Document of

The World Bank

Report No: 20422-TUN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF EUROS 112.1 MILLION EQUIVALENT

TO THE

REPUBLIC OF TUNISIA

FOR A

WATER SECTOR INVESTMENT PROJECT

05/10/2000

Rural Development, Water and Environment Group, MNSREMiddle East and North Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective )

Currency Unit - Tunisian Dinar (TND)TND 1.29 = US$ 1.00US$ 1.00 EURO 1.11

FISCAL YEARJanuary I - December 31

ABBREVIATIONS AND ACRONYMSAfDB African Development BankANPE National Environment Protection AgencyAPL Adaptable Program LoanASIL Agricultural Sector Investment LoanASIL2 Second Agricultural Sector Investment LoanAVFA Agricultural Extension and Training AgencyBCT Central Bank of TunisiaCAS Country Assistance StrategyCFD Caisse Francaise de DeveloppementCRDA Regional Commissariats for Agricultural DevelopmentDGFE Directorate General of Finance and EncouragementsDGGR Directorate General of Rural WorksDGPA Directorate General of Agricultural ProductionDGRE Directorate General of Water ResourcesERR Economic Rate of ReturnFMPM Financial Management Procedures ManualFMS Financial Management SystemGCF General Controller of FinancesGOT Government of TunisiaICB International Competitive BiddingIRESA Institute of Agricultural Research and EducationKfW Kreditanstalt fur WiederaufbauLSDP Letter of Sector Development PolicyMETAP Mediterranean Environmental Technical Assistance ProgramMOA Ministry of AgricultureNCB National Competitive BiddingNPMU National Program for Modernization and UpgradePFS Project Financial StatementsPMR Project Management ReportPMT Project Management TeamSEA Sectoral Environmental AssessmentSOE Statements of ExpendituresTOR Terms of ReferenceWRM Water Resources ManagementWSIP Water Sector Investment ProjectWSR Water Sector ReviewWUA Water Users Associations

Vice President: Jean-Louis SarbibCountry Manager/Director: Christian Delvoie

Sector Direcfor: Doris KoehnTask Team Leader/Task Manager: Madani M. Tall

TUNISIATN-WATER SECTOR INVESTMENT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 4

C. Project Description Summary

1. Project components 42. Key policy and institutional reforms supported by the project 53. Benefits and target population 64. Institutional and implementation arrangements 7

D. Project Rationale

1. Project alternatives considered and reasons for rejection 82. Major related projects financed by the Bank and other development agencies 103. Lessons learned and reflected in proposed project design 114. Indications of borrower commitment and ownership 125. Value added of Bank support in this project 12

E. Summary Project Analysis

1. Economic 122. Financial 133. Technical 14

-4. Institutional 145. Environment 166. Social 187. Safeguard Policies 19

F. Sustainability and Risks

1. .Sustainability 202. Critical risks 213. Possible controversial aspects 21

G. Main Conditions

1. Effectiveness Condition 212. Other 21

H. Readiness for Implementation 22

I. Compliance with Bank Policies 22

Annexes

Annex 1: Project Design Summary 23Annex 2: Project Description 29Annex 3: Estimated Project Costs 32Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 33Annex 5: Financial Summary 41Annex 6: Procurement and Disbursement Arrangements 43Annex 7: Project Processing Schedule 53Annex 8: Documents in the Project File 54Annex 9: Statement of Loans and Credits 55Annex 10: Country at a Glance 57

MAP(S)No. IBRD 28811

TUNISIA

TN-WATER SECTOR INVESTMENT PROJECT

Project Appraisal Document

Middle East and North Africa RegionMNSRE

Date: May 10, 2000 Team Leader: Madani M. TallCountry Manager/Director: Christian Delvoie Sector Manager/Director: Doris KoehnProject ID: P035707 Sector(s): Al - Irrigation & Drainage, WY - Other Water

Supply & SanitationLending Instrument: Specific Investment Loan (SIL) Theme(s):

Poverty Targeted Intervention: N

Project Financing Data1 Loan O Credit O Grant D Guarantee O Other (Specify)For Loans/CreditslOthers:Amount (US$m): EUR 112.1 million Equivalent

Proposed Terms: Fixed-Spread Loan (FSL)Grace period (years): 5 Years to maturity: 17Commitment fee: 0.85% for first fouryears; 0.75% thereafterFront end fee on Bank loan: 1.00%Financing Plan:. Source, Local Foreign. TotalGOVERNMENT 137.50 0.00 137.50IBRD 6.00 97.00 103.00KREDITANSTALT FUR WIEDERAUFBAU 2.50 15.00 17.50

Total: 146.00 112.00 258.00

Borrower: GOVERNMENTResponsible agency: MINISTRY OF AGRICULTURE

Address: 30, rue Alain Savary, 1002 TunisContact Person: Abdallah Mallek, Director General, DGFETel: 216-1-842687 Fax: 216-1-784447 Email:

Other Agency(ies):Ministere de la Cooperation Internationale et de hInvestissement ExterieurAddress: 98, Avenue Mohamed V, 1002 Tunis-BelvedereContact Person: Mr. Kamel Ben Rejeb, Director GeneralTel: 216-1-798-522 Fax: 216-1-799-069 Email: Multilaterale@mci.gov.tnEstimated disbursements ( Bank FY/US$M):

FY 2001 2002 - 2003 2004 2005 2006Annual 5.0 20.0 25.0 25.0 20.0 8.0

Cumulative 5.0 25.0 50.0 75.0 95.0 103.0

Project implementation period: 2001-2005Expected effectiveness date: 01/02/2001 Expected closing date: 06/30/2006

OCS PAD FOt- MF . 2000

A. Project Development Objective

1. Project development objective: (see Annex 1)

The project's main objectives are to (a) promote effective integrated water resource management by: (i)establishing/implementing an sound institutional framework and sector reform measures for demandmanagement (revised tariff policy, new institutional arrangements) as shifting programs from supply todemand management is the main thrust of the Government's strategy in the sector, (ii) improving thecapacity of the Government, Water Users Associations (WUAs) and private operators to efficiently manageresources, and (iii) facilitating real-time management of ground and surface water (from conventional andnon-conventional sources); and (b) promote conservation of water resources and protection of theenvironment. These two objectives are expected to significantly improve the productivity of agricultureand access to safe water in rural areas.

2. Key performance indicators: (see Annex 1)

Key indicators of progress for achieving project development objectives will monitor the effectiveness ofpolicies and investments and their impact on both the beneficiaries and the water resource base. Thiswould enable the Government to assess the phasing of investments, policies and institutional measuresduring the duration of the WSIP and provide the basis for long term support of the water sector (notablyduring a follow up project: WSIP2). For objective (a): indicators will, on the institutional front, monitor:(i) the effectiveness of institutions involved in the water sector (including WUAs) as a result of betterdefined mandates, improved skills-mix and additional training; and (ii) the degree of successful transfer ofoperation, maintenance and replacement functions to beneficiaries. On the financial front, indicators willmonitor (i) the impact of policies, as they pertain to cost recovery, and sustainability of maintenancemechanisms; reduction of subsidies to CRDAs and impact of reforms; and (ii) the impact of an expansionof recent water pricing reforms and water savings policies (programme national d'6conomie d'eau). On thephysical front, indicators will monitor (i) water use efficiency in relation to water availability from surfaceand groundwater sources. For objective (b): indicators will monitor: (i) the sustainability of water use(quality and allocation parameters) through more effective instruments and water allocation betweenperimeters and/or subsectors (agriculture, tourism and industry). It is important to note however that dueto the duration of the WSIP (five years) and the annual variability in climatic conditions in Tunisia, theassessment of the full impact of these measures will be difficult. The key performnance indicators are listedin Annex l. They were finalized during appraisal and reconfirmed during negotiations.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: R 2000-46 Date of latest CAS discussion: 04/27/2000

A series of in-country consultations, convening stakeholders from various levels of government, sectoralministries, and civil society have been undertaken in preparation of the CAS. This process culminated withits adoption by the Board on April 27, 2000.

The sector-related CAS goals are to: (a) improve the conservation and sustainable management ofnatural resources, mainly water, and the protection of the environment; and (b) help alleviate poverty,especially in rural areas by encouraging a more efficient irrigated agriculture (stressing high value cropswith proven competitive advantage) and supporting a long-term water management strategy that does notpenalize poor rural dwellers. The first CAS-related goal would be supported by the project by: (i)strengthening water sector institutions in key public functions (strategic planning, monitoring, regulatory

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mandate, and sensitization) and facilitating their retrenchment from those to be carried out,by the privatesector, notably WUAs; and (ii) encouraging greater efficiency in the use of scarce water resources, inparticular in the agriculture sector which uses 85% of the available water, through policy measures (tariffand regulatory), and investments over the duration of the proposed project. As for the secondCAS-related goal, it is expected that the WSIP would help mitigate the effects of droughts on smallfarmers (an important group of the population around the poverty line in the rural areas) through increasedaccess to water as a result of better usage and less wastage in irrigated perimeters, and improved access tosafe drinking water, and tariff revisions which do not penalize the small farmers.

2. Main sector issues and Government strategy:

Background. The Water Sector has always been at the center of Government's development agenda inTunisia. Its strategic importance is even more pronounced in the agriculture sector which consumes 80%of water resources. As such, it has benefited from considerable public investment since independence (over$2 billion or 37% of the public investment budget for agriculture during the IXth plan alone-1997-2001)which have translated into major water mobilization infrastructure (22 large dams, 100 hill dams, 500 hilllakes, 120,000 tubewells etc.) thereby reducing the country's vulnerability to irregular rainfall and recurrentdrought, bringing irrigated areas to about 350,000 ha (400,000 ha by the start of the Tenth Plan-2002), andpotable water to meet the demands of close to 80% of rural households, all urban areas, tourism andindustry alike. Irrigated agriculture covers only about 7 percent of agricultural' land but generates 45% ofagricultural output. There are about 125,000 farmers that practice irrigation of some type, with half ofthose relying on shallow dug wells, 30 percent on surface mobilization, and 20 percent on tubewells.Thanks to important efforts to promote water users associations (WUAs), there are now about 2450 WUAsin Tunisia (1500 for Potable Water; 800 for Irrigation; and 150 for Potable Water'and Irrigation). Parallelefforts at commercialization/privatization of the Water Supply and Sanitation sector are also ongoing.

A strong institutional setup and legislative framework, coupled with a solid sustainable development policy,has also enabled Tunisia to stand at the forefront of the Middle East and North Africa Region in the area ofnatural resource management and environmental protection. While these efforts have allowed the countryto register these important gains, it has become apparent to Government that if current trends persist, watershortages would be inevitable by 2015 as Tunisia would have developed, by then, its full water resourcepotential while demand for water would continue to increase. In this context, and in recent years, theGovern-ment of Tunisia with the support of major donors (AfDB, AFD, IBRD, JBIC, KfW, etc.) hasconducted a number of key studies (Eau 2000, Eau 21, etc) which culminated with a major comprehensiveWater Sector Review (Etude sur le Secteur de l'Eau) destined to provide a new strategy for integrated waterresource management in Tunisia. The Water Sector Review (WSR), which main thrust is participatorydemand management, was completed in April 1999, and soon after presented at a Round Table in Tunis. Ithas been endorsed by the Government as the basis for the proposed project and all future investments in thewater sector in accordance with the new strategy. Its mains guidelines will be included in a Letter of SectorDevelopment Policy (LSDP). This long term strategy specifically addresses the following sector issues: (i)integrated management and conservation of water resources; (ii) economic efficiency of irrigation wateruse; and (iii) institutional restructuring and capacity building in the water sector.

For Integrated management and conservation-of water resources, the Government is working on two fronts.On the technical front, it intends to facilitate (i) increased interconnectivity of mobilization and transferinfrastructure; (ii) improved technical capacity for surface water management based on real time data andmanagement of groundwater (including registration, qualitative and quantitative monitoring); (iii) propermanagement of good rainfall years and reduction of physical losses; and (iv) at a later stage, greater use ofnon-conventional water resources (desalinization, reuse of treated wastewater, artificial recharge where

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economically justified). On the legislative front, the Government will monitor pilot activities on the groundand progress of participatory management and supervisory approaches to be tested during the WSIP so asto update the Water Code in the follow-up phase (WSIP2).

For Economic efficiency of irrigation water use, the Government wants to encourage (i) the use of water asan economic input in competitive and profitable crop production as a result of progressive tariff reforms;(ii) policies to improve modernization and efficiency of irrigation activities; (iii) legislative and institutionalreforms to encourage water management by users; (iv) agricultural intensification in existing irrigationareas, and increased productivity of water used in irrigated perimeters through improved farming practicesand better cropping strategies.

On Institutional restructuring and capacity building in the water sector, the Government wants to reduceexcessive involvement of State agencies, improve administrative and financial management, andaccountability with a view to progressively reduce subsidies. This is to be achieved through the progressiveretrenchment of the State from non-public functions in the sector to the benefit of the private sector andWUAs. The latter would be strengthened and therefore be expected to take on more responsibilities(financial, technical and managerial). New skills (water economics, statistics, MIS, M&E, communityorganization and participation, etc.) needed to solidify a demand management strategy would also bedeveloped and the efficiency of support services would be improved as a result of ongoing and expectedreforms in agriculture and research institutions (AVFA, IRESA in particular).

3. Sector issues to be addressed by the project and strategic choices:

The sector issues to be addressed by the project are fully in line with those summarized above. With regardto integrated mana ement and conservation of water resources, the project would focus on water resourcesthrough irrigation improvement in large and small scale perimeters, groundwater monitoring andprospecting, water quality control and greater support to, and empowerment of, WUAs. On economicefficiency of inigation water use, tariff measures and water saving policies will be pursued andprogressively deepened to cover more CRDAs (at least 10 by end of the WSIP) and irrigated perimeters.Institutional restructuring and capacity building would be addressed through the addition of new skills inMOA, the development of new training modules oriented toward demand management, specificcapacity-building activities for WUAs and the private sector, and the facilitation of systematiccollaboration between concerned public entities (MOA, Environment, ONAS, ANPE, SONEDE, etc.).

All of the above would support the clear strategic choice made by the Government, notably the shift fromsupply (water mobilization) to demand management (through financial/pricing, technical, legal, andinstitutional measures). The proposed WSIP would also be the principal vehicle to support implementationof priority reforms, greater involvement of the private sector, and investments needed to facilitate integratedwater management and environmental protection. In order to reach consensus on these priority reforms,pilot operations and investments to be included in project, appraisal efforts have built on the extensiveconsultation process initiated during the water sector review (WSR) with all key stakeholders (UTAP andWUAs in particular) and key donors (AFD, AfDB, EIB, EU, JBIC, KfW, etc.) in the sector.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

In addition to key policy and institutional reforms measures described in Section C-2, the project would bedeveloped around the following investment components: Irrigation Management (including small and

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large scale perimeter rehabilitation); Groundwater Management; Conservatdon of Water Resourcebase and Environmental Protection; Rural Water Supply; and Capacity-Building. Central to allcomponents would be knowledge development and dissemination.activities for irrigation efficiency andmanagement, drainage and salinity management, acquifer recharge, treated waste water reuse, etc. Thiswill also be complemented by the strengthening of public/private capacity for needed research andextension in the upcoming Bank-supported Agriculture Services Initiative. A detailed description of projectcomponents is available in Annex 2.

