Document of The World Bank

Report No: 29329

IMPLEMENTATION COMPLETION REPORT(TF-26326 FSLT-70940)

ON A

LOAN

IN THE AMOUNT OF EURO 281 MILLION

TO THE

REPUBLIC OF TUNISIA

FOR A

THIRD ECONOMIC COMPETITIVENESS ADJUSTMENT LOAN

June 28, 2004

Finance, Private Sector and Infrastructure DepartmentMiddle East and North Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 30, 2004)

Currency Unit = Tunisian Dinar Tunisian Dinar 1 = US$ 1.25

US$ 1 = TD 0.80

FISCAL YEARJanuary 1 - December 31

ABBREVIATIONS AND ACRONYMS

AAEU Association Agreement with the European UnionAfDB African Development BankCAS Country Assistance StrategyCMF Comite des Marches FinanciersEC European CommissionECAL Economic Competitivess Adjustment LoanESW Economic Sector WorkEU European UnionFIAS Foreign Investment Advisory ServiceFSAP Financial Sector Assessment ProgramGSM Global System MobileICR Implementation Completion ReportICT Information and Communication TechnologyM&E Monitoring and EvaluationMTR Mid-Term ReviewNPLs Non Performing LoansPCD Project Concept DocumentQAG Quality Assurance GroupSINDA Systeme Informatique des Douanes (customs computer system)TTN Tunisie Trade NetUIB Union Internationale de BanqueUMTS Universal Mobile Telephone ServiceVAT Value Added TaxVSAT Very Small Aperture Terminal

Vice President: Christiaan PoortmanCountry Director: Theodore Alhers

Sector Director:Sector Manager:

Emmanuel ForestierZoubida Allaoua

Task Manager: Hamid Alavi

TUNISIAThird Economic Competitiveness Adjustment Loan

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 116. Sustainability 117. Bank and Borrower Performance 128. Lessons Learned 159. Partner Comments 1610. Additional Information 16Annex 1. Key Performance Indicators/Log Frame Matrix 17Annex 2. Project Costs and Financing 26Annex 3. Economic Costs and Benefits 27Annex 4. Bank Inputs 28Annex 5. Ratings for Achievement of Objectives/Outputs of Components 29Annex 6. Ratings of Bank and Borrower Performance 30Annex 7. List of Supporting Documents 31

Project ID: P055815 Project Name: Third Economic Competitiveness Adjustment Loan

Team Leader: Hamid R. Alavi TL Unit: MNSIFICR Type: Core ICR Report Date: June 29, 2004

1. Project DataName: Third Economic Competitiveness Adjustment

LoanL/C/TF Number: TF-26326; FSLT-70940

Country/Department: TUNISIA Region: Middle East and North Africa Region

Sector/subsector: General industry and trade sector (27%); Telecommunications (24%); Non-compulsory pensions, insurance and contractual savings (24%); Banking (14%); Central government administration (11%)

Theme: Regulation and competition policy (P); Other public sector governance (P); State enterprise/bank restructuring and privatization (S); Legal institutions for a market economy (S); Other financial and private sector development (S)

KEY DATES Original Revised/ActualPCD: 10/10/2000 Effective: 12/27/2001 12/27/2001

Appraisal: 04/18/2001 MTR:Approval: 12/20/2001 Closing: 06/30/2003 12/31/2003

Borrower/Implementing Agency: GOVERNMENT OF TUNISIA/MINISTRY OF ECONOMIC DEVELOPMENTOther Partners: European union, African Development Bank

STAFF Current At AppraisalVice President: Christiaan J. Poortman Jean-Louis SarbibCountry Director: Theodore O. Ahlers Christian DelvoieSector Director: Emmanuel Forestier Emmanuel ForestierTeam Leader at ICR: Hamid Alavi Hamid AlaviICR Primary Author: Jean Pesme

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time:

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

Third of a series of policy reform operations supporting the Government's program to enhance the international competitiveness of Tunisia's economy, the Third Economic Competitiveness Adjustment Loan (ECAL III) aimed at maintaining a stable macroeconomic framework, at promoting private investment, at strengthening the financial sector, and at liberalizing the information and communication technology sector. ECAL III built on the achievements of and lessons from ECAL I and ECAL II, which were respectively focused on a first generation of reforms in the real sector and improvements of efficiency in the banking sector.

The overarching objective of these ECALs, and of their foreseen successors, is to prepare the Tunisian economy to face global competition brought about by the implementation of the Association Agreement with the European Union and by the dismantling of the Multi Fiber Agreement.

ECAL III was consistent with the Tunisia CAS. It was however associated with an increase in the level of adjustment lending compared to the CAS scenario. This increase was justified to some extent by an accelerated pace of reform in some of the areas identified in the CAS as high-case triggers and more importantly by deteriorating external conditions.

As was the case for the previous ECALs, ECAL III was jointly prepared with the European Union and the African Development Bank. The EU supported the program with a grant of euro 80 million and the AfDB with a loan of euro 216 million equivalent. The policy matrix was jointly designed, negotiated and adopted by the three institutions - which was not the case for previous ECALs.

3.2 Revised Objective:

There was no revision of the original objective.

3.3 Original Components:

The euro 281 million loan ($ 252,5 millions) comprised four tranches: one standard first tranche of euro 144.69 million with a capitalized front-end fee of euro 2.81 million to be disbursed at loan effectiveness and three equal floating tranches of euro 44.5 millions. The three floating tranches were linked, respectively, to reforms related to the private investment climate, the financial sector and information and communication technologies. The maintenance of a stable macroeconomic framework - defined by a specific set of macro-economic indicators - constituted a fundamental condition for all tranches.

The first tranche was designed to lock-in a critical mass of reforms in all the components of the reform program. It was disbursed on the basis of measures adopted by the Government related to the macroeconomic framework, to the private investment climate, to the financial sector and to information and communication technologies. They were needed for the future implementation of the other three tranches conditions and for the sustainability of the overall reform program. This approach also helped in maintaining a reform-oriented momentum in the design and negotiation phases.

The private investment climate tranche's main objective was to prepare Tunisia to the full roll-out of the Association Agreement with the European Union in 2008. This component therefore focused on competition policy and on reducing the cost of doing business for private firms. It targeted in particular the

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relationships between the tax authorities and private sector, the quality of financial information as well as the simplification and streamlining of administrative procedures. It also aimed at supporting privatization - though on a small scale - and at paving the way for a gradual liberalization of the import monopolies regime. Given the impact of the Association Agreement on the investment climate, a study on the promotion of investment was to better identify the related challenges and to propose policy options for modifying investment incentives.

