ICRR 10340 Report Number : ICRR10340 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: L4069 Project ID : P042287 Project Name : Economic Competitiveness Adjustment Loan Country : Tunisia Sector : Financial Adjustment L/C Number : Partners involved : EU Prepared by : Elliott Hurwitz, OEDCR Reviewed by : Laurie Effron Group Manager : Ruben Lamdany Date Posted : 06/23/1999 2. Project Objectives, Financing, Costs and Components : Objectives : (1) Foster continuation of stable macroeconomic and fiscal framework, including measures to replace revenues lost from expected tariff reductions; (2) accelerate implementation of Free Trade Agreement (FTA) with the EU; (3) increase private sector role by accelerating privatization in competitive sectors; (4) improve regulatory environment by lowering transport costs, facilitating trade, and improving the legislative framework; (5) increase labor market flexibility while protecting workers and containing labor costs . Costs and financing : The loan was a 2-tranche operation of US$75 million with co-financing of US$120 million by the EU. The loan was approved on July 25, 1996, made effective on December 6, 1996, and closed on June 30, 1998, six months later than planned . Components : (1) Macroeconomic framework--monitoring export growth, fiscal program, balance of payments; (2) trade policy--ratification of the FTA, reduction in tariffs and NTBs; (3) reducing state role: improving legal/regulatory environment for private enterprises; government brings to point of sale 51% of capital of agreed enterprises; (4) reforms in trade-related areas: facilitation of shipping and port clearance, simplification of shipping documentation and procedures, revision of the Customs Code, and restructuring of SOEs involved in shipping; development of strategy for reforming telecommunications sector; (5) increasing labor flexibility: simplification of Labor Code; bolstering protection of laid-off workers; containing social security contribution rates . 3. Achievement of Relevant Objectives : Macroeconomics : Macroeconomic performance improved, although it did not quite meet ECAL targets . The country's external position improved and in 1997 it was able to borrow on the US dollar euromarket for the first time; the VAT was increased to compensate for lost tariff revenues, but additional expenditure restraints were also required; FTA implementation : ECAL accelerated FTA implementation by permitting tariff reductions to be included in the 1997 budget, thereby helping to achieve FTA ratification; increased private sector role : Two large cement producers (with a price of over US$400 million) as well as around 60 other firms were privatized, an improvement in the country's privatization progress; however, the government withdrew some companies from consideration due to political or "strategic" considerations; improved regulatory framework : less progress was made than expected on improving maritime activities, but one law liberalizing ship operations was approved and adoption of another was expected; little progress was made toward telecommunications reform; a new company code was adopted, slightly improving the climate for private business; increased labor flexibility : some progress was made in this area, with draft law submitted to the Chamber of Deputies creating limited severance scheme for laid -off workers, and measures were taken to reduce the burden of social security for non -agricultural private employers. 4. Significant Achievements : By providing financial assistance and technical advice, ECAL helped facilitate Tunisia's progress in implementing the FTA, which in the long run will have a major impact on opening many producers to foreign competition, and will have beneficial results for consumers . 5. Significant Shortcomings : Although progress was made in several areas of the ECAL, 2 technical waivers and a partial waiver were required in order to allow for the second tranche release . Also although progress was made in privatization, it is not clear that the "state's role in commercial sectors " was substantially reduced, because the project did not specifically address this point by including objectives of reducing for example, percent of revenues or value added generated by state-controlled firms. Finally, little progress was made in reforming the shipping or telecoms sectors . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Partial Not Rated ICR rates institutional development as partial, but does not present sufficient evidence for this assessment . Sustainability : Likely Likely Bank Performance : Highly Satisfactory Highly Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : More highly-focused adjustment lending--complemented by TA, ESW, and public education --is required to make significant progress in privatization, and in the shipping and telecomms sectors . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : ICR is satisfactory overall, but does not include Aide Memoire of ICR mission, nor evidence of Borrower participation in project completion process (although OED understands that extensive discussions between Bank and Government on ICR did take place). In addition, the section on future operations deals only with future Bank operations, not the future operations of this project . ICR rates Institutional Development efficacy as partial, but does not present sufficient evidence for this assessment . ICR does not provide context on privatization progress, e .g., extent to which this project diminished proportion of productive assets, by sector, owned by state . The latter would be important in assessing the significance of the benefits from the project, and the extent to which effective, de facto privatization was achieved.