Senegal - Investment Promotion (SOFISEDIT) Project

Report No. 344a-SE FILE Senegal: Appraisal of SOFISEDIT (Societe Financiere Senegalaise pour le Developpement Industriel et Touristique) May 9, 1974 Development Finance Companies Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  OURRENCY EQUIVALENTS Currency Unit = CFAF CFAF 1 = US$0.004 US$1 = CFAF 250 ABBREVIATIONS ADB African Development Bank BCEAO Banque Centrale.des Etats de l'Afrique de lOuest BIAO Banque Internationale pour 1'Afrique Occidentale BICIS Banque Internationale pour le Commeroe et l'Industrie au S&nfgal mmDS Banque Nationale de Dgveloppement du S6nJgal CCCE Caisse Centrale de Cooperation Economique DM, Deutsche &atwicklung Gesellschaft FMO Nederlandee Financierings Maatschappij voor Ontwikkelingslanden -.rZw Kreditanstalt fu'r Wiederaufbau SGBS Soci6t4 Ggnerale de Banques au Senegal 5OFISEDIT Socie'te Financidre S4negalaise Pour le Dfreloppement Industriel et Touriatique SOGPI Societg Nationale dEtudes et de Promotion Industrielle -SB Union Senegalaise de Banques This report was prepared by Mr. Diego Hidalgo on the basis of his mission to Senegal in November 1973.  APPRAISAL OF A FIRST PROJECT TO ASSIST THE SOCIETE FINANCIERE SENEGALAISE POUR LE DEVELOPPMEENT INDUSTRIEL ET TOURISTIQUE (SOFISEDIT) Table of Contents Page, No. SUMMARY ' .. ................ ......................i - ii I. INTRODUCTION ...................................... ...... 1 II. INDUSTRIAL AND TOURISM DEVELOPMENT .................. 1 Summary of Economic Developments and Prospects. 1 The Tourism Sector ... ............... *.... 2 Industry ................................ 4 Government Policies ..... .... . . .... . . ....... . 7 SONEPI ................................... 8 Other Promotional Institutions ................ 10 III. FINANCIAL INSTITUTIONS .....o. ..... 10 Credit System of the BCEAO .e.A O............ 10 The BNDS ....... , 11 The USB ............. 12 The Commercial Banks .................... 13 IV. THE SOFISEDIT PROPOSAL ...................... 15 Background .............. 15 Legal Basis .......16 Ownership 16 Two-Stage Formation ........... . ...... * ..... 17 Objectives and Powers ...........09 ........ 17 Policies .. ....... ............ 17 Management and Staff ...... 18 Appraisal Procedures ...... 19 Relations with Other Institutions 21 Auditors .........21 V. OPERATIONAL AND FINANCIAL FORECAST ......... . 21 Business Outlook and Forecast Operations 21 Resource Requirements ...............0.00... 22 Projected Profitability and Financial Position. 22 VI. CONCLUSION AND RECOMMENDATIONS 23 Conclusions . . . .23 Recommendations ........... 23   LIST OF ANNEXES 1. SENEGAL - Approvals under Investment Code 2. SENEGAL - Government Incentives to Investment 3. SONEPI - Financial Assistance 1969-73 4. BNDS - Summary Financial Statements 1970-73 5. USB - Summary Financial Statements 1968-69/1971-72 6. SENEGAL - Interest Rate Structure 7. SENEGAL - Analysis of Outstanding Medium and Long-Term Credit 1963-73 8. SOFISEDIT - Present and Contemplated Shareholding and Board Structures 9. SOFISEDIT - Draft Statement of General Policy 10. SOFISEDIT - Board of Directors 11. SOFISEDIT - President's Curriculum Vitae 12. SOFISEDIT - List of Possible Projects 13. SOFISEDIT - Assumptions for Financial Projections 14. SOFISEDIT - Projected Operations 15. SOFISEDIT - Projected Income Statements 16. SOFISEDIT - Projected Balance Sheets 17. SOFISEDIT - Projected Cash Flow 18. SOFISEDIT - Estimated Disbursement Schedule for the Proposed Bank Loan   SUiARilY i. Although fixed investment in industry and tourism in Senegal has averaged over $25 million for the last five years there has been no industrial and tourism development bank in the country, which has an agricultural develop- ment bank and four commercial banks providing medium-term financing. The Bank Group was requested to participate in the establishment of a new indust- rial development bank in Senegal in early 1970. At that time the Bank con- cluded that immediate investment prospects did not warrant a new institution. In 1972 the Government of Senegal proposed the creation of SOFISEDIT, an in- dustrial and tourism development bank, as a joint venture with the participa- tion of the Government, financial institutions in Senegal, IFC, Caisse Centrale and other foreign institutions. One of the main issues considered was the desirability of creating a new institution against choosing BNDS, an agri- cultural development bank being reorganized, or USB, a sound and dynamic commercial bank which had received lines of credit from foreign institutions for long-term industrial financing. None of the latter alternatives had the support of the Government or of the financial community. The Bank Group concluded that SOFISEDIT was the most feasible means of establishing a well- managed long-term industrial and tourism-financing institution in Senegal. ii. A Working Group including representatives of SOFISEDIT's prospective shareholders and SONEPI, and industrial promotion institution, was formed in June 1973. The Group has discussed SOFISEDIT's prospective policies, organi- zation and staff, projected operations, and relationships with existing fi- nancial and promotion institutions in the country. SOFISEDIT was incorporated in March 1974; its share capital will be raised to CFAF 650 million of which the Senegalese Government and public sector institutions will hold 46% and Senegalese private shareholders 6%. IFC, Caisse Centrale (France), FMO (Holland) and three foreign controlled commercial banks operating in Senegal will take the remaining 48%. The Government has nominated and the Board elected Mr. N'Diaye, a capable Senegalese, as Chief Executive of SOFISEDIT; he will be assisted by an expatriate Deputy General Manager and a Director of Investments who will be expected to train Senegalese Project Officers. The cost of the expatriate team will be financed out of the Bank loan. SOFISEDIT will start operations in June 1974. iii. IFC's participation in SOFISEDIT is important to bring in other participants and to ensure a good start, the adoption by the company of sound policies, and a stronger and more independent Board of Directors. IFC's proposed investment in SOFISEDIT will be approximately US$200,000, about 7.7% of total share capital. IFC will have a seat in SOFISEDIT's Board. While it should be recognized that the financial return to IFC on this small investmeut will be marginal for the foreseeable future, its involvement in SOFISEDIT is of major importance for SOFISEDIT to ensure a good start, bring in other participants and contribute to a stronger Board of Directors. iv. SOFISEDIT will make long and medium-term loans and equity invest- ments in industrial and tourism projects in Senegal. SOFISEDIT will work in  - ii - close cooperation with SONEPI to ensure consistency in economic analysis of projects and that projects receiving incentives from the Government are financially and economically viable. v. Prospects for investment in Senegal and projects now under prepara- tion which could come for consideration to SOFISEDIT indicate that SOFISEDIT's commitments through 1976 would amount to about $8 million. A Bank loan of $3 million would cover two-thirds of foreign currency requirements through 1976, and include up to $200,000 to finance the cost of the expatriate team. vi. The proposed loan would have an amortization schedule reflecting the repayment schedules applied to subprojects, with maximum maturities of 20 years for tourism projects and 15 years for all other projects. The foreign exchange risk would be borne by SOFISEDIT's borrowers. To help SOFISEDIT through its initial operating stages, SOFISEDIT would be granted concessional treatment on commitment charges. The free limit for individual subprojects would be $100,000, with an aggregate free limit of $600,000.  