1984, leading to an appraisal in the Fall, negotiations in early 1985 andBoard approval in March 1985.

20. As the financial terms attached to this second line were more favorablethan those of the first (interest rate was 7.75% against 11.6% for EMI), BDETrequested -and the Bank accepted- that the uncommitted part of the first lineof credit be cancelled when the second line of credit becomes effective. TheEMI 2 line of credit became effective in June 1986. The cancellation made-hen amounted to US$9,6 million equivalent. This amount corresponded to aboutUS$6.3 million still uncommitted by late 1985 (barely lower than that in late1984), plus funds -in an amount of US$3.3 million- made available between late1985 and mid-1986 as a result of cancellations of past commitments, for a goodpart, in the EMI sector. At the time, this situation of under-commitmentunder the EMI-1 line was explained by BDET, by their wish to keep upcoming EMIprojects for commitment under the new line soon to be established.

21. Had the 1984 slowdown in EMI commitment been fully understood, theassessment of the demand for the second EMI operation would have beendefinitely different. At the time, however, the slowdown was blamedessentially on the temporarily depressed investment climate (para 18), and theripple effect of the crisis experienced by car assembly in Tunisia.

22. BDET's financial situation started showing signs of a slightdeterioration in 1984-85, as a result of (a) significant delays in theGovernment payments of BDET's losses on account of foreign borrowings, and (b)increasing client arrears. Because of its cash flow problems, BDET had tostart bcrrowing expensive short-term funds, which led to a reduction of itsprofitability.

23. Delays (of more than a year) in Government payments of BDET's losses onaccount of foreign borrowings were due to the Government's budgetary problemswhich started developing in the early 1980's. Despite repeated commitmentsfrom the Government to catch up with its arrears, these kept worsening. Onlyin 1988, was the Treasury able to make annual payments to BDET (TD 19.2million) that exceeded BDET's losses in that year (about TD 15 million), thusbeginning to redv_. the Government's cumulated arrears to BDET (TD 34.1million at end-1987). In the meantime, BDET had to meet the high cost of itsshort-term borrowings and reduce the dividends paid to its shareholders. TheTreasury's commitment to pay its past dues to BDET remains genuine, butforecasts are that, in the foreseeable future, the Government's budgetarysituation should remain somewhat difcicult. It is likely, therefore, that theGovernment will need a minimum of three years to meet its backlog of paymentsto BDET. In mid-1988, however, in consultation with the Bank under the SAL, anew system of foreign exchange risk coverage was adopted which disengages theGovernment for post-1988 foreign exchange borrowings. Also, interest rateliberalization -starting with deposit rates- is gradually introduced.

6

24. Client arrears were due to the economic slowdown referred to in para 18.By late 1984/early 1985, client arrears had increased to 15.9 million, from TD8.1 million at end 1982. Of the total amount of arrears, 85-90 was from 22clients; of these clients' arrears, about half (among which the largest andlongest standing ones) were from about 10 public enterprises (PEs) orinstitutional projects. A special action program was developed by BDET inearly 1985 to address its client arrears problem; it involved adjusting itsorganization, responsibility assignment, procedures and monitoring forsupervisinn. The action program was promptly put into effect in mid-1985.Within the subsequent 18 months, its effects were very favorable, and majorarrears from private clientsv started decreasing, a number of cases havingled to restructuring (or liquidation) of the enterprise, or transfer to formallitigation procedures. Attempts to reduce arrears from PEs or institutionalprojects, however, had very limited results, as payments of arrears was -oncemore- dependent on the Government's budgetary situation (para 23). Thegradual reduction of PE arrears should become significant in the near future,as the Government is now addressing the general problem of PEs restructuring,privatization and/or liquidation, with the assistance of the Bank, under thePERL operation. (As of June 30, 1989, client arrears were slightly belowrTD 49.4 million] the level reached on June 30, 1988 tTD 51.2 million] anddecreased further to TD 38.1 million on December 31, 1989. BDET newmanagement was of the opinion that this situation would improve by the laterpart of the year, yet was planning to request that the Government take upinter alia the arrears from PEs and institutional projects).

25. In 1988, BDET's overall situation began recovering from themid-1980's crisis. In the process of overcoming that crisis, however, BDETmanagement grew very cautious about financing PEs. as well as confident in itsability to find solutions with clients in difficulty. Because of itsexperience with Government arrears, BDET management has also become a strongsupporter of financial liberalism, favorable to: (a) leaving intermediariesresponsible for mobilizing their resources where they find it feasible,assuming the risk -including foreign exchange related- associated with it andadapting their lending terms accordingly; and (b) gradually reducing thedistinction between commercial and investment banks.

BDET's financial statements, and financial performance in 1988-89

26. In 1989, despite a still somewhat sluggish economic climate in thecountry, BDET's financial position kept improving: results would suggest thatBDET's net profit/equity ratio would have reached 13.3% (compared with 6.5X in1988) and its net profit would have reached TD 5.3 million (compared with TD2.5 million the year before). This was achieved essentially because of: (a)BDET's continued concern (maintained by the new management) for its overall

In the meantime, however, arrears from other clients -mostly mediumsized- increased significantly, offsetting the gain achieved on themajor arrears. This significant increase in new arrears stemmed fromthe foreign currency controls instituted by the Government from mid-1985to late 1986 to overcome its foreign exchange shortage, the effect ofwhich was to hamper entreprises -especially new ones- in their purchaseof impor-ed equipment or raw materials, and thus to prevent them fromoperating as planned.

7

arrears situation, and sustained efforts to control it; (b) a significantincrease in the tourism sector, which made it possible for important clientsof BDET's to resume payments on their loan (c) higher interest rates and; (d)important profits from sales of portfolio.

