Tunisia Public Expenditure Review
A New Pact for the Transition
Modernizing the State for Better and Fairer Public Spending
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Overview Report
Tunisia Public Expenditure Review
A New Pact for the Transition
Modernizing the State for Better and Fairer Public Spending
Overview Report
Contents
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .v
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Chapter 1: To Turn the Tanker Around: Creating Fiscal Space
for Growth and Equity-Enhancing Public Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Chapter 2: The Mother of All Reforms: Improving the Performance
and Productivity of the Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Chapter 3: Time for Change: Building a More Sustainable
and Equitable Pension System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Chapter 4: Renewing the Social Assistance Contract: From Subsidies
to Targeted and Expanded Safety Nets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Chapter 5: Tackling the Next Challenge on Education: Efficient
Spending for Learning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Chapter 6: Better Care: Improving the Efficiency and Equity of the Health System . . . 35
Chapter 7: The Energy to Move Forward: Toward a More Efficient and Greener
Electricity Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Chapter 8: Valuation and Conservation: Toward More Secure
and Sustainable Water Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Chapter 9: Paving the Way Forward: Improving Land Transport Services
for Competitiveness and Jobs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
LIST OF FIGURES
Figure 1.1 GDP and export growth, 1980–2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Figure 1.2 Key macroeconomic indicators, 2000–07 vs. 2008–10 . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 1.3 Fiscal deficit and public debt, 1990–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 2.1 Wage bill spending: international comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 2.2 Government effectiveness and wage bill spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
iii
iv Public Expenditure Review: A New Pact for the Transition
Figure 2.3 Composition of wage bill spending (% total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 3.1 Determinants of pension cost: dependency and support ratios . . . . . . . . . . . . . . . . . . 16
Figure 3.2 Pension deficit under the modernizing package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Figure 4.1 Energy subsidies received by welfare quintile, 2015/16 (TND millions) . . . . . . . . . . 23
Figure 4.2 Food subsidies received by each welfare quintile, 2015/16 (TND millions) . . . . . . . . 24
Figure 4.3 Social assistance expenditure as a share of GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Figure 4.4 Cash transfer coverage of poorest quintile (%), various dates . . . . . . . . . . . . . . . . . . . 26
Figure 5.1 Gross and net enrollment rates (GER and NER) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Figure 5.2 Public spending in education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Figure 5.3 Wage bill spending in public education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Figure 5.4 Student-to-teacher and student-to-administrative ratio . . . . . . . . . . . . . . . . . . . . . . . 32
Figure 5.5 Repetition rates by governorate (primary, secondary, and high school) . . . . . . . . . . . 33
Figure 5.6 Dropout rates by governorate (secondary school) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Figure 6.1 Total health expenditure: international comparisons, 2012–15 averages
(% of GDP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Figure 6.2 Relative efficiency of health spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Figure 6.3 Input and functional allocation of health spending (all values represent share
of spending in %) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Figure 6.4 Disparities in health services and spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Figure 7.1 STEG technical losses, % of injected power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Figure 7.2 STEG borrowing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Figure 7.3 Gas turbines (GT) installed capacity and production, % of total . . . . . . . . . . . . . . . . 44
Figure 8.1 Renewable water resources, cubic meters per capita . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 8.2 Water technical losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 8.3 Water cost and tariff, TND per cubic meter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Figure 8.4 Water SOEs financial balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Figure 9.1 Investments in the road network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Figure 9.2 Distribution of toll revenues across highways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Figure 9.3 Number of passengers in the three largest regional transport companies . . . . . . . . . . 56
Figure 9.4 Bus fleet operational (Transtu) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Acknowledgments
This report was prepared by a team of experts from the World Bank (WB) and the African Devel-
opment Bank (AfDB) with Tunisian and international experts. This team was composed of Abdou-
laye Sy (WB), Philip Trape (AfDB), Dalia Al Kadi (WB), Sonia Sanchez Quintela (WB), Marwen
Hkiri (WB), Natsuko Obayashi (WB), Ibrahim El Ghandour (WB), Lida Bteddini (WB), Montser-
rat Pallares-Miralles (WB), Edward Whitehouse (expert), Thomas Walker (WB), Mehdi Barouni
(WB), Michael Drabble (WB), Samira Halabi (WB), Hafedh Zaafrane (expert), Fatima El Kadiri
El Yamani (WB), Sylvestre Gaudin (expert), Ines Ayadi (expert), Hedi Larbi (expert), Ahmed Basti
(expert), Mohamed Chebbi (expert), and Raoudha Gafrej (expert).
The report was prepared under the direction of Kevin Carey and benefited from the overall guid-
ance of Marie Francoise Marie-Nelly, Tony Verheijen, and Yacine Fal.
The report also benefited from valuable comments from Fadila Caillaud, Ivailo Izvorski, Rajesh
Advani, Yuko Okamura, Gustavo Demarco, Moez Cherrif, Tu Chi Nguyen, and Ezzedine Khalfallah.
The team is also grateful to several Tunisian public institutions who provided constructive com-
ments and facilitated access to data, including the Ministries of Finance, Development Investment
and International Cooperation, Social Affairs, Civil Service, Education, Health, Transport, and
Agriculture; the National Statistical Institute (Institut Nationale de la Statistique); the Research
and Social Studies Center (Centre des Recherches et Etudes Sociales); the National Institute for
Competitiveness and Quantitative Studies (Institution Tunisien de la Competitivite et des Etudes
Quantitatives); and the National Economic Council (Conseil de l’Analyse Economique). More spe-
cifically, the team is grateful to the Heads, General Directors, and staff in these public institutions
that personally participated in the various workshops to prepare this report.
v
Executive Summary
Tunisia’s fiscal performance has deteriorated markedly over the past decade; public debt has
increased by almost 30 percentage points of GDP since 2008 and is now above 70 percent of GDP.
Contingent liabilities of state-owned enterprises (SOEs) are equivalent to 14 percent of GDP,1
while the deficit of the pension system could rise to TND 4.6 billion by 2020 (4.8 percent of GDP
in 2017). While Tunisia’s fiscal space has shrunken, and fiscal risks risen, the country’s development
needs are significant: regional disparities remain important, the decentralization process is in its
early phases, the education and health sectors need better quality services to improve quality of life
and human capital, energy and water provision need to be secured, and the country’s infrastructure
must be upgraded. This public expenditure review provides evidence on the root causes of Tunisia’s
weaker fiscal stance by completing an in-depth analysis of the efficiency and equity of public spend-
ing of the central government and SOEs. Such an analysis has been made possible by Tunisia’s par-
ticipation in the World Bank Open Budget initiative of which Tunisia is the only member from the
MENA region.2 This has allowed access to detailed data on the central government’s expenditure,
which was complemented by a year-long data collection effort among key SOEs.
The report shows that at the core of Tunisia’s fiscal challenges is a vision of the State as a provider
of jobs and of subsidized goods and services in an economy characterized by low value added,
low wages, and a stunted private sector. This development model and social contract was main-
tained, while the capacity, productivity, and performance of the public administration and SOEs—
responsible for spearheading the model—have weakened significantly. Among the visible and
persistent signs of failures of the model are the high rate of inactivity, particularly among youth,
and especially those in lagging areas. The report argues that Tunisia will need to embark on a firm
and bold break from the past and devise a new pact to resolve these deep structural issues in order
to make the political and economic transition a success. The report provides detailed recommenda-
tions for this pact aimed at tackling the public spending failures that have contributed to Tunisia’s
fiscal challenges. The report also indicates that improved domestic resource mobilization is part of
the solution and should prioritize reducing tax avoidance and evasion, making tax incentives more
efficient, improving tax administration, making the tax system more equitable, and incorporating
the informal sector. However, the temptation of a purely revenue-based solution through higher
taxation and higher growth that ignores structural spending weaknesses is unlikely to solve Tunisia’s
1Total of guarantees, on-lending, and treasury loans to SOEs in 2016.
2World Bank Open Budget Initiative or BOOST website: http://boost.worldbank.org/
vii
viii Public Expenditure Review: A New Pact for the Transition
fiscal challenges. It could rather exacerbate economic challenges such as a weak private sector, low
job creation, and informality.
On the eve of independence, Tunisia embarked on building a strong public administration and
SOEs to impulse its state-led development model. This model delivered strong human develop-
ment outcomes, including almost universal access to basic services such as education, health, water,
and electricity and formed the basis of the country’s industrial and services sector. But, over the past
decades, several shocks, transformation, and turning points have challenged the effectiveness and
sustainability of this model. More recently, the 2007 global financial crisis, the 2007–08 commodity
price increases, and the 2011 revolution have been major shocks that led to significant increases and
volatility in public spending and the worsening of Tunisia’s fiscal stance. The report shows that the
two arms of the state-led development model, the public administration and SOEs, are no longer
able to sustain this social contract and need deep reform.
The first arm of the State, the public administration (central and local governments), employs an
estimated 645,000 people or 7.4 percent of the working-age population, which is equivalent to
18.5 percent of employment. The central government wage bill alone has grown by 4 percentage
points of GDP since 2010 and stood at 14.7 percent in 2017 (more than 60 percent of government
revenues). This was due to rising staff hiring in the aim to create jobs and maintain social peace
following the 2011 revolution, as well as promotions and general wage increases. Administered
prices of food and services were frozen for several years. Consequently, budget allocations for food
and energy subsidies peaked at 5 percent of GDP in 2013 (the equivalent of central government
investment spending) and those for transport doubled to about 0.5 percent of GDP, while social
assistance in the form of direct cash transfers rose to 0.8 percent of GDP although still below the
levels in peer countries.
While the State spent more on recruitments, wage increases, and other inputs for the functioning
of a large civil service (office space and infrastructure, utility, etc.), the performance and productiv-
ity of the public sector deteriorated. Surveys indicate that citizens and firms have a negative per-
ception of and experience with the public administration due to high bureaucracy, low productivity,
unequal treatment and privileges, and corruption. Several international assessments of institutional
and policy performance, such as the World Bank Doing Business Report (2019) and the Worldwide
Governance Indicators (2019), point to a degradation of public sector performance and efficiency,
translating into lower public service quality and a higher cost of doing business for firms.
The education sector provides a telling example of the disconnect between high spending (around
6.7 percent of GDP or 22 percent of central government spending), weak performance, and declin-
ing quality of public services (high repetition rates particularly in underprivileged areas, and high
dropout and repetition rates in transition between cycles primary–secondary, secondary–high
school, etc.). This highlights the inefficient spending and need to reform the public sector, in par-
ticular its human resource (HR) management policies. Wage bill spending in the education sec-
tor has increased significantly due to hiring, promotions, and wage increases, accounting for over
Executive Summary ix
95 percent of education spending. Between 2005 and 2017, the pupil to teacher ratio dropped from
20.1 to 17.2 in primary education (compared to 27.6 in Morocco), and from 17.4 to 11.9 in secondary
education (compared to 18 in Morocco) such that today, there are 1.4 teachers per class in primary
education, and 2 teachers per class in secondary education. These evolutions have occurred while
the hourly workload of teachers remains low (15 hours per week of teaching compared to 24 hours
in Morocco and France). In addition, there are spatial differences in the allocation of the most expe-
rienced teachers, which mirrors differences in learning outcomes and student achievements. Similar
spatial inequities exist in the health sector with most physicians and specialists located on the coast,
leaving interior regions without much-needed specialists and highlighting the need to formulate
sound human resource policies to improve efficiency and lower regional disparities.
Therefore, after achieving almost universal access to schooling, the next challenge of the education
sector will be to enhance quality of learning. This will require significant human resource manage-
ment reforms, including better deployment (and redeployment) of well-trained teachers combined
with a rationalization of the network of schools, particularly in areas with very small class sizes, and
readjustment of the hourly workload, as well as efforts to attract the best qualified and motivated
young diploma holders. These HR reforms would need to be combined with a reallocation of
spending toward greater coverage for the preparatory year (5-year olds) in public primary schools
and access to pre-school education for 3- and 4-year olds. Moreover, more resources to education
cycles that will experience higher attendance given demographic trends (particularly middle school)
will be needed. Additionally, it will be important to introduce evaluation frameworks at each stage
of the education system to measure student learning and guide decision making, modernize school
administration, strengthen their autonomy and capacity, and seize the opportunities offered by
information and communication technologies.
In fact, many of the public sector and HR reforms needed in the education sector cut across the
public administration and can be classified in three key objectives: improving strategic staffing,
accountability, and strengthening the link between performance, pay, and promotion. Strategic
staffing is key to adequately assessing and anticipating current and future skills and competencies
needed. In this context, it will be necessary to stimulate and facilitate redeployment and mobility
as key measures to improving the allocation of human resources, notably in the context of fiscal
constraints and still significant regional disparities in the quality of services. The weak link between
performance, pay, and promotion in Tunisia is highlighted by the seniority-based promotion sys-
tem and the almost universal attribution of “performance bonuses” to all civil servants. This calls
for strengthening the measurement of performance at the level of civil servants and administrative
units, but also at the level of government. This fundamental change is key to making civil servants
accountable to their superiors and governments to citizens. For accountability to develop, informa-
tion should be produced and transmitted in a timely manner, and the most relevant aspects made
available to citizens.
However, today, there is a large information systems gap in the Tunisian administration (e.g., there
is no integrated payroll database, no HR management system, no commercial information system
x Public Expenditure Review: A New Pact for the Transition
in several agencies and SOEs). Where they exist, such information systems are often not interlinked
across critical segments of the administration, which accentuates existing institutional fragmenta-
tion and lowers efficiency (e.g., there is no systematic exchange of data and interoperability of sys-
tems between the tax and social security administrations). In addition, the interactions of the public
administration with citizens and firms remain dominated by “the paper and the pen.” Therefore,
key ingredients for the transformation of the public sector include the development and strengthen-
ing of information systems and their governance, as well as the urgent deployment of an ambitious
digital government program. The Tunisian society appears ready for this change provided there
are further improvements in access to digital technology (physical access and affordability) to min-
imize potential divides: Tunisia has 15 million mobile cellular subscriptions (1.2 subscriptions per
capita), 8 million Internet subscriptions on mobile phones, and over 7 million Facebook accounts,
but only about 56 percent of the population uses Internet (compared to 62 percent in Morocco and
88 percent in Estonia). According to the World Bank Enterprise Surveys (2013), about 94 percent
of firms use e-mail to communicate with their suppliers and clients (91 percent among firms with
less than 20 employees) and 66 percent have their own website (59 percent among firms with less
than 20 employees).
The second arm of the State, SOEs and parastatals, are present in several sectors, including banking,
telecommunications, water, energy, transport, and logistics, etc. They employ an estimated 190,000
workers or 2.2 percent of the working-age population, which represents 5 percent of employment.
The government estimates that they make up between 9 and 10 percent of GDP. Despite affecting
the performance and productivity of the entire economy, their own performance and financial via-
bility have deteriorated markedly in the past years.
The top 20 largest SOEs incurred financial losses equivalent to TND 1.3 billion in 2016 (1.5 per-
cent of GDP), of which 26 percent originated from the power utility SOE, Tunisian Company of
Electricity and Gas (STEG), one of the main loss-making SOEs over the past years. We estimate
that the deficit of all SOEs in the water and sanitation sector, excluding government subsidies, stood
at TND 300 million in 2015 (representing 50 percent of the SOEs revenues or about 0.4 percent of
GDP). The State provided significant financial support through budget transfers to transportation
SOEs amounting to TND 564 million in 2016 (0.6 percent of GDP). This report provides some
quantitative and qualitative evidence explaining the deteriorated performance of SOEs and key
challenges moving forward, with examples from the energy, water, and public transport sectors.