I. INTRODUCTION 1.01 In February 1970 a Banlk mission visited Senegal at the request of the Government to examine the feasibility of creating a new development bank to specialize in long-term financing for industrial projects. The mission concluded that immediate investment prospects were not sufficient to warrant the establishment of a new institution. In mid-1972 the Government again raised the idea of creating a development bank to specialize in providing term finance to industry and tourism. Government proposed the creation of Societe Financiere Senegalaise pour le Developpement Industriel et Touristique (SOFIS- EDIT) with a share capital of CFAF 600 million (US$2.4 million) as a joint venture with the participation of the Government, Central Bank, local financial institutions, IFC, Caisse Centrale and other foreign institutions. The Govern- ment also requested a Bank loan for the institution. A Bank mission which went to Senegal in November 1972 concluded that investment prospects in Senegal had improved sufficiently to warrant a specialized institution, and recommended Bank Group support of the SOPISEDIT proposal. During 1973, Bank and IFC staff assisted in planning the establishment of the new institution. This report is a result of a mission in November 1973 to appraise SOFISEDIT for an IFC investment and a Bank loan. II. INDUSTRIAL AND TOURISM ENVIRONMNT Summary of Economic Developments and Prospects 2.01 Since independence in 1960 the rate of economic growth in Senegal has been less than the population growth rate due to the difficult process of adaptation to the more limited economic, political and administrative role of the country as compared to its pre-independence role in French West Africa. Moreover, during the second half of the decade, the rural sector was seriously affected by unusually adverse weather conditions, aggravated by a fall in groundnut producer prices. As a result, groundnut production (which accounted during 1960-70 for about half of value added by the agricultural sector and for more than half of Senegal's export earnings) fell from a peak of 1.1 mil- lion tons in 1965 to less than 600,000 tons in 1970; production in 1972 was only 350,000 tons following the catastrophic drought in West Africa. In 1973 groundnut production may have reached 650,000 tons. 2.02 In spite of these difficulties, the annual rate of growth in the industrial sector reached 4.7 percent during the period 1960-1971 (6.2 per- cent excluding the groundnut processing sector), or about four times that of the rest of the economy. While the growth in the first half of the decade is largely explained by the implementation of import substitution policies, the major explanatory factor during 1966-71 has been a marked increase in exports, mainly towards neighboring countries with which Senegal forms a partial customs union. By 1970, 25 percent of local manufacturing production  -2- (other than groundnuts) was exported, accounting for about $60 million, or almost 40 percent of Senegal's total exports, as coapared to 23 percent in 1965 and 17 percent in 1960. 2.03 Bank projections of economic growth during the next several years (4.8 percent per annum at constant prices) point to a sizable improvement as compared to past performance. As a result of drastic financial measures taken in favor of the rural sector, a marked recovery is expected in this sector in the 1970's. The Bank has projected that value added in manufactur- ing could grow at about 6 percent per annum between 1971 and 1980. Growth should also be stimulated by the Government's successful efforts to diversify agriculture and to stimulate the expansion of fishing and tourism already underway. The Tourism Sector 2.04 Senegal has important assets for the development of tourism, in- cluding attractive beaches, a long warm and sunny season, and reasonable accessibility to Dakar from Western Europe and America, with over 40 inter- continental flight landings per week. However, tourism development, while growing rapidly, has been limited, due mainly to the lack of hotel accommoda- tions. No detailed tourism statistics had been gathered until January 1972; however the evolution of air arrivals in the last five years allows the following estimates to be made (in thousands): Estimated Nio. of Arrivals by Air All Arrivals Tourists Hotel Bednights 1968 72 88 30 108 1969 83 99 34 122 1970 92 106 37 133 1971 102 116 40 144 1972 131 171 59 256 1973 (6 months) 81 100 54 228 While the rate of growth in tourists and hotel bednights has been spectacular since 1971, the estimated 228,000 hotel bednights for the first six months of 1973 compare with about 10 million annual hotel bednights in the neighboring Canary Islands. The average stay of tourists is short (4.2 days in 1973), reflecting a high proportion of airplane crews and of travellers combining Dakar with other stops in package tours, but it is gradually increasing as the proportion of "pure tourists" grows. Over 80% of tourists come from Western Europe, only 10% from America and less than 10% from Africa and Asia. 2.05 Tourism statistics for the first six months of 1973 show that average room occupancy of hotels has been about 80% (over 90% in the peak  winter menths), which suggests that lack of hotels has been a bottleneck for tg4rim development. At the end of June 1973 the total hotel capacity in Senegal suttable for international tourism was 1,771 rooms, over two thirds of which were in Dakar, with only about 580 rooms scattered throughout the reat of the country, About 800 rooms (all directed toward the foreign visitor mark.et) are presently under construction, of which half are in the Dakar area; this will bring total capacity suitable for foreign visitors to about 2,500 rooms, of which about 1,500 will be in Dakar. 2.06 Because of a high import component, weak project planning and lack of sufficiont control, costs have been on the high side in some cases, par- titeula4rly for luxury hotels where costs have been as high as $35,000 per room (Hotel Teranga and Village Cap Skirring). However, for other hotels (Necker- man, Sunugal, Twabacounda) investment costs are lower (about $12,000/room) and thus there will be a mix of various categories of rooms available on the market. Even the expensive hotels are quite profitable because of relatively high prtces and favorable occupancy ratios. 2,07 Except for two hotels financed entirely by equity funds, initial debt/equity ratios for hotels have ranged between 70/30 and 60/40. Long-term finAncing has been arranged on a case-by-case basis from abroad, mostly from Catae Centrale de Cooperation Economique, and the implementation of several other proposed hotels has been delayed considerably by lack of long-term funds. Medium-term loans rediscountable at BCEAO account for about 20% of total hotel financing. About 30% of the hotel capacity existing or being added in Senegal belongs to natlonals. 2.08 Tourism Prospects. The growth in hotel bednights by over 70% in 1972 and 78% in the first half of 1973, and the high occupancy ratio of hotels in Senegal show that the main bottleneck for tourism expansion in the country has been the inxufficieney of hotel accommodations. Although the planned increase in hotel capacity is likely to keep up with demand in Dakar, con- siderable potential exists in other regions, particularly in the Petite Cote (4 long string of beaches 60 miles south of Dakar). A UNDP-financed feasibil- ity study of the development of the Petite Cote is presently underway; the Government has also requested World Bank financing for the required infra- structure but, if the results of the study are positive, the necessary works will probably delay the start of hotel construction for another three or four yeares Other regions with considerable potential are Casamance (south of Gambia) and the Sine Saloum islands, where several hotels are planned or under construction. A tourism school (possibly to be financed by the World Bank) is expected to open in 1977 and will help solve manpower problems. 2.09 Recent tourism demand studies undertaken for Senegal show that if the right kind of accommodations in price and category were available, tour- ism bednights could increase annually by over 30% for the next ten years. It is now diffieult to assess the possible long-term effects of the energy crisis on Senegal's tourism prospects; the effects in 1974 and 1975 appear  - 4 - minimal because supply of hotel capacity is and will probably continue to be the bottleneck. The Fourth Development Plan (June 30, 1973 - June 30, 1977) includes the construction of 6,270 hotel beds with a total investment cost of CFAF 18.4 billion, with an additional 5,000 beds and CFAF 8.8 billion in "optional projects" in the Petite Cote. Although this target appears un- realistic due to constraints in infrastructure and trained personnel, about fifteen medium-to-large hotels with about 3,000 rooms and a total investment cost of over CFAF 10 billion are scheduled to start construction in the period 1974-1976. Although Senegal would need almost 1,000 new hotel rooms a year to keep up with likely demand, plans based on advanced proposals indicate that at least 500 hotel rooms at an average cost of CFAF 4-5 million/room will be built in each of the next four years; annual investments would therefore be on the order of SFAF 2-3 billion. Industry 2.10 Historical Development and Orientation. Modern industry was intro- duced into Senegal well before World War II. The industrialization process accelerated during the 1950's, when French firms established plants to serve all of former French West Africa (FWA), i.e., a market of about 20 million people. The industrial sector, however, faced a difficult situation in the early 1960's after transformation of FWA into a number of independent states, because of the loss of Dakar's privileged position as the capital of FWA, and a depressed local demand for manufactured goods due to the departure of most French civil and military personnel. 