Auditing Performance

27. BDET has its accounts audited annually. Commonly, audit reports reachthe Bank by end of June, at the earliest; this is due to the fact that banksin Tunisia close definitely theiz accounts in March only, then call theirauditors. This is a local practice that will continue in the foreseeablefuture. Audit reports have been steadily good, rather detailed andcompr:'. fIve; which probably follows in part, at least, from the requestmade b- e Bank about four years ago that auditors be asked to review BDET'sarrep. re gtreater detail.

28. By the time the EMI-1 project was completed. 18 projects (of which 8 inthe EMI sector) had been financed through the Bank line of credit. Of these18 projects, 10 were new projects (of which 5 in the EMI sector), and 8 wereextensions. Overall Bank financing amounted to about 19% of total investment(TD 98.4 million). About 76% of Bank financing went to new projets.Approximately 2,060 jobs were created, of which 1,360 -or 34%- in newenterprises. Taking into account the cancellation of about one-third of theloan (34.3%. para 20), this job creation still fell short -by nearly 50%- ofexpectations at the time of project appraisal. The average cost per jobcreated amounted to 60,800 in new enterprises, and TD 22,600 in extensionprojects; significantly more than expectations, even after account of the 1986devaluation of the TD. This discrepancy can be traced to the fact thatinitial estimates of the cost per job created was based on investments madeearlier in the sector that proved to be un-representative of investmentopportunities to come.

29. The final allocation of Bank financing was distributed among sectors asfollows: EMI, 32.7%; rubber and chemical products, Z5.4%; building materials,ceramics and glass, 18.7%; agroindustry, 10.4%; tex.tile and leather. 7.7%;paper and printing, 5.1%.

30. As regards the general purpose component of the loan to BDET, theproject was a success.

31. As regards the EMI component, only about half of the expected demandmaterialized. The result is that the expansion expected -as a benefit of theproject- of the country's industrial base in the sector was not achieved tothe extent originally envisioned. Most EMI projects financed through the Bankline of credit had an export orientatior., and imports of EMI goods did notdecrease significantly: with the ultimate result of a limited improvement ofthe balance of payments situation attached to the sector. (As of mid-1989,the EMI sector as a whole had evolved further, with problems affecting in aun-remediable manner three large enterprises -SOFOMECA, STIA and CMT- whicheventually had to close).

B

Share of EMG Sector in meeting the demand for capital, intermediate andconsumer goods. and performance of the sector as regards lmport substitution

32. By a cascade effect, the foundry subsector (e.g. SOFOMECA) was badlyaffected by the problems encountered by the local production of capital goods(e.g. car engines by Complexe MHcanique de Tunisie), which itself had lost amajor client (i.e. STIA. in car assembly) that had collapsed. In these linesof production, local integration (and concomitantly import substitution)failed. In productions of intermediate and consumer goods, results came muchcloser to expectations, even if for a period of about two years. theysuffered--by a ripple effect--from the problems mentioned above affectinganother EMI subsector. At present, a number of productions are developingsteadily; in particular, under subcontracting arrangements with foreignmanufacturers--such as bundles of electric wire for automobiles, carradiators, etc. Also, productions of final products, such as small dieselengines, electric motors, etc. are multiplying; most of the time, with asignificant export orientation. For consumer goods, in particular, importsubstitution was largely achieved.

33. The initial estimate of the demand for investment financing was toooptimistic. There appears to be three causes for this oversight. First, theestimate made at the time of preparation and appraisal should have been moreconservative; especially regarding the outer years. considering that thesector was still in its early stage of development.

34. Second, the estimate was made after detailed investigations of thestructure of existing EMI enterprises and imports, which revealed a number of~import substitution opportunities and -possibly- attracted excessive interest:from potential investors. Also, the estimate was made after (a) BDET haddesigned a development strategy for the EMI sector, which had led to theidentification of EMI activities (inter alia foundries and electric motors)expected to have a significant "pull" effect on the rest of the sector; and(b) BDET had began seeking -and had found- investors willing to realize someof its project ideas. The analysis of the projects effectively realized showsthat (i) investors eventually trusted their own judgement and marketassessment more than those of BDET cadres; and (ii) the most successful EMIprojects proved to be export oriented and involving some technical/commercialpartnership with foreign firms.

35. Third, the above investigations were carried out at a time whereTunisian investors had gathered significant experience in a diversified rangeof productions and might have developed an excessive confidence in theirability to enter new activities, to master new technologies and tosuccessfully compete with imports. Also, the initial estimate appears to haveignored that a significant fraction of Tunisian investors are, above all,businessmen; and only rarely, fully developed industrialists -which the EMIsector calls for more than most other industrial sectors. Therefore,investments in the EMI sector -it should have been expected- would be realizedinasmuch as competing opportunities -in terms either of returns, or lessertechnical, commercial/marketing difficulties- remained modest. EMIs proved tobe a challenging sector, both technically and marketwise. Investors, as aresult, appear to have promptly gone back to more customary activities such astextiles, agroindustry and tourism.

9

36. The other undertakings under the project -i.e the institution buildingof CETIME and INNORPI and the carrying out of the protection study- weresuccessful. As indicated earlier (para 16), CETIME has established itscredibility, is called regularly by EMI enterprises for technical advice andassistance, and is able to charge realistic fees. INNORPI has produced morethan 600 norms, has delivered nearly forty certifications and is expanding itsactivities in the area of promoting quality control, management andmonitoring.

37. The development si-rategy study on foundries was completed and itsresults discussed with the Bank. Most qualifications made at the time werewidely confirmed in the last two years by the difficulties faced by thissubsector, which were fully exemplified by the collapse of SOFOMECA.

38. The study undertaken by BTKD on the platework subsector was nevercompleted. Following a swift beginning, methodological and technicaldifficulties soon began hampering its execution. This was compoinded by theunfavorable evolution of that branch of the sector, which justified that thestudy be suspended.