The financial sector tranche was intended to deepen Tunisia's financial sector by further strengthening banking regulation, accelerating the development of capital markets and reforming the insurance sector. In the banking sector, the operation focused in particular on improving financial intermediation. It addressed the issues of non-performing loans and the lack of recovery and foreclosure of loan collaterals. A study on the impact on these non-performing loans was foreseen, including the assessment of how the Code of Civil and Commercial Procedures, would improve the situation of the NPLs. If called for by the conclusions of this study, ECAL III was to support new measures to accelerate the recovery of bank loans and collateral foreclosure. These objectives were to be supported in parallel by the privatization of two state-owned banks, in the context of the investment climate component. In capital markets, the operation focused on progress in corporate transparency, and its associated cost. In the insurance sector, the operation pursued three main objectives: reduce contingent liabilities, promote long-term savings and provide a crucial safety net. ECAL III therefore addressed the structural deficit of the insurance sector by eliminating the excessive price rebates proposed by some companies at the expense of their financial sustainability and at improving insurance regulation. It focused on modernizing the regulatory framework, the price-setting mechanisms and on restructuring the most ailing public insurance companies (with El Ittihad, the weakest company then, receiving primary attention given its level of deficit).

The information and communication technology (ICT) tranche pursued three main objectives: putting in place a revised regulatory framework conducive to increased competition and private sector participation, laying out a liberalization strategy covering all the sub-sectors and supporting the awarding of the second Global System Mobile (GSM) license. A previous attempt to grant the license had failed, as the Government was not satisfied, inter alia, by the amounts offered by the bidders. The negotiations focused on the associated fiscal receipts (as evidenced by the minutes of the discussion and the incorporation of a review clause). Contentious at negotiations, the conditionality eventually referred to "grant[ing] a second GSM license through a competitive and transparent bidding process". The negotiation documentation did not specify which parameters would be used to assess this process.

*

Three main issues deserve consideration when assessing the design of the operation:

• The final architecture of ECAL III was expected to provide Tunisia with more leeway in managing the implementation timetable and therefore in being able to close external and fiscal gaps with Bank support. The authorities were concerned by the potential negative financial and fiscal implications of some of the underlying reforms. The tranching feature was therefore intended to provide the authorities with as much flexibility as possible in their handling of the various constraints: time to implement the policy reforms, potential short-term negative impact and expected positive effects later on, and balance of payments needs. The loan architecture was also expected to bring sectoral consistency to the reform agenda, as a critical mass of reform was to be locked in before disbursement for each of them.

• ECAL III supported an ambitious and complex reform agenda, both in its scope and timetable. The

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emphasis of studies to be undertaken, in particular on sensitive issues such as the investment climate or non-performing loans, reflected reservations from the authorities to take action within the operation's time-frame.

• the design of the GSM-related conditionality reflected the emphasis on the need for enhanced competition, sound and transparent open-market economy and private-provision of services.

3.4 Revised Components:

None of the components were revised.

The closing date of the operation (initially June 30th, 2003) was extended to December 31st, 2003 during the Spring 2003. This decision was taken on the basis of the strong likelihood that the conditions of at least two of the floating tranches (investment climate and financial sector) needed a longer time-frame to be implemented. The Bank however declined in December 2003 Tunisia's request for a further extension. The operation was therefore closed on Dec. 31st, 2003 with the cancellation of the remaining floating tranche, related to the information and communications technology.

3.5 Quality at Entry:

This ICR rates Quality at entry as satisfactory.

ECAL III was not evaluated by the Quality Assurance Group for quality at entry. The objectives of the operation were in line with the CAS and well-related to the broader policy agenda laid out in the Government's 10th Development Plan. The lessons learnt from ECAL I and II were used in the design of this operation. The important body of Economic and Sector Work helped in fueling the dialogue with the authorities in the identification of the measures to be supported by the operation. However, insufficient attention was paid at entry on how the measure of performance and monitoring of achievements would take place, as evidenced for instance by the focus on outputs and the lack of M&E tools. The operation was finalized in a context of high level of uncertainties on the external front for Tunisia, just after Sept. 11th, 2001. The concerns on a possible macro-economic shock accelerated the speed of negotiation, somewhat at the expense of the depth of the ownership by the Tunisian authorities.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

The development objectives of ECAL III have been met. The rating for the achievement of development objective is satisfactory. ECAL III has supported important policy reforms in Tunisia, and significant progress (though uneven) has been achieved in all the sectors covered.

In addition to the preservation of a sound macro-economic framework, areas of major success in the implementation of the operation include: (i) improvements in the investment climate, with the simplifications of the regulatory framework and progress in state divestiture from the economy; (ii) decisive evolution in the insurance sector, with a revamping of the sector regulation, a major change in the automobile insurance mechanisms, an improved pricing framework and a restructuring of the weakest insurance companies, thereby eliminating one of the central distortions in the competition framework and a potentially serious contingent liability; (iii) improved recognition by the authorities of the challenges related to the non performing loans in the banking sector, with enhanced disclosure of the extent of the issue and progress towards a shared diagnosis with the Bank; increased private sector participation in the banking

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sector with the privatization of two banks and (iv) reinforcement of the regulatory regime and institutions in the ICT sector; preparation of a Telecommunications strategy with a liberalization timetable covering each of the sub-components.

4.2 Outputs by components:

The outcome of the macroeconomic component is considered satisfactory.

Despite a challenging external environment, the macroeconomic framework remained sound and in line with the loan objectives. Faced with the simultaneous shocks of low tourism earnings following Sept. 11th, 2001, weak EU growth, drought and uncertain external conditions (in particular following the terrorists' attacks in Tunisia and the negative impact on tourism of geopolitical tensions in the region), the authorities tightened fiscal and monetary policy in 2002. In a context of sluggish fiscal revenues, they cut capital expenditures and postponed investment in a number of public enterprises. Monetary policy adopted a restrictive stance in 2001 and 2002, before being eased in 2003 in view of the growth slowdown and of the reduction in current account pressures. The deviations to the targets set in ECAL III remained limited (a table in annex presents the projections and actuals for the various economic indicators defined in the memorandum of the president). No waiver related to the macroeconomic framework was requested for the disbursed floating tranches.

ECAL III also contributed to strengthen debt management. An enhanced monitoring of the foreign public and private debt was put in place. A "Strategy for a Public Debt Management", which represents an important step towards an even more active and forward-looking approach in that respect, was prepared with Bank support.

*

Overall, the outcome under the investment climate component is considered satisfactory.

The main measures contemplated under the operation have been implemented, but not always to the extent initially expected. A waiver was sought on a condition relating to the privatization of a petroleum company and three conditions were substantially met.

