Senegal - Second Railway Project

s_CIRCULATtNG COPtsi.REST CIRCULATING ~~~~ Report No. P-1084 TO BE RETURNED TO REPORTS DESK FILE COPY This report is for of ficial use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REGIE DES CHEMINS DE FER DU SENEGAL WITH THE GUARANTEE OF THE REPUBLIC OF SENEGAL AND A CREDIT TO THE REPUBLIC OF SENEGAL FOR THE SECOND RAILWAY PROJECT June 1, 1972   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REGIE DES CHEMINS DE PER DU SENEGAL WITH THE GUARANTEE OF THE REPUBLIC OF SENEGAL AND A CREDIT TO THE REPUBLIC OF SENEGAL FOR THE SECOND RAILWAY PROJECT t. I submit the following report and recommendation on a proposed loan to the Regie des Chemins de Per du Senegal (Regie) with the guarantee of the Republic of Senegal for the equivalent of US$6.4 million and a credit to the Republic of Senegal for the equivalent of US$3.2 million to help finance the second railway project. The loan would have a term of 25 years including 5 years of grace, with interest at 7-1/4 percent per annum. The credit would be on standard IDA terms. The proceeds of the credit would be relent to the Regie for 25 years, including 5 years of grace, with interest at 7-1/4 per- cent per annum. The French Caisse Centrale de Cooperation Economique (Caisse Centrale) and the Fonds d'Aide et de Cooperation (FAC) would participate in financing the project to the extent of US$1.3 million equivalent. PART I: THE ECONOMY 2. Senegal covers an area of 77,000 square miles, and has a population of about 4 million. The climate is sahelian in the north, gradually becoming Guinean towards the south. Soils are generally light and poor. Agricultural potential is limited by low rainfall, distributed over only three to four months per year. In the northern half of the country, where the bulk of the population lives, millet and groundnuts are about the only crops that can be grown without irrigation. Irrigation is possible along the Senegal River but would be very expensive. In addition, there is some potential for live- stock raising in most parts of the country. In the south and southeast, the rural potential is somewhat greater (rice, cotton, fruit), but lack of feeder roads and other infrastructure has so far hampered development there. Senegal developed its industrial sector, which now accounts for about 16 percent of GDP, earlier than other West African countries. It is generally agreed that the industrial labor force is one of the best in Africa. 3. A report on "The Current Economic Position and Prospects of Senegal" (AW-15a) was distributed to the Executive Directors on June 10, 1970. A Bank economic mission visited Senegal in February-March 1972 to assess the country's current economic situation and prospects. The following paragraphs reflect the preliminary findings of that mission. Country data are given in Annex II and a map in Annex IV.  -2- Past Developments 4. During the 1960's, the first decade after independence, GDP growth (2.5 percent per annum) hardly exceeded population growth; per capita income stagnated at around $200. Two factors were responsible for this situation. 5. First, with independence Senegal lost its privileged position as the center of French West Africa. This resulted in the loss of important ex- port markets for manufactures, as domestic industries developed in other West African countries. At the same time, demand for services and locally produced goods was depressed, following the departure of most French civil and military personnel. Stagnation in agriculture further accentuated the already difficult internal market situation for manufactured products. Senegal has not yet been able to offset the loss of markets in Africa by increasing exports to non-African countries. A number of obstacles made the transition from African-oriented to world-oriented exports difficult: (i) high tariff barriers and resulting inefficiencies; (ii) limited size of the local market which does not permit economies of scale; and (iii) mono- polistic organization of production resulting in high profit margins and costs. 6. Secondly, the difficult process of adjusting to the new political, economic and administrative dimensions was seriously jeopardized in the sec- ond half of the 1960's when groundnut production fell by 50 percent due to a combination of bad weather and falling export prices. This was critical in an economy in which groundnuts account for almost half of agricultural output and 15 percent of GDP. At the same time, production of major food- crops stagnated at a level insufficient to cover local demand. 7. In these circumstances, Government finances deteriorated through- out most of the 1960's. Public savings slowly but continuously declined to virtually zero by 1968/69. Revenues stagnated, in spite of a substantial tax effort, because of the decline in imports, the most important tax base. Thus, keeping the tax ratio at roughly 20 percent of GDP was quite an achievement. But current expenditures grew, albeit moderately, at some 3 to 4 percent annually thus eroding the current account surplus. 8. After 1968/69 better tax collection and substantial surpluses of the groundnut stabilization fund following rising world market prices led to a recovery of public savings in 1970/71, when they represented some 7 percent of current revenues. Yet locally financed public investment con- tinued, as it had throughout the 1960's, to exceed savings by a wide margin, resulting in a complete depletion of Treasury deposits by mid-1971. Rising deficits of public enterprises have in recent years contributed heavily to the Treasury's liquidity squeeze. This is particularly constraining within the framework of the West African Monetary Union where the possibilities of credit expansion are very limited. 