39. The effective protection study, after a slow start due to delays in themobilization of foreign (Canadian) experts, developed in a satisfactorymanner'. The results of the study were extensively used in the design ofthe Government's later decisions pertaining to the liberalization of theeconomy -in particular, those related to the reduction and alinement ofcustoms tariffs-, and in the preparation of the Bank ITPA loan to support thisliberalization program.

Project Sustainabili

40. The general purpose component of the line of credit to BDET provedhighly Justified, and was sustainable as well as replicable.

41. The EMI component proved to be significantly oversized (para 30-34); acomponent about half the size of that agreed upon would have been morereasonable. This overshooting stems essentially from the assumption made atthe time of project preparation and appraisal that the demand in later yearswould be comparable in magnitude with that existing at the time.

Certainly in its most critical phase where the methodology was to betested and the essential results were to be developed and discussed.Later on, responsibility to duplicate the study on other sectors waspassed from the IEQ (Institut d'Etudes Quantitatives) to the CNEI(Centre National des Etudes Industrielles), which proved to be a majorerror, as CNEI has serious difficulties assembling teams of competent,experienced econo: 'sts to continue the work started by the IEQ.

10

42. The economic covenant pertaining to customs tariffs on EMI products wasmet. Also, further strengthening of BDET was achievedP as BDET was able(a) to improve the management of its client arrears problem; as well as (b) toachieve better results in negotiating with Treasury the Government's paymentsof its losses on account of foreign borrowings, and adjustments to interestrates. In the latter adjustments, the Bank was able to play a significantrole, using the results of the Financial Sector review carried out in 1984.

43. One objective of the project was to address for the first time inTunisia, a specific industrial branch, EMIs, and to focus our support todevelopment banking on subsector investment and policies. This approach wasone among several attempted by the Bank at the time, to explicitly link itsassistance with the resolution of economic policy issues; in the case ofTunisia, the attempt aimed at trade policies. An overall review of thisapproach would be needed to pass a judgement on its success. In the case ofthis project, results were mixed: creating CETIME and INNORPI was a success,while the development of EMIs fell short of expectations.

44. The extension of a second EMI line of credit proved premature. Had itbeen appraised a few months later, clear signs then would have been availableof the limits of the demand for investment financing in the sector. In early1989, a significant fraction of this second line hiad to be cancelled, after itwas recognized that the demand was modest and coul.d be met through otherexisting lines of credit.

The Bank Performance

45. During the project implementation period, the Bank contributedsignificantly to the improvement of the sector policy framework, and to thestrengthening of the implementing agency, BDET. The Bank participated in thedesign of the ITPA program and extended a loan to support it. The Bank alsocarried out a review of the financial sector and, as a follow-up, participatedin the regular review of the country's interest rate structure. In parallel,the Bank undertook a comprehensive review of BDET's organization andoperational procedures, which led to a number of recommendations, most ofwhich were adopted and promptly put into effect by BDET's management.

46. In 1985 and 1986. after the negotiation of the EMI-2 operation, the Bankfell short on the supervision of the operation. This prevented theconfirmation of the early signs of a shortfall in demand for investmentfinancing for the EMI sector and, as a result, the prompt introduction of theadjustments that were called for. Steadier supervision and proper updating ofsector work would have certainly permitted to reduce the misappreciation thatwas at the base of the launching of the second line of credit. (This secondline itself was not subjected to sufficient supervision, which made it

The question of feasibility of investing trough BDET was not at thecenter of this operation. This became an issue in 1984 only, as aresult -in part- of the Financial Sector study which w&s carried outthat year. This then became a more central question for the Banksubsequent lines of credit. This issue will be a main focus of the PCRsof these operations when they fall due.

11

possible for problems affecting its utilization to last longer than waswarranted).

The Borrower's Performance

47. BDET failed to develop !n time a full awareness of the fragility of thedemand for investment financing for the EMI sectorW.

48. Otherwise, BDET's performance was basically satisfactory. When the loanwas made in 1982, BDET's supervision was still weak, in spite of the Bank'surging. With the deterioration of the economic environment, BDET's portfoliodeteriorated significantly. By 1985, BDET management was more receptive tothe Bank's concern on the worsening arrears situation and was prompt to reactin a tangible manner on this issue (para 24). As regards Government arrears,BDET management was able, all along, ' secure from Treasury the maximumpayments that the State could afford .o meet its commitments to BDET. BDETincreased its capital to TD 30 million, mobilized a larger fraction of itsresources through international borrowings (from BEI, DEG, France, Italy, etc)and through issuance of bonds on the local market. The importance of theprivate sector in BDET's portfolio kept increasing regularly. BDETparticipated in two privatization operations and has now adoptedsystematically the practice of arranging with its clients the buybacks of itsparticipation in their enterprise. a.lso, BDET management has established anew strategy to cope with the new economic and institutional context in whichBDET has now to operate. Basically. BDET management has clearly decided that,for the years to come, BDET's line of conduct as regards lending shouldconsist of the following: (i) to limit its exposure to new operations withPEs only to the most viable ones; (ii) to give priority to export-orientedprojects; and (iii ) to intensify its activities in the tourism sector,focussing, however, on medium size operations. These objectives are in linewith the best opportunities available in Tunisia to development financeinstitutions.

Consulting Services

49. Such services were used for technical purposes by CETIME and INNORPI.The consultants hired were LGV and CERLAB/AFNOR, respectively; both fromFrance. Their performance has been most satisfactory, and both CETIME andINNORPI were keen under the EMI-2 operation to obtain financing for theextension of their services.