2.11 In spite of difficulties encountered, the manufacturing sector played a relatively important role in the 1960-71 period. During this period annual growth of industrial output reached 4.7% at constant prices (6.2% ex- cluding the groundnut processing sector which accounts for 11% of total value added in industry), compared with an over-all growth of only 1.4% in GDP. Growth of exports in the latter part of the 1960's contributed about one third of the increase in industrial output. Exports of manufactured products (ex- cluding processed groundnuts) rose to $60 million in 1970-71, compared to $35 million and $25 million five and ten years before. They now account for 25% of the production in the manufacturing sector (groundnut processing excluded). These new markets were found largely within former FWA, although some firms, mostly in textiles, have proved to be competitive in the markets of developed countries. 2.12 The relative importance of the textile, mechanical, and electrical sectors, has increased since independence: while they accounted together for 32% of value added in manufacturing (excluding groundnut processing) in 1959, they now represent 45%. Another important sector is foodstuffs, although its share of value added in manufacturing has decreased from 38% to 25% during the period. Chemical industries now contribute 9% of total value added.  -5- 2.13 The present position of manufacturing within the national economy may be briefly summarized as follows. Value added in manufacturing d,mounts to CFAF billion 28.5 ($110 million) equivalent to 12% of GDP at factcir costs. Not counting the artisan, sector, modern industry provides employment for approximately 20,000 persons, against an estimated 13,000 persons a decade ago. 2.14 Investment. New investment in the manufacturing sector increased at about 14% per annum between 1962 and 1967. Gross investment excluding a large sugar complex is estimated to have amounted to over CFAF 4 billion per annum in 1969-71, against CFAF 2.5 billion per annum per annum in 1964-66. This growth of investments in the past recent years may suggest that the problem of over-capacity in manufacturing sector, due to shrinkage of market in the early 1960's, is now over, except for groundnut processing industries which, following decreasing crops, were working at only 68% of their capacity in 1969-71 and at less than 40% in 1973 due to the drought. 2.15 The annual sectoral breakdown of approvals under the Investment Code shown in Annex 1 provides a good indication of the growth of investor's interest in recent years. In the period January 1, 1970-August 31, 1973 approvals by the Investment Commission have totaled over CFAF 44 billion, or three times the approvals in the eight preceding years. Excluding projects in tourism, a tire project later withdrawn, and a large sugar mill approved in 1970, industrial investments approved have averaged CFAF 4 billion annually since 1970. 2.16 Geographical Distribution. From its inception, Senegal's industry has been located primarily in Dakar and in the Cap Vert region. Around 70% of all industrial enterprises are situated there. They benefit from the con- centration of Senegal's infrastructure and purrhasing power in the Cap Vert region where 20% of the population lives and where per capita GNP is two and a half times the average in the country, and nearly eight times the average for the population living in the hinterland. Although the Government has tried to encourage investments outside Dakar (see para. 2.23) the concentra- tion of industry in Dakar is unavoidable because few large projects would be viable outside. Annex 1 shows that almost two-thirds of investments receiving incentives since 1962 have been in the Cap Vert region. 2.17 Ownership. Modern industry is almost completely in the hands of expatriates, although it is not possible to express in quantitative terms the distribution of enterprises according to size and nationality of ownership. However, it is estimated that 85% of industrial assets are still owned by French investors. There are about 400 enterprises in the modern sector (i.e., with over 20/30 workers) of which less than 10% are owned by Senegalese; this proportion is probably significantly more than it was three years ago due to SONEPI's action (see para. 2.26). Modern industry is almost completely pri- vate; the Government, until now, has taken few equity investments in industrial companies. The main exception relates to fisheries: the State has associated with French companies to develop tuna fishing and canning.  2.18 Labor and Wages. Labor productivity in Senegal may be as high as in Europe in the case of mechanized or repetitive industrial operations. In contrast, productivity may be lower, and sometimes much lower, than in European countries when skills requiring years of training are involved and/or when the work pace is not controlled by the machine. Senegalese industry has also benefited from a relatively low rate of increase in industrial wages. Indi- cations are that, despite the heavy and increasing cost of expatriates, the rate of wage increases may have been less than 5% per annum in the 1960's as compared to about 8% between 1950 and 1961. Present wages range from a minimum of CPAF 25/hour (CFAF 2,000/week) to about CFAF 140/hour (CFAF 5,600/ week) for highly qualified labor. 2.19 Senegalization. The Government wants to maintain its encouiragement of foreign private investment and welcomes the establishment of foreign-owned firms in Senegal, although it also seeks increased opportunities for Sene- galese-owned enterprises and joint Senegalese-foreign ventures. However, it has decided that with the exception of top management and of experts of un- usual skills or qualifications, all labor and supervisory jobs in new and existing industrial enterprises should be filled by Senegalese by 1981. All enterprises have been asked to submit to the Government a timetable for train- ing of Senegalese and their replacement of expatriate staff. Progress of the implementation of timetables will be reviewed yearly by the Government. 2.20 Prospects. Except for capacity expansions to meet increases in domestic consumption there seems to be little scope for further import sub- stituting industries. The real future for Senegalese industries lies with exports to developed countries and, to a minor extent, with development of exports to countries associated with Senegal in the recently established Communaute Economique de l'Afrique de l'Ouest which succeeded UDEAO. A free port and free trade area in Dakar projected by the Government may help export oriented investments but is still at a preliminary stage of preparation. Senegal will also have to cope with the three following obstacles: (a) quality needs to be improved; this fact puts special pressure on the need for skilled labor and the development of managerial ability; (b) most products would have to be manufactured on a larger scale that at present, requiring substantial investments; (c) Government incentives to industry (protection and the Investment Code - see below) have artificially protected a few sectors of Senegalese industry from international competition (and even domestic competition in some cases). 2.21 The Government's Fourth four-year Development Plan 1973-1977 projects investments in manufacturing totalling CFAF 17.6 billion or CFAF 4.4 billion/ year. The Plan projections include an investment of CFAF 3 billion in a tire project which has subsequently been found unviable and abandoned. They ex- clude, however, any investments in the free port as well as the Dakar-Marine project (a proposed major ship-repair project) and any side-effects that this project might have on Senegalese industry. A few large projects not included in the Plan are now under preparation: they include investments of CFAF 3 billion needed by the five main groundnut oil processingxlenterprises to comply  - 7 - with new toxicity standards recently imposed by the EEC on its oilcake imports. These and other firm proposals suggest that annual investments in manufactur- ing will probably not fall below of CFAF 4 billion in the next few years; they may exceed that amount considerably if the Dakar Marine project is finally implemented and if the Government is successfuL in promoting the installation of industries exporting to Western Europe. Government Policies to Promote Investment 2.22 Since independence the Government has continuously endeavored to promote industrial investment by financial incentives to enterprises, parti- cularly through an Investment Code, protection of the local market against foreign competition, and the creation in 1969 of a semi-public institution, SONEPI, for the promotion of Senegalese small and medium-scale enterprises. 