One of the key drivers of the SOEs’ weak financial performance is the deterioration of their tech-
nical and commercial performance. Technical losses in the electricity distribution network have
increased from 12 to 14 percent of generated power between 2010 and 2016 in a context of increas-
ing and large energy trade and current account deficit. We estimate that reducing losses from 15 to
10 percent would be equivalent to savings of TND 200 million (5.3 percent of the revenues of the
power utility STEG). Water system losses (as a ratio of mobilized resources) have increased from
24 to 36 percent between 2005 and 2016, while losses in the irrigated perimeters vary between 30
and 50 percent of mobilized water. In a context where Tunisia is facing acute water scarcity, water
Executive Summary xi
losses are expected to become more severe with the projected impact of climate change. The rate
of operationally functional buses in the public transport company for the Tunis area (Transtu)
dropped from 82 to 52 percent between 2010 and 2015. Commercial losses have also increased
due to arrears from public entities and households, as well as theft. The deterioration of SOEs’
technical performance denotes in most cases poor investment efficiency due to weaknesses in the
planning and prioritization of investment projects, delays in execution, and a gap in maintenance.
A second key driver of the SOEs’ loss of performance is the inadequate adjustment of adminis-
tered prices to reflect the level and evolution of the cost of supplying public services. In the energy
sector, despite recent progress, several energy products remain highly subsidized. These include
socially-sensitive products such as LPG (prices are only at 30 percent of cost recovery in 2018),
electricity and gas (between 60 and 70 percent of cost recovery in 2018), particularly for certain
groups of users such as industry and to a lesser extent gasoline and diesel (over 80 percent of cost
recovery). Budget payments for electricity and gas subsidies averaged 3.2 percent of GDP between
2011 and 2014 or 82 percent of STEG’s revenues and more than three times its investments. We
estimate that drinking water prices cover around 60 percent of production, but irrigation prices
cover only between 10 to 15 percent of the cost of production (irrigation accounts for over 80 per-
cent of water consumption). In the case of sanitation, revenues from user fees covered around
50 percent of operating costs in 2015.
Resolving governance failures will be critical to put SOEs on the right track. The current gover-
nance framework is severely outdated and does not provide the foundation for good SOE gover-
nance, particularly on the objectives or rationale for state ownership, the government’s expectations
of SOEs, the process for nominating and appointing SOE boards, etc. The ownership structure is
fragmented across several ministries and agencies which often lack specialized capabilities in com-
mercial and financial matters that are at the core of SOE operations. In addition, potential conflicts
arise when line ministries act as supervisors, policy makers, and regulators which can often lead to
anticompetitive behaviors and inefficiencies. Composed almost entirely of government representa-
tives, SOE boards lack the objectivity, skills, and industry specific knowledge required for effective
operations. Most SOEs do not have modern management information systems. Various ex-ante and
ex-post controls (HR, procurement, etc.) place a heavy burden on SOEs that limit their autonomy
and performance, particularly SOEs evolving in commercial or competitive sectors.
Clearly, substantial investments are needed for the production, distribution, loss reduction, and
quality improvement of energy, water, and transport services (and in general) in all SOEs. In this
context, and given the limited fiscal space, reforms will be needed to improve SOEs’ performance
and promote greater private sector participation for efficiency gains and alternative financing. First,
for structurally unprofitable SOEs in commercial and competitive sectors, a deep restructuring will
be necessary, which could involve the entry of a private operator or investor. Second, in sectors or
subsectors where significant private investment is needed to reach the State’ objectives, such as in
the case of renewable and nonrenewable energy production, important reforms will be needed to
transform the administration and strengthen the enabling environment. These reforms include:
xii Public Expenditure Review: A New Pact for the Transition
1. Strengthening the legal, institutional, and economic framework for private investments:
through the establishment of independent regulatory bodies where private sector participation
will increase substantially and develop adequate financing, and guarantee schemes to lower
risks for the private sector;
2. Capacity building: strengthen the planning and management capacity of sectoral institutions
(adapt human resource profiles, develop capacity and skills), develop tools to prepare, commis-
sion and evaluate quality feasibility and technical studies to provide decision makers relevant
analyses on the most appropriate investment financing option (purely public, purely private,
or public private partnership), and rapidly upgrade the information systems across the sector;
3. Reforming SOEs: improving the financial performance and viability of SOEs by strengthen-
ing the governance of the sector, but also reforming administered prices to reduce subsidies
while protecting the poor and vulnerable populations.
Indeed, Tunisia’s social protection system will need to be strengthened significantly to protect the
poor and vulnerable from the potential impact of reforming subsidies. As indicated above, Tuni-
sia’s social assistance system remains dominated by energy, food, and transport subsidies. which
have been reformed in past decades to contain their cost, including through spatial targeting and
to a lesser extent through price adjustments and greater use of targeted cash transfers. Despite
these efforts, subsidies remain large and are regressive or neutral relative to the income distribu-
tion; in addition the distortions and inefficiencies they create (including waste, and negative health
outcomes) provide a good rationale for reform. This report shows that the reform of energy and
food subsidies should be considered on a product-by-product basis given their heterogeneity. Such
reforms would engender significant fiscal savings and efficiency improvements but would require a
targeted expansion of the coverage of cash transfers to fully compensate poor and vulnerable house-
holds. The existing cash transfer program (Programme National d’Aide aux Familles Necessiteuses,
PNAFN) covered around 285,000 households in 2018, or 8 to 9 percent of households, but only
reached 16.9 percent of the poorest (bottom quintile).
At the same time, there is an urgent need to safeguard Tunisia’s social protection system given the
dire financial situation of the pension system. The pension schemes have exhausted their reserves,
face liquidity shortfalls, and are increasingly draining government resources. Consequently, the
schemes have increasingly used contributions for family benefits to pay for pensions and withheld
contributions destined for the health-insurance scheme, jeopardizing the social security system.
The report shows that the parametric reform to improve the sustainability and equity of the pen-
sion system will need to address (i) the relatively high contribution rates which act as a tax on
labor; (ii) the implicit incentives for early retirement (there is no penalty for early retirement); and
(iii) the iniquities between different career and wage profiles given that the pension calculation is
based on a few years’ salaries. In addition, respecting the principle of accrued pension rights (no
application of parametric changes to past years of work and contribution) means that financial
improvements on the benefit side of pension accounts will have a delayed effect. There is a need to
Executive Summary xiii
implement measures to deal with short-term financial pressures. Lastly, the roadmap for pension
reform should involve improving the coverage of the pension system by incorporating the informal
sector and reducing the scope for transitions in and out of informality, as well as underreporting.
To sum up, these findings have important implications for Tunisia’s economic and development
model and the ingredients for the transition to succeed. First and foremost, Tunisia will need to
revisit its social contract and devise a more focused and effective role for the State. Additionally,
the State will need to build modern, performant, and user-centric public administration and SOEs,
and improve the enabling environment for greater public-private partnership to provide quality
public infrastructure and services to all Tunisians. This transformation will require a new political
and social pact to make Tunisia’s democratic transition a success. To be impactful, this pact would
need to be led by reform champions guided by the need to restore the credibility of the State’s pri-
orities and actions, and rebuild trust between the State, its citizens, and the private sector. The pact
should be founded on an action-oriented engagement with a pluralistic civil society conscious of the
strategic priorities of the country and representing the interests of all segments of the population.
Moreover, the frequent and volatile social tensions, and political instability over the past years have
not created a favorable environment for the public administration and SOEs. Moving forward,
greater political and government stability, and credibility will be necessary given the difficult and
pluriannual nature of the reforms suggested in this report. Lastly, while the analysis of this report
focused on the spending side, this new pact for a successful transition will require important tax
reforms to improve the mobilization of domestic resources, but more importantly to ensure that all
citizens and firms pay their fair share, adhere, and contribute to the new pact.
Introduction
Today, Tunisia faces the challenge of improving the quality of its public spending and main-
taining fiscal sustainability following a decade of weak economic performance. Tunisia’s
economic performance has weakened due to a combination of low growth, a slow pace of eco-
nomic reforms, a weak global economy, and several political, security, economic, and social shocks.
Economic growth dropped from 4.5 percent per annum in the 2006–10 period to 1.7 percent
per annum in 2011–17. Concomitantly, its fiscal position deteriorated markedly; the fiscal deficit
averaged 5.4 percent of GDP in 2011–17 (excluding grants) compared to 2.1 percent in 2006–10.
Consequently, public debt reached 70.3 percent of GDP in 2017 compared to 40 percent of GDP
in 2010, resulting in high interest payments (2.5 percent of GDP in 2018). Tax revenues held rela-
tively well amid the growth slowdown while nontax revenues dropped slightly due to weak perfor-
mance of SOEs and despite the sale of some state assets. In the meantime, spending increased by
2 percentage points of GDP during the same period. The composition of spending has deteriorated
and is dominated by recurrent spending, particularly wages (14.7 percent of GDP in 2017), and
subsidies and transfers (6 percent of GDP on average in 2017), while public investment (5.5 percent
of GDP in 2017) suffered from both adjusting to meet budget constraints and bottlenecks in the
execution of projects.
At the same time, it is critical for Tunisia to strengthen the quality of infrastructure and
services, and to support inclusive growth and private sector job creation. Tunisia has histori-
cally been heralded for the quality of its basic services, which played a critical role in improving the
country’s human and physical capital since independence. However, the quality of public services
has stagnated or deteriorated in the last decades. Consequently, Tunisia must resolve several chal-
lenges to improve the quality of infrastructure and services for citizens and foster private sector
growth and job creation. First, the public administration has gotten larger and more costly for the
State, while its planning, execution, regulatory capacity, and performance have weakened signifi-
cantly. The experience of the private sector with the public administration is also documented as
cumbersome, slow, and costly. Second, the education and health sectors do not sufficiently raise
the human capital of citizens. A Tunisian born today will only achieve about 51 percent of its
potential productivity as an adult (World Bank Human Capital Project 2018). Third, the electricity
and water sectors both face a twin sustainability challenge. On the one hand, there is the financial
and macroeconomic sustainability challenge due to significant subsidies, large energy imports with
volatile prices, and declining performance of state enterprises, and on the other hand there is an
1
2 Public Expenditure Review: A New Pact for the Transition
environmental sustainability challenge due to the reliance on fossil fuels despite significant renew-
able energy potential and high losses of mobilized water in a country with limited water endow-
ment. The human, technical, and financial capacity needed to tackle these challenges are substantial
which highlights the need for improving efficiency and fairness, and ensuring more partnership
between the public and private sectors for the provision of infrastructure and services.
The aim of this Public Expenditure Review (PER) is to identify structural policy options
to help Tunisia tackle its economic and social challenges through more effective and equi-
table public spending. The fragility of the social, political, and economic environment requires
actions to address the fiscal situation while ensuring that expenditures are allocated to improve
the quality of infrastructure and services. This would be crucial in fostering private sector growth
and job creation, and protect the poor and vulnerable. Therefore, this PER focuses on the key
issues and sectors that are critical to Tunisia’s fiscal stance and economic performance and ana-
lyzes them through a lens of efficiency, sustainability, and equity. The report identifies short and
medium-term efficiency and equity-enhancing package measures to improve Tunisia’s fiscal growth
and job performance.
This PER employs a rich set of detailed spending data at the level of the central government
and SOEs to analyze how public expenditures in Tunisia can be allocated and spent in a
more effective and equitable manner. Access to detailed spending data has been made possible
by Tunisia’s participation in the open budget initiative.3 This provides us with information on the
level and evolution of spending line-by-line for almost a decade through the so-called BOOST
database. The report also assembles detailed expenditure, operational, and financial data from
SOEs with a focus on the energy, water, roads, and public transport sectors. These data allow us to
analyze and benchmark Tunisia’s spending trends, effectiveness, and equity, and to identify areas in
which spending growth could be contained, where spending gaps exist, where resetting of spending
priorities is needed and reallocation of expenditures necessary, and where spending should be more
balanced to reduce inequities.
The PER is organized in three blocks. The first block—composed of Chapters 1 to 4— analyzes
the macro-fiscal profile and the two largest spending items, namely wages, energy, and food sub-
sidies, as well as the single largest liability, namely pensions, and the social protection system
which is critical for protecting vulnerable households from shocks and from the potential negative
effects of certain reforms. The second block—composed of Chapters 5 and 6—covers the educa-
tion and health sectors, the two most important social services for human capital development,
which account for the largest share of social spending. The third and final block—composed of
Chapters 7 to 9—analyzes the issues of public investment efficiency and SOE performance in the
3Tunisia is the only MENA country to participate in this transparency initiative.
Introduction 3
electricity, water, roads, and transport sectors. These sectors were selected given their impact on
the budget either through subsidies, transfers, or state guarantees, and because they are critical for
growth throughout the economy, for productivity and employment.
The remainder of this synthesis provides a summary of the main findings and policy implications
of the different chapters.
Chapter 1
To Turn the Tanker Around:
Creating Fiscal Space for Growth
and Equity-Enhancing Public
Spending
The 2007 global financial crisis, the increases in commodity prices between 2007–2008,
and the 2011 revolution marked turning points in the gradual deterioration of Tunisia’s
macroeconomic and fiscal performance. Tunisia experienced high growth, strong macroeco-
nomic and fiscal performance in most of the 1980s, 1990s, and early 2000s. Economic growth
averaged between 4 and 5 percent per annum, export growth between 5 and 6 percent per annum
and as much as 8 percent in the early 2000s following the implementation of trade liberalization,
including with the EU, coupled with export promotion policies (Figure 1.1). The transition from a
state-led development model to a more open economy in the 1990s was accompanied by an overall
improvement in the fiscal situation. The fiscal deficit dropped from 4 to 3 percent of GDP from the
FIGURE 1.1 GDP and export growth, 1980–2007
8.0
6.1
5.3 5.2
4.8
3.6
1980s 1990s 2000–2007
GDP growth rate Export volume growth rate
Source: Authors using the WDI and WEO database.
5
6 Public Expenditure Review: A New Pact for the Transition
FIGURE 1.2 Key macroeconomic indicators, 2000–07 vs. 2008–10
8.0
4.8 4.6
3.8
3.4
3.1
2.5
1.5
–2.8
–3.8
GDP Inflation (%) Volume Current Reserves
growth (%) of export account (months of
growth (%) deficit (% imports)
of GDP)
2000–2007 2008–2010
Source: Authors using the WDI and WEO database.
1990s to 2000–07, and public debt dropped from 67 to 52 percent of GDP during the same period
(Figure 1.3). The tide started to turn in 2007 with the global financial crisis and commodity price
increases. In fact, economic growth dropped to 3 percent on average in 2007–10, export growth
plummeted to 1 percent per annum in 2007–10, and the current account deficit widened from 3 to
4 percent of GDP from 2000-07 to 2008-10 (Figure 1.2). The 2011 revolution was a major politi-
cal, institutional, and social shock, which led the government to adopt an expansionary fiscal policy.
This was achieved mainly through more hiring, wage increases, and expansion of subsidies on basic
goods and services such as food, energy, and transport. Tax revenues which were skewed toward
labor income taxation, held up relatively well during this period despite the growth slowdown.