Indicative Bank- %,ofComponent -Sector Costs % of financing Bank-

-_____ ._ --__ .__ .;__ :_-______ NUSM) -Total T OUS$M financingIrrigation Management Irrigation & 112.20 43.5 44.70 43.4

DrainageGroundwater Management. Natural 80.70 31.3 24.80 24.1

Resources. Management

Water Conservation and Natural 4.90 1.9 3.60 3.5Environmental Protection Resources

ManagementRural Water Supply Rural Water 51.90 20.1 26.30 25.5

Supply &Sanitation

Institutional Strengthening and Institutional 8.30 3.2 3.60 3.5Capacity-Building Development

Total Project Costs 258.00 100.0 103.00 100.0Front-end fee 0.00 0.0 0.00 0.0

Total Financing Required 258.00 100.0 103.00 100.0

2. Key policy and institutional reforms supported by the project:

In agreement with the Government of Tunisia, the Water Sector Investment Project (2001-2005) would bethe first of two consecutive loans, in line with the country's Xth and XIth Development Plans, to assist theGovernment of Tunisia in implementing a series of reforms and supporting investments destined to installdemand management practices in accordance with the new strategy for the water sector. Accordingly, it isexpected that implementation of key reforms would be done in two stages. A number of first round reformswould be supported during WSIP. They include (i) delegating progressively overall responsibility for themanagement of irrigation perimeters, including those of the State, to Water Users Associations; (ii)extending modem commercial cost and income accounting practices to all CRDAs with a view tointroducing transparent billing and contracting procedures between Government and WUAs, and reduce thecost of water delivery in the irrigation sector; (iii) the implementation of a water tariff structure based onfixed and variable terms (tarification binome) across priority CRDAs building on current elements (15%nominal increase for irrigation water per year, 10% for potable water, binomial tarification, tranching, etc.)

(iv) establishing a socio-economic unit for water resources management at the Ministry of Agriculture asa prelude to future institutions which would see a greater implication of other sectors in water managementdecisions; and (v) the formulation of a communication strategy for water conservation.

In addition, the Government of Tunisia has agreed to include in the WSIP, studies and pilot investmentsthat would help prepare a second set of reforms to be implemented during the course of WSIP2

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(2006-2010). The "readiness" of these reforms, for which additional work, piloting of new innovations andconsensus-building is required, would be determined at Mid-Term Review (June 2003). They couldinclude: (i) the revision of the Water Code to: include the definition of time-bound water use rights andprovision for contractual trading of such rights, establish the principle that irrigation tariff policy includespartial recovery of capital costs (current recovery rates vary from 50% to 125% of O&M depending on theregion and/or type of perimeter but Tunisia is doing better than most countries in the MNA region: nationalaverage of O&M cost recovery rate in 1999 was above 90%), and ensure that potable water tariffs reflectlocal mobilization costs, and revision of restrictions pertaining to treated wastewater reuse, etc; (ii) thedefinition of a new water tariff structure integrating both surface and ground water; (iii) the restructuring ofwater institutions (including the transfer of non-public functions to the private sector and WUAs, and thestreamlining of the remaining public water institutions); and (iv) the creation of economic and institutionalmechanisms for efficient transfer of water from agriculture to other sectors (Urban, Tourism and Industryin particular) and the promotion of non-consumptive water uses. The detailed list of the policy reformmeasure that will be prepared and monitored, and the timetable for their implementation under WSIP and asubsequent phase were discussed with the Government during appraisal and reconfirmed duringnegotiations.

3. Benefits and target population:

It is expected that the Project would generate significant benefits by improving water. resourcesmanagement and promoting participatory management of water resources in agriculture, through improvedirrigation efficiency, and improved ability to monitor both water quality and quantity. Overallsustainability of investments in small-scale irrigation systems will be improved and public and privatewater sector institutions will be strengthened leading to environmentally sustainable use of the waterresource base.

The proposed reforms, coupled with investments in the sector are expected to result in a significantstrategic shift to demand management and address the water sector's basic structural deficiencies. Betterparticipatory water resources management with institutions (public and private) able to respond tochanging water needs, effective institutional and regulatory framework for effective water resourceallocation, and empowered Water User Associations with the needed financial and managerial autonomywill help achieve the following important benefits: Environmental benefits would be generated as a resultof sustainable surface and groundwater management through improved monitoring, and the introduction ofparticipatory aquifer management techniques. Groundwater exploration and monitoring would also providethe foundation for water resources inventories (quality and quantity) and help define sustainable extractionrates for economic uses. This will help Tunisia in establishing groundwater management plans for itsat-risk aquifers. Surface water users will also benefit from reduced losses, better management, andimproved measurement. The latter, coupled with the generalization of commercial cost and incomeaccounting, would also benefit the CRDAs and the canal authority (SECADENORD) in improving theefficiency of the billing system. With regard to irrigation, the WSIP is expected to result in improved waterresources planning, integrating direct users as well as third-party users. As for Economic and Socialbenefits, the rural water supply component will result in improved access to safe and potable water for100,000 rural dwellers. The small-scale irrigation development component would result in an additional3260 hectares in 19 govemorates where the average farm-size is about 3.2 ha. About 1200 farmhouseholds are expected to directly benefit from the estimated net increase in total value of agriculturalproduction of TD 12.4 million annually and from the stabilization of their incomes from drought impacts.Irrigation rehabilitation and modernization will result in improved irrigation efficiencies with a concomitantreduction in amount of water consumed. This would result in the improvement of 9900 hectares (includingthe geothermic perimeters) in 15 governorates. About 1000 farm households are expected to benefit from

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improved yields and reduced O&M costs. The treated wastewater reuse component is expected to directlybenefit about 200 farm households. The creation of 17 sources of water supply to consolidate thehydraulic infrastructure in the pastoral areas of the governorates of Medenine, Kebili, and Tataouine isexpected to benefit about 30,000 pastoralists. The flood water management component is expected tobenefit about 150 farm households. The groundwater management component, the water conservation andenvironmental management component, and the capacity building component will indirectly benefit farmersand other water users through improved data collection and management, more sustainable use of the waterresource base, and improved strategic planning in the water sector. Finally, long term fiscal impact ongovernment resources as a result of reduced subsidies is expected to be significant.

4. Institutional and implementation arrangements:

Institutional and implementation arrangements would follow those established for ASIL and ASIL2. Thesehave proved to be fully satisfactory.

Project Coordination. Overall project coordination among the executing units would be assured by theDGFE (Direction Generale du Financement et des Encouragements) and a Coordinating Committee chairedby the Minister of Agriculture and comprised of key directorates and other institutional partners (MCIIE,MINFIN, MINECODEV, MEAT, ONAS, ANPE, SONEDE).

Project. Implementation. The Ministry of Agriculture would be the overall executing agency forimplementation of the project, with investment preparation guidelines and sub-sector policy pursued at thecentral Ministry level by the: (i) Directorate General of Rural Works (DGGR) for the irrigation and ruralwater supply components; and (ii) Directorate General of Water Resources (DGRE) for the groundwatermonitoring and prospecting component. At the regional level the Regional Commissariats for AgriculturalDevelopment (CRDA) would be responsible for sub-project identification, preparation and monitoring andfor coordination across technical units at the local level. For activities for which close collaborationbetween the Ministry of Agriculture and its traditional partners (ONAS, SONEDE, AVFA, and IRESA) isrequired, contractual agreements would be established along the same lines as those in effect in ASIL2.

Financial Management. The Financial Management System (FMS) in place in the MOA, is based onprinciples and procedures defined by the legal framework applicable to the' pubic sector and morespecifically to governmental institutions. MOA is maintaining an accounting system based on the cashbasis and the outline of budget components according to the provisions of the Public Accounting Law.The financial management system in place is overall satisfactory but still in a transition phase. A NationalProgram of Modernization and Upgrade (NPMU), has been launched in 1994 and aims at improving theMOA's management information system by December 2002. In the meantime and in order to have inplace a complete and sound financial management system, DGFE will set up arrangements specific tothe project, as reflected in the agreed time bound action plan, by no later than September 30, 2001. These financial management arrangements are detailed in annex 6 and summarized below.

Accounting, and financial reporting. Accounting and financial reporting will be assured centrally by theProject Coordination Unit within DGFE. During the first three years (2001-2003), Technical Directoratesinvolved in the WSIP will act on behalf of CRDAs and would be responsible for financial management andaccounting duties for activities managed by their field representatives. They would maintain accountingrecords for components under their responsibility, prepare and disseminate sub-project accounts financialmanagement reports. They would also ensure timely transmission of these accounts and reports to DGFE.DGFE would be responsible for aggregating this data and submitting to the Bank, by no later thanSeptember 30, 2001 a semi-annual project management and monitoring report. DGFE would also be

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responsible for issuing, no later than September 30, 2001 a simplified financial report and its submission tothe Bank on a quarterly basis. The financial reporting system will be reviewed in December 2002 in lightof the NPMU's achievements, in order to reconsider, after discussions with the Government, the frequencyof the submission of the integrated project management report. This is an exception as it goes beyond the18-month period for implementation of action plans under the Bank's Project Financial ManagementManual. The reporting frequency.of six months agreed with the Tunisians is also higher that thethree-month reporting requirement for PMRs as proposed under by the Project Financial ManagementManual. However, it is considered acceptable as it would be supplemented by quarterly financial reports.This will give the Tunisian the needed flexibility in reporting until the NPMU is in place given (i) the natureof the project, and (ii) the multiplicity of entities involved (23 administrative regions), while at the sametime ensure that the Bank gets information it needs for proper implementation and financial monitoring.

Audits. The General Controller of Finance (CGF), as auditor acceptable to the Bank, will be appointed tocarry on an annual audit according to the International Standards of Auditing as issued by the InternationalFederation of Accountants, the Bank's Guidelines (e.g. Financial, accounting, reporting and auditinghandbook, "FARAH") and specific Terms of Reference (TORs) acceptable to the Bank. The auditor willexpress a professional opinion on the annual project financial statements. An annual audit report will bemade available to the Bank within six months of the close of each fiscal year.

Monitoring and Evaluation Arrangements. The DGFE would be responsible, with inputs from allimplementing units, for monitoring of financial and physical progress on investment implementation, forprogress reporting on the execution of policy measures and development impact, for coordinatingdisbursement. On these basis, DGFE would prepare agreed reports.

The above arrangements were detailed during appraisal and reconfirmed at negotiations.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

During pre-appraisal, it was agreed that the proposed WSIP, if implemented as the first of two consecutiveoperations, would be best suited to launch this process as it would enable the development andimplementation of successive, logically sequenced reforms and investment in line with the 10th and 11thplans. An Adaptable Program Loan (APL) was considered at some point but the Tunisia Govermmentpreferred the option of separate but consecutive loans. While some of the objectives sought after throughthe WSIP (improved public sector management, greater efficiency of public sector expenditures,institutional reforms and increased privatization of irrigation) could have been tackled by other operations,i.e., Institutional Development Projects, Agricultural Sector Reform Projects, the comprehensiveapproach proposed under the WSIP with water as the central theme was judged the best. Also, to ensurethat the WSIP does not present the shortcomings of a "classic/stand-alone" investment loan, theGovernnent intends to implement it within the framework or "Cadre de Coherence" stemming from theWSR and endorsed in a long-term focused Letter of Sector Development Policy (LSDP). The LSDP wasdiscussed at appraisal finalized at negotiations. The LSDP would also be the basis for all futureinvestments and reforms in the water sector. Early in the preparation process, a series of Learning andInnovation Loans, to be followed by stand-alone investment loans were also considered and latterabandoned as they would have been limited in scope, could not have provided the all-encompassingframework for long-term commitment, and would have been more time-consuming in their processing. TheWSIP, as envisaged, would help the Government break away from past practices of supply management inthe water sector in favor of a long term demand management strategy. This is a major undertaking which

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needs to be sustained over time. In the case of Tunisia, it is expected that the major reforms needed to gobeyond conventional water mobilization and establish a framework and capacity for demand managementthrough legislative, fiscal, economic, institutional and technical reforms would be carried out during thespan of the 10th and I 1th National Economic and Social Development Plans (2002-2006; 2007-201 1).

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2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

La"testS SuervsoSector Issue Projet S Raii i

Implementation DevelopmentBank-financed Progress (IP) Objective (DO)Small-scale irrigation investment and Second Agricultural Sector S Suser-group management; groundwater Investment Loan (Ln. 4278,exploration and monitoring FRF246m, ongoing)

Small-scale irrigation investment and First Agricultural Sector S Suser-group management; groundwater Investment Loan (Ln. 3661,exploration and monitoring; hill dam $120m, ongoing)investment and social impact

Public irrigation perimeter operations, Irrigation Management S Smaintenance and management Improvement Project (Ln.

2573, $22m, completed)Treated waste water reuse Greater Tunis Sewerage and S S

Reuse Project (Ln. 4175,FRF283m, ongoing)

Other development agencies

Small-scale irrigation rehabilitation and Small- and Medium-Scalemanagement Irrigation (KfW, ongoing)

Rural potable water investment and Second Rural Potable Waterparticipatory management Project (KfW, ongoing)

Real-time management of reservoir Optimal Management of Waterstocks and water transfers; modeling for Resources (GTZ Projectmanagement of reservoir water quality 92.2507.9, ongoing)

Groundwater management Water Management in SouthemrOases (OECF, ongoing)

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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3. Lessons learned and reflected in the project design:

The proposed WSIP builds on lessons learned during the implementation of major projects in the watersector (ASIL, ASIL2, Rural Water Supply and Sewerage, Greater Tunis Sewrage and Reuse Project) andfindings of strategic studies (Eau 2000, Eau 21, Etude sur le secteur de l'Eau) undertaken during the pastseveral years and corresponding consultations with key government staff, donors and the private sector(WUAs and UTAP in particular). Key lessons include: (i) the need for extensive consultation on thereform process, (ii) the need for capacity building concomitantly with investments, and (iii) progressivity inthe implementation of policy measures. As a result, planned reforms were designed after extensiveconsultation with all stakeholders. Their impacts will be closely monitored so as to gradually phase them inon the basis of a consensus and not conditionalities. Experiences with water sector projects in othercountries (Algeria, Morocco, Jordan, Cyprus, etc.) have been looked at during the project design process.Key issues addressed during appraisal and reflected in the project design concern:

* Sustainable Groundwater Management. The appropriate management approach will vary according tocircumstances, but what is most urgent for the Government is to develop a methodology and capacityfor participatory design and implementation of groundwater management. The WSIP would pilot thisapproach.

e Water Users' Associations About 60% of existing WUAs are yet to achieve financial autonomy. TheWSIP would support WUAs in the irrigation subsector towards such financial autonomy.

* Multiplicity of Technical Units. The structure of the Ministry of Agriculture at both the central andregional levels fragments water management into a number of technical units. This does not facilitatecomparison across technical options for solving local water availability/management constraints toidentify the least-cost alternative. The WSIP would help re-focus technical departments more on policyformulation and monitoring and less on investment project preparation and support the creation of asocio-economic unit at the cabinet level at MOA.

* Participator Management. Beneficiary involvement from the beginning for agricultural investmentprojects that use water (e.g. irrigation infrastructure) is critical to the success of their activities and forguaranteeing the durability of water systems. The Ministry of Agriculture has strengthened itsparticipatory methodology for small-scale irrigation creation and is already implementing this forASIL2 sub-projects. This methodology would be monitored during implementation through beneficiaryassessments, refined, and its application extended in the proposed WSIP for investments in artificialrecharge, rural water supply, and the rehabilitation of irrigated perimeters in particular.

* Institutional Responsibilities for treated wastewater re-use and water quality issues in agriculture arefragmented among ONAS/the Ministry of the Environment, the CRDAs, user associations and theMinistry of Public Health. The WSIP would strengthen coordination mechanisms, and supportcapacity building efforts in the implementing agencies.