1/ the waiver points to the absence of sale offer to a strategic investor for at least 25 % of the capital of a public company. The authorities have selected for partial privatization the "Societe Nationale de Distribution du Petrole". The process of selection of an investment bank to assist the Government was launched in December 2003. Given the needed due diligence to be carried out before the privatization (including environmental and social assessments), the condition could not be fulfilled before the loan closing date. Since the dialogue was continuing and the absence of achievement of this condition did not compromise either the impact or sustainability of the overall reform program, a waiver was requested. It is worth noting that the lack of subsequent progress on this divestiture has led the European Commission in May 2004 to request additional information to the authorities regarding their timetable to partially open the capital of this public company. When this ICR was finalized, the European Commission had not yet disbursed its "investment climate" tranche, mainly because of these additional delays.

2/ the condition of the revision of the Company Law was substantially met, as the Government chose to amend the law itself. The amended law, when approved, would exceed the expectations underlying ECAL III condition and would constitute a positive development, in line with modern corporate law approaches The law was not yet approved by the Parliament when this ICR was finalized.

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3/ the condition on the reform of public import monopolies was substantially met, as the Bank judged the related study as not comprehensive enough and somewhat conservative in its analysis and recommendations. The authorities have confirmed their intention to undertake additional studies, to look at each import monopoly separately and to accelerate the liberalization process where possible, They are currently preparing Action Plans for some of the products which could be liberalized more quickly. Given the importance of the issue and the social sensitivity around some of the concerned products, the Bank and the authorities agreed to continue the analysis and to take up the issue in the context of ECAL IV.

4/ the condition related to investment promotion and incentives was substantially met. It dwells upon one of the most important issues in the dialogue between Tunisia and the Bank on private sector development. It concerns the fiscal incentives granted to the off-shore companies (i.e, those which are predominently targeting the external markets - while the onshore sector is oriented towards the domestic market). The Bank's analysis showed that such incentives were distortionary and did not have as strong an impact in the promotion of investment. The authorities and the Bank agreed to carry on a study on the "dichotomy" between the on-shore and the off-shore sector to provide inputs for the Tunisian authorities to develop an Action Plan on investment promotion and incentives. This analysis was supposed to be undertaken with PHRD funding end 2001, before loan effectiveness. However, PHRD funding was not available, because the study was not launched before loan effectiveness. To be as proactive as possible, the Bank proposed that the study be realized by FIAS instead, given its expertise in this area - proposal which was agreed by the authorities. The key recommendations of the draft FIAS study touched upon:

the need for Tunisia to take bolder steps to prepare itself to the impact of the full roll-over of the lAssociation Agreement in 2008. The study recommended that the authorities actively reflect on the pros and cons of a more radical approach to reforms, compared with the current gradual approachthe need to improve the tax regime across the board, i.e. to reduce the gap in tax incentives between the lon-shore and the off-shore sector, with a view to ultimately remove exonerations currently targeting the off-shore sectorin that respect, the importance to a/ reduce the corporate tax rate and enlarge the tax base, b/ suppress lexonerations on customs duties currently embedded in the Investment Code and c/ reform and simplify the Value Added Tax (reduce the number of rates, enlarge the tax base, improve administrative procedures for reimbursement).

The study and recommendations triggered substantive exchanges (and disagreements) with the Tunisian authorities. The authorities expressed concerns regarding the fiscal impact of the recommendations and the strong risk to see off-shore companies leave Tunisia if the incentives framework was to be modified.

The analysis and recommendations put forward by the FIAS study highlight the main challenges facing Tunisia, but the conditions under which it was launched were clearly sub-optimal, with a very tight time-frame. Time permitting, an in-depth assessment of the potential impact of removing the fiscal incentives for off-shore companies (i.e. negative impact on current off-shore investment with a risk of shift to other countries) could have been prepared. In that respect, the main concern put forward by the authorities is legitimate. A full-fledged discussion did not take place in the context of ECAL III, as the authorities pointed to the conflict of interest for the Bank when assessing the achievement of the conditionality as the recommendations were prepared by one of its units.

The Action plan subsequently prepared by Tunisia goes in the right direction. It keeps however a very gradual approach. In particular, it does not consider changes before 2007 to the advantages granted to the off-shore sector. Its impact on the preparation of the on-shore sector - much less used to be confronted to

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strong competition - to the shock of the full roll-over of the Association Agreement is questionable.

Two developments help reinforce this ICR overall positive assessment. In the context of the 2004 Budget Law, Tunisia took steps to bring closer the investment and tax regimes for companies targeting the domestic market with those regimes applying to the off-shore sector. They have in effect started to implement changes in the direction recommended by FIAS. The authorities also agreed that the dialogue will be pursued with the Bank on the various options in the context of ECAL IV. Given the importance of the issue, and dilemmas the Tunisians authorities face given the uncertainties of the external environment, maintaining open and constructive channels of communication on this issue is positive.

All the other measures foreseen in ECAL III were implemented. The authorities have:

simplified procedures for the start-up and operations of private enterprises and accelerated the customs lclearance process.strengthened the institutional framework for competition.lamended the Code des droits et procedures fiscaux.lsubmitted to Parliament a proposal to modify the legal framework for Corporate Conglomerates.lmade public new accounting standards relating to the consolidation of financial statements and the ltreatment of financial conglomerates.offered for sale, through a competitive and transparent bidding process, all public shares in Union lInternationale de Banque (UIB). The privatization was completed during loan implementation, exceeding the operation's objective.offered for sale, through a competitive and transparent bidding process, all public shares in Banque du lSud.

The enactment of the revised "Code des droits et procedures fiscaux", represented an important step towards re-balancing the relationship between the tax administration and the private sector - and putting it at arms' length to reduce interference and rent-seeking behaviors. Though the new Code was deemed as still leaving scope for improvements, it nonetheless provided for a much more transparent and explicit legal tax framework. The clarification of the tax procedures lifted in particular the most discretionary tools of the tax authorities.

Overall, the authorities still have to define a strategic and visionary definition of Tunisia's private investment climate after the roll-over of the Association Agreement. Absent such an explicit longer-term perspective, private investors - both domestic and foreign - will continue to face uncertainties. The choice at negotiations to build on studies as a tool to pursue the dialogue on contentious issues has not been as successful as expected in that respect, as these studies have not triggered decisive action in the context of the operation. However, they have yielded positive impact as they have fueled the authorities' analysis of the underlying challenges, and modified their stance - as evidenced for instance by their new approach to the import monopolies, which is much less restrictive than previously the case. The level of recognition of the need to bring closer the investment regimes for the on-shore and off-shore sectors has also increased. The main achievement of ECAL III is to have stepped up the momentum to adapt the investment framework to the challenges ahead.

*

The outcome under the financial sector component is considered as highly satisfactory.