This might have been due to the significant efforts that BDET had madeidentifying an appropriate way to develop the country's capabilities inthat sector (para. 31), and the resulting difficulties that BDET thenhad acknowledging that investors were not fully convinced of thefeasibility to enter this sector.

12

Project Dgcumentation-and Data

50. The data base for this project is basically satisfactory. From late1984/early 1985 on, the data base is fundamentally the same as that of theEMI-2 operation, as work on each of these two projects was carried outjointly.

Lessons Learned

51. The main lesson the Bank has learned from the Project is to avoid linesof credit that are too specialized, since temporary or permanent changes inthe demand for credit in a specialized subsector may result in a considerableunder-utilization of available funds. Instead it would be less risky to definea broader sub-sector such as export industries cr small and medium-scaleindustries. Substantial changes in a specialized industry within thesesubsectors would be less likely to have such a major effect on the progress ofthe loan. Concerning Project supervision, the Bank should be consistent inits monitoring activities, keep its analytical outlook after projectappraisal, note causes of differentials from expectations, maintain awarenessof competing lines of credit and help resolve important issues related tosupervision by financial intermediaries. Moreover, the Bank should not begina second operation of the same type in a subsector where commitments have beensignificantly below the original forecast, without an in-depth analysis of thepotential underlying causes.

I 3

PROJECT COMPLETION REPORT

TUNISIAELECTRICAL AND MECHANICAL INDUSTRY (EMI) PROJECT

(Loan 2113-TUN)

PART II: PROJECT REEW.- FROM BORROWRERS PERSPECTIVE

1. Except for the portion of the loan onlent to the Government (US$2million)y. Loan 2113-TUN has been used up to 66.4%; it financed 19subprojects with a total investment cost of TD 98.4m. (US$127m.) and helpedcreate 2.057 jobs. There were 37 subloans for these projects with an averagematurity of IO years. including 2 years of grace.

2. The objectives of the loan have been broadly met:

- over 3/4 of the amount used of the loan contributed to the financingof pzicects outside Greater Tunis;

- 75.7% of the financing concerned new projects;

- the financing of priority sectors was distributed as follows: EMIprojects which had first priority under loan, received 32,9% of thefinancing. Next are the rubber industry (25.4%) constructionmaterials (18.7%) and agro-industries (10.4%) (Annex 7 gives thesectoral breakdown of subprojects).

3. The average cost of jobs created is relatively high at TD 47,800.However, excluding STIP and COTREL which are capital intensive, the averagecost per job created falls to TD 28,500.

BDET EVOLUTION DURING THE 1982-1987 PERIOD

4. In order to increase more significantly its contribution to theobjectives of the Sixth Development Plan (1982-1985), BDET increased itsequity and its borrowed resources.

Equity: BDET share capital which was TD 10 m., at end-I981 was increased toTD 20 m. in 1982 and TD 30 m. in 1984. In parallel, BDET made a specialeffort to promote foreign investment in Tunisia from industrial enterprises orfinancial institutions, as follows:

61 The purpose of this component was to finance the cost of technicalassistance for INNORPI as well as the study of effective protection inthe manufacturing sector.

14

- two participation agreements: first, with the IslamicDevelopment Bank (ID Sm.) and, more recently, with theEuropean Investment Bank (ECU 3m);

- joint venture between 4'oreign firms with technical know-how and BDETprojects.

Borrowings: During the 1982-1987 period, the outstanding amount of BDETresources more than doubled: from TD 93.3m in 1982 to TD 219.6m in 1987. Thisgrowth was characterized by:

- resource diversification: IBRD's share of BDET resources fell from20.4Xin 1982 to 9X in 1987. This was offset by borrowings on theinternational capital markets, which were very small until 1982 butrepresented nearly half of the total resources at the end of 1987, aswell as by borrowings from institutional lenders (EIB. DEG, Italiancredits, etc.);

- maximization of domestic borrowings: important progress wasachieved in issuing bonds on the local market; in 1987, thesebonds represented more than one-third of resources used during thatyear, ie. TD 14.2m.

BDET's Policy: BDET's Statutes and General Policy Statement remainedunchanged.

Staff: BDET has currently a qualified staff of 215 including 50 officerscomprising 15 engineers, 25 economists and financial analysts,and I0 legal staff.

Industrial Projects Promotion: There are 48 projects identified; 29 arealready in operation, and 11 under construction.

5. BDET's Operations between 1982 and 1987 (Annexes I and 2): During theperiod under review, Tunisia's banking system was characterized by thecreation of new development banks. This event placed greater competitivepressure on BDET. It also provided the opportunity for cofinancing newprojects, particularly in tourism and in large industrial projects.

a. Approvals:

During the 1982-87 period, credit approvals reached TD 42.7 m. per yearon average. However, these approvals decreased steadily between 1985 and 1987due to:

- the conscious decision in 1985 and 1986 to limit approvals in thetourism sector;

- the economic difficulties faced by the industrial sector, stemming frowa decrease in domestic demand and the important increase in projectcosts resulting from the davaluation of the dlnar.

15

During the 1982-1987 period, the distribution of approvals was thefollowing (see annex 6b):

- new protJcts were predominant, representing 2/3 of the approvals;

- 701 of approvals were for projects outside the Greater Tunis area;

- the private sector remained the principal beneficiary of BDET'sfinancing: its share of total financing was 89.51;

- equity parti^ipations represented 6.4% of total financing.

With respect to sectoral distribution, three-fourths of BDET'sapprovals were made to manufacturing. EMI led all other manufacturingbranches, thanks to BDET's promotion efforts. As a result, on average, EMIannual approvals represented 20% of total approvals during the 1982-85 period.

L L. were followed, in decreasing order of importance, by chemicals andrubber. agro-industries and construction materials which representedrespectively 16%. 13.7% and 11% of total approvals.