Maintaining current trends of spending and economic performance would severely under-
mine Tunisia’s fiscal sustainability, further contract the fiscal space for spending in critical
sectors, and jeopardize the quality of public services. The fiscal deficit averaged 5 percent
of GDP over the past years, and public debt has increased by 30 percentage points of GDP in
seven years and now stands at around 70 percent of GDP (2017). If the fiscal trends over the past
years were to be maintained, then the fiscal deficit could reach over 10 percent of GDP (primary
deficit of 6 percent of GDP) and public debt would rise to over 90 percent of GDP by 2022.
Chapter 1: To Turn the Tanker Around 7
FIGURE 1.3 Fiscal deficit and public debt, 1990–2016
8 80
7 70
6 60
5 50
4 40
3 30
2 20
1 10
0 0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Fiscal deficit, % of GDP (left axis)
Public debt, % of GDP (right axis)
Source: Authors using the WDI and WEO database.
Bringing the debt-to-GDP ratio from 70 to 60 percent over a five-year period to create
more fiscal space to finance Tunisia’s important development needs would require reducing
the primary balance by 3.5 to 4 percent of GDP relative to the recent historical average
(2012–16). We estimate that the primary balance would lower the debt-to-GDP ratio from 70 to
60 percent of GDP over a five-year period under two assumptions: an average growth of 3.5 per-
cent per annum, or of 2 percent per annum. If growth averages 3.5 percent per annum, then the
primary balance would have to be –0.1 percent of GDP, which is equivalent to a fiscal adjustment
of 3.5 percent of GDP relative to recent historical performance (2012–16). However, if growth
averages only 2 percent per annum, then the primary balance would have to be around +0.8 percent
of GDP, which is equivalent to a fiscal adjustment of 4 percent of GDP relative to recent historical
performance. Creating more fiscal space is critical for Tunisia to finance its important development
needs combined with greater partnership with the private sector.
These objectives could be achieved through a mix of efficiency and equity-enhancing spend-
ing policy measures, including those identified in Chapters 2–9 of this report. Tax measures
will also play a role as well as reforms to promote growth combined with greater partnership with
the private sector to finance investments in key sectors. Critical spending measures detailed in
the paragraphs below and in the different chapters include containing the growth and volatility
of some expenditure items (e.g, wages, subsidies, and transfers to SOEs and parastatals). This can
be achieved by prioritizing and orienting spending toward more effective and equity- enhancing
programs, by raising the efficiency of spending in key sectors. Improving tax revenues can also
play a role with the imperative of promoting growth and job creation by reducing tax avoidance
8 Public Expenditure Review: A New Pact for the Transition
and evasion, making tax incentives more efficient, and improving tax administration (transparent
and efficient tax services, incorporating the informal sector, etc.). Lastly, growth will be necessary
to improve Tunisia’s fiscal stance and generate fiscal space for investment in key sectors, com-
bined with measures to leverage private sector financing. However, the temptation of a purely
revenue-based solution through higher taxation and growth that ignores structural spending weak-
nesses is unlikely to solve Tunisia’s fiscal challenges and could exacerbate its economic challenges,
such as the weak private sector dynamism and job creation, and the significant level of informality.
Chapter 2
The Mother of All Reforms:
Improving the Performance and
Productivity of the Public Sector
Tunisia’s civil service has increased rapidly over the past seven years. The government wage
bill in Tunisia is among the highest in the world, taking up more than 60 percent of govern-
ment revenues and 50 percent of expenditures, thereby crowding out needed investment and social
spending, and increasing the deficit (Figure 2.1). This wage bill covers salaries and wages for central
government staff employed in central and regional administrations, but excludes staff working in
local governments (around 30,000) and state-owned enterprises (around 190,000). The wage bill
to GDP ratio has grown by 4 percentage points since 2010 and stood at 14.7 percent of GDP in
2017 due to increased hiring, promotions, and general wage increases in the aim to create jobs and
maintain social peace following the revolution. The annual growth rate of the government wage
bill has consistently surpassed the growth rate of GDP, inflation, and productivity since 2011, a
clear departure from past trends.
FIGURE 2.1 Wage bill spending: international comparison
Panel A. Wage bill, % of GDP Panel B. Wage bill, % of government spending
Source: Authors using Worldwide Development Indicators.
9
10 Public Expenditure Review: A New Pact for the Transition
Several other wage and benefits-related expenditure items are not accounted for in the
Budget line for the “wage bill.” These are accounted for under the operating and capital expen-
ditures as well as tax credits, totaling around 0.3–0.4 percent of GDP in 2016 and 2017. The total
amount identified by the authors was equivalent to 0.36 percent of GDP in 2016. They include
transportation allowances (daily, mileage, gas vouchers, etc.), medical expenses for staff and their
children, as well as pension expenditures. In addition, in 2007, there were about 0.4 percent of
GDP in tax credits given to public employees on account of agreed wage increases.
At the same time, the performance and productivity of the public sector has deteriorated.
A recent public opinion survey indicates that 51 percent of citizens have a negative perception
of the country’s public administration, perceptions of low productivity, clientelism, inequality of
treatment, and corruption.4 According to the Worldwide Governance Indicators (WGI), the per-
formance of the bureaucracy has decreased between 2010 and 2016 as its score for government
effectiveness dropped from 70 to 45 (over a maximum of 100) (see Figure 2.2.) Several global busi-
ness environment and competitiveness rankings such as the Doing Business also show that firms
experience a more cumbersome, slower, and less effective administration.
FIGURE 2.2 Government effectiveness and wage bill spending
90 16
WGI rank on government effectiveness
14
75
Wage bill as % of GDP
12
60
10
45 8
6
30
4
15
2
0 0
Tunisia Ghana Morocco Colombia Turkey Rwanda Jordan Malaysia Mauritius Chile
2016 rank Wage bill as % of GDP
Source: Authors using Worldwide Governance Indicators.
The root causes of the public administration’s poor performance include its inability to
attract and retain talent in key technical and managerial specialties, to provide adequate
training, and to establish a credible performance incentives and evaluation system. The
overall premium for public sector employees is estimated to be around 18.2 percent by the IMF,
while it is estimated to be around 34 percent for employees of state-owned enterprises.5 A more
4Opinion survey by Sigma Conseil.
5Tamirisa,Natalia T., and Duenwald, Christoph. Public wage bills in the Middle East and Central Asia, Washington, DC:
International Monetary Fund, 2017.
Chapter 2: The Mother of All Reforms 11
nuanced picture is shown when the premium for public sector employees is split across education
levels. Wage premiums appear to be higher for employees with secondary and tertiary education
diplomas (around 28 percent). However, a 2015 World Bank study found that public sector salaries
for engineers were not competitive when compared to the private sector.6 For instance, the study
estimated that private sector salaries were two to three times higher for junior level engineers and
up to three to four times higher for an engineer with 25 years of experience. In addition, train-
ing offerings to civil servants remain highly centralized, and linkages between training and career
advancement are not sufficiently strong, leading to overreliance on weak performance assessment
methods and application of seniority-based promotions. Strengthening national training plans and
institutions would help to respond to emerging new roles and responsibilities at all levels of gov-
ernment. This would be particularly relevant for managerial roles that require change and relation-
ship management skills, and the management and evaluation of teams according to clearly defined
performance criteria.
There are important barriers to horizontal and geographic mobility in the civil service. Such
barriers limit potential wage bill control and efficiency measures that could have been achieved
through the redeployment and optimal allocation of staff geographically, particularly in lagging
regions. Allowances attributed to specific professional groups can sometimes match or exceed the
base salary for certain employees (doctors, magistrates, engineers, certain ministries) and thus dis-
incentive mobility (Figure 2.3 and Table 2.1). In addition, the civil service statutes prevent civil
servants from being redeployed without their consent. Consequently, experienced staff with higher
qualifications are disproportionately located in richer coastal regions. In the education sector for
instance, the distribution of teachers is influenced by a legacy which assigns the youngest teachers
in the interior regions and more experienced teachers in urban areas and large cities. Moreover,
FIGURE 2.3 Composition of wage bill spending (% total)
8.3 8.8 9.0 9.9 9.7 9.8 10.5 10.6 10.6 10.6 11.2
10.5 11.3 11.7 11.7 12.3 12.3 12.0 12.1 12.2 12.0 11.6
36.3 34.3 31.4 30.6 29.2 28.7 27.7 27.9 24.2 24.7
39.5
37.3 37.9 40.4 40.9 40.8 41.1 44.3 43.5
32.6 34.4 35.4
2008 2009 2010 2011 2012 2013 2014 2015 2016 2016 2017
(LF) (LF)
Bonuses and allowances Base salary Social insurance contribution
Temporary and contractuals Military and diplomats Subsidies to public agencies
Source: BOOST Dataset, MInistry of Finance.
6Brockmeyer, A., M. Katrouch, and Gael Raballand, “Public Sector Size and Performance Management: A Case Study of
Post-Revolution Tunisia,” World Bank Policy Research Working Paper, January 2015.
12 Public Expenditure Review: A New Pact for the Transition
TABLE 2.1 Decomposition of bonuses and allowances
Bonuses and allowances 2009 2010 2011 2012 2013 2014 2015 2016
Specific fixed allowances 83% 84% 86% 86% 86% 87% 87% 88%
Performance allowance 11% 10% 8% 8% 7% 7% 6% 5%
Managerial allowance 3% 3% 3% 2% 2% 2% 2% 2%
Family allowance 1% 1% 1% 1% 1% 1% 1% 1%
Special allowances 1% 1% 1% 2% 2% 2% 2% 2%
Extra hours and night work allowance 1% 1% 1% 1% 1% 1% 1% 2%
Source: Boost Dataset, Ministry of Finance.
there is a high concentration of trainee and substitute teachers in the predominantly rural cen-
tral, northern, and southern delegations. The suboptimal regional distribution of staff, skills, and
competencies hinders the delivery and quality of priority services and the effective management of
public investments in poorer regions.
Modernizing Tunisia’s public sector is central to the necessary transformation of the State.
This report identifies short- and medium-term recommendations to implement this reform that
many observers have deemed “the mother of all reforms.”
• In the short term, the government could implement feasible and sustainable measures that con-
tain the wage bill and set the civil service on a path to greater performance orientation. This
should involve the following measures feasible to implement in the short term:
– Implement a general freeze on recruitments for a maximum period of five years (longer would
distort the age pyramid of the civil service and drain it of required skills and competencies).
Compared with departure programs,7 a five-year freeze has greater cost-saving potential and
poses less implementation challenges. To mitigate the negative effects of a recruitment freeze
on the quality of administration and the provision of public services in remote or lagging areas,
targeted recruitment could be allowed.
– Establish clear and transparent criteria for promotion by professional groups, with the intro-
duction of ceilings on the number of posts in specific grades per year, or over three years to
follow the multiyear planning process.
– Introduce improvements in the procedures for recruitment and selection of staff, including
competitive-based recruitment (written and oral exams) and promotions applicable to all posi-
tions, irrespective of professional groups.
7Government efforts to contain the wage bill through early retirement and voluntary departure programs have not worked
due to very low take-up.
Chapter 2: The Mother of All Reforms 13
– Conduct a diagnosis to build the foundation of the reform process. Diagnosis tools could
include functional reviews, data collection/analysis, user satisfaction surveys, legal reviews, etc.
Although some of these measures have been initiated in 2018, they need to be accelerated and
finalized.
• In terms of medium-term structural reforms, Tunisia must look to put in place specific
projects that target the drivers of public sector inefficiencies: (i) weak strategic planning
including staffing allocations/mobility and performance management (promotions based on
seniority, lack of in-service evaluation); (ii) complex compensation frameworks (multiple stat-
utes); and (iii) poor career development and training. The reforms should
– Introduce a strategic workforce planning framework (Gestion prévisionnelle des effectifs, des
emplois et des competences, or GPEEC) for ministries and agencies to adequately assess and
anticipate current and future staffing skills and competencies needed. While there is no single
or common approach to workforce planning, experience from OECD countries suggest that
workforce planning could focus on different aspects, including for instance efficiency savings,
demographics, or service delivery issues. Overall, the GPEEC reform will be an essential mea-
sure to help ensure a sustainable management of the public sector wage bill and an efficient
management of human resources over the long term.
– Accelerate the implementation of the program-based budgeting reform (Gestion Budgetaire
par Objectifs, GBO in short), which could enhance monitoring mechanisms on the number of
employees by introducing a budget management process based on clearly identified objectives
and needs.
– Stimulate and facilitate redeployment and mobility as key measures of the allocation and man-
agement of human resources, notably in the context of fiscal constraints. The success of this
reform depends on the level of understanding of staffing, skills, and competency gaps, and
availability of precise job descriptions. It is also important to note that a successful redeploy-
ment reform will require agreement among stakeholders to: (i) implement revisions to the
legal framework in order to set out the general rules and conditions for mobility and (ii) nego-
tiate the likely impact on compensation framework; in the absence of a harmonized salary
system, special financial and nonmonetary incentives such as allowances and promotions could
be considered.
– Introduce better designed and targeted training programs that enable senior and mid-level
technical and managerial staff to cope with new roles and responsibilities related to perfor-
mance in the context of the program-based budgeting approach. New training programs and
modules could be linked to a defined set of potential career pathways that allow civil servants
to identify what they need to achieve in terms of acquiring specific skills, completing an assign-
ment in a specific region, occupying a specific post, etc., in order to advance in their career.
Chapter 3
Time for Change: Building a
More Sustainable and Equitable
Pension System
Tunisia’s pension system8 is in a dire financial situation. The pension schemes are structur-
ally in deficit, have exhausted their reserves, face liquidity shortfalls, and are increasingly draining
government resources. The demographic profile and projections indicate further pressures on the
financial equilibrium of the system. The deficit of the pension system quadrupled between 2009
and 2015, from under TND 250 million to nearly TND 1.2 billion (1.4 percent of GDP). The
World Bank projects this explosive growth to continue in the absence of reform and reach TND
4.6 billion by 2020 (4.8 percent of GDP in 2017). The largest scheme for private sector workers
had reserves worth TND 940 million in December 2014 (about 70% of annual benefit spending),
which fell to TND 311 million by December 2015 and turned negative in 2016. The public sector
scheme, which had reserves amounting to TND 206 million in 2010, had exhausted them by the
end of 2013. Consequently, the schemes have increasingly used contributions for family benefits
to pay for pensions, withheld contributions destined for the health insurance scheme, and owed
debts to it amounting to more than TND 1.8 billion in 2017. The State has transferred on aver-
age 0.4 percent of GDP annually to the pension scheme between 2015 and 2017 to help cover its
liquidity needs. Such transfers are regressive, especially as a large part of the population is not cov-
ered by the pension system. Tunisia’s pension spending appears high compared to the population
aged 65 and above (a measure of the dependency ratio) as seen in Figure 3.1 while the support ratio
(number of contributors per beneficiary) is rapidly dropping to levels found in European countries.
8There are two main pension funds (CNRPS—covering public sector employees, and CNSS—covering private sector
employees). CNSS has seven different regimes covering different types of employees, RSNA being the biggest one. All
schemes are of the defined-benefit type and are financed on a “pay-as-you-go” basis (current contributions pay for current
benefits).
15
16 Public Expenditure Review: A New Pact for the Transition
FIGURE 3.1 Determinants of pension cost: dependency and support ratios
Dependency ratios and pension spending Projected support ratios
Source: World Bank ASPIRE database.