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All the measures foreseen in the financial sector component have been implemented. The authorities have:

amended the "Code des procedures civiles et commerciales" and finalized a study on foreclosure of real lestate. On this basis, they have considered that no new legal measure was necessary to accelerate the recovery of loans and the foreclosure of real estate collateral by credit institutions. Tunisian authorities and the Bank have agreed to follow-up on this issue in the context of ECAL IV.adopted a Bank of Tunisia regulation on financial transparency of all corporations with debt exceeding lcertain limits.prepared studies on the development of capital markets and the organization/information systems of the l"Conseil du Marche Financier" (securities regulator).submitted amendments to the Insurance Code to the Chamber of Deputies.lincreased auto insurance rates for civil responsibility.ladopted a medium-term action plan with the objective of eliminating the deficit of the automobile lbranch of the insurance sector.submitted draft legislative amendments with the objective of revising the system of indemnity in lautomobile insurance.presented restructuring scenario for the most troubled insurance companies and launched the related lrestructurings. They have also agreed on corrective plans with the three undercapitalized and under-provisioned insurance companies. These plans are under implementation.put in place the resources necessary for the Comite General des Assurances (insurance supervisor).l

For the banking sector, the regulations adopted by the Central Bank on the transparency of big borrowers, the improved governance structure of the state-owned banks, the new risk diversification requirements should improve the risk-taking behavior of the industry. Once more forcefully enforced, they will contribute to reduce the flow of new non-performing loans. The tax relaxation for provisioning and write-offs of non-performing loans have been used by some banks to improve their level of provisions. The preliminary studies undertaken by the Central Bank on the existing stock of non-performing loans were not as comprehensive and ambitious as initially expected by the Bank. However, they represent a very positive step forward, as the Central Bank has accepted to go in much more details on the financial situation of Tunisian banks than before. The recognition of the challenges ahead now seems better spread and shared, which is likely to help in paving the way for future action. The objective to deepen the authorities' sense of urgency and to prepare the grounds for more decisive action on NPLs is therefore met. In addition, the progress in the privatization of two state-owned banks (supported by ECAL III under the investment climate component) was an important step forward.

For the insurance sector, the measures related to the automobile insurance will assist in restoring the financial sustainability of this branch. The social impact of the increases in the auto insurance rates has been managed through the sequencing of the rates hikes. The restructuring of El Ittihad also was a courageous undertaking by the Government. It managed well in particular the dialogue with the trade unions involved in this insurance company. The insurance supervisor has demonstrated its commitment to more efficiently discharge its supervisory function. It has been provided the needed human and financial resources. The secondary legislation for the new Insurance Code is under preparation, including on reinsurance. A supervision manual has been adopted, improving the modalities of inspection. The enhanced monitoring of one of the important insurance companies after a review of its technical provisions illustrates the proactive stance of the "Comite General des Assurances".

*

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Without underestimating the overall progress and while the outcome under the information and communications technology component was highly satisfactory, the process through which this outcome was reached was unsatisfactory. This ICR therefore rates this component unsatisfactory.

The information and communications technology tranche was cancelled because one of the key conditions was not met.

Most of the measures contemplated under ECAL III were taken. The authorities have:

adopted key implementation regulations for the new Telecommunications Code (decrees on linterconnection, on rights of way, on approval of telecom equipment; "arrete" on numbering).created a national telecommunications agency and a national frequencies agency.ladopted the Law on exchanges and electronic commerce.llaunched an international tender for the granting of a second GSM licence.lmade public a standard interconnection offer.ladopted and made public a liberalization timetable for the period 2002-2006.lselected an investment bank with a view to launching the bidding process for at least one Very Small lAperture Terminal (V-SAT) licence.

Key objectives were met: definition of a medium to long-term ICT strategy, with a liberalization timetable for each sub-component; new regulatory framework in line with international standards and setting up of the related regulatory bodies; opening up of the Telecoms sector to private sector participants (granting of second GSM license, announcement in the Letter of Development Policy of the partial sale of a minority stake in Tunisia Telecom capital, with related improvements in the Tunisia Telecom accounting system).

The number of mobile customers has boomed, with a growth rate of 242 % between 2002 and 2003. The various decreases in access or rental prices are positive steps, even if the scope for further reductions still exists, in particular for international lines. The authorities have prepared an action plan to reduce the price of Internet access and the cost of specialized telecommunications lines has decreased 50 % between 2002 and 2003. Since loan closure, the authorities have in addition successfully completed the bidding of the VSAT license. They have also announced plans to issue data licenses in 2004 and new licenses for fixed lines and UMTS in 2005, confirming their commitment to gradual liberalization.

The ICT tranche was cancelled because the Bank determined that the bidding process for the second GSM licence was not carried out according to the loan condition.

Regarding the bidding process, the issues were the following:

the Bank had reviewed the bidding documentation and commented on it. Neither loan documentation, lnor the minutes of the negotiations, defined though how the quality of the bidding process would be assessed. The Bank considered that the bidding process had inter alia not respected Tunisian standard practice, and had signalled it early in implementation. Though not legally set in loan documentation, the threshold against which the Bank would assess this condition was in practice defined by Bank senior management at the latest in September 2002.

insisting on their understanding of their obligations from the loan agreement – and probably not willing lto set a precedent in terms of disclosure to the institution, the authorities did not provide the minutes of the opening of the bidding offers. Doing so, they largely contributed to reverse the burden of the proof,

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against their interests.

The awarding of the second GSM license is in itself positive, as it shows the Government's willingness to extend private participation in the economy. However, the strong reservations expressed by the authorities to disclose (privately to the Bank) the needed materials evidence a reluctance to shift to a new approach of their role in the economy, where transparency is key. This is all the more important as such a change is also a cornerstone of the development of a Knowledge Economy.

When this ICR was finalized, the EU and the AfDB had not yet taken a final position on the ICT tranche but were leaning towards considering the condition not to be met.

Despite the important concerns surrounding the process to award the second GSM licence, significant steps have been taken by Tunisia in the information technology sector, which without doubt represent an important progress towards liberalization. The change in the overall stance of the Tunisian authorities in this sector is in itself a success, when compared to their reluctance to open it in the late 90s. Transparency-related concerns should not be downplayed. They have a strong bearing on the development of private sector contribution to Tunisia's development economy. Though the approach elicited may have given excessive weight to one single measure as a proxy for transparency improvements, ECAL III was useful in promoting bolder steps on economic governance in Tunisia.