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4. Indications of borrower commitment and ownership:

The Government of Tunisia is fully committed to, and engaged in, the realization of the WSIP. Itscommitmnent and ownership are reflected through: first satisfactory implementation of ongoing projects inthe water sector and its full involvement in the definition of key issues and terms of reference forpreparatory studies; second, efforts undertaken to finance a National Round Table on the water sector, andhave the main findings of the Water Sector Review discussed and internalized by all key stakeholders; andthird, the formulation of a LSDP which includes the main underpinnings of the Note d'OrientationStrategique pour le Secteur de l'Eau (a vision statement for the water sector to be the basis for futurepolicy reforms and investments in the water sector). Still, two important aspects would need to be takeninto account: (i) strong consensus would need to be built around potentially difficult policy reforms,notably when trade-offs are made in the context of intra (cereallsubsistence agriculture versus high-valuecrops) and cross-sectoral (tourism versus agriculture versus industry) water management; (ii) the pace withwhich WUAs are expected to achieve full financial autonomy still generates discussions, especially forWUAs in certain less-favorable areas. This means that recommendations which have, been approved at thetechnical level and ambitious proposals stemming from them would need to be endorsed at the politicallevel before their implementation and as they come on stream during the WSIP and beyond, notably duringWSIP2.

5. Value added of Bank support in this project:

Value-added (for the Borrower) of Bank support is two-fold:

* The Bank has built good experience in the Middle-East and North Africa in particular on policydialogue, sector work, and operations dealing with the water sector. The Bank can facilitate access toinformation, lessons learned, best practices on areas 'where the Government needs it: water resourceseconomics, institutional management, regulatory and participatory issues. Having experienceddifficulties in pushing some reforms in the areas of tariff systems, institutional restructuring,decentralization, etc. in certain countries, the Bank is also best placed to realistically assess thelikelihood of progress on the above-mentioned reforms.

3 Bank's participation builds on important investments undertaken in the sector, a trusting collaborationand therefore provides continuity for implementation of the (sought after) long term water managementstrategy. Moreover, other donors active in the water sector in Tunisia are ready to intervene evenmore actively in the context of a new strategic framework and are looking to the Bank to take the leadin assisting the Government define the frarnework and help implement it.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):

* Cost benefit NPV=US$12.4 million; ERR = 18.1 % (see Annex 4)O Cost effectivenessO Other (specify)The correction of current distortions in water pricing will require definition of long-term objectives andproper phasing of a revised tariff structure to be spread over WSIP and WSIP2. For agriculture inparticular, this would entail (i) defining to which extent capital cost recovery for both CRDAs and WUAsshould be sought; and (ii) pricing of water extraction from acquifers to reflect opportunity costs (a keytenet of an integrated water resources management strategy), etc. The WSIP, as a key component of futureinvestments in the sector, would also promote a sector investment approach. As such, an assessment of

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MOA's overall draft public investment program in the water sector for 2000 was reviewed during thepreparation. As done for ASIL2, it will be reviewed on an annual basis.

Cost-benefit analysis will be used for the large and small-scale irrigation rehabilitation components withcriteria of a minimum ERR of 10 to 15% depending on the type of perimeter (new or rehabilitated). Thetechnical departments concerned already have the requisite procedures in place based on experience fromearlier Bank-financed agriculture sector projects, and these will continue to be reviewed by Bank staff forquality control during supervision missions. Cost-benefit analysis will also be applied to the groundwaterexploration based on new procedures instituted under the ongoing ASIL2. This will include adequatecomparison with other options for mobilizing water for a given locality. Site selection for exploration andmonitoring tubewells will be based on rigorous technical evaluation that incorporates economicjustification. Exploration will be justified through demonstrating that the expected value of new waterresources is greater than the costs of exploration. Cost-effectiveness criteria would be applied to thegroundwater monitoring (piezometer drilling and instrumentation) and surface water instrumentation.Cost-sharing options in aquifer exploration expenditure through the establishment of aquifer managementplans are also envisaged.

2. Financial (see Annex 5):NPV=US$ million; FRR =.% (see Annex 4)

The proposed WSIP would support the Government of Tunisia in its planned shift from a focus on supplymobilization to demand management. Conditions for an evolution of the current tariff structure would beprepared during the course of the WSIP. Work on a new tariff policy would be pursued during WSIP toensure readiness for implementation during WSIP2. This work would be based on the completed tariffstudy (CNEA/BRL of December 1997) and the results of the WSR, and address the need for consistency ofprinciples across types of water use (including recharge and treated wastewater reuse), and inclusion ofprovisioning of depreciation by CRDA and water users associations. Irrigation tariffs which achievecomplete recovery of O&M costs, and a progressive recovery of capital costs is also planned. Governmentis now willing to discuss conditions under which user groups, where they are managing tubewellinfrastructure, could be establishing user charges that are adequate to provide, in time, for pumpreplacement so as to progressively reduce the implied contingent liability for the public investment budget.Achieving improved financial autonomy needs to be accompanied by an expansion of managementcontracts between CRDAs and user groups for all perimeters, and a timetable for progressive establishmentof management contracts with existing user groups. Two of twenty-three CRDAs have experimented withimplementing parallel commercial cost accounting and there is Government support for expanding this toCRDAs. Finally, there will be an analysis to identify positive budgetary impacts from increased revenuesfrom better off farmers, and reduced budget expenditures as a result of farmers paying for more O&M andcapital cost recovery.

Fiscal Impact:

The preferential irrigation tariff recently introduced during the 1998-99 season in 10 CRDAs for cereals,forage crops, and seed production is expected to have a negative impact on public expenditures. The costof this subsidy for 1998-99 has been estimated at 2.1 M DT covering a total area of about 33,000 ha and aconsumption of about 47 million m3 of irrigation water (an average subsidy of 40 mmes/m3) for 7850beneficiaries (an average subsidy of 270 DT/beneficiary). The fiscal impact of the binomial tariff isdifficult to estimate with precision since it would depend on the effect of this reform on the level ofirrigation water use. In the case where the binomial tariff would result in increased irrigation use during the

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winter season, it is reasonable to expect an improvement in the O&M cost recovery, and hence, a favorableimpact on the Government's budget. An indicative idea of these budget savings are expected to be obtainedand monitored during the course of the WSIL through in a sample of 12 pilot irrigation perimeters. Theannual revision of the irrigation tariffs in the public irrigation perimeters still under the management of theCRDAs is expected to have a neutral fiscal impact. For those large public irrigation perimeters wherethere is to be a progressive transfer to the WUAs, the impact. on the governmental budget cannot bequantified with any degree of certainty due to the absence of analytical and commercial cost accountingpractices in the majority of the 23 CRDAs. Nevertheless, it is expected to have a significant positiveimpact on the public expenditures on the O&M of existing public irrigation perimeters. For the irrigationperimeters to be created and/or rehabilitated under the project under the management of the WUAs, thelevel and the structure of the tariffs (and hence, cost recovery) are to be decided on a case by case basisbetween the WUA and the Administration as a function of the specific technical parameters of the irrigationperimeters and the capacity of the water users to pay. Any modifications concerning the water savingspolicies (programme national d'economie d'eau) is bound to have an important fiscal impact. For the period2001-2006, the annual governmental expenditures on this program is estimated at 35 million DT based oncurrent levels of subsidy. The impact of all these tariff reforms and the water savings policies will beclosely monitored during the course of the WSIL and reviewed at mid-term to ascertain if modificationsand/or new policies are warranted.

3. Technical:

Groundwater monitoring: appropriate technology for data capture from piezometers and transfer to adatabase structure needs to be reviewed during appraisal so as to finalize investment needs. Data captureis still largely manual, although a shift to digital equipment has begun. The proposed National informationSystem for water resources planned in ASIL2 would address this issue. Technical aspects of participatoryacquifer management were also confirmed by a specialist during appraisal and agreed by the Tunisiansduring negotiations.

The technical and management aspects of rehabilitation/modernization of public irrigation perimeters werereviewed by a Bank Specialist during appraisal. They are fully in line with those used under ASIL2. Inparticular, the division of large perimeters into smaller, more manageable, "sectors" and their transfer toWUAs is a promising approach that could be rapidly extended to all large scale perimeters.

4. Institutional:

4.1 Executing agencies:

The Ministry of Agriculture would be the main executing agency. Detailed institutional and executingarrangements are presented in Section C: Project Description Summary.

4.2 Project management:

Project Management. Capacity for management of extemally-financed projects is adequate within theMinistry of Agriculture. For program loans, the capacity at the CRDA level is also important, since it isthis level that identifies, prepares and implements most of the sub-projects. CRDAs' roles are evolving asdisengagement from various activities progresses and as new mandates come into effect. A diagnosis iscurrently underway under the PHRD-financed Agriculture Services Study and an internal committee hasbeen set up by the Minister of Agriculture to make specific proposals for the future shape/mandates ofCRDAs. Implementation of the WSIP would also rely on the outcome of this initiative.

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M&E Capacity. The DGFE already coordinates M&E adequately although capacity for impact monitoringneeds improving. DGFE would also be improving its capacity further by implementing a new managementinformation system, put in place with support from Bank-financed projects (ASIL2 and Natural ResourceManagement Projects). The DGGR is piloting the monitoring of income impacts of public investments inirrigation; this initiative needs support, assessment and expansion under the proposed WSIP. Evaluationcapacity is weaker, particularly thematic ex post reviews. Currently, the Ministry primarily relies onproject completion reports prepared by external financing agencies and outside consultants.

Participatory Irrigation Development. Through the DG/Genie Rural (DGGR), the Ministry of Agriculturehas progressively strengthened integration of participatory approaches in the development of new irrigationschemes. This has accelerated with recent initiatives with the KfW in three CRDAs and with the WorldBank through ASIL in two other CRDAs. It will be important to monitor the capacity to carry outparticipatory methodologies of both CRDAs and national consulting companies conducting the preparatorystudies for investments in irrigation. If shortcomings are diagnosed, identification of training and requiredadjustments would be made a priority.

Water Code. An institutional mechanism is needed to translate the expected substantial changes in policyorientation into clear legislative texts. This will take time and go beyond the WSIP implementation period.The process of legislative revision to the water code will be consultative and dynamic, and a structuredinstitutional approach will be needed to guide it. Early preparatory studies have proposed a two-tieredapproach, with four technical commissions (groundwater management, pollution control, water allocations,and demand management, and treated wastewater reuse) charged with making recommendations on policyreform and practical implementation based on the preparatory studies, overseen by a national consultativecommittee for revision of the Water Code which would coordinate and validate these propositions beforecommunicating them to legal specialists for translation into legislative texts. Definition of the process (e.g.amendment or wholesale revision of the existing Water Code; progressive or one-shot revision) with respectto the timing of the WSIP (2001-2005) will be necessary. Facilitation of the process within the context ofthe WSIP is planned under the Capacity-Building Component but specific timing of covenants at this stagecould be counterproductive.

.4.3 Procurement issues:

See Annex 6.

4.4 Financial management issues:

The Financial Management System (FMS) in place at MOA is based on guidelines and procedures definedby the legal framework applicable to the public sector in general and Government institutions in particular.The current system is in a transition phase. A program of modernization and upgrade was started in 1994.and has favored the implementation of a matrix organization within MOA. One of the major benefits ofthis ongoing program is that it reinforces decentralization and greater implication of CRDAs in the ProjectManagement. The main characteristics of this system are: (i) an accounting system based on a cash basisand the outline of budget components; (ii) an annual budget submitted for approval to the Ministry ofFinance; (iii) a fiduciary responsibility of control of budget execution assigned to the Government's Auditdepartment (CGF), and the Audit Court.

Although it is globally satisfactory, the existing financial management system should be improved in orderto achieve the desired efficiency. The main improvements are in line with the national program formodernization and upgrade (NPMU) promoted by the Prime Minister's Office. These concern: (i) theadoption of coherent and similar financial management procedures in all the CRDAs; (ii) the harmonizationof management information systems in terms of technology solutions; (iii) the implementation of acomprehensive analytical accounting system at the level of the 23 CRDAs; and (iv) the development of

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general training program for the staff of DGFE as well as those in involved in the project monitoring at thecentral and regional levels.

The financial management arrangements proposed in the agreed time bound action plan, if successfullyimplemented, during the agreed 15 month period, will help mitigate the risk linked to the shortcomingsidentified at the level of MOA in the existing financial management system.

5. Environmental: Environmental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The lending instrument is a sector investment loan and therefore, the approach used during appraisal wasto conduct a specific sub-sectoral enviromnental review (irrigation and drainage/agriculture) to ensure thatadequate environmental impact assessment procedures are in place as needed for sub-project components.The environmental assessment was carried out by an independent consultant who consulted with the staff inthe key technical units in the 'Ministry of Agriculture, Ministry of Environment, the Agence Nationale pourla protection de 1'environnement (ANPE), and selected CRDAs. In addition, consultations were also heldwith the other cofinanciers (notably, KfW and the African Development Bank). Selected field visits werealso carried out.

The results of the environmental assessment indicated that no major negative environmental impacts areexpected. In fact, the project is expected to result in enhanced environmental benefits through increasedefficiency of water use, drainage improvements which would enhance soil quality and reduce productionlosses, improved management of groundwater quality and quantity, and more generally, improvingdecision-making processes. The EMP incorporates many of the mitigation measures oudined in theEnvironmental Management Plan developed in conjunction with the ongoing ASIL2 and will continue to beadhered to for specific sub-projects. All individual sub-projects under the WSIP will continue to requireindividual EIAs in accordance with the national law under which the ANPE was created (loi no. 88-91,modified by loi no. 92-115). It was agreed with the Government during appraisal that the sectoralassessment as well as any other environmental studies would be made available to the public in accordancewith the requirements of OP 4.01.

Specifically, the SEA determined that only the activities to be carried out under three project components,the Irrigation Management component, the Groundwater Management component, and the Rural DrinkingWater Supply component, might have an effect on the environment, if any. The SEA concluded thatpotential adverse impacts in irrigation and groundwater development, if any, could be fully mitigated, if thenational environmental assessment procedures are applied systematically. With regard to Rural WaterSupply, discussions are underway with the DGGR to simultaneously program facilities for wastewaterdisposal and sanitation. This will require close coordination with ONAS, in line with its recent SectorStrategy for Rural Sanitation. For environmental reasons and for public health reasons such coordinationto avoid unnecessary pollution in rural areas is essential.

The main issues with potential environmnental implications are: water and soil quality (pertaining topollution, wastewater treatment etc.); groundwater management; and drainage. The small-scale irrigationdevelopment component is not expected to have major environmental impacts. The impact on groundwateraquifer management is expected to be minimal since the administration (DGRE) is capably monitoringirrigation development, and only permits additional tubewell irrigation capacity to be installed whererenewable groundwater resources are not overexploited. In order to qualify for financing under the Project,for each tubewell irrigation sub-project, the Bank will require documentation (from DGRE) thatdemonstrates the water requirement of the project in relation to the current exploitation and renewable

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resource status of the aquifer involved.

The monitoring of the realization of the SEA Environmental Management Plan will be carried out duringproject supervision, and will be presented as part of the annual implementation report to be submitted bythe Government to the Bank for review on an ex-post basis. In addition, the Government would send forprior review to the Bank the Environmental Management Plan (incorporating the mitigation measuresproposed in the SEA) duly approved by ANPE for 2 small-scale irrigation projects using treated wastewater.

5.2 What are the main features of the EMP and are they adequate?

The objective of the sectoral EA is to provide a broad overview of the environmental issues in theirrigation/drainage sector (including groundwater) in Tunisia including those investments that are envisagedunder the WSIP. This overview takes into account the environmental polices and guidelines of theGovernment of Tunisia (GOT), including its National Environmental Action Plan, as well as those of theBank's (O.P. 4.01). The SEA includes an EMP which incorporates many of the mitigation measuresoutlined in the Enviromental Management Plan developed in conjunction with the ongoing ASIL2. Inaddition, the SEA has included a component on training for the staff of the Ministry of Agricultureconcerning the techniques of Environmental Impact Analysis. This component also includes a publicawareness program for the water users association and other local authorities involved in theimplementation of the project.