Coverage of the mandatory pension systems in Tunisia is one of the highest in the MENA
region; however it is still low when compared to developed countries. Moreover, contribution
density in the private sector is low. Around 50 percent of the labor force contributes to the two
main schemes. When small programs are also considered, the total coverage rate in the country
is slightly higher than 70 percent of the labor force or 40 percent of the working-age population.
However, contribution density in the private sector is low due to underreporting and transition in
and out of informality.
Regarding adequacy, the pension system in Tunisia is generous by design given interna-
tional standards but can often lead to small pensions. Public pension expenditures, nearly
7 percent of national income, are the highest in the Middle East and North Africa, even with
Tunisia’s young population. Despite its generosity, the pension system does however generate small
pensions because of the low contribution density, and early retirement provisions. All regimes pro-
vide a minimum benefit to help low-wage and short-career workers achieve an adequate income in
retirement ranging between 30 and 66 percent of the minimum wage which raises issues of equity
between members of different schemes.
The pension system creates inequities among those in the system, as well as between insid-
ers and outsiders, and generates distorted incentives to work and contribute. The system has
high contribution rates (20.7 percent for the public scheme, and 12.5 percent for the largest private
scheme) which act as a tax on labor, discouraging employers from hiring workers. A high contribu-
tion rate also encourages workers and employers to evade social security contributions and operate
in the informal sector. The system also implicitly encourages early retirement because there is no or
a very limited penalty for early retirement, which is increasingly costly with increases in life expec-
tancy given the longer duration over which pension benefits are paid (Table 3.1, column 1). The
Chapter 3: Time for Change 17
TABLE 3.1 Improving equity, efficiency, and sustainability of pensions in Tunisia: reform measures
Feature of the pension Destination policy
system Fundamental principles
Current policy International experience Slower reform Faster reform
Accrual rate Linear accrual: same rate 2% at all ages for new 2% for all: new and
4%–2% and 3–2% CNSS; for all years entrants existing contributors
2–3–2% CNRPS 27 of 28 countries
(except for Spain)
Earnings measure for Average earnings of Lifetime average salary All accrual from reform
pension calculation entire career for new entrants point on lifetime
CNRPS: best of final 14/28 countries before Existing workers: average salary.
salary and best 2 reform; 26/28 countries extend reference Existing workers
consecutive years after reform (except salary one year per effectively have
RSNA: 10 final years France—best year: two-part pensions
RSAA, RSA: best of final 3 25 years—and Czech CNRPS: final 1, 2, 3, 4, (on final and average
or 5 years Republic, 30) 5 . . . years salary bases)
RNS, RTFR, RTTE, RACI: RSNA: 10, 11, 12 . . .
career average years
RSAA, RSA: 5, 6, 7 . . .
years, average
salaries
Valorization of earlier Growth of average RSNA: currently Same
years’ earnings earnings valorized to prices so
CNRPS, RSAA: none 20/28 countries (except: easier to continue
RSNA: price valorization price inflation— Others: valorization
RNS, RTFR, RSA, RTTE, Belgium France, Greece, to prices for equity
RACI: minimum wage Spain—and GDP reasons
growth: Italy and Turkey
Minimum pension: No guidance from basic Gradual increase of Same, plus:
length of service principles the minimum length introduction of a
CNRPS: 5 years of Average OECD of service from 5/10 social pension (basic
contributions (partial countries: 21.5 years of to 15 years scheme or targeted)
benefit), 15 years (full contributions (partial) for all new retirees
benefit) and 27 (full benefit); after a certain date
RSNA: 5 years of average in MENA: (2025–2035)
contributions (partial 15 years
benefit), 10 years (full 23/35 of OECD countries
benefit) and 4/16 MENA have
RNS, RTFR, RSAA, etc.: no minimum pension;
10 years basic or targeted
schemes instead
(Continued on next page)
18 Public Expenditure Review: A New Pact for the Transition
TABLE 3.1 Continued
Feature of the pension Destination policy
system Fundamental principles
Current policy International experience Slower reform Faster reform
Pension eligibility age Age should increase in Increase retirement Increase retirement
CNRPS, RSNA, RSAA, line with growth in life age 4 months every age 6 months every
RSA: 60 expectancy at age 60 year, starting in 2025: year, starting in 2023:
RNS, RTFR, RTTE, Long-term policies: 2020 60 2020 60
RACI: 65 15 OECD countries 65, 2025 60 2025 61
14 at 67, and 5 at 68 2030 61.7 2030 63.5
or 69. No country 2040 65 2040 66
with pension age less After 2040: increase After 2040: increase
than 65 with life expectancy with life expectancy
Early retirement Actuarially neutral Phased increase Immediately 6% for all
CNRPS: no adjustment adjustment: Equalizes 2–3–4–5–6% over a new retirees
RSNA: 2% per year present value of accrued five-year period
of voluntary early benefit between normal
retirement; no and early retirement.
adjustment in specific With Tunisia’s mortality
circumstances rate, 6% is actuarially
neutral. Average of 24
countries: 5.6%
Indexation Price indexation Price indexation for Price indexation for
CNRPS: péréquation It is also international new retirees new and existing
CNSS: minimum wage norm in 20/28 retirees
or discretionary countries
Note: Péréquation is the system in which pension increases are linked to wage increases in the public sector.
system calculates the pension based on a few years’ salaries, which accentuates inequities between
different career and wage profiles.9 Lastly, the multiplicity of schemes creates very different mini-
mum pensions, accrual rates, contribution rates, and maximum replacement rates, which generates
unequal pension contributions and payments.
Aware of the current financial crisis in pension schemes and the need to respond, the gov-
ernment has introduced some revenue measures to finance pensions and is also seeking
consensus around a set of limited parametric changes with its social partners in the so-called
tripartite commission with UGTT and UTICA. A new tax, the contribution sociale de solidarité
(CSS), levied at a rate of 1 percent on income was introduced in 2018 to finance the social secu-
rity system, starting with pensions; the tax is close in spirit to France’s contribution social généralisée
9In the public sector the pension is calculated based on the maximum between the last salary and the highest salary
received for two consecutive years, while in the private sector it is based on the salary over the last ten years in the private
sector for the largest scheme.
Chapter 3: Time for Change 19
(CSG). As a general principle, earnings-related pensions (such as Tunisia’s defined benefit schemes)
should be financed by contribution revenues; this is fair between the covered and uncovered pop-
ulations. The tripartite commission has also agreed on a limited package of reforms composed of
raising the retirement age and raising contribution rates. The main concern with increasing con-
tribution rates is that this damages economic competitiveness and reduces employment because of
higher labor costs. Tunisia’s contribution rates are already among the highest in the Middle East
and North Africa region. They are significantly above those in many middle-income countries in
other regions, such as in Latin America and the Caribbean.
This report proposes a package of reforms respecting some of the principles agreed to by
the stakeholders, including gradual changes and preserving accrued pension rights (les droits
acquis). Windows of opportunity for change—when the demographic situation was more favorable
and the system less mature—have been lost. The result of this delay is that the measures needed to
put pension finances on a sustainable path are both much more urgent and more difficult. However,
respecting accrued pension rights, as discussed between government and the main stakeholders,
means that financial improvements on the benefit side of pension accounts will take some time to
have an effect. For example, changing the accrual rate to 2 percent for all workers in the future will
yield significant savings on pensions in only 20 years’ time and savings then would be only from new
retirees; the full impact will be felt after 50 years. The report makes two main recommendations:
• Adoption of a “modernizing package of parametric reforms”: This reform package consists of
bringing the pension schemes to international standards and reducing inequities and distortions
in the system (see Table 3.1). This package includes gradually increasing the retirement age to
65, making the accrual rate uniform and lowering it to 2 percent, gradually introducing the life-
time average salary as the earnings measure, introducing a penalty for early retirement, moving
to price indexation, etc. This reform package would eliminate the deficit of the public pension
scheme by 2020, and there would be a period of surplus lasting nearly 15 years (Figure 3.2). In
FIGURE 3.2 Pension deficit under the modernizing package
Main scheme for private sector employees, RSNA Public sector employees’ scheme, CNRPS
Source: World Bank projections using the Prost model.
20 Public Expenditure Review: A New Pact for the Transition
the long term, a shortfall averaging 0.8 percent of GDP between 2040 and 2060 is expected.
This is less than half of the status quo. Accumulated surpluses, if kept in a ring-fenced pension
fund, would cover about half of the deficits between 2040 and 2060. The main private sector
pension scheme would be largely sustainable under this reform scenario.
• Dealing with the short-term financial pressures: ‘Sharing of sacrifices’ is one of the important
principles agreed on by most stakeholders involved in pension reform in Tunisia. However, this
should not mean that those not covered or the younger generations should bear the bulk of
the adjustment cost to financial realities through general taxations and delays in reforms. Over
the past decade, nearly half of the advanced economies of the OECD have taken measures to
close the short-term pension deficits through freezes in the nominal value of pensions in pay-
ment (Belgium, the Czech Republic, Finland, Greece, Slovenia, Portugal), caps on the amount
of pension increases such that larger pensions are uprated by less than smaller ones (Austria,
Greece, Italy, the Slovak Republic), and special levies or taxes on larger pensions (Greece, Ire-
land, Portugal). Finally, two reforms of the personal-income tax system related to pensions could
provide additional resources for the budget to cover the pension deficit. First, about 25 percent
of pensioner incomes are not subject to tax, while for workers the tax abatement is just 10 per-
cent, such that pensioners pay less tax than workers with the same income. In extreme cases, net
incomes in retirement of public sector workers can exceed those when working. Second, while
the deductibility of social security contributions against the personal income tax is reasonable in
principle, it can often lead to regressive taxation (gross social security contributions are constant
but net social contributions, once taxes are taken into account, fall as pay increases). Ending the
deductibility of social security contributions would be a progressive measure, raising a modest
amount of revenues from the higher paid.
The roadmap for pension reform in Tunisia should also involve dealing with additional
important issues. These include improving the coverage of the pension system, incorporating
the informal sector, addressing the disability and survivorship pension programs, and launching a
well-designed and planned communications campaign. First, around 30 percent of pension benefi-
ciaries are survivors, and this represents around 15 percent of all pension expenditures. Enhanced
protection for dependent survivors, for example, will require additional cost-saving measures if
the pension scheme is to preserve fiscal balance. Second, the informality phenomenon in Tunisia
involves a high percentage of workers in the private sector. Additionally, some evidence suggests
the need to rethink policy making, especially regarding labor markets and social security reform,
because many of the intended beneficiaries operate beyond the reach of legislative reform. Also,
the contribution density is low among those covered in the private sector due to underreporting
and transitions in and out of informality. Lastly, as with any difficult reform, a strong and proactive
reform champion is needed to lead the process and develop consensus, as well as an effective public
information campaign, particularly targeted at the youth, workers, and employers.
Chapter 4
Renewing the Social Assistance
Contract: From Subsidies
to Targeted and Expanded
Safety Nets
Tunisia has a comprehensive welfare system—comprising health insurance, employer-based
social insurance, subsidies, and targeted cash transfers. It however remains dominated by vol-
atile and non-targeted energy and food subsidies. This report identifies and simulates the welfare
impact of reform options to reduce energy and food subsidies and strengthen the safety nets to pro-
tect the poor and vulnerable. Tunisia’s welfare programs have formed a crucial part of the country’s
social compact for many decades, with price stability and access to basic goods like bread, fuel, and
electricity being of paramount concern. However, while this form of safety net has helped reduce
monetary poverty, it has not been as successful in addressing inequalities and social exclusion. Tuni-
sia spent 3.2 percent of GDP on social assistance in 2016, the bulk of which was allocated to direct
price subsidies for food and energy products. This number peaked at 8 percent of GDP in 2013
when fuel subsidies were particularly high (5 percent of GDP in 2013 versus 0.5 percent of GDP
in 2016). Food subsidies have been less volatile, fluctuating between 1.7 and 1.8 percent of GDP
during the same time frame. The country spends 0.8 percent of GDP on targeted social assistance
programs, up from 0.4 percent of GDP in 2008; however, this is still largely below regional and
global averages (Figure 4.3). While universal subsidies were an appealing policy option in an era
when poverty was widespread and administrative systems weak, modern targeted and expanded
safety nets can now assist vulnerable households more effectively. In addition, Tunisia’s goal to
transition to more renewable energy with large private sector financing also requires reforming
subsidies and improving the performance of energy subsidies, particularly for electricity and gas
(see Chapter 7).
Energy prices have moved closer to cost recovery levels in recent years but remain subsi-
dized for several products. Through a system of price controls and transfers to SOEs, the gov-
ernment subsidizes a range of fuel products including gasoline, diesel, LPG, natural gas, kerosene,
and heavy fuel oil (which is used for heating). In recent years, several products have moved closer
to cost recovery levels following the introduction of VAT and a more systematic application of a
formula-based fuel price adjustment mechanism for gasoline and diesel products (Table 4.1). These
two products are now respectively at 87 and 83 percent of cost-recovery (as of July 2018). However,
21
22 Public Expenditure Review: A New Pact for the Transition
TABLE 4.1 Composition of fuel subsidies by product
2014 (prices are in millimes of TND) 2018* (prices are in millimes of TND)
Regulated Actual Effective Cost Regulated Actual Effective Cost
price cost subsidy recovery price cost subsidy recovery
(millimes) (millimes) (millimes) (%) (millimes) (millimes) (millimes) (%)
Gasoline, unleaded 1,670 2,064 394 80.9 1,925 2,221 295.5 86.7
Diesel, unleaded 1,500 1,830 330 82.0 1,685 2,027 342.4 83.1
Diesel 1,250 1,749 499 71.5 1,405 1,750 345.2 80.3
Domestic LPG 569 1,900 1,331 30.0 592 2,010 1,418.1 29.5
Industrial LPG 1,317 2,036 719 64.7 1,350 2,082 731.9 64.8
Lamp oil 810 1,738 928 46.6 860 1,617 757.1 53.2
Heavy fuel 510 1,138 628 44.8 595 1,162 567.0 51.2
Source: Authors’ calculations. *Prices are as of July 2018 and costs are based on Brent price of 70 USD and exchange rate
of 2.6 DT/USD.
several products remain highly subsidized, including socially sensitive products such as LPG (at
30 percent of cost recovery) and lamp oil for lighting (53 percent), but also heavy fuel (51 percent).
The net subsidy for electricity and gas, estimated using the price gap approach, decreased between
2014 and 2016, but reached 0.8 percent of GDP in 2017. Electricity and gas cost recovery stood at
73 and 60 percent respectively as of mid-2018.
At present, the bulk of subsidy expenditure is devoted to LPG and electricity, which are more
neutrally targeted across per capita consumption quintiles (Figure 4.1). However, the overall
targeting of energy subsidies remains regressive, largely due to residual subsidies on gasoline and
diesel. In the case of electricity, the presence of a lifeline tariff contributes to the relatively neutral
targeting. Recent increases in prices for consumption above 400 kWh/month have contributed to
further reductions in the shares going to the upper quintiles. Subsidized energy products accounted
for about 7 percent of household consumption in 2015–16, with richer households spending slightly
more on electricity, while poorer households spent more on LPG. Except for LPG, the regional
distribution of energy subsidies is inconsistent with the incidence of poverty. The differences are
most pronounced for natural gas (for which the Centre Est region accounts for almost two-thirds of
spending), and for diesel and gasoline (dominated by Grand Tunis and Centre Est).