4.3 Net Present Value/Economic rate of return:

Not applicable for adjustment operations

4.4 Financial rate of return:

Not applicable for adjustment operations

4.5 Institutional development impact:

The project yielded a substantial institutional development impact, for two main reasons :

in each component, specific output-based measures were accompanied by enhancements in the linstitutional and regulatory framework:

(i) in the insurance sector: revamping of insurance regulation and creation of supervisory authority; new regulations on financial transparency;

(ii) in the investment climate: interface between Tunisia Trade Net and Systeme Informatique des Douanes (SINDA - customs computer system); reduction of number of administrative authorizations; reorganization of the Competition Authority; improvements in the relationship between the tax authorities and the corporate tax payers;

(iii) in the telecom sector: revamping of the ICT regulatory framework and creation of new regulators.

the operation emphasized the need to allocate the appropriate financial and human resources to the new lauthorities, in particular by the new Insurance supervision authority, the Competition authority and the Telecommunication one. Loan supervision was adequately rigorous on that matter. By giving supervisory and regulatory bodies the needed critical mass as early as possible and by paying attention to their independence/autonomy, the project has clearly helped in fostering their credibility and therefore in increasing institutional development impact.

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5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

The high-level of external uncertainty, following the September 11th, 2001 and the Djerba terrorist attacks in Tunisia, as well as the growing tensions in the region in the lead-up to the Iraq war, have clearly had a strong influence on project implementation, given the direct impact on tourism and thus macro-economic stability. All these elements have of course made macro-management all the more complex and have contributed in delaying the implementation of some of the structural reforms, as the authorities were concerned about the possible impact on the balance of payments if the cost of some of these reforms turned out to be higher than anticipated. This was a particularly important consideration in their reluctance to remove some of the imports' monopolies and to level the fiscal incentives between the on-shore and the off-shore sector.

5.2 Factors generally subject to government control:

Not applicable

5.3 Factors generally subject to implementing agency control:

Not applicable

5.4 Costs and financing:

Not applicable

6. Sustainability

6.1 Rationale for sustainability rating:

The sustainability of the operation is considered to be likely.

The architecture of the reform program supported by ECAL III (in particular the attention paid to the set up and autonomy of regulatory authorities), the clear political commitment of the authorities, the emphasis put on building consensus up-stream provide very strong support to the sustainability of the operation.

Regarding the investment climate component, the strong commitment of Tunisia to a full roll-over of the Association Agreement with the European Union is a very strong indication of sustainability, as there are no other avenues for Tunisia to prepare itself than to build on and deepen the track of reforms supported under ECAL III. This important deadline should support a strong reformist dynamic and act also as a very strong incentive for Tunisia to accelerate its current pace of reform, and therefore to comfort the sustainability of the achievements under ECAL III. The authorities are currently discussing the design of an ECAL IV to further deepen and sustain the reforms supported by ECAL III.

For some components of ECAL III (evolution of the new El Ittihad in its mutuelle form, consolidation of the insurance industry, improved risk-taking behaviors of the banking sector, improved investment climate, increased private participation in the financial sector), strong mobilization of and maintained pressure from

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the supervisors and regulatory agencies will be needed to sustain the progress made so far. This will require the Government to continue to support strong autonomy for them. This will also require that human and financial resources be provided, and that attention continues to be paid to training. In the financial sector, sustainability will also be linked to efforts to promote consolidation of the market and open it to foreign investors and to improve public trust in insurance companies (including by paying more attention to customer satisfaction and dispute resolution). In the telecommunications sector, the authorities' commitment to the liberalization strategy and the steps taken so far to implement it are strong indications of sustainability. Past track-record of the authorities in implementing policy reforms and their public commitments make it very likely that these additional steps to comfort sustainability will be taken as necessary.

6.2 Transition arrangement to regular operations:

On two accounts, the operation can be rated as satisfactory as far as transition to regular operations is concerned:

the agreement with the authorities to continue engagement through subsequent ECALs, under the loverall umbrella of preparing the Tunisian economy to the challenge stemming from the full roll-over of the Association Agreement, put the reform program in a useful longer-term perspective. Such a clear deadline provides a very strong incentive for the authorities to maintain their reformist stance. For instance, issues such as banks' NPLs, important monopolies, promotion of investment will continue to be addressed in forthcoming operations. In parallel, the authorities have requested Bank support in the ICT sector, in the context of their hosting of the World Summit on Information Society in the Fall 2005.

Tunisia has traditionally been a slow and gradual reformer. This pace of reforms (and their depth in some components) has reflected a strong attention from the authorities to build a strong and wider consensus for change. As its main competitors are usually adopting bolder reforms to enhance the attractiveness of their investment climate, Tunisia may need to step up its reform stance in order not to lose grounds. The Bank should continue to factor in this challenge in future dialogue.

as mentioned above, the emphasis in ECAL III on setting right the regulatory and institutional lframework and on ensuring that the implementing institutions are provided with the needed resources should give comfort that the transition to regular operations (i.e outside of Bank support) will be sustainable and smooth. On some instances (competition policy, financial regulation and supervision), the quality of the transition to regular operations will strongly depend on the extent to which the Tunisian Government will endorse and support the decisions made by autonomous/independent authorities or ensure close coordination between the regulatory and supervisory functions (for instance in the insurance sector, as the Government has kept the regulatory powers). The Bank will be assisting Tunisia on these issues in its on-going dialogue on ECAL IV.

7. Bank and Borrower Performance

Bank7.1 Lending:

The Bank's performance during the project preparation was satisfactory.

Based on the preparatory diagnosis work, the teams appear overall as having found the right balance

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between advocacy in the initial discussions on issues considered as instrumental to the impact of the reform agenda (based on the comprehensive prior ESW) and focus during negotiations on key measures and capacity to deliver on the demanding second-generation microeconomic reforms. The objectives of the operation were adequate, in line with the Government's Development Plan and the CAS. They were the result of a very good coordination and dialogue between the three co-financiers, even if the conditions for tranche release were not exactly similar, nor the closing dates. For the Bank and the AfDB, disbursements were conditioned by the achievement of "star conditions", whereas the European Union had to satisfied itself in addition of sufficient progress against all the other measures of the policy matrix.

The absence of upstream definition during the negotiations of how the quality of the GSM awarding process will be assessed (and how the related conditionality should be met) has clearly created an ambiguity on the parameters to be used. Though far from being the only reason, this initial "misunderstanding" obviously played an important negative role in the discussions surrounding the Bank's assessment of the GSM licence bidding process. More attention from the negotiating team, and from senior management involved in negotiations, would probably have put the Bank in a better position during supervision.

The internal organization of the ECAL III team was a difficulty from the outset, as the initial team leader left the Bank between appraisal and negotiation. The Bank proved reactive by quickly designating a new team leader, who was not from the unit leading the operation. Such a setting reflected the cross-cutting nature of the operation. It also created some tensions in terms of division of responsibilities within the team. Better acknowledging these challenges and clarifying up-stream responsibility and accountability lines would have been useful.

7.2 Supervision:

The Bank's supervision is rated satisfactory.