Recent developments: Because of the serious difficulties in the EHIsector (decrease of domestic demand, important foreign exchange losses),investment in this sector has fallen down. Approvals fell from TD 8.1m. in1986 to TD 0.8m in 1987. At present, the priority is to consolidate andrehabilitate existing projects. It is likely that a revival of industrialinvestment will require some time.

On the other hand, the demand in the tourism sector is very strong.Approvals in this sector have grown to about TD 46m. in 1986, and are expectedto remain at a high level in 1989.

b. Commitments and Disbursements:

Because of the normal lag between approvals, commitments anddisbursements, the later two have decreased since 1985, but at a slower rstethan the decrease in approvals.

6. Loan and participation portfolio. Over the 1982-87 period, BDET'soutstanding loan and participation portfolios have increased at very similarrates: 11.5 and 11.0% p.a., respectively. The loan portfolio increased fromTD 139.4 million to TD 239.8 million; the participation portfolio grew from TD18.0 million to TD 30.3 million. The ratio between the portfolios remained atabout 1:10.

To improve the revolving of its participation portfolio, BDET nowincreasingly requires that its privpte partners sign buyback agreements.

As of late 1988, such agreements concerned a total of TD 4.9 million, ofwhich TD 2.9 million were guaranteed by drafts backed by the banks of BDET'sinvestment partners. Also, worth mentioning is tihe privatization of twopublic enterprises which was undertaken in 1987 and concluded in 1988.

16

Provisions are equivalent to 4% of BDET's loan and participationportfolios.

7. Repayments and financial profitability

Mi Arrears

Client arrears have worsened since 1984. This was due, first, toproblems encountered by several large projects, and second, to the difficulteconomic climate that the country experienced in the last few years. Thesearrears have evolved as follows:

1982 1983 1984 1985 1986 1987

…in TD million-----

A - Loan portfolio 139.4 168.7 194.2 210.6 227.6 239.8B - Total arrears 8.1 9.5 15.9 21.1 32.9 38.4C - Portfolio affected

by arrears 36.0 31.0 58.6 63.9 74.5 94.6

B/A (X) 5.8 5.6 8.2 10.0 14.4 16.0C/A (%) 25.8 18.4 30.2 30.3 32.7 39.4

As of end-1987, the structure of these arrears was the following:

Number Arrears(in TD thousand) of clients in TD thousand as X f total

Larger than 200 18 12,875 33.5Between 100 and 200 16 2.129 5.5Between 50 and 100 15 1,156 3.0Between 20 and 50 10 316 0.8Smaller than 20 26 168 0.4

Sub-total 85 16,644 43.3

in litigation 123 21.759 56.7

Total 208 38,403 00.0

The above data shows that, of all arrears, 90% are from clients now inlitigation (from which BDET holds reliable guarantees) and from 18 clientswith arrears larger than TD 200,000. Among the latter, 10 are publicenterprise whose arrears amount to about TD 9 million.

With the exception of a few projects in the tourism sectory,almost all arrears are from industrial projects.

zz In particular, Compagnie Touristique Arabe and Societe Arabe deTourisme.

17

BDET has strengthened its Legal Department to handle the increasingnumber of dossiers in litigation. BDET has also significantlyimproved iti 1.roject supervision and technical assistance activities to bemore effective in its search of solutions for projects experiencingdifficulties, and in its support to tha implementation of these solutions.

(ii) Profitability

The structure of BDET's borrowings has changed very substantiallysince 1982, as shown below:

1982- 1987Amount Share Amount Share

(TD million) (X) (TD million) (X)

- Local resources 14.7 16.2 34.3 15.6- Borrowings from bilateral or

multilateral sources 65.6 72.4 85.0 38.7- Borrowings on the internal

capital market 10.3 11.4 100.3 45.7

TOTAL 90.6 100.0 219.6 100.0

Borrowings on the international capital market has now become BDET'smain source of funds, which has resulted in an increase of the cost of itsresources. The average interest rate on borrowingsg has increased fromabout 7% in 1981 to 8.4% in 1987. However, this cost increase has beenmitigated by the fact that BDET was able to obtain favorable terms on itsborrowings:

(a) for the US$60 million F.R.N. loan contracted in December 1983,the spread applied to BDET was only 0.25%; and

(b) for the Y10 million syndicated loan - of which, half is atvariable rate - contracted from the Bank of Tokyo in 1985, the spread (forthe variable part of the loan) was 0.2% above the long-term prime rate.

BDET also made substantial progress in issuing bonds on thedomestic market, as shown by the amounts of funds mobilized in this manner:

1982 1983 1984 1985 1986 1987*

2,200 2,125 3,950 4,150 7,580 9,500

In addition to this bond issue, another one was made in late 1987, in anamount of TD 4.7 million, referred to as the "1988 Issue".

Excluding any account of exchange rate variations.

18

To improve its margin, and consistent with the general increase ofinterest rates in Tunisia, BDET raised its rates in September 1982, thenin June 1985, to reach the following valuesv.

for SMIs 12.0%for large industrial projects 12.5%for tourism 13.0%for "non resident" industries 14.0%

Moreover, BDET charges a management fee of 1% flat, as well as acommitment fee of 1%.

Also, BDET has kept monitoring closely its administrativ'e costs, whichamounted in 1987 to 0.9% only of its average assets, and 1.3% of its averagenet portfolio.

These actions, combined with a relative decline of interest rates oninternational markets since 1985, had made it possible for BDET to graduallyimprove its profit margin.

This improvement, however, was obliterated by losses on foreignexchange (FX) borrowings, which were worsened by the devaluation of the Dinar.These losses are to be covered by the FX Fund established for thispurpose-o, but ressources available to the Fund proved insufficient and onlypart of BDET losses could actually be covered. The following table presentsBDET losses on account of foreign borrowings, payments made to BDET to coverthese losses, and the year-end backlog of payments due.