2.23 The Investment Code. Detailed provisions of the Investment Code are shown in Annex 2. In June 1972 the Investment Code was amended to extend financial incentives to agricultural and tourism investment; a special bill was enacted at the same time to grant specific advantages to small- and medium- scale Senegalese enterprises. Incentives included in the Code are greater for enterprises outside the Cap Vert. The new Code guarantees foreign investors in industry, tourism, agriculture and research the free repatriation of their invested capital and subsequent earnings. Enterprises in such sectors may also be given by decree the status of a "priority enterprise", provided they undertake investments of at least CFAF 100 million or create a minimum of 50 new jobs for Senegales. A "priority enterprise" may be granted exemption of duties and taxes on imported equipment for the investment, reduction of duties and taxes on imported equipment for the investment, reduction of duties on imported raw materials required for manufacture, partial protection against foreign competition, and up to five-year exemptions of income taxes (33%). Tax holidays can be of up to 8 years for enterprises located outside the Cap Vert. Enterprises undertaking investments of at least CFAF 500 million over three years may sign an "Establishment Convention" with the Government, thereby being granted, in addition to part or all of the above advantages, a guarantee that the level of fiscal charges levied on them for a period of up to 20 years will not be changed. Small- and medium-scale Senegalese enter- prises owned by nationals may also benefit from fiscal advantages under a special bill enacted in June 1972, when they invest at least CFAF 5 million in two years (CFAF 3 million in agriculture); as of June 1973, 35 enterprises (for a total investment of CFAF 645 million) had received incentives under this Act. 2.24 Applications for benefits under the Investment Code with a project appraisal prepared by SONEPI (see para. 2.28 below) are discussed by a Technical commission headed by the Ministry of Planning and then submitted to an inter- ministerial Committee which meets in principle monthly. Decisions are taken unanimously. Since 1962, 114 enterprises have benefited from the Code for a global investment of CFAF 59.1 billion ($263 million); most decisions were taken in the past four years (see Annex 1).  - 8 - 2.25 The loss of revenue for the Government and other economic costs of benefits granted under the Investment Code are not being estimated. A regime of duties, taxes and other charges levied on imported commodities has provided excessive protection to some import substitution projects. In addition, partial or complete import bans for selected products can be negotiated on a case-by- case basis between the Government and industries. Thus the existing incentive system has often encouraged import substitution more than world-wide export- oriented projects, and may jeopardize competitiveness in the export market outside CEAO by pushing up prices of intermediate goods. It is important that the Government acquire the skills to undertake sound economic analysis; during negotiations Sofisedit agreed with the Bank on guidelines for calculat- ing the economic return of project proposals, and Government agreed that Sofisedit will be invited to become a member of the T.C.. (See paras. 4.18- 21.) The Societe Nationale d'Etudes et de Promotion Industrielle (SONEPI) 2.26 SONEPI was established in 1969 as a predominantly public corporation with a share capital of CFAF 55 million of which the Government has 24%, BNDS 23%, the Central Bank 18%, USB 4%, and the other commercial banks 2% each; the remaining 25% is evenly distributed among seventy companies established in Senegal. SONEPI's primary objective is the development of small and medium- scale industrial enterprises controlled by Senegalese. To this end, SONEPI makes feasibility studies of selected industrial projects, seeks Senegalese investors to sponsor feasible projects it has identified, and assists them in project development, organization and management, improvement in methods of production and in providing finance and acts as technical counselor of the Government for policies regarding Senegalese entrepreneurship. SONEPI has also been used by the Government to analyze industrial projects applying for incentive under the Investment Code. 2.27 SONEPI's professional staff totals 23; it includes three members from a UNIDO team, three experts from the Fonds d'Aide et Cooperation (FAC) and one financed by German aid. The UNIDO team is scheduled to leave SONEPI at the end of 1974, and German aid is expected to replace it. 2.28 Assistance to small Senegales enterprises. SONEPI's assistance has been given in the three following forms: (a) Equity Participations and Guarantees. To ease difficulties for small Senegalese enterprises to have access to credit from commercial banks SONEPI was endowed at the end of 1970 by FAC, Caisse Centrale and the Government with two funds totaling CFAF 80 million: an "equity participation fund" and a "guarantee fund". Annex 3 shows the 27 proj- ects which have so far received equity participations and guarantees. Except for two large ones, investment costs of the projects have averaged CFAF 10 million. SONEPI's funds are scarce and almost fully committed. SONEPI's participation fund will probably be increased by  - 9 - CFAF 40 million by a long term loan from KfW in 1974, which should provide sufficient resources for about a year. The guarantee fund will also be increased through allocations of 1.5% of the amount out- standing on a KfW loan to USB. (b) MIanagement training. SONEPI's role in training Senegalese entre- preneurs is particularly interesting. A specific department with five professionals under the guidance of a UNIDO expert gives a technical assistance to about sixty enterprises; special training courses of ten weekly morning or evening sessions (16 to date) are also organized for entrepreneurs in order to give them an elementary knowledge of business management, including shop organization, bookeeping and calculation of costs. All applicants for equity participations and guarantees from SONEPI must enroll in these courses. (c) Industrial estates for small scale industry. SONEPI has so far created a small industrial estate in Thies where ten small enterprises are now established. These companies have experienced difficulties, mainly because of lack of continuous assistance but they are now improv- ing. Another industrial estate is to be created soon in Zinguinchor, to be followed by one in Kaolack; and three more are now under study. 2.29 Evaluation. Even though at a modest scale, SONEPI is slowly proving to be a useful and effective institution, probably among the best in Africa in promoting indigeneous entrepreneurs. In the short period since its creation, SONEPI has given technical and/or financial assistance to some 80 Senegalese enterprises which have increased their aggregate sales from CFAF 273.5 million in 1970 to an estimated 824.5 million in 1973, and their employment by almost 500 jobs. Several enterprises including two furniture companies, two in construction and a shrimp freezing operation, have been very successful following SONEPI's assistance, and about thirty others have good prospects. There have been very few failures so far. Its equity participations and guarantees which have a modest limit of CFAF 3 million per operation have succeeded in mobilizing other sources of funds and resulted in an aggregate investment of CFAF 561 million (see Annex 3). While in two or three instances there have been some pressures on SONEPI to finance doubtful ventures, SONEPI's Executive Committee has reached its decisions exclusively on project viability grounds. The relative success of SONEPI's assistance and the small number of failures prove the soundness of SONEPI's entrepreneurs selection process. 