The various supervision missions documented well the progress in implementation, flagging as early as possible the unevenness of the progress in some key areas. In particular, the stalemate on the second GSM issue complicated but did not preclude policy dialogue in the other areas - thereby allowing good overall progress under the operation. The team was reactive to new circumstances and flexible in its assessment of the progress achieved (including in the assessment of important conditions of the policy matrix), without undermining the substance.

Supervision struck a right balance between adopting a flexible approach on some conditions, as evidenced for instance by the investment climate tranche, and keeping a firm stance where differences of approaches were too wide (such as on the ICT liberalization strategy and the strong reluctance of the authorities to commit on a clear liberalization timetable). This balance yielded very positive results, as it helped in focusing the dialogue on the most important issues and in signalling to the authorities what were the most critical issues.

The difficulties on the ICT tranche were flagged early in implementation, and senior management was appropriately involved. This dialogue did not emphasize the risk of having the ICT tranche as a whole cancelled. This may have reflected the Bank's desire to keep as long as possible all options open in the hopes that a satisfactory outcome would be achieved. Such a restraint may however have fueled the Government's expectations and hopes that the Bank would ultimately change its position.

In this respect, it would have probably been more useful for the tasks team to seek much earlier in the process an assessment from the Bank procurement specialists regarding the Government's proposed

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approach to the GSM bidding process. With hindsight, such an up-stream factual review of the bidding process could have probably helped in giving the dialogue a more objective stance, and in flagging to the authorities that their decision to change the bidding process was going to create a conflict with internationally-accepted practices. While there were many verbal and written exchanges between the Bank team and senior Government officials about the adequacy of the bidding process, there was not a clear indication to the authorities at an early stage that this could jeopardize the release of the tranche. Once the bidding took place under the process questioned by the Bank, there was not much the Bank team could do to make the authorities reverse their decision or to be assured that the process was transparent and competitive as required by the conditionality. The team then did the right thing in moving the dialogue between the Bank and the Tunisian Government to the senior management level, and in keeping the responsibility to supervise only the two other tranches.

Cofinanciers felt that they were not sufficiently kept abreast on a regular basis of the Bank’s internal discussions on this issue and of the position it took regarding the bidding process. The Bank could have probably done better in that respect, by setting more systematic lines of communication. At the same time, however, the AfDB faced other important challenges stemming from the situation in Ivory Coast, and restrictions in its ability to communicate and participate in missions. The European Commission was for itself confronted with differences of views between Brussels and its delegation in Tunis, and lagged in designating a counter-part to the Bank's team.

Despite these difficulties, all supervision missions have however been jointly undertaken by the Bank and the European Union, in occasions along with the African Development Bank. This ensured consequently the needed coordination between the co-financiers. This helped in reaching joint assessment of the progress made and in ensuring the consistency of the dialogue with the authorities. The absence of a systematic participation of the AfDB to the joint World Bank/European Union supervision mission has created some gaps, even if the origin of this absence was clearly exogenous to the operation.

7.3 Overall Bank performance:

Bank performance is rated as satisfactory.

The sensitivities surrounding the operation, the negative impact of the differences of internal processes and organization with the African Development Bank and the European Commission created risks which were properly mitigated. The tensions with the authorities triggered as appropriate a strong involvement of senior management.

Borrower7.4 Preparation:

Borrower performance was satisfactory.

It identified well - in particular in the context of the 10th development plan - the crucial areas for reform, and clearly laid out its expectations in terms of Bank support - including through its own vision of the sequence for reform in some of the most sensitive areas. The Government was therefore a very active player in the loan preparation.

7.5 Government implementation performance:

Overall, and on balance, the Government performance is rated satisfactory.

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The rating of Government implementation for this loan can only result from a balanced rating for the ICT tranches and the three other ones. Regarding the ICT tranche, the full bidding documentation was eventually not provided to the Bank. This strong reluctance to provide the associated documentation did not facilitate the dialogue - with the back and forth clearly creating a situation of respective mistrust. For the other components, the Government was behind schedule in the implementation of some key reforms but eventually took them.

The borrower was efficient and responsive in ensuring that the overall vision of the economy underlying ECAL III remained the bottomline when flexibility was needed to adapt to new circumstances. The borrower was in particular very active in maintaining a very strong inter-agency coordination and in focusing each participant in the government on the delivery of its contribution to this broad agenda of reform.

7.6 Implementing Agency:

The performance was satisfactory.

The Government - and namely the Ministry of Cooperation and Economic Development - was the implementing agency. The internal coordination mechanisms it set up during the preparation, negotiation and implementation of this loan proved efficient. The implementing agency appropriately raised the most sensitive issues at political level, and was a good entry point for the Bank on all these matters. It also ensured that the Bank had a very good counter-part team in Tunisia.

7.7 Overall Borrower performance:

The rating for overall government performance is satisfactory, despite the important shortcoming in the ICT component.

8. Lessons Learned

Four main lessons can be drawn from the ECAL III experience:

The Bank should pay more attention to set much clearer and more precise (measurable) loan lconditions. Clarity is needed on the indicators and instruments to measure progress or compliance and avoid unnecessary friction. The Bank should also be clear about the communication channels between partners and about their results frameworks. When the complexity of the reform program is in itself challenging, aligning from the outset as much as possible the internal processes, the conditionalities and the communications gateways of the various partners is crucial to success.

The Bank should better define responsibilities for internal Bank coordination and for lcommunication with the authorities and partners. Notwithstanding the substance, the tensions on the ICT tranche have evidenced some gaps in the Bank’s handling of the communications channels with the authorities. It has been reported that some potentially contradictory messages were passed by different staff members at the same time. The number of Bank units involved in this particular tranche would have deserved much earlier in the process a clearer definition of responsibilities and accountabilities. If the scope of the ECAL-type operations calls for a multi-disciplinary team, the accountability lines (in particular between Bank units) deserve clearer definition in such circumstances.

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Programmatic approaches require a longer time horizon and strengthened monitoring and levaluation tools. The de facto programmatic approach characterizing the ECAL series (and the implicit understanding with the authorities that ECAL III would likely not be the last of the series) should be used to set with the authorities a joint measurement framework, covering the timeframe of the series of operations.

The Bank Group should not be both judge and party. Studies which are part of the loan lconditionalities should not be undertaken by units of the Bank group. This creates on the authorities' side a perception of conflict of interest, whatever the quality of the input.

9. Partner Comments

(a) Borrower/implementing agency:

The Borrower has not provided comments and has not provided its own implementation completion report.

(b) Cofinanciers:

The African Development Bank has not provided comments.

The European Commission has provided comments on this ICR, which it considered as balanced and constructive. Regarding the collaboration between the Bank and the European Commission, it emphasized that the quality of the dialogue has been increasing during implementation, after some initial hesitations, and that the joint nature of the supervision mission had indeed played a very useful role in that respect. Building on these achievements and the lessons drawn fron ECAL III, the European Commission also reinforced its commitment to maintain and even deepen such a coordination.