The SEA has enlarged the scope of the Water Conservation and Environmental Protection component. Ithas recommended that two studies concerning soil quality be launched as soon as possible to obtain asystematic evaluation of the control measures for salinization in the irrigation perimeters as well as of otherforms of soil degradation due to land leveling, excavation, and formation of embankment associated withthe creation of new irrigation perimeters. In addition, five other studies to address water quality issueshave been proposed: inventory of sources of pollution complementing the information already obtained forindustrial sources from the METAP study and the Tunis-West Project; Establishment of a national networkto monitor and control water quality; elaboration of a National Master Plan for addressing water pollution;promotion of treated wastewater reuse in irrigation and aquifer recharge; and clarification of the role ofGovernment agencies responsible for management of water pollution, and establishment of a NationalInformation System for Water Resources (SINEAU). In addition, for the rehabilitation of public irrigationin the north in the Medjerda watershed (to be financed by KfW), a regional EA has been recommended.Agreement was reached with the Government on all these priority studies, and they have accordingly beencosted into the project.

The proposed EMP and associated studies are considered adequate. They will, for the first time, bringabout a close collaboration between the Ministries of Environment and Agriculture in the domain of waterresources management. The SEA found that the project complies fully with the Bank's safeguard policies.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: April 14, 2000

The final SEA was reviewed during negotiations the week of May 2-5, 2000.5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation' that were used and which groups were consulted?

Since this is an SEA, the preliminary screening was carried out through consultations with relevant

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Ministries and technical units, selected field visits and consultations with the CRDAs. For all individualsub-projects requiring an EIA, stakeholders will be consulted by the firm that carries out the study.

The main elements of the SEA were discussed with the Government and agreed upon. In addition, theGovernment agreed to the public disclosure guidelines as required by the Bank's O.P 4.01.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

Several key studies have been designed and costed into the project design to monitor and evaluate aspectspertaining to soil and water quality. In addition, most of the indicators include several indicators that bear adirect and/or indirect environmental impact including, inter alia, groundwater use as a percentage ofrecharge; efficiency improvement and water conservation mechanisms in place; adoption of improvedirrigation methods; percentage of water logged areas reduced; major sources of pollution are identified on aselective "hot spots" basis and; monitoring network (including warning system) to control water quality isin place (See Annex 1).

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

Overall, the project is not expected to have negative social impacts. Nevertheless, it has been agreed withthe Government that for each component/reform under the WSIP where there could be potential socialimpacts (some of which are listed below), a listing of these potential impacts would be established, and, ifrequired, appropriate mitigation measures would be costed and financed under the WSIP. To this end, asocial review for sub-projects and/or activities with potential social impacts was carried out duringappraisal by a local social scientist under the overall guidance of the MNA Social Unit.

Issues:Groundwater management. The project proposes to pilot participatory management of shallowgroundwater resources. The commitment of groundwater users is uncertain in cases where the resource tobe jointly managed is not visible, free riders are hard to control and the physical behavior of the resource isnot always known with certainty.Irrigation tariff policy and the poor. Water tariff analysis done by the DGGR on farm budget impacts ofoptions for future irrigation tariff policy shows that some irrigation perimeters and farm sizes in Tunisiacould be vulnerable to substantial income losses. In these perimeters, land, location and irrigationinfrastructure constraints limit the scope for adjustment. The social aspects of these identifiable aspectswill require different treatment from the irrigation sector as a whole. The farm budgets in selected CRDAswill be monitored during the course of the project.

Irrigation using treated waste water. Two social aspects will be addressed in this case: (i) healthmanagement and monitoring of farm workers that may have contact with the irrigation water; and (ii)surveying of public acceptance on markets of-agricultural products irrigated with treated waste water, anddesign of information campaigns as needed.

The principal social development outcomes are expected to be: increased rural incomes from agriculturalsources, and hence, improved social well-being; enhanced access to potable water resulting in reduced timespent by women on collecting water thus contributing to the gradual elimination of the negative genderimplications in the socialization of the younger generation; greater attention to the social aspects ofagricultural development projects in the Ministry of Agriculture through adequate staffing of the

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socio-economic unit with new skills (water economics, planning, legislation, participatory processes, etc.);strengthening of WUAs through the development and implementation of specific capacity buildingprograms.

6.2 Participatory Approach: How are key stakeholders participating in the project?

Investments in new/rehabilitated irrigation infrastructure, would only be considered for the public budget ifinitiated by official request from beneficiaries. Draft socio-economic and technical preparatory studieswould be presented to, and verified by, beneficiaries before finalization of proposals. The process ofestablishing user groups would begin with socio-economic preparatory studies, and the groups' officers,elected, would co-sign as part of provisional reception of irrigation works as done in ASIL2. Assurances tothis effect were obtained from Government during appraisal.

For farm households implementing shallow aquifer management plans, beneficiaries would fullycollaborate with the Administration in identifying and implementing sustainable groundwater withdrawals,including allocations, monitoring, and enforcement mechanisms.

Concerning irrigation user group associations, achieving financial. autonomy would entail progressivelyhigher water charges to group members, but would be accompanied by a negotiated management contractbetween the group and the Administration that would clearly identify each party's responsibilities andrights.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

N.A

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

As part of the social review, several recommendations have been made to the Government concerning keysocial aspects in the components of groundwater management, rehabilitation of the geothermic perimeters,treated wastewater reuse in irrigation, participatory groundwater management, and strengthening of waterusers associations which will be adhered to during project implementation. The government has agreed tothe establishment of a socio-economic unit within the Ministry of Agriculture which will ensure that socialdevelopment outcomes are closely monitored in this project as well as future projects.

6.5 How will the project monitor perfornance in terms of social development outcomes?

The project will ensure that a social development specialist is part of the supervision team to monitorperformance of in terms of the social development outcomes.

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

POlicy Applicability -Environmental Assessment OP 4.01 BP 4.01 GP 4.01 Yes [3No

El Natural habitats (OP 4.04 BP 4.04, GP 4.04) O Yes 1 NoEl Forestry (OP 4.36, GP 436') E Yes Z NoEl Pest Management (OP 4.09) E Yes 1 NoEl Cultural Property (OPN 11.03) O Yes 1 NoEl Indigenous Peoples 0D.p 4.20 El Yes 1 NoEl Involuntary Resettlement (01 4.30) OL Yes 1 No

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D Safety of Dams (OP 4.37. BP 4.37) O Yes 1 NoEl Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) O Yes (Z NoO Projects in Dis uted Areas OP 7.60 BP 7.60. GP 7.60) Yes 1X No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

See section 5.

F. Sustainability and Risks

1. Sustainability:

Sustainability would be addressed at three different levels:

Water resource use: As the main thrust of the WSIP is to shift emphasis from a water mobilizationstrategy to a long term demand management strategy, the WSIP is expected to significantly contribute toimplementing reforms and financing investments that would be conducive to increased sustainability ofwater resource use.

Irrigation:(i) involving beneficiaries in validating planning assumptions about future farm activities to ensure

that these are realistic and sufficient to permit farmers to pay water charges to localmanagement groups that will be contractually responsible for operations and maintenance;

(ii) improving financial autonomy of irrigation user groups, and ensuring that these implementwater charges that are sufficient to provide for replacement of irrigation equipment, withoutfurther subsidies from Government;

(iii) defining future tariff policy for public delivery of irrigation water, going beyond O&Mrecovery to include partial capital cost recovery, and thereby encouraging water savings inagricultural uses; and

(iv) introducing piloting of water use rights for irrigation water user groups and thereby increasingincentives for efficient use and local market development.

Groundwater resource use:(i) better identification of the resource through exploration, monitoring, and evaluation (including

modeling);(ii) strengthening of quality and quantity monitoring;(iii) integration of surface and groundwater monitoring;(iv) computer data storage and dissemination to stakeholders(v) developing methodologies for the monitoring of water extraction from shallow aquifers; and(vi) piloting, for shallow aquifers, user-defined and implemented sustainable management plans.

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2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Ratingq Risk Minimization MeasureFrom Outputs to ObjectiveGovernment commitment to the M -Define policy benchmarks to conditionimplementation of a strategy for water investment support; national consultativedemand management wavers, and workshop carried out to reinforce cominitmentopposition to tariff reform from various -Letter of Sector Development Policy adoptedinterest groups -All stakeholders consulted prior to

implementation of tariff reform during WSILimplementation

Financial autonomy for the WUAs M -Define benchmarks (eligibility criteria andremains fragile minimum economic rate of returns or

benefit/cost ratio) as conditions for investmentsupport

- Specific capacity-building programs forWUAs

Resistance to staff changes and transfer of M -Define training and reconversion program priorresponsibilities to launching institutional reforms

From Components to Outputs

Implementation delays M -Program coordination to be carried out byDGFE with realistic, time-bound targets

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

None.

G. Main Loan Conditions

1. Effectiveness Condition

- Implementation Manual has been sent to the Bank

2. Other [classify according to covenant types used in the Legal Agreements.]

Accounts and Audits

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* The Government will assure that the annual audit reports, with an opinion on the statements ofexpenditure used for certain disbursements and on the special account, are sent to the Bank within sixmonths of the end of the fiscal year of the Borrower.

* The Borrower will open and manage a special account in Euros.Management Aspects

* The Borrower will take all necessary steps to assure that a Coordination Committee for overallmanagement of the project is established and functional no later than December 31, 2000.

Monitoring, Review and Reporting* The Borrower will prepare and fumish for the Bank's review and comments not later than March 31

and September in each Fiscal Year, a report, in a form satisfactory to the Bank, on the progressachieved during the preceding six months in the financial and physical implementation of the project,and on performance and impact indicators.

H. Readiness for Implementation

[E 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

Cl 1. b) Not applicable.

3 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

O 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.CI 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Madani M. Tall Doris Koehn Christi DelvoieTeam Leader Sector Manager/Director Country Manager/D ector

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Annex 1: Project Design SummaryTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

-Key Performance-Hierarchy of ectives I:lndic*a:tos Monitoring & Evaluation Critical Assumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)- Environmental management - Improved surface and - DGRE statistics -Government's commitmentand natural resource groundwater management to policy reforms to promote aconservation through water demand managementsustainable use of the water -Groundwater use as a -DGETH, DGGR reports strategy does not falter.resource base percentage of recharge

- Sustainable use of -DGRE reportsgroundwater resources

- Rural poverty alleviation - Rural incomes from - DGGR and DGPDIA reports - Stable sectoral,through increased farm agricultural sources macroeconomic and politicalproductivity and rural income conditions prevail.Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:- To promote effective - Increased agricultural yields; - Ministry of Agriculture - Institutions in the waterintegrated water resource sector, including WUAs aremanagement so as to improve - Additional population with responsive to the newthe productivity of agriculture access to safe and clean water - Ministry of Agriculture opportunities provided by theand access to safe water in (100,000 by end of WSIP); reports/DGGR projectrural areas.

- Bank SPN reports

Sector institutions are - New institutional - Ministry of Agriculture - Political support andstrengthened arrangements for the water - Bank SPN reports commitment obtained from

sector in place stakeholders at national andlocal levels

-To promote conservation of - Efficiency improvement and -Ministry of Agriculturewater resources and protection water conservation -Bank SPN reportsof the environment mechanisms in place

- Sustainability of water use

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Output from each Output Indicators: Project reports: (from Outputs to Objective)component:1. Through Irrigation - Moderate physical andManagement: climatic crop risks;

Stable producer price andla. Agricultural production in - Number of ha rehabilitated - DGGR/CRDAs; DGPA non-price productionproject areas benefiting from under use. incentives;small-scale irrigation is - Availability of water Extension advice andincreased resources. agricultural inputs are

- Adoption of improved available in a timely manner.irrigation methods.- Tons of output per unit ofirrigated land

lb. Sustainability of - DGGR/CRDAs - Government overcomesinvestments in small-scale and - Number of operational water reluctance to include partiallarge-scale irrigation systems user associations (WUAs) in recovery of capital costs fromis improved the small-scale irrigation water users associations;

perimeters by start of Operation of theoperation; multidisciplinary mobile team- O&M cost recovery to train local MOA units isincreased; successfully completed.- Provisioning for (partial)capital cost recovery increased- Contribution to investments - DGGR

lc. Improved irrigation increased.efficiency

- Decrease in waterconsumption in areasrehabilitated;- % of water logged areasreduced

-24 -

2. Through GroundwaterManagement:

2a. Improved qualitative and - Groundwater usage brought - DGRE statistics - Government is committed to

quantitative inventories of to sustainable levels maintaining adequate

groundwater resources - Additional renewable budgetary resources for data

2b. Improved capacity to groundwater resources collection, analysis, and

monitor groundwater identified. management.

resources - Systematic monitoring of thepiezometric network.- Systematic monitoring andcorrective actions for intrusion

2c. Improved data of salt in water table and soil.management capacity - Development of efficient,

user-friendly, standard centraland regional datamanagement systems(SINEAU)- Development of anintegrated alarm system forsalinization of soils andgroundwater level and quality

3. Through WaterConservation and Protection - DGETH; GTZ reports

of the Environment:

3a. Surface and groundwater - Establishment of real-timewater management systems monitoring of water suppliesare upgraded and functional (flows and reservoir storage)

and demand in the majorirrigation sectors based on aimproved data collection andtransmission system;- Use of appropriatetechnology;- Use of metering system.