BDET foreign Payments Backlog ofexch. losses made to BDET payments due to BDET…-----… in the year ---- --- at year-end-

---- …----------------…in TD '000 …---------------------

1982 3,381 1,552 4,2351983 10,698 2,220 12.7131984 8,378 2,100 18,9911985 11,755 -- 30,7461986 11,312 10,650 31,4081987 15,812 13,150 34,070

Kz Interests are paid every semester, in advance.

10, For losses on borrowings contracted after the creation of the Fund.Losses incurred on borrowings contracted before that date, are coveredby the Treasury.

19

Delays in the payments to BDET have resulted in importantadditional financial costs to BDET, as BDET had to contract expensiveshort-term loans to cover the gap caused by the above delays. In 1987,these financial costs amounted to TD 3 million.

Thus compensation payments to BDET - TD 3.875 million in 1986 , andTD 4.54 in 1987 - only cover the additional financial costs incurred by BDET,plus part of BDET losses on account of arrears from public enterprisesIt should be mentioned, however. that significant improvements in the paymentsto BDET have incurred recently, with TD 19.15 million paid in 1988.

As BDET has stopped recording the interests due on these loans.

20

PROJECT COMPLETION REPOR

TUNISIAELECTRICAL AND MECHANICAL INDUSTRY (EMI) PROJECT

(Loan 2113-tUN)

PART III: STATISTICAL INFORMTION

Ogiat.e ~hfltI ZAflI ana'e1 !eIt

a_ tee gank 13§ dflaf21- : ee ofL:asncreazt r.ttO P,,,@@, Ao.rov.i 4:t

:. nGstry IV Moden *nr .toane xS Couonotee(SOFONECA) foun@ ry otant -

. bxort Industry Fgnjnce v&sole ExaOri iSIs Next suOgvorojects miss. 06/69

>. _!t1-2 :tnee vilole lreets IglS Net sewav;n t,,e EIN setor "ass. a/sie

.. isnr2 rinence viable StI 966 Next sugarvprojects "Ci. 65/69

21

TaoL. :

OatsOt.OeItem Plannea Rovtsod Actual

. Project Briet 07/21X81 - 67/21/61O.oarto,nt Apcroval 07/28/1I 07/28J/1

3. felflow Cover 10/30/S1 - 11/13/014 N. gotiactions 12/J7/81 - 02/01/02S. Bouar Aagrov4L 02/6sq/8Z - 3/2S/82S. Sgniang ODat 03/00/82 - @5/14/627. Effecstve Oate 37/31/92 69/36/82 12/13/82S. Closing Oate !2/3?/87 12/31/88 12/31/07S. Goan Cooiaet on Oat. 66/30/58 66/30/69 06/36/86

22

si3

Aocrwaasl Este qa:e 83/8Z) USS ZO 500.aoo.oo

Actual (06/98) uss Ze0.l6,256.48

Cancelled a6/86)! US$ 9,S53,739.5ZActual aas oa cestage of Estimate 68.61

"Ite of FLnai C1sOursement U6/09/S 8

I/ Following the effectivene*s of the EMI-Z Ilne of creaat in June 19S6.

23

7ebL* 4

arnotaet Csa igM Fe naanei

Source Planned Actual Percentago- - (USS Rillion) - -

30.50 .20.92 68.6

- Line of Crecit '3.00 19.42 8.8- T.A. 2.00 2.66 166.0

(front-enG fee* (0.50) (0.50)

14.00 9.04 64.6.

Equity ana al 168.00 100.12 59.6

Ooverrment (for T.A.) S.60 5.00 S0.0

Total 217.56 135.08 62.1

24

Project Benefits

Aoprauakl Cosng Oatg

I, Nu,Dor of proj*cts 30 18

2. *Iumoor of joos crestog _6l,000 A,067

3. rotal &nveatent ;10.0 127.6USS "tithon)

25

~able o

uge gf. IA1k clesourem

A - sllss

Stage of J./Project ionth/ Numoer of Cays Ln Spoecalisation PerforoanceCycle Year Persons Field Reoresented Rating Status

A. Through AvpraIs3l

I. Me/l Z 2/4 n.2. W6/Vi 3 2a 2/4S/ n.-.3. 09/91 2 2/4

8. Suoervision

1. 04/82 1 2 210/82 1 2 2

3. 0S/83 2 t /SI4. 04/84 1 5 2 1S. 09/84 3 S 2/4/S IS. 12/84 3 4 2/4/9 17. 12/8s 2 is 2/S 2S. 0S/87 2 12 21S 2S. 02/88 I 2 2 3

I0. 06/88 3 a 2/4/S 3

.1.1 1. Oivision Chief ,/ I. litnor Problems2. Project Officer 2. Mloderate Proolems3. Loan Officer 3. Major Problems4. Financial Analyst 4. Failure5. Industrial Engineer

- iStaf nfmut (staff weeks)uo to

Boara approv. Superv. Total

Total !iout: 177.9 - 3?.: 2:5.1of whicn

Oivision Staff - Cons.: 15.8 30.1 18S.7Others: 22.3 .I 16.4

26

BDET's OPERATIONS IN 1984-88(D million)

1984 122 198Z 19881986

RLrect Loan

Approvals 46.3 40.4 30.6 25.3 60.9Commitments 41.9 31.2 30.2 22.6 23.3Disbursements 43.3 37.6 34.1 36.8 29.2

Eauitv Investments

Approvals 1.7 4.3 1.9 2.5 7.4

BDET's LOAN PORTFOLIO BETWEEN DECEMBFE 1984 AND SEPT. 1989(D million)

(As of end of period) 1984 1985 i986 1987 1988 30.9,99 (i) 30.9.89 (ii)