9. Senegal has been benefitting from a high inflow of foreign aid, mostly on concessionary terms. About 65 percent of the public capital pro- gram has been financed by foreign aid which averaged US$25 million per year  -3- between 1966 and 1970. This corresponds to US$6.5 per capita annually, main- ly financed by the European Economic Community (40 percent) and France (30 percent). The World Bank Group and Germany contributed, respectively, 13 and 10 percent of the total. Foreign aid concentrated on infrastructure and on directly productive projects in the rural sector. Of importance was tech- nical assistance, mainly in education, which amounted to US$29 million an- nually. Seventy-five percent of this was financed by the French Government. 10. An important constraint to more rapid economic growth has been the inadequacy of Government planning and project preparation. The Plan has re- mained a list of projects and pre-projects prepared by the technical minis- tries, and the Secretariat for Planning suffers from a shortage of qualified personnel at all levels. A team of four experts from the UN is expected to join the Secretariat for Planning in the near future to help draw up the Fourth Plan (1973/74-1976/77). This reinforcement will still leave some critical positions understaffed. Prospects 11. Prospects for the coming years are brighter. Following a 30 per- cent producer price increase, other supporting Government measures (e.g. a planting bonus to farmers, cancellation of old debt) as well as more favor- able weather, groundnut production increased by about 60 percent in 1971/72. This has been instrumental in triggering economic recovery and creating for the first time in several years an atmosphere of optimism in Senegal. At the same time, several projects, mainly for the production of rice, cotton, and more recently, vegetables have made good progress, and will allow Senegal in the longer term to broaden its agricultural base. It is estimated that rice production could grow at more than 15 percent a year in the next six years while cotton production might well double between 1971/72 and 1974/75. The livestock sector has already started to recover from the 1968 drought; pros- pects for meat exports through the introduction of feeding ranches are en- couraging. 12. In spite of the obstacles described in paragraph 5, industrial pro- duction increased by 6 percent in 1970 and by 11 percent in 1971 (excluding groundnut processing) mainly in textile, shoes, and building material. This trend is expected to continue as long as purchasing power remains high follow- ing the recovery of groundnuts. Moreover, two sectors, fishing and tourism, have greatly helped to offset the 1968-1970 recession in agriculture and are expected to continue to expand rapidly in the coming years. Fish production has increased by 30 percent in 1971, while expansion of tourism was hampered by the lack of adequate hotels. This should change during the coming season, when hotel capacity will increase by 75 percent. 13. However, diversification will at best be a lengthy process. For many years to come Senegal's economic fortunes will continue to be closely associated with groundnuts and the vagaries of weather and world market prices. The immediate outlook for groundnuts seems bright. A bumper crop is expected for 1972/73 and possibly also for 1973/74, which may reach the 1965 record production of 1.1 million tons. Medium and longer term prospects,  -4- however, depend largely on the future trend in world market prices. Since the beginning of 1971, groundnut prices have fallen by some 16 percent, but are still some 50 percent above the 1967 level. Even if world market prices further decline, it should be noted that present producer prices are suffi- ciently low to absorb another 15 percent decline without eliminating govern- ment revenues from groundnut exports. Thus, except in the case of a very substantial decline in groundnut prices, GDP growth over the next five years should be much higher than'over the last decade, possibly reaching as much as 4-5 percent per year. 14. Such acceleration of economic growth is essential to help-improve public finances." Since tax rates are already relatively high, the urgently needed revenue increases will have to come from a combination of better col- lection and economic growth. In addition, the Government is determined,to keep the necessary expansion of current expenditures to a minimum. Probably the most promising way to generate more resources for investment within the . public sector is to improve the financial performance of public enterprises,' thus eliminating their substantial drain on the Treasury in recent years. The combination of these measures ought to result in some increases in public savings. However, no spectacular results can be expected in the short-run and Senegal will remain heavily dependent on foreign aid. 15.- It is estimated that the resource gap will increase rapidly to reach an annual average of over US$50 million for the period 1971-1975 as against US$33 million in 1966-70. France and the EEC-are expected to con- tinue to finance about one half of the resource gap, and the share of the Bank Group would increase from 9 percent in 1966-70 to about 20 percent in 1971-1975. 16. The terms of foreign aid have hardened substantially; the propor- tion of grant aid declined from 85 percent in 1965/66 to 65 percent in 1968- 1970 with a low of 51 percent in 1970. In view of the difficult financial situation of Senegal, it is crucial that this proportion does not further deteriorate and that foreign 'aid makes an appreciable contribution to local cost financing. 