3b. Water resource base is - Major sources of pollution Ministry of Environment, - Environmental education

protected and water quality are identified on a selective ANPE reports programs and sensitization

improved through significant "hot spots" basis - SPN reports efforts are pursued

reduction in water pollution - Monitoring network - DGRE(including warning system) tocontrol water quality is inplace

- 25 -

3c. Treated Waste Water - Inventory of critical - ONAS reports - Level of social acceptance is(TWW) reuse activities are sectors/activities using TWW - DGGR reports improved and progress inpromoted - Study for the development of - SPN reports research on TWW is on par

TWW distribution network with growing demand for it- Improvement in pilotirrigated schemes using TWW -Legislation is suitably revisedand development of a - DGGRlong-term plan for reuse ofTWW in irrigated perimeters- Water quantity mobilized

4. Through Rural WaterSupply:

4a. Access to safe and potable - number of new WUAs for - DGGR reports - Complementarity withwater is improved for rural potable water created ongoing water supply projectscommunities (KfW, JBIC, 26-26, fonds

national de solidarit6 is4b. National coverage of - number of water points guaranteedpopulation with access topotable water is improved

5. Through InstitutionalStrengthening andCapacity-Building:

5a. Public and private water - Adequate staffing with new - Ministry of Agriculture - Political backing is given toinstitutions are strengthened skills. (water economics, - SPN and progress reports staff redeployement,

planning, legislation, reconversion and trainingparticipatory processes, etc.) plansgeared to demandmanagement and long termstrategic planning,- Renewed emphasis ontraining in geology,hydrology, hydrogeology, etc.- Socio-Economic Unit inplace- Specific program for W-UAsdeveloped and implemented

- 26 -

:-:Key PerformanceHierarchy of Objectives Indicators- Monitoring & -valuation Critical AssUumptions

Project Components I Inputs: (budget for each Project reports: (from Components to

Sub-components: component) Outputs)

1. Irrigation Management. $68.2.OM - rate of physical - DGGR and CRDAs - Creation of WUAs takes

la. Small-scale irrigation and financial implementation; place in a timely manner

development number of irrigation - Absence of major

perimeters environmental constraints

rehabilitated/modernized; area

added; cropping intensity

- DGGR

lb. Irrigation rehabilitationlarge-scale perimeters) and $ 44.0 M - rate of physical - DGGR; annual reports

management reform. and financial implementation;

area rehabilitated

2. GroundwaterMaGrounagment- Timely procurement

Management. $7.7 M - rate of physical and Availability of counterpart

moe lian financial implementation; funds assured

moaelimg $3.0 M - rate of physical and - Implementation occurs as

financial implementation; scheduled

2c. Exploration and $ 70.OM - exploration: rate ofphysical and financial

monitoring implementation; number of

prospecting tubewells; linear

depth of exploration; ratio of

negative wells to total number

of (positive and negative)wells.

monitoring: rate of physicaland financial implementation;number of monitoring wells

created and equipped

3. Water Conservation andEnvironmental Protection.3a. Water Instrumentation $1.OM - rate of physical and - DGETH

financial implementation

3b. Protection of water $3.4 M - rate of physical and - Ministry of environment, - Adequate coordination

resource base and pollution financial implementation ANPE, ONAS, IRESA,and between agencies

mitigation program DGRE

3c. Promotion of treated $0.5 M - rate of physical and - ONAS, DGGR - Demand for TWW

wastewater reuse activities financial implementation forthcoming from potential

users

4; Rural Water Supply $51.9 M - rate of physical - DGGR - WUAs in place and

irnplementation functional

- 27 -

5. Institutional $8.3 M - rate of physical and - Overall coordination byStrengthening and financial implementation DGFE with inputs from otherCapacity-building. (Studies, departmentsSupport to reforms, technicalassistance, and training)

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Annex 2: Project DescriptionTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

By Component:

Project Component I - US$112.20 millionIrrigation Management. Under this component, the project would finance (i) the creation of 56 small,tubewell-based, irrigation perimeters covering about 3,000 ha; (ii) the creation of eight pilot irrigatedperimeters on about 580 ha using Treated Waste Water; (iii) the modernization and rehabilitation of 40(small to medium size) existing perimeters covering 7,800 ha; (iv) the rehabilitation of 14 perimeters ofabout 2100 ha irrigated with hot "geothermal" underground water; (v) drainage installations on about 3,700ha of irrigated perimeters; (vi) the electrification of water sources and tubewells (for potable water and/orirrigation) with a view to reducing energy and maintenance costs; (vii) the creation of 17 water points in thesouthem arid zone; (viii) the creation of 25 deep tubewells for irrigation purposes; (ix) works toward floodwater management; and (x) research activities to support irrigation and drainage management. In parallelto activities planned under this component with Bank financing, a major modernization effort concerningthe Medjerda Valley would be undertaken with KfW financing. A feasibility study covering 5,536 ha of27,000 ha would be carried out with a view to modernizing irrigation infrastructure, during a first phaseoperation, on about 3,000 ha of priority perimeters. Progress on the modernization of the Medjerda wouldbe closely monitored during the WSIP as lessons learned could help dictate strategic choices for therehabilitation and/or modernization of similar large scale perimeters in the future, notably in the context ofWSIP2.

For all investments in large and small scale irrigation, a number of selection criteria would be applied.Sub-projects for individual or groups of tubewells and related irrigation infrastructure with a cost notexceeding 500,000 TD, in aggregate would be subject to a simplified procedure for cost-benefit analysis(format agreed during AS1L and being implemented in ASIL2) and would need to demonstrate abenefit-cost ratio greater than 1.0. Sub-projects with an estimated total of more than 500,000 TD would besubject to a feasibility study with a complete cost-benefit analysis and would need to have an ERR of atleast 10% for newly-established perimeters and 15% for rehabilitated or modernized perimeters to beeligible for Bank-financing. For irrigated perimeters using TWW, the feasibility study would also includean environmental analysis, including, if needed, a mitigation plan to be integrated and costed in thesub-project. For a project to be selected, it also needs to be demonstrated on the basis of analysis by theDirectorate General of Water Resources (DGRE) that the acquifer source of water for the project is notoverdrafted. Finally, for all investments in large and small scale irrigation, WUAs would need to be inplace and functional prior to the start of the corresponding sub-project. These WUAs would be fullyimplicated in the preliminary studies and participate in the supervision of works. Management contracts,highlighting the roles and responsibilities (including cost-sharing arrangements) of each party (CRDAs andWUAs) would be used.

Project Component 2 - US$80.70 millionGroundwater Management. Under this component, the project would facilitate (i) the drilling ofexploratory wells and piezometers, (ii) the protection and rehabilitation of existing wells and piezometers,(iii) the development of infrastructure for artificial groundwater recharge from available surface water; (iv)research to support groundwater management; and (v) the financing of a number of experimental/researchprojects which are destined to strengthen collaboration. between, and joint-implementation by, severaldirectorates of the Ministry of agriculture and other entities, bring coherence to the way data is collectedand analyzed, and organize data access and use for decision-making at the regional and central levels. Inparticular, the WSIP would finance over 5 years 310 exploratory wells (over 105,000 linear meters) and

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about 610 new piezometers and the rehabilitation of 125 existing piezometers. Some of these wells couldbe put to productive use if they were to be "positive". Along the lines of integrated management of bothsurface and groundwater resources, artificial recharge activities would be developed from conventionalsources, and the overall capacity to monitor groundwater would be strengthened through the establishmentof a comprehensive National Information System for Water Resources and the optimization of the existingmonitoring networks (reseaux de suivi de la ressource en eau: reseau piezometrique et reseau de suivi deseaux de surface, reseau qualite, etc.). Another key part of this component would be the piloting ofparticipatory management approaches for groundwater to assess future implications for decentralization,cost-sharing, water rights, and surveillance/control operations.

For exploration wells, sites would be selected on the basis of technical prospecting studies and economicparameters defined in the context of ASIL2. The implication of the private sector in drilling activities andhydrogeological prospecting would build on efforts already undertaken in the context of ASIL2.

Project Component 3 - US$ 4.90 millionWater Conservation and Environmental Protection. Under this component, the project would center ontwo key activities, namely (i) the monitoring of water resources (quality and quantity); and (ii) theprotection of the water resource base and soils, particularly in irrigated areas. A number of entities(Agriculture, Environment, ONAS, ANPE, SONEDE, etc.) are expected to play a major role in theimplementation of these activities. The WSIP will facilitate such collaboration and help define a number ofsub-projets and research activities by (i) updating the inventory of key sources of pollution ("hot spots")and setting up a network for water quality monitoring; (ii) financing information, educational andawareness campaigns; and (iii) working on new institutional arrangements for the management of waterpollution issues. Investments, research work, and policy reforms stemming from this component would, ifappropriate, be funded by grants and other consessional funds.

Project Component 4 - US$51.90 millionRural Water Supply. The Rural Water Supply component will consist of providing potable water toabout 100,000 rural dwellers. This component would be implemented over three years (2001, 2003) aspart of the Government's overall strategy to increase access to safe, drinking water from about 78% ofrural areas to about 90% by the end of the 10th plan in 2006. Eligibility criteria for the selection of siteswere reconfirmed with the Government during appraisal. They are in line with the national rural waterstrategy and include at least (i) a minimal target population to be served, (ii) a cost ceiling for theinvestment (i.e., less than 600 TND per person); and (iii) the involvement of WUAs from the onset. In thisregard, close interface would be established with ongoing water supply projects funded by the JapaneseCooperation (JBIC) and KfW in particular to ensure complementarity and avoid sending conflicting policysignals to the Tunisian Government and the rural population.

Project Component 5 - US$8.30 millionInstitutional Strengthening and Capacity-building. As the water sector is shifting from supply todemand management, new capacity and skills are required during the implementation of WSIP and WSIP2.In this regard, the component would facilitate the development of new skills (water economics, informationsystems, client orientation and marketing, participatory management, maintenance, etc.), mostly orientedtoward planning and demand management in the water sector while strengthening the Ministry ofAgriculture's capacity in areas which will always remain under its aegis, namely regulation, control, andstrategic planning. The WSIP would also facilitate the creation of a Socio-Economic Unit in MOA, whichcould later on evolve into an inter-sectoral think-tank/planning unit as water issues become more and morecross-sectoral, and as trade-offs become more prevalent. An important capacity-building effort would alsobe financed for the benefit of WUAs, NGOs, and private entrepreneurs in the water sector. This capacity

- 30 -

building effort would be supplemented by an active communication program for water conservation and the'need for demand management. A communication program would also be developed and implemented tosupport the new strategic vision for the water sector.

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Annex 3: Estimated Project CostsTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

Irrigation Management 54.00 46.00 100.00Groundwater Management 42.00 32.40 74.40Water Conservation & Environmental Protection 2.50 1.90 4.40Rural Water Supply 28.50 18.70 47.20Institutional Strengthening and Capacity-Building 3.20 4.30 7.50Total Baseline Cost 130.20 103.30 233.50Physical Contingencies 6.50 5.00 11.50Price Contingencies 8.30 4.70 13.00

Total Project Costs 145.00 113.00 258.00Front-end fee 0.00 0.00

Total Financing Required 145.00 113.00 258.00

Local F%oreign-ota

Goods 6.50 45.00 51.50Works 127.00 59.00 186.00Services 5.50 7.00 12.50Training 6.00 2.00 8.00

Total Project Costs 145.00 113.00 258.00Front-end fee 0.00 0.00

Total Financing Required 145.00 113.00 258.00Figures may not add due to rounding.

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Annex 4: Cost Benefit Analysis SummaryTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

Summary of Benefits and Costs:The Water Sector Investment Project (2001-2005) would be the first of two consecutive loans, in line withthe X and XI Plans, for a sub-set of investment activities in irrigation management, groundwaterprospecting and monitoring, rural water supply, water conservation and environmental protection, andinstitutional strengthening and capacity building. Implementation of key reforms would thus be done in twostages. Since this is a sector investment loan to assist the Ministry of Agriculture's water sector investmentprogram commencing in 2001, there is at this stage of preparation some detail for the 2001 program butonly the broad envelope of activities for the subsequent years. This makes it difficult to conduct acomprehensive cost benefit analysis, although indicative rates of return are presented for some of the keyinvestment components accounting for over 70 percent of total project costs. The Water Sector Studycompleted in April 1999, is the basis for the proposed project and all future investments in the sector inaccordance with the new strategy of participatory demand management.

Specific sub-projects for irrigation systems to be financed by the Loan will be subjected to economicselection criteria whose application has already been tested under the ongoing ASIL and ASIL2. Directbeneficiaries would be farmers in small-scale irrigation systems and the rehabilitated large-scale irrigationperimeters who would gain in terms of increased production and income through increased yields, croppingintensities and a shift to high valued crops. In addition, the "minimum impact approach" was applied toevaluate the economic feasibility of the project's water resources management component (Cummings, etal., 1996; Mexico Water Resources Project, 1996; Brazil Bahia Water Resources Management Project,1998; and Brazil Proagua Project, 1998). A qualitative analysis of the benefits of some of the componentsis also presented where appropriate.

The rural water supply component will increase the percentage of rural population served nation-widefrom 78% currently to 90% by the end of the project. Better access to safe, accessible, and adequate watersupply is expected to reduce the cost of water to beneficiary households in terms of time, energy, money.Further, improved sanitation and hygiene practices will have a positive direct impact on health andproductivity. These effects would be especially beneficial to women and children. Social considerations areparamount in the Government's rural water supply strategy. The justification for the house connection restson the recognized benefits of service in the home versus collecting water from standpipes and, in the ruralareas, on the basic need for safe water. This is also noted in the Project Completion Report (PCR) of theTunisia National Rural Water Supply Project (1994).

The most significant direct benefit of the drainage improvement component would be to farmers in theform of increased efficiency of service delivery, improved availability of irrigation and drainage supplies,and concomitant reduced costs. Principal short-term benefits will come from physical drainage andimprovements in irrigation practices, and better O&M resulting in more effective drainage which will resultin increased environmental benefits and increased output of agricultural produce. Improved drainage wouldalso enhance sustainability of the land and water resource base through reducing the groundwater table andreducing waterlogging and soil salinity leading to significant improvement in crop yields, both qualitativelyand quantitatively. Benefits would also ensue from the avoidance of future production losses which wouldresult if groundwater and salinity problems were to persist.

- 33 -

The institutional strengthening and capacity-building component would result in better coordination ofwater resources planning and implementation among the multiple technical units involved in waterresources management (WRM) that would yield significant economic benefits nationwide. An integratedapproach to WRM would foster resource consolidation and complementarity, and improved publicinvestments. Improved coordination would lead to more efficient project design and implementation,reduced cost overruns, and more efficient use of existing infrastructure. By supporting the upgrading andfurther development of a modem hydrological information network, more efficient water use would bepromoted, since both availability and use would be more closely monitored. The change in strategy fromnew water resources development to demand management will eventually result in the establishment andimproved collection of water tariffs which would promote more rational water use. There would be lesspressure on water supply development, and a greater share of the economic cost of water consumed/usedwould gradually be borne by consumers/users. Through capacity building efforts of the WUAs, NGOs, andprivate entrepreneurs in the water sector, a more discerning and environment-conscious management ofwater resources would be achieved, assuring the long-term sustainability of the resource base.

Treated wastewater reuse activities would result in significant economic, agronomic, and environmentalbenefits. Besides increased agricultural productivity, such controlled land application reduces, through twonatural processes, the amount of chemical and organic contaminants entering surface water andgroundwater. First, the crops absorb the substances as nutrients and prevent them from entering the runoffor groundwater. Second, the soil filters out pathogenic organisms and trace elements as the water percolatesdownward. Inrigation with treated wastewater has the associated economic benefit of reduced financialinvestments for new sources of potable water by substituting wastewater for high-quality irrigation water.The presence of valuable nutrients in the treated wastewater can reduce fertilizer use and thereby improvefarmers' net incomes.

The water conservation and environmental protection component would result in significant long-termbenefits through improved monitoring, evaluation and management of aquifers, reduction in waterpollution, and the protection of the water resource base. Stakeholder involvement in water resourcesmanagement would be enhanced through public education programs on the value of water resources and theimportance of water conservation through rational use and control of water pollutants. In the context of theWSIP, a methodology for participatory design and implementation of groundwater management would bepiloted to transfer more responsibility to farmers insofar as sustainable aquifer management is concerned.

Evaluation Criteria for Water Sector Investments:

Irrigation: For tubewell irrigation, sub-project selection criteria for individual or groups oftubewells and related irrigation infrastructure with a cost exceeding TD5,000/ha but less than TD 500,000in aggregate would be subject to a simplified procedure for cost-benefit analysis and would need todemonstrate a benefit cost ratio greater than 1.0. Sub-projects with an estimated total cost of more than TD500,000 would be subject to a feasibility study with a complete cost-benefit analysis and would need tohave an ERR of a minimum of 10% to receive Loan finance. Sub-projects costing less than TD5,000/hawould not be subject to an economic analysis to be eligible for financing. Periodic "audits" of the economicanalyses for the smaller sub-projects and reviews of all larger sub-projects under the ongoing ASIL andASIL2 have proved to be successful. For small-scale, tubewell-based irrigation investments, projects haveachieved rates of return of 15-21%. Finally, for all investments in large-scale and small-scale irrigation, thewater users' associations (WUAs) would need to be in place and functional prior to the start of thecorresponding sub-project. All the above criteria would also apply to the 8 irrigation perimeters (580 ha) tobe irrigated with treated wastewater.

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Rural Water Supply: Eligibility criteria for the selection of sites would include, at a minimum:

(i) a minimal target population to be served; (ii) a cost ceiling for the investment; and (iii) full involvement

of the WUAs from the outset. These criteria will be agreed with the Government during appraisal. The

WUAs would meet all the O&M costs, and progressively, the replacement costs.

Drainage/rehabilitation of existing perimeters: All sub-projects would be subject to a feasibility

study and would need to demonstrate a minimum ERR of 15% to be eligible for Bank-financing.