Loans outstanding 189.0* 205.2* 2 22.5* 235.0* 242.8* 245.4* 257.8*Loans Affected by Arrears 48.9 50.1 53.4 69.8 58.4 105.5 112.6Arrears over 3 Months 11.8 16.1 24.7 30.8 31.8 47.2 46.7Loans Affected/Loans (X) 25.9 24.4 24.0 29.7 24.1 43.0 43.7Arrears/Loans (X) 8.4 10.3 14.8 16.3 15.8 19.2 18.1Prov. for Losses/Loans (%) 3.6 3.8 3.6 3.9 4.5 4.0 4.6Rescheduling of ArrearsWrite Offs

* FOPRODI not included 5.2 5.4 5.1 4.8 4.3 4.6 4.8

(1) The September 30. 1989 situation differs front that in previous yearsbecause of (i) changes in schedule of repayments which were introduced in thelater part of the year, and (ii) the significant magnitude of repayments -falling due in the last quarter.

N

28

EDET's FINANIAL INDICATORS IN 1984:,8(D million)

(As of end of period)

Loans Outstanding 194.2 210.6 227.6 239.8 247.1Equity Investments 25.8 28.5 28.7 30.4 26.5Net Operating Profit 3.5 3.7 4.0 3.3 3.9(before provisionsand taxes) (1.0) (1.0) (1.2) (1.4) (1.4)

Net Profit 2.5 2.7 2.8 1.9 2.5Net Profit/Equity (X) 8.93 6.92 7.0 5.01 6.53Current RatioLong-Term Debt/Equity 4.65 4.81 4.73 5.34 5.34

29

(0 mt1t|4n)

LIlA L2AAiE L282 1988

rnterlst tnct

Loans 16,8 19,' 20,8 22.2 23.5Investments b Oe0ostts 0,7 0,9 0.6 1,6 2.5

ra&I Interest Incom L7,5 20.1 21,4 ?18 26

!ntereAL Ex6esea 18.6 17,6 19.2 22,- 2.4

net Interest otff. InCOme (1,1) 2.5 2,2 1.8 3.6

Otvydends Income 0.3 0.3 0,3 0.2 0,3Comissions & Other Income 6,4 3.5 4,7 5 3,S

Not ODuratIng IaQm 5,6 6,3 7.2 7.- 7,3

Qoeratflno £enses:

Staffing 1,2 1,3 1,4 1,5 1,5Oeprectation 0,4 0.5 0.6 0.5 0,6AmerttZatlon Deferrea ChargesOther AdMinistrative Expenses 0,5 0,8 1,3 1,7 1.3

IL UOrI'd LIAU n A Ae_lQ e 2.1 2,6 33,7 3.4

Net OQOratlng Profit 3.5 3. 3 3.9

Less: Provisions 0,6 0,6 0,6 0,6 1,0Extraordinary Profits

TA&xabl Prgftts 2,9 3,1 3,4 2,7 2,9

Less: Income Tax 0,4 0.4 0,6 0.8 0,4

Mgt Prqflts _~~~~~2,L5 2 1.9

At % of Average Net Assets 237,6 275,5 306,1 330,3 347,6

Int3rest tncoTw 7,37 7,30 6,99 7,21 7,48Intirest expenses 7,83 6,39 6,27 6,66 6,44Net Operating tncome 2,36 2,29 2.35 2,12 2,1Ope*ttng expOnses 0,88 0,94 1,08 1,12 0,98Proviasions 0,25 0,22 0,20 0,18 0.29Prc'tt before tax 1,22 1,13' 1,11 0,82 0.83Not Profit 1.05 0,98 0,91 0-58 0,72

Return gn Ecuity (tI 7 7 5 5 6

30ANNEX 5

Balancg Sbes IQBI&-IB

(C. million)

AS of Oecefber 31 1984 198S 1986 1987 1988

AIILLI

urrent AssetiCash and Bank 3,6 3.6 5,7 6,4 6,7Current Maturities of Loans 30,6 39,9 49,1 54,7 55,5Receivables Oor FE Losses 19 30,7 31,4 34,1 33,1Other Receivaoles 16,2 25,8 26,8 37 37.3Total Current As_tt 69,.4 100 113,- 132,2 132.6

Loans I.Eguity PortfolioLoais Outstanding 194,2 210,6 227,6 239,8 247,1Less: Current Maturities -30,6 -39,9 -49,1 -54,7 -55,5Equity tnvestments 25,8 28,5 28,7 30,4 26.5Less: Provisions for Losses - 6,8 - 7,7 - 8,1 - 9,1 - 11Otbentures & Goverrnent Bonds others 4,4ToTal N.t Portfol o 182,6 191,5 199,1 206,4 211.5

Exchange Loss OeferredNet Fixed Assets 3,3 4,1 4,5 5,3 7,2Net Deferred Charges

IQIAL 6SSEIS 255,3 295,6 316,6 343,9 351, 3

LfABrLI1rrE & SHAREHOLDERS' EOUIT

cUrrent LiabilHtis.UIf rIRCL n"4dwt iL i(Ur i.I U,Gui 16,2 11,6 16,- 17,8 19,8Olvidends & Taxes Payable 6.3 7 7,4 7,2 6,7Accounts Payable & Others 74,6 50,3 63,9 78,7 79.9

Total Current LiabilitieS 97,1 68,9 87,3 103,7 106,

Lana-Term DebtTot4l Local LoansTotal foreign Loans 146,4 199,3 205,3 220,1 224.4Less: Current maturities 16,2 11,6 16 17,8 .8Total Long-rM Oebt 130,2 187,7 189,3 202.3 204.6

eronxayj ns (fros losses of Inceas tf. pertieipetlme) ),0

f aultyShare Capital 20 30 30 30 30Reserves , DNRE, Report a nouveau (y compris 8 9 10 7,9 8,3

total Egulty r6sultat) 28 39 40 37.9 38.3

rDTAL LIABILIrTES & EOUITY 255,3 295,6 316,6 343.9 351,3

Loans/Net Assets (t) 76,1 71,2 71,9 o9,7 70,3Provisions/Loans (Z) 4,66 i,60 2,56 2,65 4,45Current RatioLong-Term Oeot/Equity'' 4.65 4,81 4,73 5,34 5,34

" Provisions in excess of probacle loan `sses are included unde. equity.