2.30 SONEPI has been much less effective in its role as appraiser of industrial projects applying for incentives to the Investment Commission; its economic analysis has been weak, and has supported some projects with doubtful economic justification. (See paragraph 4.21) 2.31 SONEPI faces several increasingly severe problems. First, it will lhave an increasing workload in assisting the small scale industrial sector as the number of companies under its supervision increases. Second, as  - 10 - SONEPI is a relatively efficient institution the Government tends to rely on it and give it increasing and varied responsibilities which may conflict with its main objectives. Third, the UNIDO team will leave at the end of 1974 and SONEPI will have to attract, develop and keep an increasing number of Senegalese staff. To cope with these problems SONEPI, whose present budget of about CFAF 50 million (excluding external technical assistance) is now substantially financed by the Government, will need to develop other sources of revenues. This should include not only further foreign technical assist- ance but also an attempt to generate income from its financial assistance and technical services. Other Promotional Institutions 2.32 Two other promotional institutions lhave recently been created by the Government: (a) Societe Nationale de Garantie et d'Assistance au Commerce (SONAGA) which gives accounting assistance and manages a guarantee fund for loans to Senegalese-owned commercial and transport enterprises; and (b) Societe Nationale de Promotion de Tourisme (SNPT) which will manage the port- folio of Government's minority participations in hotel companies in Senegal, and will gradually develop a technical bureau to undertake feasibility studies of hotel projects. III. FINANCIAL INSTITUTIONS Credit System of the BCEAO 3.01 Senegal is a member of the Western Africa Monetary Union established in 1962 and composed of six countries with a common central bank, the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO). Banking and credit institutions in Senegal include four commercial banks (BICIS, BIAO, SGBS, USB), an agricultural development bank (BNDS), and, with relatively limited roles, SONEPI and SONAGA. 3.02 The Monetary Union makes possible the pooling of reserves among the seven member countries, and guarantees the convertibility of the CFA Franc into the French Franc and the freedom of capital movements and remittances. IHowever, a direct consequence of this system is also to place the burden of external stability on credit policies. The degree of difficulty of the task of the Central Bank to maintain monetary stability is a function of the balance of payments situation of the individual country (in spite of the pooling of reserves, no individual country can run an external deficit at the expense of the zone over an extended period of time). In Senegal, this task is particularly difficult due to a tight balance of payments situation and an increasing demand for credit.  - 11 - 3.03 The major instrument of monetary policy is the qualitative and quantitative control of credit exercised by BCEAO through a global rediscount ceiling set for the country as a whole, individual ceilings for each bank and each borrower, and detailed study of each individual application for rediscoxnt facilities. In order to ensure that the financial resources of the country are used internally, except for the normal outflow of expatriate remittances and investment income payments, the rediscount ceiling on a country basis is defined as the difference between the forecast needs of the economy (subject to the limits imposed by the balance of payments equilibrium) and its internal resources. 3.04 Individual bank ceilings for rediscountable short-term credit (less than two years) and medium-term credit (two to seven years) are determined separately. To date medium-term financing is provided in Senegal by BNDS and the four commercial banks: most credits are rediscountable at BCEAO, within the individual bank's ceiling. Medium-term rediscountable loans generally finance local currency costs and cover the import component of an investment when external long-term loans and suppliers' credits are not available. The proportion of credit to project cost is generally limited to a maximum of 65%. There has been no internal source of long-term financing (over seven years). Long-term credit to industry has been extended only by CCCE, directly or through BNDS 1/ (until 1970, see para. 3.06) at low interest rates (3-1/2 - 6-1/2%). However, USB has recently obtained from ADB and KfW two long-term loans totalling CFAF 700 million (US$2.8 million). No commitments under these loans have yet been made by USB (see para. 3.10 below). Those loans are to be used for the long-term financing of small and medium-scale industries. 3.05 The short-term rediscount ceiling for an individual bank cannot exceed 65% 2/ of its short-term financing operations. As regards development banks (BNDS) the medium-term rediscountable ceiling is defined by BCEAO as 150% of the sum of the bank's equity (minus fixed assets and its equity investments), and its long and medium-term resources (minus term loans not rediscountable). Medium-term rediscountable credits guaranteed by the Government are not included in the ceiling, although they nevertheless are eligible for discounting. A less favorable definition applies to commercial banks. Banque Nationale de Developpement du Senegal (BNDS) 3.06 BNDS was established in 1964 by merging two financial institutions: Banque Senegalaise de Developpement and Credit Populaire Senegalais. Its 1/ Between 1951 and 1973 CCCE made loans to private sector amounting to CFAF 7.3 billion of which CFAF 4.2 billion for one company. "Les Phosphates de Taiba". 2/ 50 percent for banks which do not participate in the financing of agri- culture crops.  - 12 - main shareholders are the Senegalese Governmen: (65%), CCCE (23%), and BCEAO (6%). The present share capital of CFAF 1,700 million will be increased in 1974 to CFAF 2,400 million through Government's subscription (CFAF 100 million) and conversion of Government's advances (CFAF 600 million). Formerly a multi-purpose development bank lending to all sectors of the economy, using CCCE funds for long-term loans and BCEAO rediscount facilities for medium-term lending, BNDS has specialized, since a Government decision in 1970, in operations to the agricultural and agro-business sectors. BNDS is primarily responsible for providing short-term crop loans; in 1971-72 it extended 70% of the short-term consortial groundnut crop credit. The total portfolio of BNDS short and medium-term loans to agriculture has grown from CFAF 6 billion in 1969 to CFAF 8.1 billion in 1973. BNDS is used to lend to cooperatives a part of two IDA credits of $6 million granted in 1969 and 1973 for developing production and yields of groundnut and millet-sorghum in the Groundnut Basin. BNDS long-term and medium-term operations to the private sector developed as follows (years ending September 30): 1969 1970 1971 1972 1973 No. Amount No. Amount No. Amount No. Amount No. Amount Industry / 2 72 1 36 7 816 /2 3 42 4 256 Fisheries - - 2 100 2 226 - - - - /1 Including agro-industry. 72 Of which CFAF 500 million to Campagnie Sucriere Senegalaise. 3.07 Comparative balance sheets and income statements of BNDS are given in Annex 4. After experiencing a loss of CFAF 22 million in 1970/71 and a breakeven year in 1971/72, operational surplus for the year ending September 30, 1973 is CFAF 172 million before depreciation and provisions for bad debts, and should result in a small net profit. For the past two years BNDS has been trying to improve its organization and clarify its accounts. A competent and dynamic General Manager has been appointed by the Government, its organization has been changed and most accounts clarified. Societe Fiduciere Suisse, an audit firm designated by IDA, has reorganized BNDS' accounting system. I Union Senegalaise de Banques 3.08 USB was established in 1961 to take over Credit Lyonnais' activites in Senegal. USB has a share capital of CFAF 1 billion distributed among the Government (32% directly and 19% held by BNDS), Credit Lyonnais (37%), and three German, Italian and US banks (about 4% each). Its Board of Directors has 12 members of whom 6 are Senegalese. Since its creation, USB has had the same Senegalese General Manager, who is assisted by a Deputy Managing Director seconded by Credit Lyonnais. Comparative financial statements of USB are shown in Annex 5.  - 13 - 3.09 The Government decided in 1970 to transfer from BNDS to USB the main responsibility for medium and long-term financing to industry. This, and USB's dynamism, explain the increase of USB's medium-term loans from 8 credits for CFAF 267 million in FY 1970 (year ending September 30) to 21 loans for CFAF 1.2 billion in FY 1972; and 20 loans for CFAF 1.1 billion in FY 1973, of which about half was for manufacturing projects. USB accounted for 37% of medium-term rediscountable loans made in FY 1972 in the country. USB's financial situation is good, although net profits have been moderate and now run at about 8% on equity. 