Deep tubewell exploration: For exploration wells, sites would be selected on the basis oftechnical prospecting studies and economic criteria. These criteria include a comparison of alternative

sources and uses of water and a simple cost-benefit analysis for irrigation perimeters established and testedunder the ongoing ASIL2.

Bank Experience and Economic Evidence: The evidence, derived from direct Bank experience andthe economic literature, convincingly demonstrates that the economic gains to be realized from improved

water resources management more than justify the associated costs. Table 1 summarizes the projectcomponent's main activities, the nature of their economic impact, and an estimation of the magnitude ofthese impacts.

Table 1. Water Resources Management Component: Activities, Expected Impacts and Magnitude

Impact Value Supporting Evidence

Source Level

Better WRMCoordination

Increased benefits High Ganges Basin (Rogers, 1993) 20% increase

Reduced investment High Brazil - Proagua Project &costs Bahia WRM Project 20% - 32% savings

Reduction/elimination High Bank's experience 15% cost overrunsof cost overruns

Improved WaterDemand Management

Better control of water High India; Singh 1983 25%-35% increasedresource use

irrigation efficiency

-35-

.2' ~ ~ .. , I , it

Better control of water Medium-High Bhatia, et al 1994 26% decrease throughresource use through targeted educationaleducation campaigns for high

volume users

Increased user High De los Reyes et al, 1989 50%-75% incr. ag.participation in water productivityresources management 100% incr. in irrig.

area

Promotion of WUAs High, Subramanian, 97 25%-30% decr. in cost ofirrig. supplies

Minimum Impact Approach: The fundamental shift in water resources development - a shift fromsupply mobilization to improved management as the means for solving water needs has given rise to a "newgeneration" of water-related projects where the aim is to enhance and modernize a country's capacity tocollect, process, and use the most critically important input to water management: information. These "newgeneration" projects, of which WSIP has joined the ranks, are characterized by significant investment datacollection and information processing, use of information for decision making, and investment ininstitutional development and capacity building. The minimum impact approach as elaborated inCummings, et al 1996 draws on the intuition of new options of investment under uncertainty and evaluatesthe economic feasibility of a project on the basis of responses to two related questions: What is theminimum impact on measurable social values attributable to the project that would be required for itsfeasibility (a B/C ratio of unity); and does there exist a reasonable basis for expecting such minimumimpacts ? This approach has been used in the Bank's recent portfolio of "new generation" projects, notably,the Mexico Water Resources Project, 1996; Bahia Water Resources Management Project, 1997; andBrazil Proagua Project, 1998 to assess the economic feasibility of the water resources managementcomponents.

In the WSIP, the impact of improved data collection and information management can be expected todirectly impact social welfare through a combination of such things as increasing agricultural production(via increased efficiency of water use), expanding opportunities for industrial growth (via, as one example,reallocating water for municipal and industrial uses), ameliorating or eliminating the mining of exhaustiblenatural resources thereby promoting sustainable growth, reducing risks and costs associated with damsafety, floods, and drought, improving environmental quality, and more generally, improvingdecision-making processes. Specifically, the water resources management components would: (i) rationalizewater infrastructure investment decision-making (through better coordination and planning, as well asdemand management), which, in turn, would have an impact on public expenditures in the water sector; (ii)positively affect water demand, by progressive implementation of tariff reform; and (iii) improve existingO&M of existing and new water infrastructure.

The table below provides estimates of annualized benefits and costs of some of the activities in the watersector that would be affected by the project, and where feasible, their estimated economic impacts.Estimated relevant total values (using conservative assumptions) total US$1065 million. Annualized costsof the water resources management component over the life of the project are estimated at US$3.5 million.Social costs are assumed equal to economic costs. Thus, the implied value of the minimum impact to justifythe investment would be equivalent to 0.3 percent of the social value of the water sector. This means thatthe economic feasibility of the water resources management component would require that it affects (either

- 36 -

by increasing benefits or decreasing costs) the current levels of water-sector related benefits/costs by anaggregate equivalent to 0.3 percent of the social values involved. Even when applying a partial list ofconservatively estimated benefits, the annualized possible benefits stemming from the WRM-typecomponents would be about US$30 million yielding a benefit-cost ratio greater han 8.

Table 2. Impact of the Economic Values of the Water Sector (US$miflion)

Economic Values Present Level Estimated Impact(Benefits and Costs)

Type AnnualLevel

Public investments in 183 10% efficiency gain 18.3water resourcesdevelopment

Costs overruns on 22 10% reduction 2.2water relatedinvestments

Value of irrigated 850 +1% increase 8.5agricultural production

Energy and O&M 9 10% reduction through improvedcosts electrification 0.9

Costs of groundwater 1 10% reduction through improvedmining groundwater management 0.1

Total value 1065 30.0

Cost-effectiveness analvsis for deep tubewell exploration:

The following methodology was used to determine, ex post, the cost-effectiveness of the deepexploratory tubewells investments: between 1990 and 1995, exploration activities by the DGRE resulted inthe estimated annual sustainable aquifer yield in Tunisia increasing by 40 million m, of which 80% wasutilized in irrigated agriculture and 20% for urban and rural potable water supply. Based on this increasedavailability of water, returns to three tepresentative cropping pattems Ml, M2 and M3) for awith-project" (irrigated agriculture) were analyzed and compared to a typical "without-project" croppingpattern (rainfed agriculture) using detailed farm budgets and cost of cultivation data. Ml represents theleast-value added cropping pattern, with a irrigated forage and cereals (88%), legumes (15%) andhigh-value vegetables (10%). M3 represents the highest-value added with legumes (80%) and high-valuepeppers (50%) with M2 representing an average value-added cropping pattern. Costs included in theanalysis are the investment costs of the deep exploratory tubewells, the irrigation development costs (at `TD7000/ha. based on an average of recently completed projects in six different governorates), O&M costs,and the replacement cost of the pump every seven years. All financial costs and prices were converted to

- 37 -

economic prices using specific conversion factors. A stream of net benefits was computed and its economicrate of return computed using the assumptions listed below. This represents the ex post rate of return toinvestments in deep exploratory tubewells, and the value-added from the additional renewable groundwaterresources discovered.

Main Assumptions:I. All additional water is of reasonable quality and is wholly allocated to agricultural

production.2. Prices remain constant in real terms over the 20-year period covered in the with and without

project scenario (Specific conversion factors used for input prices and output prices arepresented in the detailed financial and economic analysis in the project files).

3. Tax and transfer policies remain constant over the same 20-year period so that economic pricesremain constant (1998 prices) in real terms during that period.

4. Benefits from the additional water start to accrue only in the third year, allowing two years fordevelopment of irrigation after additional resources of water have been discovered.

5. The SCF used for capital costs was estimated to be 0.84 with a foreign exchange component of70%.

6. The opportunity cost of capital is 10 percent.7. Farmers have no constraints in terms of access to inputs (including credit).8. The opportunity cost of unskilled labor is estimated at 70% of the prevailing wage rate.9. The project life is 20 years.

With OLe above assumptions and using cropping pattern Ml, the net stream of benefits yielded a rate ofreturn of 18.2 % , with an NPV of 12.8 DT million for the exploration investments of the 1990-1995period. The ERRs for cropping patterns M2 and M3 are significantly higher at 24.3% and 56.0%respectively. However, only the results from the most conservative case are presented here. Sensitivitytests indicate that with a 1-year and 2-year delay in benefits, the ERR would have declined to 14.6 % and12.9% respectively. A 10% increase in capital costs would have resulted in the ERR declining to 15.9 %.The tests indicate that overall viability of the investments would be robust over modest declines inperformance even in the most conservative case. Incorporating potable water uses would result in evenmore favorable economic returns. However, the nature of the results for the conservative case demonstratesthat the deep exploratory tubewell program has been cost-effective.

Table 3: Deep Tubewell Exploration: Economic Analysis Summary - Conservative Case

Economic rate of return 18.2

Net Present Value (millions TD) 12.8

Sensitivity Analysis:

Economic rate of return with:1 year delay in benefits 14.62 year delay in benefits 12.9

Increase in Capital Costs by 10% 15.9

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Cost-Benefit Analysis for Tubewell Irrigation:For the approximately 51 small irrigation perimeters envisaged under the project, an overall cost-benefitanalysis was carried out.

The overall costs included the investment costs, O&M costs, and the pump replacement costs every sevenyears. Since the new irrigated area is roughly 3000 ha., the benefits from three representative croppingpatterns (in increasing order of value-added) were computed using farm budgets and cost of cultivationdata using the same methodology as discussed earlier. All the main assumptions listed above hold here also.The conservative (low value-added) cropping pattern was the same as used in the deep tubewell case. Allfinancial prices and costs were converted to economic prices using specific conversion factors. Thebenefits are assumed to come on stream in the third year of implementation starting with 40%, followed by60%, 80% and then 100% of total benefits. The stream of net beiefits was calculated and its economic rateof return was calculated to be 18. 1% with an NPV of TD 12.4 million.

Table 4: Small Tubewells Program: Economic Analysis Summary - Conservative Case

Economic rate of return 18.1

Net Present Value (millions TD) 12.4

Sensitivity Analysis:

1 year delay in benefits 15.72 year delay in benefits 13.6

Increase in costs by 10% 16.9Increase in costs by 10% plus 1-year delay in 14.3benefitsSwitching Values: 34-Reduction in benefits (%) 58- Increase in costs (%)

Sensitivity analysis I Switching values of critical items:Results from the sensitivity analysis indicate that with an increase in total costs of 10%, the ERR declinesto 16.9%. A delay in 1-year of project benefits would result in the ERR declining to 15.7%. Thecombination of a 10% increase in capital costs and a 1-year delay in benefits would result in the ERRdeclining to 14.3%. The results are robust across all the scenarios attesting to the viability of theinvestments.

Switching values indicate that benefits would have to decline by 34%, and costs increase by 58% tomaintain a minimum ERR of 10%. The high switching values indicate that the ERR is quite robust and thatthe risk from these crucial variables is low.

Cost-Benefit Analysis of Wastewater Reuse:

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For the approximately 580 ha. (in 7 governorates) to be irrigated with treated wastewater, a cost-benefitanalysis was carried out. Nationwide, there is currently about 6000 ha. irrigated using treated wastewater.About 57% of these use sprinkler irrigation and 43% are under gravity irrigation.

For the analysis, the average national cropping pattern for irrigation perimeters with treated wastewaterwas used - cereals - 22%; fodder crops - 45%; tree crops - 29%; and industrial crops - 4% for the

with-project situation. The without-project situation (rainfed agriculture) assumed a cropping pattern ofcereals. Farm budget and cost of cultivation data were used in the same manner as the earlier analyses tocompute benefits with and without the project. Since the wastewater treatment plants already exist, theinvestment costs include only the development of the irrigation network and O&M costs of sprinlrer andgravity irrigation systems. No additional treatment costs were assumed in the with-project scenario. TheO&M costs were computed from an average of actual O&M costs for existing wastewater irrigationperimeters. Using the same assumptions in the earlier analyses yielded a robust ERR of over 40%.

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Annex 5: Financial SummaryTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

Years Ending2001-2005

_ | Year i| Year 2 | Year 3 | Year 4 Year S| Year 6 Year 7Total Financing RequiredProject CostsInvestment Costs 55,0 67.0 71.0 38.0 25.0 0.0 0.0Recurrent Costs 0.1 0.3 0.4 0.4 0.3 0.0 0.0

Total Project Costs 55.1 67.3 71.4 38.4 25.3 0.0 0.0Front-end fee 0 0 0.0 0.0 0.0 0.0 0.0 0.0

iTotal Financing 55.1 67.3 71.4 38.4 25.3 0.0 0.0

FinancingIBRDIIDA 22.0 27.0 29.0 15.0 10.0 - 0.0 0.0Government 8.0 10.0 11.0 6.0 4.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Cd-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 25.0 30.0 32.0 17.0 11.0 0.0 0.0

Total Project Financing 55.0 67.0 72.0 38.0 25.0 0.0 0.0

l Year 1| Year 2 | Year 3 | Year 4 | Year 5 | Year 6 Year 7Total Financing RequiredProject Costs

Investment Costs 22.0 21.0 20.0 20.0 18.0 0.0 0.0Recurrent Costs 3.0 3.2 3.3 4.0 4.5 0.0 0.0

Total Project Costs 25.0 24.2 23.3 24.0 22.5 0.0 0.0Front-end fee 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Financing 25.0 24.2 23.3 24.0 22.5 0.0 0.0

FinancingIBRDIIDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0Government 92.0 88.0 79.0 71.0 51.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 8.0 12.0 21.0 29.0 49.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 100.0 100.0 100.0 100.0 100.0 0.0 0.0

Main assumptions:* Financing earrnarked under the Government may be reduced to include other donors' funding yet to bedetermined.

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* Numbers in Financing Table during Operational Period should be read as percent of total.As Tunisia would be completing its mobilization phase by end of the WSIP, incremental investments andrecurrent expenditures resulting from the project after completion of implementation would still averagearound US$ 23 million per annum. Recurrent costs would include maintenance of measurement equipment,data monitoring costs of the piezometric network, spare parts, overall maintenance, including of civil works.WUAs would be responsible for 100% of O&M of the irrigation pumps and other related infrastructure andprogressively cover investment cost for all equipment with a life span of less than 10 years. Investment costswould include replacement of computer and other monitoring systems, replacement of vehicles, etc.

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Annex 6: Procurement and Disbursement ArrangementsTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

Procurement

Procurement methods (Table A)

Procurement responsibilities

To ensure smooth project implementation, the Project Implementation Unit (PIU) at the Ministry ofAgriculture will have overall responsibilities for procurement, coordination and supervision of theexecution of the project. The PIU has acquired long experience in dealing with Bank-financedprocurement, under the previous ASIL and ongoing ASIL II loans. It is administered by the DGFE, and itsCoordinator has substantial experience in handling procurement in accordance with Bank procurementguidelines. The PIU will coordinate procurement activities through local implementing units, thecommissariats for agricultural development (CRDAs), which are responsible for launching their own bidsand supervising their projects. The technical directorates of the Ministry of Agriculture DGGR andDGRE, as well as IRESA, will be responsible for preparing the international and national bid documents tobe used by the CRDAs.

With a few exceptions, the Bank is satisfied that the local procurement procedures are acceptable.Although the Tunisian legislation is generally in line with the Bank's Guidelines, certain rules andprocedures, however, are not acceptable to the Bank. These issues mainly concem the use of twoenvelopes in bidding for works and goods and open competitive bidding for hiring consultants. Under thisproject, the Bank's procurement procedures will be applied, as also specified in the loan agreement.

Procurement Arrangements

Procurement of works and goods will be done in accordance with the World Bank's Guidelines:Procurement under IBRD Loans and IDA Credits, issued in January 1995 and revised in September 1997and Januaiy 1999. Consulting services, technical assistance and training financed by the Bank will beprocured in accordance with the Guidelines: Selection and Employment of consultant by World BankBorrowers, issued in January 1997 and revised in January 1999.

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement MethodExpenditure Category . IC NCB Other2 N.B.F. Total Cost,

1. Works 46.00 136.07 3.00 0.00 185.07(31.50) (33.70) (2.00) (0.00) (67.20)

2. Goods 5.70 46.20 0.00 0.00 51.90(2.10) (25.00) (0.00) (0.00) (27.10)

3. Services 0.00 0.00 19.90 0.00 19.90(Consulting services & (0.00) (0.00) (7.70) (0.00) (7.70)training) _

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4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Front-end fee 0.00 0.00 1.03 0.00 1.03

(0.00) (0.00) (1.03) (0.00) (1.03)Total 51.70 182.27 23.93 0.00 257.90

(33.60) (58.70) (10.73) (0.00) (103.03)

Figures in parenthesis are the amounts to be fiianced by the Bank Loan. All costs include contingencies

21 Includes civil works and goods to be procured through national shopping, consulting services, services ofcontracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local governmentunits.