Public spending on food subsidies has risen gradually in nominal terms since 2011, as the
administered prices for most commodities have not kept pace with inflation (Table 4.2). The
food subsidy program was reformed in the 1990s to contain costs by following a ‘self- targeting’
approach, retaining subsidies only for lower quality items primarily consumed by poorer house-
holds, resulting in a drop in total food subsidy spending from 4 percent of GDP in 1984 to 2 per-
cent in 1993. Currently, the bulk of food subsidy expenditure is on cereals and cereal products,
including semolina, flour, pasta, gros pain (bread), couscous, and vegetable cooking oils. Milk is also
Chapter 4: Renewing the Social Assistance Contract 23
FIGURE 4.1 Energy subsidies received by welfare quintile, 2015/16 (TND millions)
12 12
Total energy subsidies received by quintile (TND millions)
10 10
Subsidy received by quintile (TND millions)
8 8
6 6
4 4
2 2
0 0
LPG Electricity Gasoline Kerosene Diesel Natural gas
Poorest 20% Second poorest Middle 20%
Second richest Richest 20%
Source: Staff calculations based on household survey 2015/16.
TABLE 4.2 Regulated and cost prices for subsidized food items, 2016
Regulated price Subsidy Cost price Cost recovery
Product (unit) (millimes TND) (millimes TND) (millimes TND) (%)
Sugar (kg) 970 544 1,514 64.1
Gros Pain (loaf ) 230 235 465 49.5
Baguette (loaf ) 190 84 274 69.3
Milk (L) 1,120 50 1,170 95.7
Grain oil (L) 900 1,051 1,951 46.1
Semolina (kg) 398 660 1,058 37.6
Couscous (kg) 795 710 1,505 52.8
Pasta (kg) 805 700 1,505 53.5
Bread flour (kg) 700 560 1,260 55.6
Source: Tunisian government.
24 Public Expenditure Review: A New Pact for the Transition
subsidized but at a much lower rate. The most heavily subsidized food items are semolina, vegetable
oil, and bread with cost recovery levels at respectively 38, 46, and 50 percent. However, as will be
shown below, the high rate of leakage of some of these subsidies is such that they could be replaced
by more efficient forms of social assistance. This could be coupled with more targeted efforts to
promote the agribusiness sector.
The largest food subsidy expenses—for bread, semolina, and grain oils—are either neutrally
or slightly progressively targeted (Figure 4.2). However, substantial subsidies remain for items
such as baguettes, sugar, couscous, flour, and milk, which are consumed in greater quantities by
the more well off. Subsidized food products account for 4.4 percent of household consumption
expenditure, and 8.3 percent of expenditure for the poorest quintile. The regional distribution of
food subsidies also deviates from the distribution of poverty. Only subsidies for gros pain are close
to mirroring the distribution of poverty. Subsidies for flour, pasta, couscous, cooking oil, and sugar
disproportionately benefit the richer eastern regions (especially Grand Tunis and Centre Est), but
are otherwise quite evenly distributed. However, the subsidies for baguettes and milk benefit Grand
Tunis proportionately more than they benefit the southern and western regions. This could reflect
the presence of pockets of urban poverty in coastal areas.
FIGURE 4.2 Food subsidies received by each welfare quintile, 2015/16 (TND millions)
100 300
90
Total food subsidies received by quintile (TND millions)
250
Subsidy received by quintile (TND millions)
80
70
200
60
50 150
40
100
30
20
50
10
0 0
Bread Semolina Grain Pasta Baguettes Sugar Couscous Bread Milk All
oil flour foods
Poorest 20% Second poorest Middle 20%
Second richest Richest 20%
Source: Staff calculations based on household survey 2015/16.
Chapter 4: Renewing the Social Assistance Contract 25
FIGURE 4.3 Social assistance expenditure as a share of GDP
3%
2%
1%
0.8%
0%
0
20 14
no 01 0
Eg ou –15
20 13
15
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Source: World Bank ASPIRE database.
The main social assistance programs, the cash transfer program PNAFN (Programme d’Aide
aux Familles Necessiteux), suffers from low coverage and lacks a transparent beneficiary
selection and graduation process. Tunisia’s social protection system is based around formal con-
tributory insurance schemes comprising old-age income support, medical insurance, disability, and
maternity. Most of the social assistance spending is provided through the cash transfer program
PNAFN, which accounted for 0.5 percent of GDP in 2016. Beneficiary households are selected for
the program based on categorical criteria. Beneficiaries receive TND 180 per month (or slightly
below 50 percent of the minimum wage) plus TND 10 per month for up to three school-age chil-
dren (6–25) and all children with disabilities. The program was scaled up significantly after 2011,
and now covers close to 250,000 households and was expected to reach 285,000 households in 2018,
or between 8 and 9% of households. However, it only reaches 16.9 percent of the poor (bottom
quintile) leaving the bulk of poor and vulnerable households without social assistance (Figure 4.4).
PNAFN, from a coverage perspective, is quite low compared to other countries in the region, while
the benefits are adequate by international standards with one-third of benefit recipients moving
into the second quintile of consumption and with greater effect in rural than urban areas. However,
the program has design and management issues (coordination, monitoring) and lacks a clear ben-
eficiary selection and graduation process. The overrepresentation of the elderly in PNAFN also
points to the lack of an adequate social pension or old age support scheme for underserved formal
and informal sector workers.
Other safety net programs include the Assistance Médicale Gratuite (AMG), which provides
free subsidized care to poor families, as well as various small programs managed by different
26 Public Expenditure Review: A New Pact for the Transition
FIGURE 4.4 Cash transfer coverage of poorest quintile (%), various dates
100
80
60
40
16.9
20
0
an 2
ep 10
co 8
09
an out 14
az 12
ifi 08– 4
09
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6
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& uth h 20 201
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i2
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ar Leb p. 2
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er igh rica 8–2
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rt
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in
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in
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w
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st
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ha
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Am
M
Eu
U
tin
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Source: World Bank ASPIRE database. Data for Tunisia come from authors’ calculations based on the household survey
2015/16 data.
Note: Coverage is defined as the ratio of direct and indirect program beneficiaries to total number of people in the poorest
20 percent of the population in terms of per capita consumption or income.
ministries. The AMG program has two subprograms, AMG-I and AMG-II. Free health cards pro-
vided under the AMG-I program cover around 260,000 families (around 90% of whom are also in
the PNAFN program), while subsidized health cards provided under the AMG-II program cover
an additional 622,900 families with selection based on income and family size or about 21.7 percent.
However, this program only reaches about 38 percent of the bottom quintile. Government estimates
indicate that the cost of the AMG program was TND 109 million in 2014, or 0.13 percent of GDP.
Other ministries provide smaller, more categorical assistance: (i) the Ministry of Education provides
scholarships and grants for school and university students totaling TND 146.5 million, or 0.16 per-
cent of GDP in 2016; (ii) the Ministry of Social Affairs (MOSA) provides in-kind services such as
childcare services, adult learning, and disability assistance; and (iii) the Ministries of Equipment and
Social Affairs provide funds for social housing, which amounted to TND 34 million in 2016.
Our simulations show that the reform of energy and food subsidies should be considered
on a product-by-product basis. This would create significant fiscal savings, but would require a
targeted expansion of the coverage of cash transfers to fully compensate poor and vulnerable house-
holds in an effective manner.10 Removing food subsidies would save TND 1.2 billion (1.1 percent
of GDP in 2018) but would have significant negative welfare impacts on the poor without com-
pensation; the poverty headcount would increase by around 1.7 percentage points to 16.2 percent,
mainly due to the subsidies on bread and semolina. Removing only the most regressive subsidies—
10These simulations incorporate the direct impact of price changes but do not take into account the indirect effects.
Chapter 4: Renewing the Social Assistance Contract 27
on sugar, milk, baguettes, couscous, and flour—would have much smaller impacts on the poverty
rate and still save the government TND 273 million (0.3 percent of GDP). The poverty headcount
would rise slightly by 0.4 percentage points. Compensation through cash transfers using the exist-
ing PNAFN program would be insufficient to protect the poorest households. However, extending
compensation to all AMG beneficiaries would protect more poor households and at a lower cost
but would still be inadequate to fully offset the impact of full subsidy removal. A better-targeted
cash transfer has the potential to protect the poor much more efficiently. Our simulations also show
that universal cash transfers would fully compensate households. However, it should be noted that
the administrative costs of doing so (and issues in terms of continuing such a policy indefinitely)
must also be considered carefully.
A full removal of energy subsidies would generate fiscal savings amounting to 1.1 percent of GDP
but would increase the headcount poverty rate by 1 percentage point. LPG subsidies represent
slightly more than half of the subsidies received by households. However, given the high reliance
of the poor on LPG as a cooking and vehicle fuel, such a reform would need to be accompanied
by compensation measures to ensure the welfare of the poor is not significantly impacted. Uncom-
pensated, the removal of LPG subsidies would raise the poverty headcount by about a 0.7 percent-
age point. Removing electricity subsidies would save about 0.3 percent of GDP and increase the
poverty headcount by a 0.4 percentage point. An expanded cash transfer program with improved
targeting could compensate almost all poor households at minimal cost, making households 8 to
13 percent better off in terms of per capita consumption.
Attention also needs to be paid to the welfare outcomes of nonpoor households, particularly
the middle class. This should be supported by a clear and proactive communications campaign.
It may not be affordable to fully compensate all households for the subsidy reforms, but reforms
can be done gradually to minimize the impact on consumers. Subsidy reform should thus be con-
sidered as part of a policy package, demonstrating clearly how the savings will be used to improve
overall welfare of all citizens, for instance on public transport, health care, and social insurance. Tax
reforms could also be considered to offset the increased cost of living and any employment-related
impacts of removing price supports to subsidized industries. Subsidy reform should be accompa-
nied by a clear and widely targeted communications campaign on the regressive nature of some
subsidies, the waste and health impact stemming from poor pricing and overconsumption, as well
as the tradeoffs between subsidies and more growth enhancing jobs and inclusive spending.
Chapter 5
Tackling the Next Challenge
on Education: Efficient Spending
for Learning
Tunisia has historically been successful in providing access to basic education for all. But
public spending in education is high, which combined with the projected increase in certain cohorts
of school-aged children, calls for greater efficiency in the sector. There is almost universal access to
basic education (primary cycle or basic education first cycle, grades 1 to 6 and basic education second
cycle or college, grades 7 to 9) (see Figure 5.1). However, only 44 percent of children aged three
to five go to school despite a one-year pre-schooling rate for five-year olds of 85 percent. In 2017,
Tunisia spent 6.7 percent of GDP on education, which is equivalent to 22 percent of total govern-
ment spending, and includes the funding allocated to the Ministries of Education, Employment and
Professional Training and Higher Education, and Scientific Research (Figure 5.2). To this should be
FIGURE 5.1 Gross and net enrollment rates (GER and NER)
Source: Author using Ministry of Education data.
29
30 Public Expenditure Review: A New Pact for the Transition
FIGURE 5.2 Public spending in education
Source: Author using Ministry of Education data.
added the private financing of education through household expenditure, which amounts to nearly
1.1 percent of GDP. Furthermore, the projected 10 percent increase in the school-age population
(3–23-year olds) between now and 2030, the bulk of which is in the 12–23 years old cohort, is a key
demographic element that will impact the level and composition of education expenditures.
Wage bill spending in the education sector has increased significantly due to hiring, pro-
motions, and wage increases. Wage bill spending has increased from 88 percent of total public
education spending in 2012 to 93 percent in 2017 (Figure 5.3), while the share of spending allo-
cated to investment has dropped to around 4 percent. This has been driven by both an increase in
staffing and remunerations. The number of teachers (respectively nonteaching administrative staff)
has increased by 1.1 percent per annum (respectively 3.2 percent) since 2005, while the number of
pupils dropped by 0.5 percent per annum in primary education and by 1.7 per annum in secondary
education. Teachers’ salaries have increased by 7.9 percent per annum between 2011 and 2017
while consumer price inflation averaged 4.8 percent during the same period. The average annual
salary of a teacher is equal to 2.2 times GDP per capita, which is equivalent to 5.3 times the min-
imum wage (against 4 times in 2005). Today, 99 percent of primary education teachers are in the
penultimate highest or highest category of the salary scale, and 87.2 percent of secondary education
teachers are in the highest category. Lastly, there are about 9,200 substitute teachers (2018) who are
not properly accounted for in the wage bill of the Ministry of Education.
Chapter 5: Tackling the Next Challenge on Education 31
FIGURE 5.3 Wage bill spending in public education
Source: Author using Ministry of Education data.
Consequently, the pupil-teacher ratio has dropped to levels found only in high-income
countries, while teachers’ hourly workload is lower than in peer countries. Between 2005
and 2017, the pupil teacher ratio dropped from 20.1 to 17.2 in primary education and from 17.4
to 11.9 in secondary education (Figure 5.4). Consequently, today, there are 1.4 teachers per class
in primary education and 2 teachers per class in secondary education. In addition, the number of
pupils per nonteaching staff dropped from 54.3 to 32.7. International comparisons show that the
student-teacher ratio in Tunisia is low compared with countries in the region or with countries
with similar levels of development. A spatial analysis shows that the student-teacher ratio is lower
in governorates with lower population density, mostly in rural and underprivileged areas. Further-
more, the youngest teachers with more diplomas are usually sent to these governorates where the
performance in terms of internal efficacy and quality of education services are lower. The high
number of substitute teachers also explains the increase in spending in the sector, although they are
not accounted for under the wages budget line.
32 Public Expenditure Review: A New Pact for the Transition
FIGURE 5.4 Student-to-teacher and student-to-administrative ratio
Source: Author using Ministry of Education data.
Despite increased education expenditures, low internal efficacy in primary and secondary
education persists and has contributed to greater regional disparities. Repetition rates in
primary and secondary education are 8 and 18.9 percent respectively but reach 20 percent in the
most underprivileged governorates (Figure 5.5). The dropout rate is almost nonexistent in primary
education and amounts to 10 percent in secondary education. There is a high dropout rate in the
transitions between cycles (primary–secondary, secondary–high school, etc.) and higher repetition
rates at the beginning and at the end of the cycles (Figure 5.6). This points to learning difficulties
which tend to accumulate throughout the years of schooling. It is not possible to measure the
learning quality in the different cycles because of the lack of a national evaluation. However, the
last international evaluations in which Tunisia participated, namely TIMSS in 2011 and PISA in
2015, have shown that the learning results are still low and have dropped slightly in recent years.
Moving forward, the challenge for Tunisia is to provide quality education and learning
for all, and prepare students for a globalized, knowledge/technology-intensive and fast-
changing world. Key for Tunisia will be to improve the efficiency of spending given the demo-
graphic changes ahead and the deep inefficiencies in the education sector. This report identifies key
reform areas to adapt the education sector to the new realities and the challenges ahead:
• To ensure greater coverage for the preparatory year (for five-year olds) in public primary schools
and access to preschool education for three- and four-year olds, there is a need to rebalance the
share of the financing allocated between primary and secondary education. Furthermore, the
Chapter 5: Tackling the Next Challenge on Education 33
FIGURE 5.5 Repetition rates by governorate (primary, secondary, and high school)
Source: Author using Ministry of Education data.