17. The need for foreign aid to remain on concessionary terms is under- lined by the balance of payments outlook. During 1971, the foreign trade situation deteriorated markedly with exports covering hardly 55 percent of imports (as compared to,70-80 percent during the last five years). This trend was the result of very special circumstances: an exceptionally low groundnut crop in 1970; high'1971 imports, in anticipation of the good 1971 crop; extra- ordinarily high foreign aid disbursements. These circumstances are not ex- pected to be repeated during the coming years. Nevertheless, even discount- ing a sharp fall in groundnut prices, balance of payments projections in- dicate little--if any--surplus over the coming years, while falling groundnut prices would no doubt increase balance of payments deficits. Thus, while ' Senegal should obtain its foreign assistance on,'DA terms, the present and foreseeable low'foreign debt service ratio (4-5 percent of exports) indicates that there is some' limited margin to borrow on Bank terms.  -5- PART II: BANK GROUP OPERATIONS 18. Bank Group lending for projects in Senegal is planned to quadruple from US$13 million in 1964-68 to US$55 million in 1969-73. As a result, the Bank Group has now become one of the major lenders to Senegal providing roughly one fifth of official external capital requirements. 19. The proposed loan and credit would be the ninth Bank Group opera- tion in Senegal. Total lending to date has been US$28.1 million (net of cancellations) in the form of six credits and two loans. Disbursements have proceeded satisfactorily except in the case of the first agricultural credit (paragraphs 6, 21) and the first railway credit (paragraphs 39-42). It is expected that the agricultural credit will be fully disbursed by December 1972, and the first railway project completed in June 1972. Annex I con- tains a summary statement of Bank Group operations as of April 30, 1972. 20. In line with the Government's development objectives, Bank Group assistance to Senegal will continue to consist in helping the Government in (a) broadening and strengthening the economic base; and (b) improving the utilization of human resources and strengthening public institutions. 21. Regarding the first objective, past lending in agriculture has been aimed mainly at improving the productivity and efficiency of groundnut produc- tion and marketing as well as extending production to new crops and new re- gions. The First Agricultural Credit (FY1969) suffered at first from the sharp fall in groundnut production. As a result, disbursements were slow. However, the Bank's continuous presence and supervision helped the Govern- ment to take strong action in 1970, which was one of the factors leading to the recent recovery of production. Since the credit is expected to be fully disbursed by the end of 1972 and in order to complete the institutional im- provements which it began, a follow-up operation is being prepared. Two credits were approved during FY1971 (Casamance rice, Terres Neuves) and another (Delta rice, FY1973), which will help to diversify agricultural production, has already been appraised. Preparation of further projects for vegetables and livestock development will be initiated soon. 22. While agricultural diversification is thus progressing, it is not likely to provide the full answer to Senegal's development problems over the years to come. Diversification of manufacturing production is a possibility. But for the reasons stated in paragraph 5, it has not yet made much headway. The Bank Group's only involvement has been IFC participation in a fertilizer plant near Dakar (Societe Industrielle d'Engrais au Senegal). The Government has recently submitted to the Bank a proposal for a supertanker repair pro- ject (total cost about US$90 million) which may provide an opportunity to take advantage of Dakar's location and existing industrial infrastructure. The proposal is being studied. Probably more important in the near term than manufacturing are possibilities in tourism. Major emphasis will be given to tourism in the Government's Fourth Plan (1973-1977). So far, the only Bank involvement in this sector is the recently appraised Dakar airport  -6- project (FY1973), the justification of which will depend in part on increased tourism. However, further projects in this sector suitable for Bank Group financing can be, expected as the project content of the Fourth Plan is firmed up. 23. As to the second objective, the Bank Group is assisting the Govern- ment in several ways. First, during FY1971 a credit was approved for techni- cal and agricultural education which will soon be followed by a larger general education project. A substantial education component is also attached to the Dakar site and services project, which is to be presented to the Executive Directors at the end of June. Second, several of our past and proposed oper- ations are directly aimed at improving the financial, technical and managerial viability of public, entities. The first railway credit of 1966 falls into this category.. By increasing and modernizing the capacity of the Regie des Chemins de Fer du Senegal (Regie), the project was designed to put the Regie on a sound technical and financial footing. As described in paragraphs 39-41, this objective has not yet been fully met. However, the transforming of the railway into a viable institution remains an urgent task, given its role as the most important freight carrier in Senegal and as a vital link for land- locked Mali. The proposed second railway project is expected to provide the basis for this rehabilitation. A further example is the first port project approved in 1967 which has been instrumental in transforming the Dakar Port Authority into a technically and financially successful operation and an im- portant contributor to public savings. Similarly, the recently appraised telecommunications project (FY1973) will substantially increase capacity and thus provide the basis for a more efficient and profitable operation of the telecommunication authority. Bank Group involvement in the site and services project is also, but not exclusively, motivated by the need to utilize scarce resources more efficiently. It will allow the Government to provide housing infrastructure and facilities at much lower cost-and satisfy the needs of a much larger segment of total urban population than under traditional housing programs. 