3.10 To carry out its role in the long-term financing of industry, and particularly Senegalese enterprises, USB was recently granted, with the Government's guarantee, two lines of credit from KfW and the African Develop- ment Bank which are to finance small and medium-size projects in industry and services. 1/ The KfW line of credit is only to finance Senegalese controlled enterprises. To handle this business USB has created a department of "Industrial Development, Projects and Studies", which consisted of a senior officer and a young Senegalese university graduate as of November 1973. Their studies focus on basic questions of creditworthiness as opposed to in-depth project appraisal. USB has found it difficult to commit its loan from ADB because of the latter's rigid documentation requirements and may have to cancel it, as it has been paying a commitment charge since April and no com- mitments had been made as of November 1973; the credit line from KfW is expected to be fully committed by the end of 1974. USB has already sent eight projects to KfW which, is approved, would use three fourths of the loan. The Government and other lenders have agreed that future lines of credit for industrial financing will be channelled through SOFISEDIT. However USB will continue to grant medium-term loans rediscountable at BCEAO. The Commercial Banks 3.11 The three other commercial banks operating in Senegal besides USB are BICIS, BIAO and SGBS. BICIS, with a share capital of CFAF 750 million, is 37% owned by the French Banque Nationale de Paris and 51% by Societe Financiere pour les Pays d'Outre Mer which has among its shareholders BNP, Dresdner Bank, Banque Lambert and Bank of America. Private Senegalese hold 12%. First National City Bank has 49% of BIAO, the rest belongs to the French Compagnie Financiere France-Afrique. SGBS is a subsidiary of French Societe Generale. Its share capital was recently raised from CFAF 500 million to CFAF 625 million; private Senegalese investors are expected to hold 10%. 3.12 The three banks, which are approximately of the same size, are basically commercial banks. According to the banking law, they can make medium and long-term loans, as well as subscribe to equity investments. So far, their contribution to the financing of industrial investments in Senegal has been mainly through granting or participating in medium-term credits rediscountable at BCEAO. 1/ ADB: UA 1,500,000 (CFAF 400 million). Fifteen years (including three years' grace). Interest rate 7%, plus a 0.75% commitment fee. KfW: - 4,000,000 (CFAF 300 million). Thirty years (including ten years' grace). Interest rate 3.5% (of which 1.5% will be given to SONEPI's Guarantee Fund), plus a commitment fee of 0.25%.  - 14 - Interest Rates 3.13 Annex 6 summarizes the interest rate structure prevailing in the Western Africa Monetary Union. This structure is built around the rediscount rate of the Central Bank, which remained unchanged until the end of 1972 at 3.5 % and was then increased to 5.5% following recommendations by the Bank and the IMF. The interest rates charged to industrial firms for medium-term rediscountable loans ranges average 9%, while the interest rates on non- rediscountable loans average 11% per annum. These rates include various commissions which amount to about 1 percentage point on the average. Long- term rates (over 7 years) have been close to those charged for medium-term non-rediscountable loans. Need for Long-Term Credit 3.14 Outstanding balances of medium-term and long-term loans extended in Senegal to industrial sector by banks and CCCE (details in Annex 7) are given below (September 30 of each year): 1968 1969 1970 1971 1972 1973 (in CFAF million) Medium-term (2-7 yrs.) 990 1,369 1,557 1,756 1,644 1,805 Long-term (7 + yrs.) 3,313 4,010 5,080 4,914 4,551 4,270 Long-term loans, as pointed out before, are extended by CCCE directly or tlhrough BNDS; of the outstanding 1973 balance, about two-thirds repr,>sent loans extended to a phosphate company, and the rest are loans to lest than ten companies. Most medium-term loans are rediscountable at the Central Bank. 3.15 There are several indicators that the Central Bank's policies have been restrictive. Between 1963 and 1970 money supply declined as a proportion of GDP, while credit to the private sector increased at less than 2 percent per annum. This in part reflects the poor economic performance of the 1960's; to some extent, however, this is the result of economic policies. Restrictions have also been felt with respect to the maturity of loans. Short and medium-term loans (2-7 years) are rediscountable with the Central Bank, but there was no local source of longer-term finance; moreover, it appears that the distribution of medium-term credit has been concentrated at the lower end of the 2-7 years term. 3.16 In the context of this credit system, the creation of a specialized long-term lending institution as desired by the Government and the commercial banks subscribing to its capital woulc be expected to contribute in three ways to economic growth in Senegal. First, medium-term credit is limited in amount and duration by BCEAO rules, so that banks tend to provide it primarily to well-established and non-risky large companies for their expansion projects. In that respect, the impact of the medium-term credit program is limited, and  - 15 - has done little to give impetus to the development of Senegalese entrepreneurs (hence the SONEPI financing shceme). Moreover, currently available credit is too short a term for some new projects, particularly in the tourism sector. Several projects have been delayed through lack of long-term financing, partic- ularly in tourism. The new institution would fill the existing gap in long-term financing. Second, a specialized long-term finance institution not ligned with one particular bank is desirable to have a more national institntion with reasonably broad international contacts at the center of Senegal's future industrialization efforts. Third, such an institution would not merely be a channel for foreign long-term funds into the country, but also help attract foreign investors and play a promotional role in economic growth. IV. THE SOFISEDIT PROPOSAL Background 4.01 In 1969, following the difficulties experienced by BNDS, the Gove7nment decided that BNDS should specialize in the agricultural and agribusiness sectors. A Bank mission visited Senegal in February 1970, at the Government's request, to examine the feasibility of creating a new development bank to specialize in long-term financing for industrial projects. Following this mission the Bank advised the Government that potential business at that time was not sufficient to justify the creation of a new institution and suggested instead that USB extend its activity to long-term lending. In 1972, the Government proposed the establishment of SOFISEDIT, whose capital would be subscribed by Government, BCEAO, BNDS, USB and the other three commercial banks, Caisse Centrale and IFC. In view of the time elapsed since the 1970 mission and the additional business possibilities which hotel financing would bring to the new institution, the Bank sent a mission in November 1972 to re-evaluate the situation and consider the SOFISEDIT proposal. 4.02 There were three alternative channels of long-term financing for industry and tourism: BNDS, USB and SOFISEDIT.' The Government strongly believed that BNDS should focus in its own reorganization and concentrate on agricultural lending; also, BNDS had no desire or capability in its present form to undertake any significant industrial financing. Concerning USB, which had no particular industrial financing expertise, the Government felt that it would not have the support of the banking community; if USB in addition to its commercial banking operations, had the competitive edge of long-term financing facilities it would become dominant, and the Government and other banks wanted to avoid this. The third alternative involving the creation of SOFISEDIT, which had the firm support of the Government, implied considerable efforts and costs in creating and building up an institution with its own staff. However, in view of the reasons explained in para. 3.16, it was considered the most feasible means of establishing a well-managed  - 16 - long-term industrial and tourism financing institution in Senegal; its operational outlook appeared sufficient to ensure its financial viability (although with modest profits) without asking for inordinate advantages in the form of low interest subordinated loans from the Government. 