Project Costs by Procurement Arrangement

Works. The works consist of small and large-scale perimeter rehabilitation, conservation of waterresource base, rural potable water supply, drilling exploratory wells and piezometers. InternationalCompetitive Bidding (ICB) will be used for contracts estimated to cost US$5 million or more. Properpost-qualification criteria will be specified in the bid documents, and contracts would be awarded only tobidders that meet the specified criteria. Under ICB, the Bank's standard bid documents will be used.National competitive bidding (NCB) with use of standard documents will be used for contacts estimated tocost US$30,000 or more but less than US$5 million. Contract awards will be made to the lowest evaluatedresponsive bidder on the basis of bid evaluation criteria specified in the bid documents. For contractsestimated to be below US$30,000 national shopping will be used based on comparing quotations from atleast three contractors. Contract award will be made to the contractor who offers the lowest quotation forthe required work, and who has the experience and resources to successfully complete the contract. Owingto the lack of other providers, direct contracting would be used with the Societe Tunisienne de l'Electriciteet du Gaz (STEG) for electrification of irrigation pumping stations and the Societe Nationale d'Exploitationet de Distribution des Eaux (SONEDE) for carrying out very specific works on potable water installations.

Goods. The project would finance computer, piezometers, laboratory, research and other equipment aswell as vehicles. International competitive bidding will be used for contracts estimated to cost US$400,000or more, and the Bank's standard bid documents will be used. National competitive bidding may be usedfor contracts estimated to cost US$30,000 or more but less than US$400,000. For contracts not exceedingUS$30,000 national shopping may be used up to an aggregate amount of US$500,000.

Consultant services. Consultant activities related to studies, short-term expertise, training and capacitybuilding will be financed under the project. Consultant services with an estimated contract amountexceeding US$200,000 will be advertised in the United Nations Development Business periodical and in atleast one local newspapers. For such contracts, the Bank's standard Request for Proposals documents willbe used. For contracts below US$200,000 the short list of consultants may comprise entirely nationalconsultants if a sufficient number of qualified firms are available at competitive costs. The selectionmethod will be based on quality and cost for all contracts above US$100,000 for firms and US$50,000 forindividuals. Below these thresholds, and with the exception of the employment of consultants throughsingle source for reasons critical to the project, the selection method may be on the basis of consultants'qualifications.

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Prior review thresholds (Table B)Works contracts equal or above a threshold of $1,000,000 equivalent, contracts for goods equal to or US$

400,000, and consultant contracts equal to or above the equivalent of US$ 100,000 for firms and US$50,000 for individuals would be subject to the Bank's prior review. These thresholds reflect the

performance of the Ministry of Agriculture on procurement of similar works and goods under ASIL and

ASIL2. The review process would cover about 20% of total contracts amounts. This percentage is

basically due to the large number of small civil works contracts, and is deemed acceptable given thesatisfactory procurement of the same implementing agencies under existing projects and the acceptability to

the Bank of National Competitive Bidding procedures. For other procurement, the Borrower shall furnishall information and documentation that the Bank may reasonably request, prior to the submission of the

related withdrawal application.

Table B: Thresholds for Procurement Methods and Prior Review

Contract Value Contracts Subject toThreshold Procurement Prior Review

.Expenditure Category. (US$ thousands) Method (US$ millions)'1. Works >=5,000 ICB All contracts

<5,000 NCB - All contracts above US$1

________=____________ _ m illion2. Goods >=400 ICB All contracts

<400 NCB No prior review3. ServicesFirms >=100 QCBS All ContractsIndividuals

<100 QCBS None (Post Review)>=50 Consultant Guidelines TORs, SL, TORs Contract

<50 Consultant Guidelines TORs only

4.Miscellaneous5. Miscellaneous6. Miscellaneous

Total value of contracts subject to prior review: US$ 35 million

Overall Procurement Risk Assessment

Low

Frequency of procurement supervision missions proposed: One every 12 months (includes specialprocurement supervision for post-review/audits)

Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of loan proceeds (Table C)Allocation of Loan Proceeds. Allocation of Loan proceeds by disbursement category and percentagesfinanced by the Loan (including a Front End Fee of 1%) are presented in Table C below.

Table C: Allocation of Loan Proceeds

l .'.g"<.tExenditure Category , , rt US$niilln F cAlmovo n t1. Works 64.00 60%2. Goods 27.00 100% of foreign expenditures,

100% of local expenditures (ex-factory),and 80% of local expenditures for the

other item procured locally3. Services, Capacity-building and 7.00 100%TrainingUnallocated 3.88Collars and Caps 0.09

Total Project Costs 101.97

Front-end fee 1.03 -

Total 103.00o

Use of statements of expenditures (SOEs):

Use of Statements of Expenses (SOEs). For:

e All works and goods contracts of an estimated cost less than US$1,000,000 and US$400,000equivalent, respectively; and

3 All consultant contracts of an estimated cost less than US$100,000 for finns and US$50,000equivalent for individuals and training.

Full documentation for expenditures under contracts requiring the Bank's prior review will be submittedwith the corresponding application.

Special account:Special Account.

Upon effectiveness, an amount equivalent to EUR 8.2 million (US$ 7.5 million equivalent) will beauthorized for deposit to a Special Account in the BCT (Banque Centrale de Tunisie). Initially, theauthorized allocation will be limited to an amount equivalent to EUR 4.4 million until the aggregateamount of withdrawals from the Loan Account plus the total amount of all outstanding specialcommitments are equal to or exceed the equivalent of EUR 22 million.

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Financial Management.

The Financial Management System (FMS) in place at the MOA's implementing agency for the project, isbased on principles and procedures defined by the legal framework applicable to the pubic sector and morespecifically to governmental institutions. The financial management system in place is currently in atransition phase. A program of modernization and upgrade was started in 1994 and has allowed amongother the approval and adoption of an organization chart characterized by a matrix organization whichreinforces decentralization and upstream and downstream controls. The main characteristics of this systemare the following:

Accounting svstem. An accounting system based on the cash basis and the outline of budget components isoperational and reflected on legal books according to the regulation described in the Public AccountingLaw. In parallel the informnation system is quite developed and allows, through numerous applications, togenerate the necessary information for the management of operational activity.

Budgeting svstem. Based on the programs and actions to be undertaken, the MOA issues an annual budgetfor commitments. The annual budget is submitted for approval to the Ministry of Finance, structure incharge of a close control through its specialized units. In terms of sources of funds, the general budgetincludes the GOT's contribution as well as funds allocated by different donors for the implementation ofspecific projects. The budget execution is also subject to authorization for payment on a transaction level.This specific authorization process aims at ensuring that the expense to be paid has been budgeted, and toissue the official instruction to make the payment. This process is supported by a computer system called "ADAB" which the various Ministries use at the central level to commit expenditures and which insures thatall conmitments are covered by the annual approved budget. The DGFE is playing an important role forthe formulation of the annual budget and its execution, since it is the official vis a vis of the donors and thestructure responsible for issuing periodical monitoring reports.

National Disbursements Procedures. Payments through the governmental budget are decentralized andprocessed by the CRDAs. Based on the authorization of payments, the Tresorerie Generale (TG) transfersthe needed funds on a quarterly basis. With regards to transactions totally or partially financed byinternational donors, payments are centralized for the eligible portion. The process involves four partieswith specific roles as follows: (i) the CRDA is responsible for implementation and issuing of theapplications for withdrawal, (ii) the technical department involved is responsible for reviewing the technicalaspects and the consistency of the supporting documentation, (iii) the DGFE is responsible for the reviewof the eligibility of the expenditures to the specific financing; and (iv) the Central Bank of Tunisia (BCT)which plays the role of manager of the special account and is acting as MOF representative for thereplenishment of this account.

Control of the budget execution. A fiduciary responsibility of control of budget execution and monitoring isassigned to MOF through a specialized audit department "Controle General des Finances" (CGF) and tothe Audit Court (Cour des Comptes) that has a judiciary role of supervision of public finance and theauthority to deliver final approval("quitus") of the management and accounts of public funds. For managing the external debt, MOF hasimplemented in 1996 a new computerized system called "SLADE".

Project Monitoring. The official structure responsible for the project monitoring and reporting is DGFE.This unit is responsible for issuing periodical reports combining physical implementation data as well asfinancial information related to commitments, disbursements and available balances from the loans, creditsand grants. Even if the system can be considered as globally satisfactory, it still presents scope forimprovement to reach the required efficiency and to improve the decision making process. In fact, DGFEstill has to handle periodically several sub reports issued by the technical departments that often don't have

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the needed coherence to allow for an easy aggregation of data. This method of operating involves delaysand extra workload related to the needed checks and reconciliation of data before issuing the consolidatedsemi-annual reports. This could also affect the accuracy and reliability of data since new entries have to bedone at the level of DGFE in order to present an overview of project implementation.

General Assessment and Scope for Improvement

General Assessment. Deficiencies in MOA's financial management systems at the central and regionallevels were identified during the assessment. It is important to note that these deficiencies do not reflectaccountability issues. The findings are mainly related to non-computerization of the accounting system,non-official definition by writing of the financial management procedures, incomplete ManagementInfornation Systems, and use by the technical structures of "individual" technology solutions for themonitoring of their operational activity. It should also be noted that MOA is in the process of addressingseveral of these issues mainly through the National Program for Modernization and Upgrade (NPMU).Still, substantive improvements will require several years of concerted efforts and mobilization of theneeded funds.

Scope for improvement. Although it is overall satisfactory, the existing financial management systemshould be improved in order to achieve the required efficiency. The main improvements are on line withthe NPMU. These are related to: (i) the adoption of coherent and comparable financial managementprocedures by all the CRDAs; (ii) the harmonization of the management information system in terms oftechnology solutions; (iii) the implementation of a comprehensive analytical accounting system at the levelof the 23 CRDAs; and (iv) the development of general training program for the staff of the DGFE as wellas those involved in the project monitoring at the central and regional levels. Indeed most of these actionsaim at making the decentralization more effective and at allowing the units at the central level to play theirroles accordingly.

Financial Management System for the Proiect. Since the implementation of the actions related to theNPMU still need several years of concerted efforts there is a need during the transition period to set upspecial arrangements for the management and monitoring of the proposed WSIP. The recommendations aretaking into account the ongoing NPMU actions and should be considered as complementary. The mainactions to be implemented during a period of 15 months and by no later than September 30, 2001 are thefollowing:

0 of the Project Management Team (PMT) headed by an official coordinator for the project.0 Hiring of a short-term consultant to develop the Financial Management Manual0 Acquisition of the needed hardware for the project team.0 Implementadon of a specific software application.0 Appointment of an accounting andfinancial management specialist0 Development of training program.

Organization of the PCU . The head of this structure has to be designated officially as coordinator. Thisperson will be responsible for monitoring and coordination as well as procurement, finance, budgeting,accounting and reporting functions. The PCU head will be assisted by an adequate number of qualifiedstaff at the central level. Designation of the team involved in the project implementation (DGFE, technicalDepartments, Administrative and Finance department, etc.) has to be done officially taking into account theactivity level, the contribution, and the mandatory segregation of duties according to acceptable internalcontrol concepts. To establish a sound financial management system, the PCU will be assisted, by aqualified accounting and financial management specialist. To establish an acceptable system for the

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monitoring and managing of the project, each technical department involved in the project will designateofficially a coordinator responsible for issuing sub-project accounts and sub-Project ManagementReports.

Financial and accounting policies for the project have to be developed. These policies are crucial forensuring transparency, providing clarity regarding financial aspects to the various stakeholders and financestaff, ensuring uniformity, and enforcing accountability. These policies inter-alia cover the followingaspects: (i) expenditures which, would be treated as project expenditures including their classification; (ii)expenditures, which would be eligible for reimbursement from Bank Loan; and (iii) project accountingpolicies. These policies would'be gradually expanded and refined to include aspects such as efficientmanagement and deployment of funds, internal control policies, etc.

Project Accounting System. The technical departments involved in the project implementation' will act onbehalf of the CRDAs and would be responsible for project financial management and accounting duties.They would maintain accounting records for the components they manage, prepare and disseminatesub-project accounts and sub-financial management reports. They would also ensure timely transmission ofthese documents to the PCU. The PCU would be responsible for the aggregating, processing and issuingof: (i) the annual project financial statements (PFS), (ii) the quarterly financial Management Report, and(iii) the semi - annual project monitoring report. He/She will also be responsible for the submission to theBank and the auditors of these documents on a timely basis. The content of the PMR would be graduallyexpanded and refined to include all the evaluation and performance indicators as well as budget forecast.

The overall principles for project accounting are outlined below:

(i) Books of accounts for the project would be maintained on cash basis principles. Project accountswould be maintained using the application developed for this purpose and which, will be implemented by nolater than March 2001. The implementation of a data base specific to the project will be used by the projectteam to reflect all the transaction flows and issuing after the aggregation of data of the quarterly simplifiedPMR and the annual project accounts.

(ii) Project accounting would cover all sources of project funds, and all utilization of project funds.This would include payments made and expenditures incurred. All project-related transactions (whetherinvolving cash or not) would be taken into accounts in the reporting system. Disburseriients made by theWorld Bank and the transaction proceeded through the Special Account maintained by BCT would also beincluded in the project accounting system. Funds received from different sources would be identifiedseparately.

(iii) Project-related transactions and activities would be distinguished from other activities. Thisdistinction would be reflected at the data-capture stage. An identifiable Trial' Balance 'for the projectcapturing all projects receipts, expenditures, and other payments under the 'project would be prepared. AChart of Accounts for the project has to be developed. The Chart of Accounts should conform to theclassification of expenditures and sources of funds as indicated in the project documents (ProjectImplementation Plan, Project Appraisal Document, COSTAB). The Chart of Accounts should allow datato be captured in a manner to facilitate financial reporting of project expenditures by: (i) projectcomponents; (ii) expenditure categories; and (iii) disbursement categories.

iv) A system of reconciliation between the Project Financial Statements /financial reports and the legalrecords (mainly ADAB and SL4DE) have to be defined.

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(v) Physical information on key performance indicators that can be readily linked to financial costswould be maintained as part of the project financial management system. Initially this would be maintainedfor some high cost items that represent a significant portion of the project cost, and for items for which,data on physical activities can be easily captured. These items have to be identified and indicated in theInternal Control Guidelines. This list would be gradually expanded during implementation.

Information Flow for Accounting Purposes. The information flow will be as follows:

(i) Each technical department will act on behalf of the CRDA and will generate and maintain vouchers andsupporting documentation for expenditures on activities directly managed within their line of specialization.Sub project accounts will be issued on a monthly basis and transmitted to the PCU for control, aggregationof data, maintaining of the centralized project accounts and issuing of the project financial statements.

(ii) Expenditures incurred by each CRDA as well as by technical department at the central level would bereviewed by the project auditors following the International Standards of Auditing and the World Bankguidelines; and

(iii) This system would be reviewed in the light of implementation experience, and NPMU's achievementsby December 2002. Reporting arrangements in terms of contain and periodicity of submission would berevised and defined accordingly.

Internal Controls . The project financial management system should include the following internal controlmechanisms:(i) Operation of a budgeting system, and regular monitoring of actual financial performance withbudgets and targets;

(ii) Adoption and operation of simple, clear and transparent financial and accounting policies whichwould govern financial management of and accounting for the project. These policies and procedures haveto be included in the Financial Management Procedures Manual.