24. The tanker repair project is a good example of the advisory role the Bank can assume in Senegal. The Government asked the Bank to take the lead among the potential lenders in assessing the economic and financial viability of this- project based on preliminary studies and to suggest the further studies needed to complete the preparation of the project. Given the complexity and the novelty of the project, the Bank is hiring consul- tants to assist Bank staff in this work. Another area where the Government has asked for Bank advice is with regard to the institutional arrangements for the power sector. The Government is close to reaching agreement with the French company on a compensated takeover which will pave the way for the.Bank to go ahead with a proposed power loan (FY1973). Finally, our discussions with the Government have also been most fruitful on general policy matters.  -7- PART III: THE TRANSPORT SECTOR 25. Dakar is the natural point of entry for goods destined for Mali and Mauritania and roughly one third of the freight carried by the railways represents transit traffic to these countries. At the same time Dakar is an important stopover point in the South Atlantic air traffic and is on major international shipping routes. 26. Accordingly, transport has consistently ranked high among the Govern- ment's investment priorities since independence. The First, Second and Third Four-Year Plans allocated roughly 25, 30 and 15 percent respectively of the public capital program to transport. Roads accounted for roughly half of the total, railways for one fifth, the rest being split between ports and airports. As a result, today Senegal possesses a relatively well-developed transport system including some 4,000 km of all-weather roads, 1,200 km of railways, and a modern deep-water port and airport at Dakar. 27. Thus, while a great deal of emphasis has already been given to transport, four issues remain to be resolved if it is to play its proper role in Senegal's development. 28. First, the neglect of feeder roads is becoming a serious handicap to agricultural development. This is particularly pressing in the Casamance and Senegal Oriental as the "frontier" of agricultural development is expand- ing into these regions. The Bank's Terres Neuves I and forthcoming second highway projects contain substantial feeder road elements for those areas, but more will be needed. 29. Secondly, there is the general need to provide transport infrastruc- ture for the opening-up of the eastern and southeastern provinces. Fertile land is available in these regions and could help to relieve the groundnut basin around Dakar, where population pressure is high and overcropping occurs. Some spontaneous and unorganized migration is already taking place towards these provinces. The Terres Neuves I project is providing the framework for orderly migration. The proposed railway project, on the other hand, would substantially increase the capacity of the main transport link with the Dakar area. 30. Third, with groundnut traffic running at only half its normal level, transport capacity in the recent past has just been adequate. However, with the recent sharp increase in groundnut production serious delays have already occurred. Since, at the same time, the road transport fleet has not been ade- quately replaced and is now partly obsolete, Senegal is likely to face serious transport bottlenecks, unless an important effort is made in the coming de- cade to modernize transport services and improve their efficiency, and to further upgrade the transport infrastructure.  -8- 31. Fourth, road/rail competition is not a major issue in Senegal as long as 80 percent of the Regie's traffic is in bulk freight more econom- ically shipped by rail, or captive international traffic. But, there are other transport coordination problems such as pricing, entry restric- tions and investment planning which deserve more attention. The Government agreed to (a) employ consultants to advise on these matters and (b) strengthen the institutional framework for decision-making on transport coordination. PART IV: THE PROJECT 32. A report entitled "Appraisal of a Second Railway Project Senegal" (PTR-112) is being circulated separately to Executive Directors. A Credit and Project Summary is provided at Annex III. The Project 33. The objective of the, proposed project, which will cover the bulk of the railways' investment needs foreseen for the Fourth Four-Year Plan period (1973/74-1976/77), is to carry on the physical rehabilitation of the Regie's equipment and improve its management, operations and finances. It would be the second Bank Group lending operation with the Regie since Senegal's independence; the first made in 1966 amounted to US$9 million equivalent. Prior to independence, a Bank loan of US$7.5 million for die- selization was made to the Regie's predecessor, the Office Central des Chemins de Fer d'Outre-Mer. Negotiattons took place in Washington from May 10-15, 1972. The Senegalese Delegation was headed by the Minister of Planning, Mr. Ousmane Seck. 34. The project consists of the following items: (a). Renewal of 175 kilometers of track as part of the ongoing program to renew the main line between Dakar and the Mali border; about 243 kilometers have been already renewed and after completion of this project item, 226 kilometers will remain for renewal. This item represents 71 percent of total project cost. (b) Rehabilitation of, and equipment for, the railway's work- shops in Thies. The workshop layout is inefficient, re- quiring removal of some existing buildings, construction of some new buildings,. installation of proper handling equipment and replacement of over-age machine tools (14 percent of total cost). (c) Modernization of rolling stock (freight cars), by the in- stallation of modern roller bearing axle boxes on 50 percent of the bogie freight car stock. The use of roller bearings will reduce maintenance and personnel costs, frequency of axle-box heating and will allow higher speeds (2 percent of total cost).  -9- (d) Six 1,200 horsepower diesel locomotives which are being financed jointly with French suppliers' credit and a grant from PAC (10 percent of the total cost). (e) Provision for training and technical assistance (1) at man- agement level to improve train operation; (ii) to improve workshop management and to implement a new freight tariff; and (iii) to the Government for transport coordination to help train personnel, carry out investment planning, review the regulatory system and other relevant systems bearing on the transportation industry (4 percent of total cost). Cost and' Financing 35. The total cost of the project net of taxes is CFAF 3,169 million (US$12.3 million) with a foreign exchange component of CFAF 1,742 million (US$6.8 million equivalent). The proposed IDA credit of US$3.2 million equivalent and Bank loan of US$6.4 million equivalent would finance 77 per- cent of the cost of the project. The remainder would be financed as fol- lows: a credit from Caisse Centrale (US$0.7 million or 6 percent), a grant from FAC (US$0.6 million or 5 percent), and the Regie's own resources (US$1.5 million or 12 percent). The Bank Group operation would finance 83 percent of foreign exchange costs and 74 percent of its local costs. The proposed cost sharing reflects Senegal's limited domestic resources and the consequent need for foreign lenders to finance a substantial part of total costs. 36. While the loan would be made directly to the Regie, the proceeds of the credit would be relent to the Regie at 7-1/4 percent annual interest to be repaid in 25, years, including a grace period of five years. Project Entity 37. The Regie was created as a state-owned autonomous entity in August 1960 out of the part of the former Dakar-Niger Railways situated in the Re- public of Senegal. Dakar-Niger Railways, serving what has now become Senegal and Mali, was run by a single management with headquarters at Thies, Senegal. The Regie, while continuing to maintain its headquarters and workshops at Thies, inherited a share of the properties and net assets of the former Dakar- Niger Railways, representing 62 percent of the total. The remaining 38 per- cent became the Mali Railway, operating under independent control and manage- ment. 38. The Regie is under the authority of the Minister of Public Works, Urbanism and Transport and is administered by a Board consisting of 18 mem- bers, including the Chairman nominated by the Minister of Transport. Except for the operating and capital budgets which, in addition to review and en- dorsement by the Board, require specific approval of the Ministers of Trans- port and Finance, the Board has overall authority for railway administration.  - 10 - Performance under the First'Railway-Project '(Credit 96-SE) 39. The 1966 project involved the relaying of track, the doubling of the Dakar-Thies line, the purchase of locomotives, rolling stock, spare parts and equipment, and the provision of'consulting services. All project items have now been delivered, with the exception of a few spare parts for motive power, and material for the renewal'of 39 additional kilometers of track, financed with savings under the credit, for which contracts have been placed. The project is due to be completed in June 1972, about three years behind the original schedule., 40. The financial performance of the Regie during the first project fell considerably short of expectations, principally because traffic did not increase as expected at the time of appraisal. Thus freight carried by the Regie increased from 1.67 million tons in 1965/66 to 1.78 million tons. in 1970/71, .rather"than to 2.76 million tons as projected. As a result, gross annual revenues stayed more or less constant at about CFAF 2.5 mil- lion instead of increasing to CFAF 3.7'million. The'decline in Senegal's groundnut production from-1 million tons in 1965 to 400,000 tons in 1970 meant that the allocation of 400,000 tons'of'-groundnuts to the Regie,'as agreed at negotiations, was impossible. 'At the same time, the Regie's ef- fort- to cut personnel costs':was largely offset by an increase in its mate- rial costs. As a,result, the-Regie is still operating at a loss as compared to a target rate of return for 1969/70 of 4 percent on investment' as agreed in 1966. 