UUillE DE DE1WAff 9 rST r ONtnQUE DE 13ISIE

DDAwrTNor ussuincusAnnex 6

Project Cost, Emp1oyment, Investment per Job

Project Number Inv. cost BDET Loan [BRDCost Of Jobs per job created (in TD '000) Financing

Nauie ReRion tin TD '000) created (in TD '000) Total BIRD Fin. (TD '000)New CompaniesTANE1RI Du N0M EL UlD 2A ) 660 41.4 265.-, U * ) 4 706 106 44*3 460 322.1 394.9* _}54 38 46.-SOCIETE TUNISI N Ul JUUE 1 1 170 23 50.8 556.6 5505 105.6STE. INWS. ACCESLIWE S ELEC. 9D1,6 82) is 19 95.1a a ~~~~~ ~ ~~~~2 290 25 91.6 859.5 842 1018.6

123 128 361,3RACIEU MACNINES A BOIS TUNIS 128.7 190.5 230.9

150 150 113.1.a a 2 500 38 65.8 481,2 66,2 19.160 21.- 25.5STE. UN. D'IID. NNTIQUES SOUS-) 5 1960 1960 2398.3a a a a ~~~~~~ ~ ~~53 000 525 97.1 466 35 3.

a a a U ) 630~~~~~~~~~~~~~~~~~~~~~~~~a 192.5 1011.1 CIE. TUN. DE RSSOtS A LAES M.AOUS ) 8 000 14P 54,0 lOSS 1351 1911.1* a a a ~~~~~~~~~~~~~~~~~~~~~~~100 62.- 81.8INDUSTItE DE hIQUQ11S ZM!5 DIVE NOSTIR )IS2 1224.4 16tS 2a a ~~~a * 9 190 28.4 152 1224.4 153.9STE. A . RD. CERAMIQUE AEU 1449.5 116.5 919.3sos a * a ) 3 280 185 17.7 114 82.5 1ooSTE. COWST. ISOTUER. ET FRIG. I.A;OUS ) 634.1 136.2 202.1

* * a * )p2 050 40 51.2 90 63.6 84.3STE DE TISSAGE DaANRUU u NONASJIR 600 12 S0 M9S 631 84.23M. ANC ALIIWTATION L ) 2 213 61 33 363 163,3 198.2a a 66 '~~~~~~~~~~~~~~~~~~~~~~~~~I3.2 51.9

-~ ~ O 91.6Subtotal I 82 605 1 3S9 60.8 14 9396 1 73S 13.9108

9396 1 73 3 70I

-BANE DE DEVELOPPENET ECOWNICUE DE TUNISIE Annex 6 bDEPARTRID REWSOURCES

Project Cost, Emp1oyment, Investment per Job

------------------ e--O--------…---NAME t * Project t Number of Inv. cost E _ L

NAME I REGION I Cost a jobs 1 per job I _ IBRD -Finan isgI I (TD '000) Icreated Icreated I Total Financig (TD '000)

~~------------ - - ------- -------- 11M !(W I- Ir ---------e- ---- --I I I~~~~~------ - …----EXISTING COMPANIES a acommSA ITUNIS I 600 1 - I - I 390 1 143 1 185,1SACB BIZERTE 955 £ 703,31 832,2SACEI I BIZERTE 1 7 272 1 309 J 23,5 I 1 617 1 249,2 1 304,3SACDI 1 BIZERTE 595 96.7 127,1SOCIETE EIMERE I I I I I I IYUNISIINE ----- I TUNIS t 2 460 1 104 1 23,6 1 1 111 1 973 1 1 388,6SINE? B sizE 3 400 9 102 1 33,3 1 300 287.9 1 399.5SOCIETE ELECTRO AL I I I J 171 t S,2 1 6I31 1 388 1 16 1 24,3 1~I 17 3 5, ,SOCIET ELECTRONEAL IB.AROUS 3 1 t J 68,5 1 53,4 68,8SOCIETE SACHERIE W I I I I I I ICUNTRE …--------- I KASSERINE I 1 260 1 100 1 12,6 J 882,5 1 809,8 1 944,6SOCIETE VaGENOTEURS StssE 1 408 1 67 1 6,1 1 10 1 176,5 | 238

Subtotal II I 15 788 I 698 I 22,6 1 6 276,2 t 3 498 1 4 494.5I I I I I I

TOTAL t 98 393 1 2 057 1 47.8 1 21 215,8 1 14 233,3 118 465,1I I I I I - 3:

_____________________________________________________________ ____ ___ ____ ___ ___ ____ ___ ___ ____ ___ ___

x

Project Analysis by Manufacturing Sector iae. 7Loan 2113-TUN

IBRD Financing zNumber (US$ '000)

MbE~ * 6 03s,s 32.7

Construction, glass ceramics 2 3 464 12,,

Chemical products, rubber 2 4 70l1.3 25.4

Plastic

IAA 3 t 915,6 10.4

Textile, Clothing, Leather 2 1 489,9 7.7

Wood, Cork, Furniture

Hotel & Tourism

Transport

Paper & Printing 1 944,6 5.

Building & Public Works

Miscellaneous

I8 18 465,3 300

I!