(iii) Establishment at the transaction level of policies, procedures and systems for ensuring acceptableinternal controls mechanism such as checking of expenditures, appropriate documentation, levels ofauthorization, segregation of duties, periodic reconciliation, physical verification, easy access to supportingdocuments etc. These policies and procedures would be reviewed and updated periodically; and

(iv) Implementation of a comprehensive system aiming to: (i) the aggregation of data at the centrallevel; and (ii) the issuing of the project financial statements and the PMR.

This document should reflect the PCU's role including a description of: (a) staff positions andresponsibilities, (b) transaction flows, and (c) relation with the technical departments and CRDA as well asexternal authorities/administrations such as Ministry of Finance, BCT, etc. This system would be reviewedin the light of implementing experience and modified as necessary.

Financial Management Reports

Project financial and monitoring reports for the project would be generated from the computerized financialmanagement system. These reports would be management-oriented (i.e., summaries rather thantransactional details) and would be used for the monitoring and implementation of the project by eachTechnical Directorate and DGFE at the central level.

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The PCU would be responsible for the issuing of the following reports:

Quarterly simplified financial reports which should include the following statements:§ Summary of expenditures committed and disbursement by component§ Summary of expenditures committed and disbursement by category§ Summary of the procurement process and procedures

Semi annually project monitoring and management report which, should include the following:(i) Financial Statement that include:

§ Summary of sources and uses of funds§ Uses of funds by project activity§ Project balance statement of affairs§ Cash withdrawal§ Cash forecast§ Special account statement(ii) Progress statement that include:§ Output monitoring report using contact management information§ Output monitoring report using unit variance as monitoring indicator(iii) Procurement management report that includes:§ Contract expenditure report - Goods and works§ Contract expenditure report - Consultant§ Procurement management report - Goods and works§ Procurement management report -Consultant

Formats of the reports should be part of the Financial Management Procedures Manual,

Anmually: Audited Project Financial Statements (PFS) would be submitted to the Bank. PFS wouldinclude: (i) a statement of sources and utilization of funds or Balance Sheet, indicating funds received fromvarious sources, project expenditures, and assets and liabilities of the project; (ii) schedules classifyingproject expenditures by components and expenditure categories; (iii) a Special Account ReconciliationStatement; and (iv) a Statement of Withdrawals made on the basis of Statements of Expenditure (SOEs).Audited PFS would be submitted to the Bank not later than 6 months after the end of the Fiscal Year.

Audit Arrangements

As an exception to the Bank requirements and guidelines, the accounts and financial statements of theproject would be audited by the "Contr8le Gen&al des Finances" (CGF), who would be the ProjectAuditor. The annual project financial statements audited by CGF would be submitted to the Bank within 6months of the close of GOT's fiscal year. The Terms of Reference (TOR) for the audit would be includedin the Financial Management Manual and approved by the Bank.

The audit would be comprehensive and cover all aspects of the project (i.e., all sources and utilization offunds, and expenditures incurred). The audit will be carried out in accordance with Intemational Standardson Auditing. Terms of Reference (TORs) for this assignment should cover an audit of financial transaction,and an assessment of the financial management system, including review of internal control mechanisms.Each CRDA as well as structures at the central level would provide the auditor with access toproject-related documents and records, and information required for the purposes of the audit. The Auditor

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would carry out a concurrent audit during the fiscal year, to bring to manag,ement's attention any issue,which needs to be addressed. This would strengthen internal controls, and would also facilitate earlycompletion of the annual audit.

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Annex 7: Project Processing ScheduleTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

ProjectdSchedule Planned Actual

Time taken to prepare the project (months) 12First Bank mission (identification) 11/15/99 11/15/99Appraisal mission departure 02/28/2000 02/28/2000Negotiations 05/01/2000 05/02/2000Planned Date of Effectiveness 01/02/2000

Prepared by:

Ministry of Agriculture with input from the World Bank

Preparation assistance:

None

Bank staff who worked on the project included:

Namne SpecialityMadani M. Tall Senior Economist, Cluster Leader, MNSREVan Tuu Nguyen Senior Irrigation Engineer, MNSREShobha Shetty Economist, MNSRESamia Msadek Financial Management Specialist, MNSREDominique Poitrinal Groundwater Management Specialist/Consultant, MNSRERene Cipriani Implementation Specialist/ConsultantNejib Saadoun Water Institutions Specialist/ConsultantKhalil Zamiti Social Scientist/ConsultantJurgen Blanken Water Economist/ConsultantSalah Darghouth Sector Leader, Water and Environment, MNSREPetros Aklilu Sector Leader, Rural Development, MNSREDoris Koehn Sector Director, MNSREM-F How Yew Kin Cluster Team AssistantAshok Subramanian Water Inst. Development Specialist, MNSREFrancois Gadelle Sr. Irrigation Engineer, AFTR3Marjory-Anne Bromhead Principal NRM Specialist, Peer Reviewer, ECSSDArbi Ben-Archour Sr. Social Scientist, Reviewer for Social issues, MNSEDDominique Bichara Counsel, LEGMNStephen D. Mink Principal Rural Development Specialist, Peer Reviewer, EACIFJohn Buursink Environment Specialist/ConsultantAlain Vidal Research Specialist, FAO/IPTRID

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Annex 8: Documents in the Project File*TUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

A. Project Implementation Plan

Plan d'Ex6cution du PISEAU, Ministere de l'Agriculture, fevrier 2000.

B. Bank Staff Assessments

-PCD -November 11, 1999- Pre-Appraisal Mission: BTO dated December 17, 1999- Appraisal Mission: BTO dated March 23, 2000- Various technical notes

C. Other

- Etude sur le Secteur de l'Eau, Avril 1999, BECHTEL/SCET-Tunisie/Ministere de l'Agriculture- Second Agricultural Sector Investment Loan-ASIL2, December 30, 1997, PAD Report no. 17208-TUN- Agricultural Sector Investment Loan-ASIL, October 29, 1993, Staff Appraisal Report no. 12229-TUTN- Sectoral Environmental Assessment, April 2000- Social Review, March 2000*Including electronic files

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Annex 9: Statement of Loans and CreditsTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

Differenoe between expectedand actual

Original Amount in US$ Millions disbursen,ents

Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Org Frn Rev'd

P005745 1996 Tunisia 2ND EMPL. & TRG. 60.00 0.00 0.00 40.81 19.53 0.00

P005733 1994 Tunisia DEV.OF MTS NW REGION 27.50 0.00 1.48 3.48 3.05 1.16

P005741 1998 Tunisia HIGHER EDUC. II 80.00 0.00 0.00 69.59 7.26 0.00

P005726 1992 Tunisia HIGHER EDUCATION 75.00 0.00 0.00 28.24 32.40 17.40

P046832 1997 Tunisia MUNICIPAL DEV. II 80.00 0.00 0.00 25.62 7.39 0.00

P005736 1997 Tunisia NATURAL RESOURCE MGM 26.50 0.00 0.00 20.98 6.01 0.00

P005749 1995 Tunisia RURAL ROADS 51.50 0.00 0.00 5.55 4.79 0.00

P005725 1993 Tunisia SECOND FORESTRY DEVELOPMENT 69.00 0.00 3.40 33.06 24A9 -1.34

P005743 1995 Tunisa SECONDARY EDUCATION 98.30 0.00 0.00 26.96 29.66 0.00

P005721 1994 Tunisia TN-AGRICULTURAL SEC INV 120.00 0.00 0.00 6.11 6.34 -3.26

P050418 1998 Tunisia TN-ASIL 2 42.00 0.00 0.00 22.62 16.05 0.00

P053255 1999 Tunisia TN-ECAL II 159.00 0.00 0.00 67.64 8.16 0.00

P055314 1999 Tunisia TN-EXPORT DEVELOPMENT 35.00 0.00 0.00 34.65 4.65 0.00

P005731 1997 Tunisia TN-GREATER TUNIS SEWERAGE 60.00 0.00 0.00 47.58 11.66 0.00

P005746 1998 Tunisia TN-HEALTH SECTOR LOAN 50.00 0.00 0.00 43.06 18.41 0.00

P040208 1996 Tunisia TN-INDUSTRY SUPPORT INSTITUTION 38.70 0.00 0.00 26.56 16.16 0.00

P005748 1994 Tunisia TN-PRIVATE INVESTMENT CREDIT 120.00 0.00 0.23 4.56 5.41 5.18

P005720 1995 Tunisia TN-RURAL FINANCE 65.00 0.00 0.00 30.68 30.68 6.43

P005680 1995 Tunisia TN-WATER SUPPLY AND SEWERAGE 58.00 0.00 0.00 18.13 10.39 0.00

P043700 1998 Tunisia TRANSPORT SECTOR INV 50.00 0.00 0.00 30.81 22.89 0.00

Total: 1365.50 0.00 5.11 585.69 274.80 25.57

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TUNISIASTATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1998/00 BIAT . 0.00 0.32 0.00 0.00 0.00 0.29 0.00 0.001993 Ideal Sanitaire 0.00 1.02 0.00 0.00 0.00 1.02 0.00 0.001995 Maghreb IM Bank 0.00 0.33 0.00 0.00 0.00 0.33 0.00 0.001986/92/98 SITEX 0.00 0.77 0.00 0.00 0.00 0.77 0.00 0.001973/75 Sousse-Nord 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.001998 Tuninvest 0.00 4.64 0.00 0.00 0.00 2.36 0.00 0.00

Total Portfolio: 0.00 7.67 0.00 0.00 0.00 5.36 0.00 0.00

Approvals Pending Commitmnent

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

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Annex 10: Country at a GlanceTUNISIA: TN-WATER SECTOR INVESTMENT PROJECT

M East Lower.POVERTY and SOCIAL & North middle.

Tuniala Africa income Development dlamond'1998PoPulation. mid-vear (millions) 9.4 285 908 Life expectancyGNP Per capita (AtAls method, US$) 2.050 2,050 1,710GNP (Atlas method, US$ billions) 19.2 586 1,557

Average annual growth, 1992-98

Population (X) 1.6 2.2 1t1Labor force (%) 2.9 3.0 15S GNP ' Gross

Most recent estimate (latest year avaitable. 1992-98) per primarycapita ,- I enrollmnenl

Poverty (% of DOpulation below national poverty line)Urban population (Mof total poDulation) 64 58 58Life expectancy at birth (years) 70 67 s8Infant mortalitv (Der 1,000 live births) 30 49 38Child malnutrition (% of children underS) 9 14 Access to safe waterAccess to safe water (% of Population) 90 81 75Illiteracy (% of poDulation age 15+) 33 38 14Gross Primary enrollment (% of school-age Dopulation) 117 96 103 - unisia

Male 120 103 105 Lower-middle-income groupFemale 113 89 100

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977 1987 1997 1998Economic ratios

GDP (USS billions) 5.1 9.7 18.9 20,0

Gross domestic Investment/GDP 30,5 23.5 26.7 27.5 TExports of goods and services/GOP 29.8 34.8 43.9 42.4 radeGross domestic savings/GDP 221 22.5 24.2 24,3Gross national savings/GDP 21.8 22.0 234 241

Current account balance/GDP -9.3 1.0 -3 4 Domest Interest paymentstGDP 1.3 3.6 2.5 2,4 Domestic " InvestmentTotal debt/GDP 43.7 70.3 59.9 51.8 SavinsTotal debt service/exports 10.6 28.3 15.7 15.0Present value of debtGDP 55.7Present value of debUexports 117,0

Indebtedness1977-87 1988-98 1997 1998 1999-03 n

(average annual qrowth)GDP 4.4 4.6 5,4 5.0 6.1 -TunisiaGNP per capita 1.6 2.7 4.5 3.8 4.4 Lower-middle-income groupExports of aoods and services 3.2 4,8 10.5 3.7 5.1

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth rates of output and Investment (%)

(% of GDP) 30Agriculture 15.8 16.5 13.3 12.4 30 TIndustrv 25.7 29.5 28.5 25.4 20

Manufacturing 10,6 15.1 18.4 18.2 0Services 58,4 54.1 58.2 59.2 .1 9

Private consumption 61.7 60.6 62.8 62.7 -20 --General government consumption 16.2 16.9 13.0 13.0 -GD1 I-GDPImports of goods and services 38.0 35.8 46.4 45.6

1977-87 1988-98 1997 1998 Growth rates of exports and Imports (%)(average annual growth)Agriculture 3.7 4.4 2.9 -1.0 5Industrv 4.6 4.6 5.6 4.9 1nAs

Manufacturino 7.9 6.1 7.1 3.8Services 45 21 6.1 6.4

Private consumption 5.1 4.5 4.0 5.2 aGeneral government consumption 5.5 1.8 6.6 3.6 53 94 95 97 s8Gross domestic investment 0.3 5.5 5.6 6.1 5IImports of goods and services 2.2 4.1 8.9 4.2 'Exports m mportsGross national product 4.3 4.6 6.0 5.5

Note: 1998 data are preliminary estimates.

The diamonds show four key indicators in the countrv (in bold) compared with its income-qroup average. If data are missing, the diamond willbe incomDlete.

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Tunisia

PRICES and GOVERNMENT FINANCE1977 1987 1997 1998 Inflation (%)

DomesV'c prices(% change) 6Consumer prices 6.7 8.2 3.7 3.1 8

Implicit GDP deflator 9.7 5.2 4.0 3.6 4

Government fInance 2

(% of GDP, includes current grants) . -Current revenue .. 28.3 28.7 29.3 93 94 95 96 97 9

Current budget balance ,, 4.9 3.4 4.5 GDP deflator 0 CPIOverall surplus/deficil . -3.0 -3.9 -2.4

TRADE

(USS millions) 1977 1987 1997 1998 Export and import levels (USS millions)Total exports (fob) 928 2,137 5,559 5,722 10,000

Fuel 389 505 503 367Agriculture 52 166 277 193 e ,o*Manufactures 434 1,43i 3,680 3,804 4.000

Total imports (cif) 1,824 3,028 7,951 8.317Foodl 216 312 691 892Fuel and energy 198 318 597 396 2,000

Capital goods 540 520 1,724 1,917 092 93 94 95 94 97 93

Export price index (1995=100) .. 69 108 105Import price index (1995=100, .. 68 107 107 EtExports *ImportsTerms of trade (1995=100) .. 100 101 98

BALANCE of PAYMENTS

`US millions) Cr1977 1987 1997 1999 Curent account balance to GDP ratio (%)Exportsofgoodsandservices 1,511 3,377 8,164 8,479 0Imports of goods and services 1,942 3,473 8,688 9,077Resource balance -431 -96 -524 -598 *2

Net income -199 -486 -860 -857 -4

Net current transfers .. .. 791 780

Current account balance -474 .98 -593 -675

Financing items (net) 437 215 711 601 -.Changes in net reserves 37 -116 -118 74 -10

Memo:Reserves including gold (USS$millions) .. 616 1,988 1,851Conversion rate (DEC, /ocal/USS) 0.4 0.8 1.1 1.1

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

(US$ millions) Composition of total debt, 1998 (USS millions)Total debt outstanding and disbursed 2,233 6,817 11,323 10,341

IBRD 167 1,052 1,434 1,450 G. 1,110 A: 1,450IDA 67 63 45 43

Total debtservice 180 1,105 1,413 1,401 C129IBRD 23 177 275 268IDA3 23 2

Composition of net resource flows F:2.e5Official grants 32 .85 134 82 0: 1.906Official creditors 312 129 105 -145Pnvate creditors 351 -120 587 6

Foreign direct investment 93 92 316 697

Portfolio equity 0 0 0 0 E: 2,966

World Bank programCommitments 78 200 167 222 A . IBRD E - Bilateral

Disbursements 53 166 127 133 8-IDA D - Other multilateral F - PrvatePnncipal repayments , 12 i00 175 180 C-IMF G -Short-term

Net flows 41 66 -48 47

Interest payments 14 79 103 90Net transfers 27 -13 -151 -137

Development Economics 9/8/99

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