41. The shortfalls in the Regie's performance under Credit No. 96-SE must be viewed in the light of the Senegalese and Malian economies' failure to move ahead as rapidly as expected. Thus the recent economic recovery in both countries will make it easier to rehabilitate the railways, which re- mains an urgent task, given the Regie's role as the most important freight carrier' in Senegal and as a vital link for the land-locked economy'of Mali. 42. But more will be needed to achieve this objective. Based on the experiences under the first project,' a plan of action has been formulated providing the Regie with the operational, financial and technical guidelines to improve its efficiency. This plan, to which the Government and the Regie, agreed during negotiations, defines measures 'to reduce personnel costs, in- crease tariffs and eliminate uneconomic lines (Schedule 4 of Credit Agree- ment). Another essential feature of the second project would be to provide a much larger element of technical assistance to help train Senegalese staff at all technical and managerial levels. The second project-projects an operating. surplus (before'interest payments) in 1975/76 equivalent to a rate of return on net fixed assets of 2 percent. Project Execution, 43. The Regie would be responsible for executing the project. With the help of the technical assistance in management, the Regie will be able to carry out the project. Its track renewal personnel are now well trained and perform satisfactory work, and the workshop modernization will have the  benefit of technical assistance. The planning unit, established in 1970, is operating satisfactorily; the project will provide assistance in imple- menting a new freight tariff structure. While the Regie was not able to meet all the targets agreed in 1966 for reducing the excessive numbers of staff and increasing productivity, considerable progress has been made. Thus, since 1965, the number of employees has decreased by 18 percent. On the other hand, the Regie, which inherited high personnel costs from pre- independence days, was not successful in preventing increases in wages and salaries paid to its employees until the wages and salaries paid to government employees reached the same level, as agreed with the Association in 1966. As new targets, the Government has agreed to the reduction of the ratio of direct personnel expenditures to total working expenditures from 71 percent in 1969/ 70 to 64 percent by 1976/77. Financial Position 44. For the period 1971-75, freight traffic is expected to increase by about 4 percent annually, that is, from 1.78 million tons in 1970/71 to 2.24 million tons in 1975/76. The biggest rise is expected in groundnut traffic which should more than double to 250,000 tons in 1975/76 in view of the Gov- errment's market-oriented agricultural policy, which in 1971/72 has already resulted in a doubling of groundnut output, and the more flexible pricing and more aggressive marketing policies to be adopted by the Regie. Only a slight increase (some 2 percent over five years) is expected in passenger traffic. 45. An important measure to Lncrease freight traffic is the simplifica- tion of the tariff structure. First, a more flexible and competitive pricing policy for groundnut traffic will be adopted. Second, selective rate adjust- ments, particularly for phosphates, are designed to achieve, together with the first measure, an increase in the average revenue per ton-kilometer from presently CFAF 5.0 to CFAF 5.5 by the beginning of 1973. The Government has agreed during negotiations to modify the tariff structure along these lines. 46. Gross revenues of the Regie are expected to increase by some 7 per- cent per annum from CFAF 2.4 billion (US$9.4 million equivalent) in 1970/71 to CFAF 3.3 billion (US$12.9 million equivalent) in 1975/76. These increases are expected to result from the projected increase in traffic, improved bill- ing for phosphate and freight tariff increases from 1972/73. Operating costs, on the other hand, are expected to stay constant at about CFAF 2.4 billion in spite of forecast increases in material costs so that, even after allowing for substantially higher depreciation, the Regie should by 1975/76 produce a net operating surplus of CFAF 288 million (US$1.1 million equivalent), in place of its present persistent operating deficits. Such a surplus would be equivalent to a rate of return of about 2 percent on the value of average net fixed assets in use, and this target was agreed during negotiations. Interest charges on long term debt, however, will steadily increase, and the Regie will continue to operate with a net overall deficit, after interest charges are paid, through 1975/76, though the gap will narrow from CFAF 356 million (US$1.4 million equivalent) in 1970/71 to CFAF 20 million (US$0.1 million equivalent) in 1975/76.  - 12 - 47. Part of the Regie's financial difficulties are the result of a substantial unsettled debt of the Malian railways which dates back to pre- independence times. The Association has received the assurances of the Mali Government that this debt will now'be 6ettled. The Senegalese Government has accepted the terms and conditions of the Malian offer to settle this debt. The written confirmation by the Senegalese Government of this agreement would be a condition of effectiveness of the'proposed loan and credit. 48. The Regie's current liabilities considerably exceed its current assets. As of June 30, 1970, current liabilities of CFAF 3.0 billion (US$11.8 million equivalent) compared with current assets of CFAF 1.87 (US$7.3 million equivalent). The principal item in the current liabilities consists of short-term advances from the Treasury which as of June 30, 1970 amounted to CFAF 2.26 billion (US$9.0 million equivalent) and were roughly equal to the accumulated deficit of the Regie. There is little prospect of the Regie repaying the Treasury advances within a reasonable period of time. The Government has therefore agreed to convert by July 1, 1973 the Regie's accumulated indebtedness to the Government (estimated at CFAF 3,400 million as of December 31, 1971) as follows: 50 percent into equity contribution to the Regie and 50 percent into long-term debt, free of interest charges and repayable over 40 years starting in 1982/83. Procurement and Disbursements 49. Procurement of materials financed by the Bank Group will be on the basis of international competitive bidding except in the case of aggregate sand and ballast, which will be procured through local competitive bidding. Bid comparisons will be made on the basis 'of the CIF landed price. In the case of procurement of cement, mostly needed for the manufacturing of ties by the Regie, international'competitive bidding will also apply, but the local supplier will be allowed a preference of 15 percent in lieu of the 7present tariff of 64 percent. Procurement for the six locomotives financed by FAC and Caisse Centrale will be on the basis of a negotiated contract with a French supplier. 