BMI View: An improving political picture combined with an uptick in demand for infrastructure should put Tunisia in a decent position as it seeks to compete for private capital for its public works projects. The country is drafting a public-private partnership framework as it seeks to develop its infrastructure to support economic growth. Whilst there remains some political uncertainty, with elections due to take place later on in 2014, we believe that an uptick in demand combined with the number of Middle East and Asian investors eyeing up the country, should see it experience a pickup in foreign direct investment following elections.
Following the revolution in 2011, Tunisia's political outlook has improved over early 2014. The passing of a new constitution on January 24 was a landmark event, which followed the appointment of Mehdi Jomaa as acting Prime Minister on January 9. With a new cabinet in place, our Country Risk team remains relatively optimistic towards the political outlook of Tunisia. However, given that elections are only expected to take place in late 2014 (an exact date has yet to be set), this means that political instability will remain in place over the immediate future - we only expect a gradual stabilisation of the country's political landscape after the elections have taken place.
|FDI Revival To Follow Political Stability|
|Foreign Direct Investment, TNDmn|
In our opinion, this lack of political stability over the near-term means that the major infrastructure projects in Tunisia will likely remain on hold until after the elections. Ahead of the elections, we expect private investors to take a wait and see approach before committing major funds to develop Tunisia's infrastructure sector. This, combined with the government's steep budget deficit, means that investment from the public and private sector into infrastructure is likely to be limited over the near-term.
As such, we believe that much of the capital for infrastructure investment over the near-term will continue to come from development bank institutions. Since the revolution, the majority of infrastructure investment has been funded by development banks such as the Japan International Cooperation Agency, African Development Bank, Islamic Development Bank and KfW Development Bank. These institutions are providing Tunisia with subsidised capital to maintain and upgrade its infrastructure. Indeed, in August 2013, the KfW Development Bank provided a 15-year EUR60mn loan for a seawater desalination plant on Djerba Island. The interest rate on the loan was just 3.8%, with a grace period of five years. However, we highlight that these loans from the development banks are relatively small.
|Limited Domestic Capital For Construction|
|Construction Gross Value Added And Budget Balance|
PPP On The Horizon
Over the medium term, we see scope for an uptick in private investment. Our core view for continued improvements in political stability bodes well for the country's goal of employing the public-private partnership (PPP) model in order to develop infrastructure as a stable political outlook will prove essential if Tunisia is to compete for private capital. Already, political and technical support for the model is in place. During his role as Minister of Industry, Jomaa was a supporter of focusing on PPPs to develop infrastructure projects. A draft PPP law was presented in May 2013 by economic affairs minister Ridha Saiidi. The drive to launch a PPP programme has been supported by the OECD, with a US$3.85mn grant awarded to assist in the implementation of the PPP law.
A list of projects was released in 2013. The list highlighted priority investment areas, which include a proposal to develop two projects as PPPs, both at the Port of Rades. These projects appear to have stalled in the feasibility study and tendering phase, whilst many other major projects on the list remain in the study and financing phase. We therefore do not expect substantial progress on these projects until after the elections, but highlight that the detailed plan for priority projects is an encouraging sign for these projects to take off once more capital is secured.
|Project Name||Value, US$mn||Status||Timeframe|
|Tunis - Kasserine railway renovation and modernisation||107.3||Study||2012-2016|
|Sousse, Kairouan and Kasserine railway rehabilitation||150||Study||5 years|
|Bousalem - Algerian border highway||758.5||Study|
|Road improvement program (phase 2)||477||Study/tender|
|Exterior ring road, Greater Tunis||252.8||Study|
|Northern waters transfer project, Cap Bon, Sahel and Sfax||103.7||Study|
|Sraouertane phosphate mine and associated railway and port||2500||Study|
|Khalled dam, Beja||37.9||Study|
|Port of Rades expansion PPP, including specialised container terminals||40||Tender was due 2013||3 years|
|Rehabilitation of the central loop of the metro transportation, Tunis||48||Tender was due 2013||30 months|
|Metro train fleet replacement||107||Seeking financing, tender was due 2013|
|Extension and rehabilitation of the wastewater treatment plant, southern Méliane||28.4||Study completed, tender due||3 years|
|Port of Rades, infrastructure surrounding the logistics platform, PPP||140||Tender was due 2013|
|Water network facilities, Bizerte||77.1||Study completed||2014-2018|
|Tunis - Kairouan - Sidi Bouzid - Kasserine - Gafsa, highway||1734.5||Study|
|National Engineering School of Gafsa||12.6||Study||5 years|
|Source: Tunisia Foreign Investment Promotion Agency, Tunisia Big Projects 2013|
On the demand side, a pickup in industrial and commercial activity could make projects more attractive to potential investors. Tunisia's main economic drivers include the tourism industry, and exports of manufactured goods to Europe. Following the steep drop off during, and immediately after, the revolution, usage of infrastructure has been steadily increasing. Increased traffic has been reported at airports and ports, which is due to greater demand from tourism, business and industrial activities. Tourist arrivals increased 22.6% year-on-year (y-o-y) in the first two months of 2014, compared to the same period in 2013. Meanwhile, passengers travelling on Tunisair increase 10% y-o-y in February 2014, while additional direct flights serving the Tunis-Carthage route have been launched. Increased cargo traffic has also been reported, with activity at commercial ports increasing 3% in 2013.
|Decent Foundations To Build Demand|
|Tunisia - Competitiveness Of Infrastructure|
Potential investors are beginning to line up, especially from the Middle East and Asia. Initial pledges of aid from countries like Japan and Kuwait are likely to be followed by investors. In March 2013, Japan announced US$480mn in funding to support the country's transition to democracy, including capital for energy and infrastructure projects. This is likely to open the door for Japanese companies. In addition, Kuwait has announced plans to boost investment in the country. This investment will not only be carried out through the Kuwait Fund for Arab Economic Development, but also through private companies, such as the Kharafi Group.