4.03 After discussions with the Government over the pros and cons of all the alternatives the Bank and IFC decided to support the proposal. The Government believed that SOFISEDIT should be an independent institution basing its decisions on businesslike criteria and wanted to have an inter- national group of shareholders represented in the institution. The IFC participation in SOFISEDIT is importart to bring in other participants, to ensure a good start, the adoption by the company of sound policies, and a stronger and more independent Board of Directors; and it was for these reasons that the Government was keen to involve the Bank Group. 4.04 A Working Group including representatives of the prospective share- holders of SOFISEDIT as well as SONEPI was formed in June 1973. The Group did a thorough job of preparing the proposal. It discussed SOFISEDIT's prospective policies, organization and staff, projected operations and relationships with existing financial and promotion institutions in the country. SOFISEDIT was incorporated on March 19, 1974. Legal Basis 4.05 SOFISEDIT is a societe anonyme under the Senegalese Commercial Code and a financial institution subject to Banking legislation from BCEAO. SOFISEDIT's functions are determined by its statutes, which were prepared by the Working Group in consultation with IFC and the Bank. A Law and a "Convention d'Etablissement" enabling SOFISEDIT to benefit from the advantages granted by the Investment Code are expected to be passed before June 1974. These benefits are a 5-year income-tax holiday, a 5-year exemption of "patente" (licensing fees) and an exemption of the registration tax on the constitution of the company. Ownership 4.06 SOFISEDIT's present share capital of CFAF 460 million will be raised to CFAF 650 million divided into shares of CFAF 100,000. The Govern- ment will be the largest shareholder; its investment, together with the Central Bank, BNDS, USB and private Senegalese investors, will represent about 52% of SOFISEDIT's share capital. Other shareholders are expected to include BICIS, SGBS and BIAO, Caisse Centrale, IFC and FMO (Holland). Annex 8 shows the present and contemplated Board of Directors and ownership structures. Although there will be a clear Senegalese majority ownership in SOFISEDIT, it is in the intention of all parties that the company will represent a cooperative effort and that due respect will be paid to the views of minority shareholders. Accordingly, a two thirds majority of votes will be required to increase or reduce SOFISEDIT's share capital, to amend its Statutes and Policy Statement, and to elect and delegate powers to the President of SOFISEDIT.  - 17 - Two-Stage Formation 4.07 The establishment of SOFISEDIT is being achieved in two steps to facilitate the entering into agreements with IFC and foreign shareholders by an established legal entity. The first stage already accomplished has included the incorporation of the company, the paying-in of their part of the share capital by shareholders accounting for over two-thirds of the share capital (mainly the Government, Central Bank, BNDS, and four commercial banks) and the appointment of a Board of Directors and the Chief Executive Officer. The second stage, which should be accomplished in the summer of 1974, will be in the form of an increase in SOFI1EDIT's share capital with the existing share- holders waving their preemptive rights to the new shares. This stage will include the paying-in of their part by the new shareholders, (IFC, Caisse Centrale and FMO), the expansion of the Board to include the foreign Directors, the signing of the Bank loan, the assumption of duty by the foreign experts occupying senior positions in SOFISEDIT, the recruitment of Senegalese staff and the opening of SOFISEDIT's doors for business. Objectives and Powers 4.09 SOFISEDIT's Policy Statement (para. 4.11) adopted by the Board of Directors on March 21, 1974 states that SOFISEDIT will take part in the economic development in Senegal by promoting the establishment, expansion and moder- nization. of enterprises in industry and tourism. To this end, it will provide medium and long-term loans, invest in equities, underwrite securities and guarantee credit from other sources. 4.10 The Government is conscious of the need to define the role of SOFISEDIT and to avoid competition among long-term financing institutions which in a small market like Senegal, could result in a relaxation of economic and financial criteria. Accordingly, it plans to give SOFISEDIT priority in long-term financing of industry and tourism. This priority, reflected in the Establishment Convention, will prevent other existing or future institutions in Senegal from making long-term loans to tourism or industrial enterprises unless SOFISEDIT has decided not to finance such projects or has decided to invest jointly with them; this measure will not apply, however, to USB's existing lines of credit from KfW and ADB (see paragraph 3.10). To determine the limit of responsibilities with BNDS, the Working Group decided that BNDS would have the leadership of apppraising agribusiness projects in which the industrial operation is directly tied to an agricultural crop grown by the prospective client (e.g. a cotton ginnery, a tomato canning plant tied to a tomato plantation); such projects, however, could be co-financed with SOFISEDIT, which is likely to have more resources for long-term financing than BNDS. SOFISEDIT will be responsible for appraising and financing other projects involving processing of agricultural goods in which the plant is not tied to a plantation.  8- Policies 4.11 SOFISEDIT's operations will be guided by its Policy Statement (Annex 9) which was drafted in consultation with the Bank Group. It con- forms in most respects to policy statements adopted by other development finance companies. According to it SOFISEDIT will normally limit its total financial assistance to a single enterprise to 20% of its own share capital and free reserves, which will amount initially to CFAF 130 million (about $520,000). Its minimum amount of assistance wuill be CFAF 2 million. Its equity investment in one enterprise will not ecceed 15% of its own share capital and free reserves. In accordance with Senegal's banking legislation, its total equity holdings will not be greater than 75% of its own share capital and free reserves. It will normally not hold more than 25% of an enterprise's share capital. SOFISEDIT will normally finance only up to 50% of the cost of a project, including permanent working capital. Board of Directors 4.12 The Board of Directors will be responsible for overall policies, procedures and operations. The number of Board members will be twelve (see Annex 10); six will represent the Government and strictly senegalese institu- tions, while the other six will represent the three foreign-owned commercial banks, plus CCCE, FMO and IFC. The Chairman, a Senegalese, will have a cast- ing vote in the event of a tie. The term of office of the Directors will be six years. The Statutes require the Board to meet at least four times a year. Since most of SOFISEDIT's shareholders will be in Senegal, there will be no Executive Committee. The Board Meetings will be scheduled in such a way that Foreign Board members who cannot attend a meeting will receive the Agenda and documents with ample time to transmit their comments and vote. 4.13 Government Directors and representatives of the other shareholders in the public sector (see Annex 10) are persons of independent judgment and of high caliber, stature and experience in banking and will contribute to form a strong and qualified Board of Directors. Hanagement and Staff 4.14 President. The full time President of SOFISEDIT will also be the Chairman of the Board of Directors and will be responsible for operations and the implementation of policies and procedures laid down by the Board. The W4orking Group, IFC and the Bank stressed that the selection of the Chief Executive is fundamental to the proposal; the Government nominated and the Board elected Mr. Ibrahima N'Diaye as President. M4r. N'Diaye, 46, has been Director of the Senegalese Post Telephone and Telegraph Office; although he has no banking experience, he has a reputation of being honest, intelligent and an able administrator. He has good relations in both the private and public sectors and an excellent standing in Senegal. Mr. N'Diaye summarized curriculum vitae is shown in Annex 11.  - 19 - 4.15 Deputy General Manager. The President will be assisted by a foreign Deputy General Manager, who should be able to help the President in establishing SOFISEDIT, recruiting its personnel, setting up procedures, coordinating the staff, preparing the budget and financial projections, formulating policy proposals, developing outside contacts and any other functions. The Bank Group proposed candidates to the Government and SOFISEDIT and is in the process of recruiting the candidate selected by the Senegalese. 