50. Disbursements will be made on the CIF landed cost of imported equipment and materials as well as on the foreign cost of technical services and training, and on 74 percent of the cost of locally acquired goods and services. Disbursements will extend through FY1974/75. If there should be any savings in Bank Group-financed items, they should be used to finance the foreign exchange costs and possibly part of the local cost of further items under the Regie's investment plan subject to agreement with the Bank Group. Benefits 51. Some 400 km'of track remain to be renewed on the main line from Dakar to the Mali border'(644 km). This line serves Mali as the main link to the Atlantic. Th'e track has passed its useful life, and severe speed re- strictions have been imposed for safety reasons. Accidents, however, are still frequent. The envisaged track renewal, designed to strengthen the back- bone of the Senegal railway system, was started during the Second Four-Year  - 13 - Plan and partly financed by Credit 96-SE. If the track renewal program were not carried out, the line could be kept in operation only for another eight years, at increasing maintenance and accident cost, reduced line capacity and a substantial loss of traffic and income to the Senegal economy. It is also essential to increase capacity and reduce cost for Mali's exports and imports, which presently to a significant extent have to be diverted to the much costlier route through Abidjan. The economic rate of return for track re- newal was estimated at about 22 percent. 52. The present inadequate layout of the workshops and their obsolete machinery means that servicing and repair of rolling stock take double the time considered normal. This adversely affects the utilization and thus the earning power of the rolling stock. The reduction in unit maintenance cost of about CFAF 70 to 80 million a year, or roughly 3 percent of the Regie's total expenditures would represent an economic rate of return of about 18 to 24 percent. 53. An important benefit of the project would be that it would make the Regie a financially viable public enterprise. Instead of the pervasive operating deficits amounting to some CFAF 240 million in recent years, the Regie is expected to make an operating surplus of CFAF 288 million once the project is completed in 1975/76. The resulting reduction of the overall deficit, after interest charges, from CFAF 356 million in 1971 to some CFAF 65 million in 1976, will represent a significant contribution to the overall improvement of public finances. PART V: LEGAL INSTRUMENTS AND AUTHORITY 54. A draft Loan Agreement between the Bank and the Regie, a draft Guarantee Agreement between the Republic of Senegal and the Bank, a draft Development Credit Agreement between the Republic of Senegal and the Asso- ciation, a draft Project Agreement between the Association and the Regie, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Association, and the texts of draft resolutions approving the proposed loan and credit are being distributed to the Executive Directors separately. 55. The draft agreements conform to the normal pattern for loans and credits for railway projects. 56. I am satisfied that the proposed loan and development credit would comply with the Articles of Agreement of the Bank and the Association.  - 14 - PART VI: RECOMMENDATION 57. I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President Attachment Washington, D.C. June 1, 1972  ANNEX 1 THE STATUS OF BANK GROUP OPERATIONS IN SENEGAL A. Statement of Bank Loans and IDA Credits (as of April 30, 1972) Loan or Amount (US$ million) Credit Number Year Borrower Purpose___ Bank IDA Undisbursed 96-SE 1966 Senegal Railway 9.0 - 1.2 493-SE 1967 Port of Dakar Port 4.0 1.2 140-SE* 1969 Senegal Agricultural 6.0 1.7 Credit 198-SE 1970 Senegal Highways 2.1 1.8 252-SE 1971 Senegal Rice 3.7 3.7 Development 253-SE 1971 Senegal Technical and Agri- 2.0 2.0 cultural Education 254-SE 1971 Senegal Settlement 1.3 1.3 Scheme Total, less cancellation 4.0 24.1 12.9 of which has been repaid 0.5 - Total now outstanding 3.5 24.1 Amount sold 0.4 of which has been repaid 0.4 Total now held by Bank and IDA 3.9 24.1 Total undisbursed 1.2 11.7 12.9 B. Statement of IFC Investments (as of April 30, 1972) Amount (US$ million) Type of Equity Year Obligor business Loan Investment Total 1966 Societe Fertilizer 1.7 0.8 2.5 Industrielle Plant d'Engrais au Senegal Total commitments now held by IFC 2.4 0.8 3.2 Total undisbursed - - * A loan of US$3.5 million for agricultural credlit (584-SE) made in 1969 was cancelled on March 25, 1971.  COUNTRY DATA COUNTRY, SAENOAL ARF, 16,00 k2 POPtlflATlON, 3.87 million J.4o~ 1970 M MAT?, 20 per k AREA. 196,000 Ro~~~~~~~~~~~~~It. oOaoeOAt. 2.2 0(fem 196 t.1i2...0 3) por k. of ao.bl. 1bod POPUIATION CHARACTEI1ISICS. HELTZHI. CZ:od. Birth Sate (per 1&o) (4. 0 970) P.1t4o per physti.im 15,300(1968) C Ioe eah tot (per 1,000) 22 0970) Popoltio. per hospital bed 735(1668) I.fADt Mlrtallty (per 1,000 31,e birth.) 156 098 INCOME DIST.oRIBTON: DIST"" R0TJ OF LAOS ORRRHIP: % of -oio...l i-ooee So-t qointilo D. D. 1ofadoedbyop I0 ooa o ~ highoat qotetil. D. a. 1 f boAd oood by nelot O eao .a ACCESS TO POTABLE WATER (% of Popolatioe) ACCESS TO ELECTR!C1IY! (1 of p.p.laOi.o) Urba o. . Urb.n n.o Ru-a 0.n. R-Ia o. A. NUTRITEON. GNP PEA CAPITA. $201 (1970) SEDCATION: C .i itotk-~ 2300 Per day per ..pit. (1 970) -AdAlMt l rtf0 rote (A) 9-10 (MM0 Per o.pit. protein intake eotio.ad to be hiph a. ooopard Prieary echooI enrolmoent (0) 26 (1967) 11tooho Afri.modt ootri. GROSS RATIONAL PRODUCTG17 r"ati:te ANNtEAL SArE OPF009( o,to price) (eoboe to Us 8 tOo.) TM!