34 Public Expenditure Review: A New Pact for the Transition
FIGURE 5.6 Dropout rates by governorate (secondary school)
Source: Author using Ministry of Education data.
projected increases of cohorts in secondary education, particularly in high school, will require
more investments. It seems difficult to reconcile these two requirements without marked
improvements in internal efficacy to reduce the grade repetition, together with greater efficiency
in the utilization of education expenditures.
• Significant reforms are needed to improve the quality of education and learning. The sector
should aim to attract the best qualified and motivated young diploma holders, deploy well-
trained teachers, and allow access to professional development. Structural reforms should be
implemented to review the assignments of staff, the hourly workload and schools’ organization
to obtain some financial leeway in order to redirect spending toward improving the learning
processes and outcomes.
• The learning outcomes must be evaluated at each stage of the education system, using a national
system, to serve as a guide for decision making in education policies and spending.
• Gains in terms of efficiency could be made through efforts at modernizing school adminis-
trations. This would entail seizing the opportunities offered by information and communi-
cation technologies and strengthening the autonomy and capacity of the Regional Education
Commissions.
Chapter 6
Better Care: Improving the
Efficiency and Equity of the
Health System
Tunisia has made tremendous progress to improve health outcomes and compares favorably
with countries at similar levels of income. Child mortality rates have decreased by 56 percent
since 2000, more than all income groups and almost all regional peer countries. In 2016, neonatal,
infant, and child mortality rates were lower in Tunisia than the average for upper-middle-income
countries and middle-income MENA countries. Tunisia’s maternal mortality ratio is also slightly
lower than the average upper-middle-income countries. The average life expectancy has increased
from 62.9 years in 1981 to 75.7 years in 2016, meanwhile, fertility rates have dropped from 5.1 chil-
dren per woman to 2.2 children for the same period, along with an important decline in major
communicable diseases (CD). As a result, noncommunicable diseases (NCDs), including diabetes,
cardiovascular diseases, and cancer, have become the main health concerns for the Tunisian popu-
lation. As of 2016, the prevalence of diabetes and hypertension among the population 15 years and
above was 15.5 and 28.7 percent, respectively.
Tunisia compares favorably with income and regional peer countries in terms of health
system quality, availability, and access to essential health services including immunization,
antenatal coverage, skilled birth attendance, etc. With 2.1 beds per 1,000 people, Tunisia ranks
higher than most middle-income countries in the region.11 With 3.2 nurses and midwives per 1,000
population nationwide in 2014, Tunisia places ahead of all countries in the region. However, the
1.6 physicians per 1,000 population (2014), is lower than some countries in the region such as Jordan
(2.7) and similar to Turkey and Iran. The private provision of health care has expanded over the past
decades, offering 20 percent of total bed capacity, employing 60 percent of physicians and 82 percent
of dentists, and accounting for 74 percent of the advanced technologies available in the country.
However, Tunisia could achieve better results at current levels of spending pointing to sig-
nificant scope for improving efficiency in the health system. Between 2012 and 2015, Tunisia
spent on average 7 percent of GDP on health, which is equivalent to 13.6 percent of total central gov-
ernment spending, a level higher than most middle-income and regional peer countries (Figure 6.1).
11Total hospital bed capacity is projected to increase by 1,400 units at the end of the 2016–20 Five-Year Development Plan.
35
36 Public Expenditure Review: A New Pact for the Transition
FIGURE 6.1 Total health expenditure: international comparisons, 2012–15 averages (% of GDP)
OECD
UMICs
LMICs
Jordan
Tunisia 7.08
Iran
Algeria
Morocco
Turkey
Egypt
Chile
Mexico
Mauritius
Malaysia
Indonesia
0 1 2 3 4 5 6 7 8 9 10
Source: Authors using GHED (WHO 2017).
Note: Using the latest GHED update, total health expenditure is the sum of CHE (current health expenditure) and HK (capital
expenditure). Here, capital expenditure is averaged over 10 years to smooth out fluctuations and capture more data points.
When data are missing for capital expenditure over the full period (as for Jordan and Egypt), we assume that they are
included in CHE; indeed, some countries could not separate capital (WHO 2017, p. 5).
About 58 percent of this spending is covered by the public sector (central government, autonomous
health facilities, and national health insurance system) and 39 percent through out-of-pocket spend-
ing. Public health spending grew by 40 percent between 2008 and 2012 to reach 4.3 percent of GDP.
After 2012, health insurance expenditures remained stable while spending by the Ministry of Health
increased 11 percent, almost entirely due to a one-year increase of 10 percent in 2015 related to the
construction of new health facilities. Health expenditure per capita followed a similar trend reaching
TND 308 (USD 157) in 2015. A relative efficiency analysis, which compares Tunisia’s health out-
comes and expenditures with other countries, shows that Tunisia is among the group of countries
with good health outcomes, but which spend more than expected for similar outcomes (Figure 6.2).
There are also significant inefficiencies in inputs (technical efficiency) and output choices
(allocative efficiency) related to high labor cost and unbalanced funding of curative care rel-
ative to preventive care and deficiencies in the referral system. An analysis of factor shares in
public health establishments (Figure 6.3 panel A) reveals a relatively balanced use of inputs, although
the share of labor is on the high side, particularly for the first and second lines of care (primary health
care centers, and local and regional hospitals). About 61 percent of expenditure by public health
providers and the public administration goes to labor, 25 percent to medical goods and services,
9 percent to nonmedical goods and services, and 3–4 percent to investment. In primary health care,
and in local and regional hospitals, labor accounts for about 80 percent of total spending, while phar-
maceutical products account for 10–15 percent, which seems to be very low to respond to the pop-
ulation’s needs at the first and second lines of care. Overall, at least 77 percent of remunerations are
directed at permanent staff, indicating high spending rigidity. Regarding allocative efficiency, about
Chapter 6: Better Care 37
FIGURE 6.2 Relative efficiency of health spending
Source: Authors using Stata program and World Bank’s HNP/HF database, Dec 2017 update (compiled using data from WDI,
WHO, IHME, IMF).
Note: Predicted values are based on log OLS regressions with measures of GDP (in PPP), population, size, and region
as dependent variables; the expenditure prediction also controls for the weight of the private sector in current health
expenditure. All countries with data are used to calculate expectations (including HICs and some outliers not shown on
the graph). **Public Health expenditure are based on revised SHA 2011 data and calculated to include current and capital,
domestic, and foreign expenditure. For details on methodology and specifications, see Gaudin (2018).
half of expenditures in the public health sector go to inpatient care and one-fourth to outpatient care
(Figure 6.3 panel B), leaving little room for preventive public health activities. Around 40 percent of
expenditure of the Ministry of Health and public health facilities goes to inpatient care, 27 percent
to outpatient care, and only 7 percent to prevention and public health. Tertiary-level national insti-
tutions (troisième ligne) still absorb one-third of central government funding indicating that there is
room for central government funding to refocus activities toward public goods and high-return low-
cost preventive care activities. There is also room to transfer some of the outpatient activity from
tertiary to lower-level hospitals and potentially reduce costs.
Lastly, despite some progress, the health system still faces important disparities across
income groups and regions, and significant vulnerabilities related to out-of-pocket expen-
ditures. Lagging regions have received more financing for health over time; nonetheless a number
of governorates would benefit from higher funding for health from the central government budget
given their poverty standing. The geographic distribution of physicians stands out as the most
38 Public Expenditure Review: A New Pact for the Transition
FIGURE 6.3 Input and functional allocation of health spending (all values represent share of
spending in %)
Panel A Panel B
Input shares Functional allocation
3.4% 4.2% 100%
9% 13% 8% 11% 14%
10% 90% 7%
6% 5%
80% 6% 10% 9%
25% 15% 7%
70% 8%
60% 27%
26% 28%
50% 29%
6%
40% 5% 5%
70% 30%
61%
20% 42% 46% 41% 39%
10%
0%
Public—All Public—MoH & EPS All public MoH & EPS Public (incl. Central
institutions social government
Labor Medical G&S insurance
Nonmedical G&S Capital investment By type of By type
health provider of financing
Inpatient care Day hospital
Outpatient care Auxiliary services n.e.c
Preventive/public health Governance
Source: Authors using National Health Accounts (NHA), 2014 (Ministry of Health, MoH).
unequal (Figure 6.4 panel A), with a significant concentration on the coast. Despite an increase in
the density of doctors in both private and public sectors, regional disparities have widened, with
most physicians and specialists located on the coast, leaving interior regions without much-needed
specialists. We find a slightly negative correlation between government per capita health spending
and regional poverty, and clear evidence that out-of-pocket (OOP) health spending is lower in
areas with local health facilities. Overall, the distribution of OOP health expenditure is neutral to
the distribution of income. However, the poor spend relatively more on pharmaceutical products
than their level of welfare would have suggested (Figure 6.4 panel B): the bottom 50 percent of
the population are responsible for 30 percent of pharmaceutical expenditure, 5 percentage points
more than their share in total consumption. The impact of catastrophic spending12 and of impov-
erishment13 are highest in the poorest southern and western regions. This has effects on impov-
erishment, mainly for households in the bottom decile. Lastly, about 12 percent of the population
reports not seeking health care for financial reasons, and as much as 19 percent in the southern
regions compared to about 6 percent in the coastal regions.
12Health expenditures are called “catastrophic” when, to pay for care, the sick or their household must pay a very high
financial participation in relation to their financial capabilities and other needs. For example, WHO defines catastrophic
expenditure exposure when a household spends more than 40 percent of its capacity to pay (i.e., its budget excluding living
expenses) on direct health payments.
13Impoverishment is calculated as the difference between the number of households below the poverty line before and
after direct health payments.
Chapter 6: Better Care 39
FIGURE 6.4 Disparities in health services and spending
Panel A
Health specialists (per 100,000 inhabitants)
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Grand Tunis North East North West Center East Center West South East South West Tunisia
General surgery Orthopedic surgery Ophthalmology
Anesthesia resuscitation Cardiology Medical imaging
Source: Carte sanitaire 2015.
Panel B
Lorentz curve of Out of Pocket (OOP) spending
100
90
80
Cumulated percentage of expenditure
70 Line of equality
Consumption (Lorenz curve)
60
Pharmacy OOP
50
OOP for regular medical care
40
OOP for deliveries
30
20
10
0
0 1 2 3 4 5 6 7 8 9 10
Consumption deciles
Source: Authors using household survey 2015 data.
40 Public Expenditure Review: A New Pact for the Transition
Tunisia will need to improve the efficiency of health spending and reduce regional and
income disparities in order to achieve its objective of providing quality health services to
all its citizens. Article 38 of the 2014 constitution explicitly recognizes the right to health and
commits the State to guarantee the right to social security and access to quality health care for all
citizens. In 2014, the societal dialogue on national health policies and strategies concluded that
reforming the health financing system is a key factor to achieve Universal Health Coverage, one
of the sustainable development goals to which Tunisia has committed to. This report recommends
key reforms to achieve these goals:
• Improve and reinforce budget allocation to outpatient activity, and preventive care at lower lev-
els (primary and secondary), along with reforming the overall referral system and reinforcing the
reform of family medicine started in 2017. Tertiary facilities should be more specialized in deliv-
ering tertiary care. Tunisia could also improve access to care at the primary and secondary care
lines by strengthening provision of care and availability of medicines. Moreover, strengthening
the roles of primary and secondary levels is critical in a context where the burden of diseases is
dominated by noncommunicable diseases.
• Formulate a sound human resources policy to lower regional disparities in terms of health care
access and human resources distribution and management, in order to improve the planning for
the training and allocation of specialties programs in the regions. Additionally, decentralizing
human resources management to improve primary health facilities control over their staff, bud-
get, and productivity, particularly at the tertiary level will be crucial.
• Reform the subsidy system for pharmaceutical products and improve the safety nets, as well as
the financing of the health system: the pharmaceutical sector (pharmacie centrale) has financial
difficulties as a result of the devaluation of the currency, some leakages to neighboring countries,
and debt with foreign providers. Balancing the financial sustainability of the pharmaceutical sec-
tor while diminishing the burden of OOP spending on the poorest and most vulnerable through
adequate targeting and channeling of resources in social safety nets can protect the poor against
impoverishing high health expenditures. These actions should be complemented with reforms
to reduce overmedication, and reforms targeting the governance of the pharmaceutical system.
Regarding the financing of the health system, the World Bank (2016)14 has proposed detailed
recommendations to finance the system and improve its coverage.
14World Bank (2016): Etude sur l’Assistance Médicale Gratuite, World Bank, 2016. Unpublished World Bank Technical
Assistance report.
Chapter 7
The Energy to Move Forward:
Toward a More Efficient and
Greener Electricity Supply
Tunisia has historically provided quality electricity supply to its citizens and firms with close
to universal access to electricity (100 percent connection rate in urban areas and about
99.5 percent in rural areas). It is ranked 51 out of 190 countries in the 2019 “getting electricity”
indicator of the Doing Business but with still a relatively high cost of connection. Tunisia performs
well in the quality of service with very low incidence of power outages. The annual electricity con-
sumption per person in Tunisia reached 1,444 kWH (2014) compared to 900 kWh in Morocco,
1,356 kWh per capita in Algeria and 1,658 kWh in Egypt.
Energy provision remains dominated by the public sector with very limited private sector
participation. The main operator of the sector is the Tunisian Company of Electricity and Gas
(STEG), the State company which is responsible for the production, transportation, distribution,
import, and export of electricity and gas in Tunisia. The STEG oversees the planning and exe-
cution of investments in the electricity and gas sectors (but not for the upstream exploration and
production of oil and gas).15 Despite some liberalization of the sector through the 1996 law that
allowed for the entry of independent electricity producers and led to the granting of a first conces-
sion (a combined cycle plant in Rades), the private sector’s participation in electricity generation
has remained timid. No independent private producer has been licensed since 2002. Moreover,
electricity and gas prices are subsidized by government (direct subsidies), which legally must trans-
fer to STEG every year the difference between the cost of the service and the administered price.
Until 2015, gas purchases from Algeria by STEG were also subsidized (indirect subsidies) to keep
costs for STEG and tariffs for consumers low. Consequently, total subsidies from government to
STEG averaged 3.2 percent of GDP or 82 percent of STEG’s revenues between 2011 and 2014.
STEG investments averaged TND 650 million per annum or 0.86 percent of GDP (compared to
15The Entreprise Tunisienne d’Activites Petrolieres (ETAP—Tunisian Enterprise for Petroleum Activities) is responsi-
ble for the upstream oil and gas sector. The Societe Tunisienne des Industries de Raffinage (STIR—Tunisian Enterprise
for Refining Industries) is responsible for the production and importation of refined petroleum products. The Agence
Nationale de la Maitrise de l’Energie (ANME—National Agency for Energy Efficiency), which is a nonadministrative
governmental agency, is responsible for developing and executing the national energy efficiency policies and programs.
41
42 Public Expenditure Review: A New Pact for the Transition
0.6 percent of GDP in Morocco and 2.4 percent of GDP in Algeria). Lastly, despite their overall
good cost efficiency, the government only spends on average TND 30 million on energy efficiency
programs through the Energy Efficiency Fund (cogeneration, solar water heaters, classification of
household electrical appliances, energy audits, etc.).