(c) Other partners (NGOs/private sector):

10. Additional Information

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Annex 1. Key Performance Indicators/Log Frame Matrix

See attached matrix summarizing progress against loan conditionalities

Implementation completion report Annex

MATRIX OF POLICY REFORM MEASURES

Annex 1. Key Performance Indicators Log Frame/Matrix

See attached matrix summarizing progress against loan conditionalities

Implementation completion report Annex

MATRIX OF POLICY REFORM MEASURES

OBJECTIVES 1st TRANCHE MEASURES

(Board Conditions)

FLOATING TRANCHE MEASURES(X indicates disbursement or “star” conditions) STATUS OF

IMPLEMENTATION AND COMMENTS

Private Investment Climate Financial SectorInformation

and Communication

Technology

MACROECONOMIC FRAMEWORK

Maintain a stable macroeconomic framework

1.1. Meet the performance indicators set out in Table 3.

1.2. Meet the performance indicators set out in Table 3. (X) Sound macroeconomic framework maintained, with deviations to the targets acceptable and likely to ensure convergence towards initial targets in the medium term

Strengthen debt management

2.1. Put in place a unified, computerized database on foreign public and private debt.

2.2. Adopt an action plan for active public debt management.

Done, with World Bank report “strategy for public debt management”

Strengthen the tax base and medium to long-term fiscal

3.1. Publish the Decree establishing the National Taxation Council (“Conseil National de la Fiscalité”).

Done

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sustainability

PRIVATE INVESTMENT CLIMATE

Promote private investment

4.1. Agree on terms of reference for the study on promoting private investment.

4.2. Finalize the study and adopt an Action Plan to promote private investment, based on the recommendations of the study. (X)

FIAS study. Follow-up Action plan only partially satisfactory to the Bank, as does not go far enough in leveling the playing field between on-shore and off-shore sectors. Condition substantially met with the understanding of follow-up discussions in the context of ECAL IV.

Improve relations between fiscal authorities and private enterprises

5.1. Submit the Code of Fiscal Rights and Procedures to the Chamber of Deputies.

5.2. Adopt implementation regulations described in the Code of Fiscal Rights and Procedures. (X)

Met, even if improvements necessary to better balance powers of the tax administration. Issue under discussion in the context of ECAL IV.

Simplify procedures for the startup and operation of private enterprises and accelerate the customs clearance process

6.1. Reduce, to a maximum of thirty days after submission of the exporter’s request, delays in the reimbursement of VAT credits.

6.2. Establish the interface between Tunisia Trade Net and Customs SINDA.

Met. Interface established in April 2002.

7.1. Put in place the system of a single contact person (“interlocuteur unique”) to authorize the creation of sole proprietorships.

7.2. Reduce by 60 percent the number of administrative authorizations which were required in 2000 to create private companies.

Met, 80 % of the 5000 prior authorizations identified were repealed or replaced by ex post controls. More than 75 % of related regulations were modified. Website facilitating online company creation was set up.

Improve the transparency and reliability of information on companies

8.1. Submit the draft Law on Corporate Conglomerates to the Chamber of Deputies.

8.2. Adopt implementing regulations for the Company Law. Publish new accounting standards relating to the consolidation of financial statements and the treatment of corporate conglomerates. (X)

Condition substantially met as the Government decided to go beyond initial plan and amend the law to address the identified shortcomings. Proposed amendment to the Law before Parliament.

New accounting

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standards were published, providing progress towards compliance with international standards.

Strengthen institutional framework for competition

9.1. Adopt an action plan to reinforce the institutional framework for competition.

9.2. Implement the action plan on competition. Condition met: Law amended, new institutional setting for the Competition Code. Training and workshops organized in parallel on Competition policy.

Pursue the policy of Government disengagement from the real and financial sectors

10.2. Launch the international bidding processes to sell all shares held by governmental entities in UIB and Banque du Sud. (X)

Done. Transaction completed during loan implementation for the UIB. Transaction soon to be finalized for the Banque du Sud.

11.2 Open at least 25 percent of the capital of one public enterprise to a strategic investor. (X)

Waiver granted. The enterprise to be privatized was selected by the bidding process has not been finalized.

12.2. Agree on a strategy for private participation in infrastructure.

Study realized and recommendations under discussion.

13.2. Carry out a study on import monopolies. (X) Condition substantially met. Study and follow-up Action plan not fully satisfactory. Dialogue continued in the context of ECAL IV.

FINANCIAL SECTOR

Continue achievements in the financial sector

Strengthen governance of public banks

14.1. Adopt, at STB and BNA, the dual-board management structure (“Directoire et Conseil de Surveillance”).

Done

Measures to clean up the portfolios of credit institutions

15.1. Submit to the Chamber of Deputies a draft amendment,

Done

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and strengthen provisioning methods

relating to loan recoveries, to the Code of Civil and Commercial Procedures.

16.1. Extend until 2006 the right of credit institutions to take a tax deduction for loan loss provisions up to 75 percent of taxable income.

.Done

17.2. Based on preliminary results from the implementation of amendments to the Code of Civil and Commercial Procedures, and on the agreed conclusions of the annual consultation with the IMF (Article IV), (i) carry out a study to evaluate the expected effects of the above-referenced new legislative environment, and (ii) introduce, based on this study, any necessary new actions which would accelerate the recovery of bank loans and collateral foreclosure. (X)Study undertaken by the Central Bank. Impact of the revised Code still to be assessed, and study fell short of recommending further action. Issue still under discussion in the context of ECAL IV.

18.1. Include in the draft 2002 Finance Law an amendment to the Corporate Tax Code relaxing the conditions for writing off nonperforming loans by reducing to two years the period during which such loans must have been

Done

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inactive.

Improve the transparency of borrower information available to credit institutions

19.2. Put in place a record of individuals’ credit histories (“Fichier des Crédits aux Particuliers”) at the BCT, in accordance with new statutes.Done even if some of the nine foreseen registers are still under development. Main register in place as of September 2002 and transmission of information by banks begun in December 2002.

20.1. Adopt BCT regulation on auditors’ certification of financial statements and on mandatory rating or stock market listing for all corporations with debt exceeding specified limits.

.Done, even if actual implementation still lagging

Risk diversification

21.1. Adopt BCT regulation establishing a new large risk concentration ratio.

Done

Strengthen the role of the financial market

22.1. Launch studies (i) on the development of capital markets and (ii) on the organization and information systems of the Conseil du Marché Financier (CMF).

22.2. Adopt an implementation plan for the accepted and approved recommendations based on the two studies on the CMF.Study undertaken and transmitted to the CMF. No final Action plan approved by CMF, including due to delays stemming from changes in top management of the CMF.