~-tb195-)! 1970l SlIP at -ak.t prioeo 779 1002 6 1.88 Groe lveto..t , 13 6 7 Srooe N.tioo1 S-olngs 55E 7.1 _34~ 90.1 .a Correot Aoooot Deficit 111 6.5 Roporte Gofode, 095B 191 24..5 oo.2.2 122.0 Importo f50, P 225 28.9 --.:.6(. o.: A. 5.2 1.5 ;UPUTTLRSFRR65 VabaeAdldoA10S11fcSotor 00,t0) labor F-cre V.I.e Added Per Worker cAIl.ooo A ~~~~~(US S) % of* -oion-l acarge Agrtooltore 210 30 n. . .0. 0. 0 Indoetry j/ 139 20 0. 0. 5.A . A n. S-reSoe 351. 50 .0 .0 .0 PUBRLIC PINANCS ICNS 1970/71 All SoYe-mote C-t,.1alFPo...aI O--.oeet i 05 YIP *o?P; 0 of GOP ..er-fo CPA, billion of 0 IDP 1Joe'o,.e 0r CFAP 13liou of GIP toet three yeare G rret R ..eipt. 4/1.1.) 1L.0 18.2 Cu.rroot Fo,ediot.ree (tool. tro...fere) 4/ .1. 10.s2 17.1. Clorent Sorpboo/Defioit ()1.3 0.6 0.7 Capital Eopeditore ..1. 3.3 E.toroa1 Aesiet-o (net) 6.2 l 2.1 PRICES 0N0 CREDIT- .d of yoor. w...eoroLP1uoo-o!,nlk C-ol..9 P,o.!, Sootr B-ok Crqd.It.L Pri-ate Scow? C...y 9?. lode., 192100) 7. uh-oe CAFA blLlion iothoCe CPAF t)llioo S 5A6 1969 119.1 h..1 0.11 35.61, 2.1 1970 123.6 3.9 .001 35.....1. 1071 131.1. 6.3 -10.26 -35.35 1.0 BALANCE1 OP PAYMENTS! IN (laet three y-sr), 1968 1%9 1970H DIS CTPOiS7 (A-er.g. f She loot t-hree ye,.-( 00. Eopo-te of Goode, N)12 201 170 191 Su.du. . 2 I.porto of Goode, NiPS 226 216 225 Ploutu123 7 Rsetoro. SOp (deftoit -22 4 -1 PIe 6.1 (n.t) ~~~~~~~~~~~~~~~~~~~~Cotton 7eT-1io J. Sotereet PoyeeOte (oet) .~~~1.1 -1.0 -2.0 A-uLSo So.- 2 Worker,' Reolttaooe -16.3 -15.2 -11..6 A1l '.-? 2ocodioo.u 221. 32 Other Paotor Pa2en.ot (oct) Ret- Tr fere 1. 3 06 1 .6 SetOo 00 Cooret Aoo....t(thol.ding trooof-ro-30 -53. -11. T051t__l StreEt Foreg. I ....t.-et 6..11 3.0 Med.io oAd L.0g-teoe L..o. (oat) 11.2 20.19 1.7 DMahreoeto (.1).0 0.5 ) 52: E ITWiAL IWBT ON D10UOlEA 31. Ao,ortiaatloo 2.C (3.6 1(3. 1(Slo. Offbotal Oroote ~~~~11. 15.-2.1 ..30 00 L,oC-tere Credits, ?.bliE 1. Sor Oe ' to e oeoo(oku Itttuel.7 .1,5 1 .22 Other C.Pit.1 (--t) 9 - LI . ) N~~~~~~~~otaG-..tsad PioEaod OlbredT.0 All other itOOR .13.6 -3.1 25.2T.1 twi .dD.bad 0roes Recervee 21.9 1, 30.21 DEBT SE.RVICE RATIO 1971l J. Ret Reeroe .1 .5. 6.9 IERS/ISA LENDSING. APRIL 30. 1972 (8 -J..) IBRD IDA SOtatoodi.g oAM Debored lu12. Uodieb.reed 121. O.t.ta.Ddi.g tool. Uodiebored ).- 2h.1 Rote of E=h-goe, US $1.10 * OAF 255.72 Rote. Su 73. 1 2/2" 01A0 1.02 US $ .0039 1/ 1962-1565 Dat t 2/ I.-11diolt Coootroutioo nod artiOa.l -oti,iti-o 2/ .LoAl 9oveomot budOeto are ot AvSlLo;s o;roou of Ce-trol Ouoerooot uperatiooo, they repreo-tod ab.ut 6 perceot of current r-copto, 9 p.r-et of uro oopouditt-e, Sad 7 Per..eot of c.pitt1 oup.odltur._ In 1967/60.  ANNEX III SENEGAL - SECOND RAILWAY PROJECT CREDIT, LOAN AND PROJECT SUMMARY Loan Credit Borrower: Regie des Chemins de Fer Republic of Senegal. du Senegal. Guarantor: Republic of Senegal. Amount: US$6,400,000 US$3,200,000 Amortization: In 25 years, including a Standard. 5 year grace period through equal semi-annual install- ments beginning on Novem- ber 1, 1977 and ending on May 1, 1997. Interest Rate: Standard rate. Service Charge: Standard. Commitment Charge: 3/4 of 1% per annum. Relending Terms: 25 years, including 5 years of grace; 7-1/4 percent. Project Description: (a) 175 kilometers of track renewal between Dakar and the Mali border; about 243 kilometers have already been renewed and after completion of this project item, 226 kilometers will remain for renewal. (b) Rehabilitation of, and equipment for, the railway's workshops in Thies. (c) Modernization of rolling stock (freight cars), by the installation of modern roller bearing axle boxes on 50 percent of the bogie freight car stock. (d) Six 1,200 horsepower diesel locomotives. (e) Provision for training and technical assistance (see "Consultants").  ANNEX III Page 2 Estimated Cost: US$ million Total Foreign Local Track renewal (175 kms) 7.97 3.68 4.29 Workshops rehabilitation and equipment 1.63 0.74 0.89 Motive power (6 diesel locomotives) 1.32 1.32 - Modernization of rolling stock (350 bogies) 0.21 0.14 0.07 Technical services and training 0.53 0.53 - 11.66 6.41 5.25 Price contingencies 0.65 0.37 0.28 Total 12.31 6.78 5.53 Locomotives Other Financing Plan: IDA/Bank - 9.6 FAC 0.6 Caisse Centrale 0.7 Regie 1.5 Total 1.3 11.1 12.3 Estimated Disbursements: Fiscal Years $ million 1972/73 2.0 1973/74 6.3 1974/75 1.3  ANNEX III Page 3 Procurement Arrangements: Materials financed by the Bank Group will be procured on the basis of international competitive bidding except in the case of aggregate sand and ballast, which will be procured through local com- petitive bidding. For cement, international com- petitive bidding will also apply, but the local supplier will be allowed a preference of 15 percent. Consultants: (i) at management level to improve train operations; (ii) to improve workshop management and implement new freight tariff structure; (iii) for transport coordination. Rate of Return: Track renewal: 22 percent (Economic) Workshop modernization: 18-24 percent Appraisal Report: PTR - 112a May 31, 1972.   SENEGAL RAILWAY SYSTEM SENEGAL > j / ; /t ~~~~~~~Toll RailwayXs K Gra~___Fvel roads .. ~ \. r1e - - Earth roads Intemrational airports lntemotionol boundaries t 7 > = i / OL 1~.6. 0 so 10 0 IIKM O /iO b Olo e r 0 / t = < .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 Srlip I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~SD 3666S 4~~~~M O zS 2 2X BI \ l >w-*B *- 5i/-qla aAELIGR- ' 0\ 14 K.* , o - T mop oo not imply endorsemens oK . t . r K e d o u o o u < > ;~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4- or ncceptanee by th World 0 .y _. _/ J >0\ *t_ < oM A L I n i OA \ST -PO T G ESE G INEA j