The sector’s performance and financial viability have weakened over the past years, and
the sector has increasingly been dependent on government support. Technical losses in the
transport and distribution network have increased from 12 percent of injected power in 2010 to
around 15 percent of injected power (Figure 7.1), a level now comparable to neighboring countries
(15 percent in Algeria and 15 percent in Morocco) but much higher than European countries (6
percent in France and 10 percent in Spain). We estimate that reducing losses from 15 to 10 percent
would be equivalent to saving TND 200 million (5.3 percent of STEG’s revenues). The volatility
of international oil prices (and thus subsidies) and budget processes increase uncertainty for STEG
and its ability to finance its investments and lower risks in public-private partnerships. In addition,
unpaid bills have grown rapidly over the past years reaching TND 1.6 billion cumulatively in 2016
(43 percent of STEG’s revenues). Consequently, the STEG has systematically been among the top
loss-making SOEs over the years. In 2016, it accounted for 26 percent of the 1.3 billion total losses
(1.5 percent of GDP) made by the 20 largest SOEs. In addition, the STEG’s external debt guar-
anteed by the state reached TND 5.4 billion (130 percent of STEG’s revenues in 2016, 6 percent
of GDP), representing about 50 percent of total guarantees on external debt of SOEs (Figure 7.2).
FIGURE 7.1 STEG technical losses, % of injected power
18
16 15.6
13.38
14
12.03
12
10
8
6
4
2
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Transportation network losses Distribution network losses Total losses
Sources: Tunisian Company for Electricity and Gas (STEG) annual report.
Chapter 7: The Energy to Move Forward 43
FIGURE 7.2 STEG borrowing
6,000 160%
5,000 140%
120%
4,000 100%
3,000 80%
2,000 60%
40%
1,000 20%
0 0%
2010 2013 2014 2015 2016
Short-term borrowings, million TND
Long-term borrowings, million TND
Total borrowings, % revenues
Sources: STEG annual report.
The sector is increasingly facing challenges to meet peak demand due to inadequate plan-
ning of investments, inefficient pricing of peak demand, and limited efforts to introduce
appliances of higher energy efficiency. Electricity generation is currently dominated by natural
gas fuel (at 97 percent), of which more than 58 percent is imported from Algeria (in 2016). Elec-
tricity generation, which reached approximately 18,000 GWh in 2015, has grown by 4.2 percent
per year on average since 2006. The installed power capacity has increased over the same period by
5.6 percent per year (reaching about 1,700 kWh/year and per capita) to meet peak summer demand
due to the development of air conditioning. The peak demand for electricity has been shifting for
almost two decades during the heat waves of the summer season due to the rapid uptake of air con-
ditioning. Peak demand for electricity has a negative impact on electricity production in two ways.
First, there is a high a reliance on open-cycle gas turbines (GT) despite their higher fuel consump-
tion, lower efficiency (due to their adaptability to responding to peak demand: rapid mobilization
of these production units within minutes during peak hours), their shorter time frames and lower
investment costs (less than 50 percent of their closed-cycle equivalents) (Figure 7.3). Second, the
electricity tariffs do not account for the higher production costs of this technology, and there are
not yet enough efforts to introduce high-performance appliances such as air conditioners.
This report proposes several recommendations to materialize the government’s vision of
reducing Tunisia’s reliance on imported fossil fuels. This can be achieved by making greater
use of the country’s renewable energy potential and leveraging more private financing in energy
production. The government’s strategic objectives are to improve energy security and inclusion by
leveraging the country’s renewable resources, private financing, and technology in energy produc-
tion, while transport and distribution would remain a monopoly of the STEG in the medium term.
The government’s aim is to deeply transform the energy mix by increasing the share of renewable
energy from the current 3 percent to 30 percent by 2030, which is equivalent to about 4,000 MW.
This would require massive investments estimated by the government at more than USD 5 billion,
44 Public Expenditure Review: A New Pact for the Transition
FIGURE 7.3 Gas turbines (GT) installed capacity and production, % of total
45
40
35
36.4 33.9
30
25
20
15 15.7
10 12
5
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
GT installed power MW, % total installed
GT production GWh, % total production
Sources: STEG’s financial statements.
the realization of which would require large private sector participation. Following several years of
delay, the government has developed an action plan to accelerate this transition. This report iden-
tifies several areas of reform to set this transformation of the sector on the right course for success:
• Strengthening of the legal, institutional, and economic framework for private investments:
Among the important institutional instruments that should be foreseen following the adoption
of Law 2015-12 of May 11, 2015, on the production of electricity from renewable energies, the
creation of an independent regulatory body for the electricity sector is a priority. The essential
role of such an institution would be to ensure compliance with the rules and fair arbitration
between all stakeholders. This body should also be able to determine the costs of service in
order to inform the various actors (public authorities, network operator, independent producers,
end consumers) about the real costs and the tariffs to be applied. In addition, Tunisia will need
to improve its economic framework for renewable projects by establishing adequate financing
and insurance schemes for projects in renewable energies and developing technical and financial
capacity for the identification, preparation, negotiation, and monitoring of projects.
• Engaging the necessary transformation of STEG: STEG should be repositioned to focus on its
core responsibilities in this new context of a significant entry of independent producers follow-
ing almost 60 years during which it oversaw the planning, construction, and operation of almost
all investments in the electricity sector. This transformation will require STEG to develop new
capacity and skills (integration of large-scale renewable energies, demand management through
smart grids, management of contractual relations with operators, etc.) and to allocate and focus
more resources to optimize planning of its investments and operations.
Chapter 7: The Energy to Move Forward 45
• Improving the performance and financial viability of the sector: The operational and com-
mercial performance of STEG will have to be improved for greater private participation in the
sector to be feasible and viable. This will require eliminating energy subsidies by reforming tar-
iffs and reducing technical and commercial losses. Chapter 4 provides policy recommendations
to strengthen the safety nets that would allow reducing subsidies while protecting the poor and
vulnerable. Those recommended actions should be combined with measures to help households
and firms improve their energy efficiency and help the most vulnerable ones absorb the short-
term adjustment costs related to these changes.
Chapter 8
Valuation and Conservation:
Toward More Secure and
Sustainable Water Services
Tunisia has made tremendous progress to provide universal access to water and sanitation
services to its citizens, but some regional disparities persist, particularly on sanitation. Access
to drinking water stands at 98 percent (as of 2016) and is slightly lower in rural areas (92 percent).
Nationwide access to sanitation is 86 percent, but access is lower in southern and central regions
and in rural areas. While 98 percent of wastewater that is collected is purified, only 55 percent of
the population has its wastewater collected and purified. Water quality has deteriorated in the last
five years with the rate of physiochemical nonconformity up by 10 percentage points to 29 percent.
Government spending on WASH (water, sanitation, and hygiene) was about 1.5 percent of GDP
in 2015 or 5 percent of total central government spending. Household expenditures on water rep-
resent on average 1.5 percent of household spending, well below the 3 percent threshold of afford-
ability. While water quality in rural areas is lower, several rural zones pay higher water fees than in
urban areas due to differences in pricing autonomy of the institutions providing water.
Tunisia is facing acute water scarcity, which is accentuated by the combination of the coun-
try’s historical approach of large water mobilization, high consumption, large network
losses, and weak investment efficiency. The projected impact of climate change will accentuate
Tunisia’s challenge to guarantee water security. Tunisia’s conventional water resources were esti-
mated at 345 m3 per inhabitant per year in 2016 (Figure 8.1), or about one-third of the international
standard of aridity (1,000 m3/inhabitant/year),16 in total 4.85 billion cubic meters (m3) of which
4.2 billion m3 were considered renewable. The largest water consumer is irrigated agriculture (82
percent of mobilized resources) followed by households and businesses (15 percent), the industrial
sector (slightly above 3 percent), and tourism (slightly less than 1 percent). Water system losses (as
a ratio of mobilized resources) increased from 24 to 36 percent between 2005 and 2016 (Figure
8.2). Losses in the irrigated perimeters vary between 30 and 50 percent of mobilized water. The
16The desalination capacity installed at the end of 2015 is estimated at about 104,700 m3/day (SONEDE the drinking water
SOE and private entities). It is mainly done from the desalination of brackish water. Desalination of seawater is one of the
components of water mobilization for the satisfaction of the drinking water supply. The first seawater desalination plant be-
came operational on May 2, 2018, in the island Djerba for a capacity of 50,000 m3/day and a total cost of TND 180 million.
47
48 Public Expenditure Review: A New Pact for the Transition
FIGURE 8.1 Renewable water resources, FIGURE 8.2 Water technical losses
cubic meters per capita
1,400
40%
1,200
35% 35.6%
1,000 32.5%
30%
800 24.3% 26%
25%
600 376.4 20% 22.5%
400 15% 16%
200 10%
0 5%
0%
hi y
G pia
ba a
or n
Ke c o
Tu nya
Al i s i a
M a
rd ta
ia
ab E tar
ira t
s
p
Et an
te
Le han
M no
ri
an
Jo al
Em gy
oc
2005 2010 2011 2012 2013 2014 2015 2016
ge
a
o
n
m
Q
er
G
% of water distributed
Ar
% of water produced
d
te
ni
% of water mobilized
U
Sources: Authors using World Development Indicators Database and Tunisian Government Data.
obsolescence of the network and lack of appropriate maintenance and rehabilitation are the main
causes of water losses, combined with an inefficient water tariff that accentuates Tunisia’s water
valuation and conservation challenges. At the same time the storage capacity of large structures is
decreasing due to lack of maintenance and protection of watersheds (siltation rate of 24 mm3/year).
Additional mobilized water resources are lost due to poor planning of water transfer works, reduc-
tion in the utilization rate of irrigated perimeters (22 percent of nonfunctional public perimeters)
and irrigation intensity, and low quality of wastewater treatment (50 percent of purified water does
not meet standards) due to an aging infrastructure. Projections show that Tunisia’s water scarcity
will become increasingly acute due to the impact of climate change, including increased tempera-
ture (an estimated 1–2°C by 2030), lower rainfall (an estimated 5–10 percent drop), and rising sea
levels which will increase renewable water salinity.
The water and sanitation sector institutional architecture and fragmentation complicate
policy coordination and undermine efficiency. Conventional water resources in Tunisia are
largely managed by the Ministry of Agriculture, Hydraulic Resources, and Fisheries (MAHRP).
The state-owned water utility SONEDE is responsible for the supply of drinking water under the
supervision of the Ministry of Agriculture, an architecture which poses serious questions on insti-
tutional and policy incentives to conserve water and allocate it to the most economically productive
use. At the level of non-communal areas, the user associations called Agricultural Development
Groups (GDA) are responsible for the management of infrastructures and the sale of drinking
water and irrigation. The SECADENORD, an SOE under the Ministry of Agriculture, has the
mandate to manage the transfer and pumping installations and sells water to major users such as the
SONEDE and the CRDAs (Regional Commissions for Agricultural Developments) located along
the network’s route. Unconventional water resources and more specifically treated wastewater are
managed by the National Sanitation Utility (ONAS), which is under the authority of the Ministry
of Local Affairs and the Environment (MALE). The monitoring and control of quality of water
used for drinking, bathing, and irrigation are assigned to the Ministry of Public Health.
Chapter 8: Valuation and Conservation 49
The water tariff policy is highly sensitive to socioeconomic considerations and does not
incentivize economically efficient use and conservation of Tunisia’s scarce water resources.
At the same time, high losses and low SOE sector efficiency raises the cost of water production.
Average prices for irrigation and drinking water are respectively TND 0.11 and TND 0.68 per
cubic meter, indicating an overall average water price of TND 0.52 per cubic meter (Figure 8.3).
We estimate that the cost of producing one cubic meter of water in Tunisia is about TND 1.1 which
translates into a production cost recovery ratio of about 47 percent overall (10 percent for irrigation
and 61 percent for drinking water). However, due to significant losses, the cost of a cubic meter of
water increases by almost 50 percent between production and billing to users, indicating an overall
cost recovery of about 31 percent (Figure 8.3). There is also a system of cross-subsidies within the
system because mobilized water from dams is sold at lower prices to downstream SOEs and other
institutions. In addition, Tunisia’s water productivity is low; the World Bank estimates that in 2014
one cubic meter of water produced USD 14.38 in the economy and only USD 1.75 in agriculture
compared to USD 104.2 for the industrial sector. Sanitation services are also highly subsidized by
the State, with total subsidies amounting to TND 76.5 million in 2015.
FIGURE 8.3 Water cost and tariff, TND per cubic meter
1.8
1.657
1.6
1.4
1.218
1.2 1.107
1.0
0.8 0.677
0.6 0.52
0.4
0.2 0.11
0
Cost Cost Total cost Tariff irrigation Tariff drinking Tariff, average
(production) (production + water
distribution)
Source: Authors using World Development Indicators database.
Note: SONEDE: National Water Company (Societe Nationale d’Exploitation et de Distribution des Eaux) (water utility), ONAS:
National Sanitation Company (Office Nationale d’Assainissement) (sanitation), SECADENORD: Northern Water Exploitation
Company (Société d’Exploitation du Canal et des Adductions des Eaux du Nord) (water mobilization SOE), GDA: Agricultural
Development Group (Groupement de Developpement Agricole) (agricultural associations for irrigation and drinking water).
Low SOE performance and inadequate tariffs have weakened the financial position and
viability of the water and sanitation SOEs. Nonetheless, the investments needed in the coming
years are large, and fiscal space for public support is limited. The deficit of all SOEs in the water
and sanitation sector (Figure 8.4), excluding subsidies, stood at TND 300 million in 2015 (rep-
resenting 50 percent of SOE sector revenues or about 0.4 percent of GDP) of which the GDA
accounted for TND 120 million (9.5 times their revenues), SONEDE TND 73 million (19 percent
50 Public Expenditure Review: A New Pact for the Transition
FIGURE 8.4 Water SOEs financial balance
1,000
800
600
400
200
–31.62 –123.372 2.92
0
–72.72 –74.4
–200
–299
–400
SONEDE ONAS SECADENORD GDA Irrigation GDA AEP Total
Cost, million TND Revenues, million TND Balance, million TND
Source: Authors using World Development Indicators database.
Note: SONEDE (Water utility), ONAS (sanitation), SECADENORD (water mobilization SOE), GDA (Agricultural Associations for
irrigation and drinking water).
of its revenues), ONAS 74 million (45 percent of its revenues) and SECADENORD TND 32 mil-
lion (139 percent of its revenues). Commercial losses of water and sanitation SOEs are also import-
ant. Arrears to SONEDE amounted to TND 340 million in 2015 of which 24 percent were from
public entities. Total investments in the water and sanitation sector grew by 6 percent per annum
on average and reached TND 500 million per annum in 2009–16 or 0.7 percent of GDP, of which
about half was carried out by the water and sanitation SOEs and half by the Ministry of Agriculture.
Projected investment needs for water production, distribution, and loss reduction are substantial
and, given the lack of fiscal space, would require strong measures to improve SOE performance and
greater alternative private financing.
Although the water code has anticipated partnership with the private sector for uncon-
ventional water production and distribution, private sector participation is very low. The
private sector involvement in the management of water resources, the supply of drinking water,
or sanitation is limited to date despite signs of a political will to move toward the “construction-
exploitation-transfer (BOT)” of seawater desalination plant. In the sanitation sector, numerous ser-
vice contracts have been concluded in recent years (maintenance, repair, management of treatment
plants, etc.). The private sector operated 17.8 percent of the sewerage network, 18.3 percent of the
pumping stations, and 14.5 percent of the wastewater treatment plants in 2015.