Strengthening the insurance sector with a view to

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liberalization

Strengthen legal framework and regulatory supervision

23.1. Submit to the Chamber of Deputies a draft law amending the Insurance Code.

Done, still before Parliament.

24.1. Sign the decree separating, at the Direction Générale des Assurances (DGA), the authority of the line ministry [as owner of the state insurance companies] from the supervisory authority.

Done

25.1. Agree on a time-bound Action Plan to strengthen the DGA’s human resources and equipment to exercise its supervisory functions.

25.2. Put in place the human resources and equipment necessary for the DGA to exercise its supervisory functions, in accordance with the Action Plan. (X)Done. New recruitments undertaken and first on-site controls realized. Guidebook for controls prepared with AfDB support.

Eliminate the deficit of the automobile branch (civil responsibility)

26.1. Increase automobile insurance premiums (civil responsibility) by at least 8 percent.

26.2. Increase automobile insurance premiums (civil responsibility) by 3 percent in 2002. Develop a medium-term action plan with the objective of eliminating the deficit of the automobile insurance branch (civil responsibility). (X)Done. Medium term Action plan approved in July 2003, building both on tariffs increases and preventive measures to reduce the occurrence of car accidents.

27.2 Submit to the Chamber of Deputies draft amendments to Laws 60-21 of 11/30/1960 and 62-23

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of 8/30/1962 with the objective of creating a new system of indemnification. (X)Done. Draft Law still before Parliament.

Strengthen the life insurance branch

28.2. Modify the tax treatment and social charges related to group life insurance premiums by putting in place an exemption which is both fiscal and linked to social charges, up to a pre-established ceiling.Done through 2002 Budget Law.

Restructuring of troubled insurance companies

29.1. Present technically acceptable restructuring scenarios, which exclude prior recourse to the resources of the Guarantee Fund, for the most troubled insurance company in the market.

29.2. Launch the restructuring of the most troubled insurance company; develop corrective plans for the insurance companies which are under-capitalized and under-provisioned. (X)Done. El Ittihad insurance company restructured, without recourse to the Guarantee Fund. Change of status (mutuelle) for the new company, under close supervision (potential need going forward to keep track of its commercial practices and market share).

INFORMATION AND COMMUNICATION TECHNOLOGIES

Develop an ICT sectoral policy promoting private participation in this sector

30.2. Prepare and publish a medium-term (2001-2006) liberalization plan for the ICT sector and select an investment bank to support the

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administration in granting at least one data license. (X)Done. Decision to have recourse to en expert instead of an investment bank to prepare the granting of one data license.

Strengthen the legal and regulatory framework for ICT

31.1. Adopt implementation regulations for the new Telecommunications Code:

(i) Decree on interconnection;(ii) Decree on rights of way;(iii) Decree on the approval of telecom equipment;(iv) “Arrêté” on numbering.

Done.

32.1. Create a National Telecommunications Agency [“INT”] (independent organization) and a National Frequencies Agency (under the authority of the Ministry of Communication Technologies). Submit to lenders the draft amendment to the Telecommunications Code concerning the status and autonomy of INT.

32.2. Submit to the Chamber of Deputies a draft law amending the Telecommunications Code concerning the status and autonomy of INT. (X)Done

33.1. Adopt the Law concerning exchanges and electronic commerce. Adopt implementation regulations for the Law concerning exchanges and electronic commerce, including the clauses on the

Done

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protection of personal data.

34.1 Publish a decree establishing the financial and administrative organization and the operating rules for the national agency in charge of providing electronic certification licenses.

Done

Introduce effective competition in telecommunications.

35.1. Prepare terms and conditions for providers of electronic certification, and publish an “arrêté” indicating the technical specifications for electronic certificates.

Done

36.1. Launch (i) an international bidding process for the granting of a second GSM license and (ii) a consultation for the selection of an investment bank of international repute to support the administration in the context of this sales operation.

36.2. Grant a second GSM license through a competitive and transparent bidding process; publish an interconnection offer by Tunisie Telecom, referencing international standards and approved by INT. (X)Second License granted in April 2002. Condition not met (leading to tranche cancellation) as the Bank was not satisfied of the transparency of the bidding process.

Interconnection offer published early 2002.

37.1. Prepare terms of reference for the selection of a consulting firm in charge of putting in place a cost accounting system at Tunisie Telecom.

37.2. Select, following an international bidding process, the consulting firm in charge of putting in place a cost accounting system at Tunisie Telecom.Done

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Annex 2. Project Costs and Financing

Project costs and financing are not directly applicable to adjustment operations. It is difficult to track the net cost to budget of the various policy measures supported by the operation. The total amount of the operation was equivalent USD 252.5 millions. The first tranche amounted to USD 130 millions and each of the floating tranch to USD 40 millions. The capitalized front-end fee was USD 2,5 millions.

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Annex 3. Economic Costs and Benefits

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty

(e.g. 2 Economists, 1 FMS, etc.)Month/Year Count Specialty

ImplementationProgress

DevelopmentObjective

Identification/Preparation10/15/2000 10 PSD SPEC./TTL (1);

FINANCIAL SPECIALIST (1)S S

Appraisal/Negotiation4/23/2001 PSD SPEC./TTL (1); S S

Supervision

03/14/2002 3 PSD SPEC./TTL (1); INSURANCE (1); FINANCIAL SPECIALIST (1)

S S

07/26/2002 2 PSD SPEC. / TTL (1); INSURANCE (1)

S S

12/27/2002 2 PSD SPEC./TTL (1); SECTOR MGR/MISSION LDR (1)

S S

05/15/2003 3 PSD SPECIALIST (1); TEAM LEADER (1); FINANCIAL/INSURANCE (1)

S S

10/09/2003 1 PSD SPECIALIST (1) S S

ICR03/16/2004 1 PSD/FINANCIAL

SPECIALIST

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)

Identification/Preparation 675 (1)Appraisal/NegotiationSupervision 273ICR 25Total 973 (2)

(1) this covers the combined expenses from identification to Board approval(2) this is Bank budget direct cost. Supervision amount does not include CTF expenses totalling about $ 32,000.

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA

SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA

Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Lending HS S U HUSupervision HS S U HUOverall HS S U HU

6.2 Borrower performance Rating

Preparation HS S U HUGovernment implementation performance HS S U HUImplementation agency performance HS S U HUOverall HS S U HU

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Annex 7. List of Supporting Documents

1. Memorandum and Recommandation of the President, Republic of Tunisia, Third Economic Competitiveness Adjustment Loan. World Bank Report P-7489-TUN dated November 27, 2001. 2. Tranche release memo.3. Project supervision files.

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