Moving forward, Tunisia needs to reorient its water strategy and policies toward greater val-
uation and conservation of water. The new vision and strategy for the water and sanitation sector
would need to recognize the rare and indispensable nature of water resources in Tunisia, which
should therefore be well managed, conserved, and allocated to the most optimal use. This will
Chapter 8: Valuation and Conservation 51
require three fundamental changes: (a) a move toward a demand-management driven model instead
of a supply-management driven approach (cost recovery, transition to less water-intensive crops,
use of water-saving technologies, etc.); (b) rigorous management and valuation of water resources
(prioritization of rehabilitation and maintenance of existing infrastructure and equipment, reduc-
tion of losses, improvement in the quality and reuse of treated water, etc.); and (c) protecting and
conserving the ecosystems, rigorously managing groundwater resources, and operationalizing a
climate change adaptation strategy. This report identifies several policy and institutional reforms
that are necessary for these changes to materialize:
• Institutional reforms and capacity building: these would aim to: (1) delegate the management of
all water resources, excluding the share of the agricultural sector, to a single and relatively neutral
institution; (2) rethink local water management given the limits of the GDA: the management of
drinking water and sanitation in communal areas must be reassessed to be in harmony with the new
decentralization policy; (3) strengthen the planning and management capacity of sectoral institutions:
adapt profiles, develop capacity and skills in the public institutions in charge of the water sector
(water/infrastructure economists; financial, management, and public policies specialists, etc.); and
(4) rapidly upgrade the information and management systems across the sector (public and private
infrastructure, equipment, monitoring of aggregate production, financial situation of the sector, pric-
ing and debt collection, performance indicators of the sector, and public and private operators, etc.).
• Investment and pricing policy reforms: public investments should be allocated to activities that
improve the use of existing resources. Consequently, reform priorities should be to: (1) develop
and implement a simple approach for planning and selecting investments in the sector (clear and
mandatory socioeconomic criteria for all public operators, need for economic feasibility studies
for new investments, etc); (2) prioritize the rehabilitation and modernization of existing water
mobilization and transfer infrastructure, drinking water distribution networks and treatment
plants, increase transfer capacity (new pipelines) especially from water resources in northern
regions and new dams to other basins (an emergency investment program could be implemented
to make better use of the existing supply); (3) establish routine and periodic maintenance of
works and equipment in the sector; (4) introduce a new pricing policy that aims to recover water
and sanitation service costs from all users, implemented gradually and combined with direct
transfers to users for social or economic reasons; (5) strengthen the policy to encourage private
sector participation in all activities where the private sector can contribute to improving the
efficiency and effectiveness of the sector, including maintenance, network management, invest-
ments in desalination and treatment plants, etc.; (6) develop and launch a program to inten-
sify works for soil conservation and underground resource protection; (7) introduce incentives
for the generalization of water-saving technologies in all sectors, especially in irrigation; and
(8) develop and implement a policy to improve the quality of treated water and encourage its use.
Chapter 9
Paving the Way Forward:
Improving Land Transport Services
for Competitiveness and Jobs
Land transport plays a critical role for mobility and the economy in Tunisia. The State plays,
de jure and de facto, a central role in the sector (Table 9.1). The sector represents 15 percent of
public and private investment, accounts for 7 percent of GDP, employs 4.5 of the workforce and
represents 97 percent of goods transport. The road network consists of 19,546 km (from 19,117 in
2001) of classified roads (routes classées) or 117 kilometers per 1,000 square kilometers compared to
90 for Morocco. The share of paved roads has increased from 66 percent in 2001 to 80 percent in
2016. The share of large roads (more than 7.5 meters wide) reached 67 percent, up from less than
45 percent in 2001. Land transport services are organized around several public companies across
TABLE 9.1 Distribution of roles between the state and other public actors in the transport sector
Operation,
Planning, contracting Financing maintenance Observations
Roads infrastructure State (Ministry State and State and Essentially the state
(support to land of Equipment), communes communes
transport) communes
Bus stations State State/transport Major state
companies/ contribution for
communes financing
Rolling stock Transport companies Transport Transport
companies companies
Railway State State Transport Law 2004-33,
infrastructures (Metro, companies (Article 5) provides
RRN, Infra/inter that the state takes
urban) charge of the
infrastructures and
their maintenance
Source: Authors based on a revue of regulations and practices.
53
54 Public Expenditure Review: A New Pact for the Transition
the different regions. The SOE Transtu provides urban and suburban passenger transportation ser-
vices in the Tunis area. Twelve other regional companies do the same for each of the governorates
and the connections between neighboring territories. The Tunisia National Railway Company
(SNCFT) manages a railway network of 2,153 kilometers for passenger and goods transport.
Significant investments have been made in recent years to improve accessibility, reduce
congestion, and modernize the road network, but infrastructure building has suffered from
delays. The post-2011 period was characterized by strong demand and recognition of the need
for greater connectivity, particularly of interior regions. This led to a significant increase in public
investment in the road network. Annual investments in roads almost doubled during the 2011–16
period compared to the 2007–09 period, reaching TND 815 million per annum or 0.9 percent
of GDP (Figure 9.1 panel A). These investments were allocated (Figure 9.1 panel B) to improve
accessibility and to reduce urban congestion (28 percent of total road investment spending) in big
FIGURE 9.1 Investments in the road network
Panel A
Level of investments
1,200
(TND millions)
1,000
1,200
800
(TND millions)
1,000
600
800
Investments
400
600
200
Investments
400
0
200 2008 2009 2010 2011 2012 2013 2014 2015 2016
0 Road network
2008 2009 2010 2011 2012 2013 2014 2015 2016
Construction of highways
Total network
Road
4% Construction of highways
Panel B
Total
Urbanaverage
Composition of investments, 2008–16
constructions and roads
7%
4% Development/modernization
9% 28% of classified roads
Urban constructions and roads
7% Consolidation and rehabilitation
Development/modernization
9% 28% of classified roads
16% of classified roads
Development/asphalting of tracks
Consolidation and rehabilitation
Construction/rehabilitation
of classified roads of
16% 8% 28% bridges, civil engineering works
Development/asphalting of tracks
Periodical maintenance of roads,
Construction/rehabilitation of
8% 28% tracks …
bridges, civil engineering works
Acquisition of lands/studies
Periodical maintenance of roads,
tracks …
Acquisition of lands/studies
Source: Authors calculations, data from the BOOST database.
Chapter 9: Paving the Way Forward 55
cities and to a large extent in the Greater Tunis area. They also aimed at modernizing the network
to improve its capacity and the service quality (28 percent), developing the highway network (26
percent of spending), developing and paving a series of rural tracks (16 percent), and undertaking
new construction and heavy maintenance operations, including rehabilitation works and periodical
maintenance (8 percent). Delays in project execution have been particularly significant between
2012 and 2014 due to poor planning, long land expropriation and compensation procedures, and a
complex procurement system, which translates into higher costs.
Despite important progress in past years, proper road infrastructure maintenance remains a
key issue. Since the early 2000s, significant efforts have been deployed for road maintenance, with
the differentiation between routine maintenance (e.g., roads pavement, track trimming, cleaning,
weeding of green spaces, sand removal) and periodical maintenance (e.g., heavy maintenance made
necessary by exceptional circumstances such as repairing damages caused by flooding, maintenance
of rural roads), with the latter outsourced to the private sector. Total maintenance spending has
increased from TND 127 million in 2014 to TND 143 million in 2016, of which 59 percent was
for routine maintenance. However, the Tunisian National Transport Master Plan estimated main-
tenance needs to be about TND 400 million in 2014 and TND 441 million in 2016, indicating that
maintenance budgets covered only about a third of estimated needs.
The financial deficit of the highway network under concession to a SOE (Tunisie Autoroute)
reached 42 percent of its revenues in 2016 (TND 38 million) and is expected to increase with
ongoing extension of the network to lower traffic areas. The length of the highway network
increased by 36 percent between 2001 and 2011, and by an additional 14 percent between 2011 and
2016 to reach 407 kilometers. Currently, there is an additional 331 kilometres under construction.
Tunisie Autoroute (TA), an SOE created in 1992 with a state ownership of over 95 percent, manages
the highway system under a concession scheme. Highway projects under construction are financed
half by the State (in the form of capital increase to TA) and half by multilateral and bilateral institu-
tions (loan guaranteed by the State). At the end of 2016, TA owed about TND 1.28 billion TD in
the form of various credits from donors. One highway, the A1 Sud (Tunis-Sfax), accounts for about
65 percent of toll revenues (Figure 9.2), highlighting the low level of traffic in remaining highways
and the overall low level of tolls (TND 2.6 cents per kilometer).17 Highways under construction are
projected to have low traffic, which will further increase the structural deficit of the network and
TA’s financial challenges. TA is characterized by high deficit and debt and slow revenue growth due
to infrequent toll price adjustments.
The public transport companies (bus and metro) have experienced a structural decline in
demand due to a rapid progression in private transport and their overall low performance.
The three largest regional public transport SOEs experienced a large drop in passengers, from more
than 490 million travelers in 2010 to about 335 million travelers in 2015 (a little over 40 percent of
17It is estimated that the A1 Sud (Tunis-Sfax) highway has an average traffic of 46,000 private cars per day against about
6,000 and 7,000 cars per day on the two other highways (Tunis-Medjez and Tunis-Bizerte).
56 Public Expenditure Review: A New Pact for the Transition
FIGURE 9.2 Distribution of toll revenues across highways
11%
Tunis-Medjez 9%
9%
Tunis-Bizerte
9%
65%
H.Lif-Sfax (A1 sud) 63%
0% 10% 20% 30% 40% 50% 60% 70%
2017 2016
Source: Ministry of Transport.
travelers are students). This represents a loss of more than 155 million travelers or 32 percent of
travelers (Figure 9.3). The company for Tunis, Transtu, alone lost 134 million passengers during
this period. In addition to these paying travelers, there are several socioeconomic groups that can
travel free of charge, including staff from the Ministry of Interior, Defense, Finance, Justice, and
Social Affairs, the wounded from the revolution, and the families of the martyrs, which are esti-
mated at over 55 million per year for Transtu. In parallel, the number of private vehicles in service
has increased considerably, from 0.95 million in 2010 to 1.18 million in 2016 (annual growth rate
3.7 percent). At the same time, the operational efficiency of transport SOEs dropped. For instance,
at Transtu, operationally functional buses fell from 82 to 52 percent of the fleet between 2010
and 2015 (Figure 9.4) due to a combination of old fleet age and lack of adequate maintenance and
repair investment and capacity. Four small private companies have engaged in urban passenger
transport (in Tunis) and one company is ensuring intercity transport under a concession. However,
FIGURE 9.3 Number of passengers in the three largest regional transport companies
In thousands of passengers
68.563 85.118
87.756
89.238 91.800
57.748 84.169
55.702
53.422 51.103
51.163
335.273
253.525 229.905 214.651 216.439 200.784
2010 2011 2012 2013 2014 2015
Tunis transport company Sfax transport company Sahel transport company
Source: Authors, based on companies’ annual reports data.
Chapter 9: Paving the Way Forward 57
FIGURE 9.4 Bus fleet operational (Transtu)
1,300 100%
1,250 80%
1,200 60%
1,150 40%
1,100 20%
1,050 0%
2010 2011 2012 2013 2014 2015
Bus fleet, number
Bus fleet, % operational
Source: Authors, based on companies’ annual reports data.
the organized private sector companies have remained stagnant in their initial lines with no possi-
bility of extension, while the various constraints continue to affect their development. For various
reasons, the public authorities have favored other modes of transport (called unorganized transport:
individual taxis, collective taxis). The rise in power of these modes of transports for more than a
decade is in conflict with the market of organized private operators and even public operators. The
phosphate transport by SNCFT has also fallen due to strikes and halts in phosphate production in
the mining basin.
Transport SOEs appear to be structurally loss-making due to their low performance com-
bined with low user fees. The State provided significant financial support to transport SOEs
amounting to TND 564 million in 2016 (0.6 percent of GDP). The revenues of regional public
passenger transport companies only covered 22 percent of their costs in 2015, down from 34 per-
cent in 2010. The drop in costs was mainly due to operational inefficiencies and to the fact that
tariffs have not increased in line with the real cost of services. Consequently, state support to the
sector in the form of transfer for operational expenses has increased continuously, reaching TND
409 million in 2015 from TND 220 million in 2010 to compensate for the freeze in tariffs for
almost all years since 2003. SNCFT’s revenues cover around 45 percent of its operating costs, while
state transfers to support expenses reached TND 55 million in 2015 from TND 38 million in 2010.
The State has also covered some of the transport SOEs social security contributions in past years
(Transtu and SNCFT) in the face of their highly deteriorated financial situation and supported
their investment efforts through on-lending of loans from donors. We identify all these transfers in
the budget and estimate them at TND 564 million in 2016 or 0.6 percent of GDP.
58 Public Expenditure Review: A New Pact for the Transition
To pave the way for better connectivity and mobility, Tunisia will need to restructure and
improve the performance of its ailing transport SOEs; improve the investment prioritiza-
tion, financial structuring, and selection of in road infrastructure; and lay the ground for
more private sector participation. The report makes the following recommendations:
• Transport SOE restructuring and performance improvement and greater private sector par-
ticipation: Transport sector SOEs of all modes of transport are ailing and require deep and bold
restructuring. Success in SOE restructuring and performance improvements will require devel-
oping and implementing clear objectives and mutual commitments between the SOE and the
State, and to strengthen the capacity of line ministries and the government to supervise reform
implementation. These mutual agreements would include giving SOEs more operational auton-
omy and ability to function on commercial rules. In this respect, pricing reform will be necessary
for the sector to move to cost-recovery and competitive pricing combined with transparent
and effective mechanisms that would allow the State to support access and mobility of targeted
groups (e.g., students, low-income households, the elderly, etc.). Private capital and know-how
can also help these changes materialize. In addition, Tunisia could encourage a more effective
participation of the private sector in roads infrastructure, in particular for maintenance. It will
also need to set up multiyear framework contracts and review the concession system for high-
ways to enable greater private sector involvement. These changes will also require redefining
and focusing the Ministry of Transport’s mission on the definition of policies for each category
and mode of transportation, the development of the regulatory framework, and the monitoring
and evaluation of policies as well as the strengthening of its capacity (strategic planning, eco-
nomic analysis of projects, evaluation of transport policies, monitoring and evaluation, prepara-
tion of specifications and monitoring of concessions, etc.)
• Strengthening investment prioritization, financial structuring, and selection: This will require
the adoption of a simple approach for planning, prioritizing, and selection of investments in the
sector (clear and mandatory socioeconomic criteria for all public operators, need for economic
feasibility studies for new investments, and cross-sector coherence railway-road). In addition,
separating the feasibility studies from the technical studies would be highly desirable, as well as
to start the latter only based on the most economically viable solution. Given the lack of fiscal
space and high public debt, new investments should include a public-private partnership (PPP)
analysis that brings out the elements of comparison between the two modes of financing (purely
public or in PPP) in order to better inform decision makers about the alternatives offered and
the possibilities of optimizing the allocation of public resources. This will also require develop-
ing tools and capacity within the administration to prepare, commission, and evaluate quality
feasibility and technical studies in order to provide decision makers with a relevant quantitative
and qualitative analysis to make the right investment decisions and the most appropriate method
of implementation and exploitation.
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