4.16 Staff. Initially, only a small Senegalese professional staff will be required, including an accountant, an engineer, and three project financial analysts/economists. This staffing is expected to be adequate for SOFISEDIT's intial forecast business of about twelve projects a year, since it will also be able to draw occasionally on SONEPI's expertise (see para. 4.20). Given the need to train Senegalese for developing banking work, an experienced Director of Investments is being sought by SOFISEDIT. The Bank Group also proposed candidates to the Government and SOFISEDIT has recruited the candidate they selected. During negotiations SOFISEDIT agreed to recruit a qualified engineer and at least one suitable project officer before the Bank loan becomes effective. 4.17 Financing of foreign experts. In several recently created develop- ment finance companies, the initial external technical assistance has been financed by a UNDP grant. Such assistance is costly relative to the budgets of new, small institutions; unfortunately UNDP funds for Senegal are fully committed and not available for the SOFISEDIT project. Bilateral assistance was also not available, and the Government prefers the World Bank Group, rather than bilateral donor countries, to propose candidates. Since the Government has budgetary problems, and SOFISEDIT cannot afford the full amount of up to $200,000 needed to cover the cost of the expatriates team for a two-year period, the cost will have to be financed out of the Bank loan and be partially reimbursed to SOFISEDIT by the Government. The Government has agreed to assume 80% of the cost of the experts with SOFISEDIT financing 20%. The amount utilized will be repayed to the Bank in ten equal semiannual installments at the end of the amortization scheduled of the proposed Bank loan. Appraisal Procedures 4.18 Given the important role that SOFISEDIT will play in Senegal SOFISEDIT will need to develop rapidly a good capability in the economic analysis of projects. During negotiations, SOFISEDIT and the Bank have agreed on guidelines to estimate the economic rate of return of projects financed by SOFISEDIT. 4.19 SONEPI's economic analysis of projects applying for incentives under the Investment Code has been weak. Several projects of doubtful economic justification have been recommended by SONEPI and obtained incen- tives. Any economic analysis undertaken by SOFISEDIT of a project submitted to it yielding negative conclusions would result in SOFISEDIT rejecting the  - 20 - project but not necessarily in preventing its implementation if the project has already obtained incentives. Thus, upgrading of SONEPI's economic appraisal capacity and close coordination between SONEPI and SOFISEDIT are essential to ensure: (a) That as many projects as possible receiving incentives and submitted to SOFISEDIT for financing are economically viable. (b) A consistent method of economic analysis by SONEPI and SOFISEDIT. (c) Occasionally, coordination of appraisal and follow-up of industrial projects, so that SOFISEDIT can draw on expertise SONEPI may have in a particular technical or market area and SONEPI on SOFISEDIT's financial skills. 4.20 To assure coordination three measures have been taken: (a) SOFISEDIT's Managing Director will sit on SONEPI's Board and Equity Participation Committee and the President of SONEPI will be invited to SOFISEDIT Board Meetings as an observer. (b) SOFISEDIT will be invited to attend all meetings of the Technical Commission, (see para. 2.24) so that it receives the project studies submitted by SONEPI and has the opportunity to discuss them at an early stage and to express an opinion as to the merits of projects. (c) Coordination at the staff level will be encouraged while still leaving SOFISEDIT free to accept/reject projects. Finally, it would be worthwhile for SOFISEDIT to consider giving SONEPI a long-term loan of about CFAF 20 million. All future SOFISEDIT shareholders are in favor of such contribution which would reinforce SOFISEDIT's ties with SONEPI, contribute to increase the proportion of SOFISEDIT's assistance to Senegalese-owned enterprises, and increase SONEPI's scarce resources for its equity participation and guarantee fund. The Government has agreed to guarantee the loan, which would be considered as a one-time interim arrange- ment with a view to a future possible Bank Group project involving direct assistance to SONEPI. 4.21 SONEPI's appraisal capacity should improve and consistency in economic analysis of both institutions should be sought. A SONEPI staff mem- ber is now attending the industrial projects course at the Economic Develop- ment Institute. SONEPI's management expects to organize a seminar attended by staff of SONEPI and SOFISEDIT where guidelines for economic appraisal of projects adopted by SOFISEDIT will be explained and discussed. Bank staff  - 21 - members are expected to participate in this seminar. Other measures to up- grade SONEPI's economic appraisals will include attendance by SONEPI staff to a good course in project evaluation at the University of Dakar. Relations with Other Institutions 4.22 SOFISEDIT will have access to medium-term rediscounting facilities at the Central Bank and will have to work closely with the four commercial banks in the appraisal and follow-up of jointly financed projects. The commercial banks' shareholding and board memberships in SOFISEDIT should be conducive to good relations with SOFISEDIT. A close association with SNPT will also be important and useful for SOFISEDIT to facilitate its technical appraisal of hotel projects. Auditors 4.23 SOFISEDIT is now in the process of selecting its Auditors; they will, under the terms of the Bank's loan agreement with SOFISEDIT, have to be satisfactory to the Bank Group. V. OPERATIONAL AND FINANCIAL FORECASTS Business Outlook and Forecast Operations 5.01 SOFISEDIT will start operations in mid 1974. Thus the relevant period for investment forecasts would commence in 1975. As noted earlier (para. 2.21) projections of annual industrial investment of CFAF 4 billion in 1974/75 $16 million equivalent) increasing to about CFAF 5.0 billion in 1978/79 appear reasonable, while investment in tourism of CFAF 2 billion in 1974/75 should grow at least at 15% annually and reach CFAF 3.5 billion in 1978/79. 5.02 Annex 12 shows a sizable list of projects now under preparation which could come for consideration to SOFISEDIT in its first three years of operations. While most medium and large industrial projects (partic- ularly new projects in food processing and extensions of existing enterprises) will be adequately financed with medium-term funds, SOFISEDIT's long-term financing will be needed for tourism projects, for some new industrial projects for investments needed by groundnut oil processing companies to maintain their exports and for small-scale industry. 5.03 Since long-term loans for industry and tourism have not been available locally, the proportion of investment which could be financed by SOFISEDIT is difficult to predict. About 30% of total investment in tourism to date has been financed through long-term loans (12 years or more) from CCCE, EIB and other foreign institutions. An additional 22% has been  - 22 - financed by medium-term rediscountable loans part of which might have been financed by long-term loans had they been available locally. Thus, it would appear at first glance that SOFISEDIT could finance up to one half of total investment in tourism. However, important hotel projects will probably be units of 400 or more beds which, at a cost of about CFAF 2.5 million/bed, would imply total investment of CFAF 1 billion, while SOFISEDIT's maximum single commitment to a single project would be about CFAF 130 million (20% of SOFISEDIT's equity) equivalent to 12% of the capital cost of a hotel. It is estimated that in its initial years SOFISEDIT will finance through loans 67' of total industrial and tourism investment in Senegal, increasing to 10% in the third year of operations and remaining at 11% after the fourth year. This seems a reasonable target. Resource Requirements 5.04 Assumptions for SOFISEDIT's forecast operations are shown in Annex 13 while Annex 14 shows the projected level of operations from 1974/75 to 1979/80. On these assumptions, SOFISEDIT's operations through 1976 are projected as follows (in CFAF million): Jun-Dec Approvals 1974/75 1975/76 1976 (a) Long-term loans 430 625 425 (b) Medium-term loans (5% of investment) 360 390 215 (c) Equity Investments (10% of (a)) 43 62 43 833 1,077 683 Commitments (a) Long-term loans 215 525 370 (b) Medium-term loans 180 375 205 (c) Equity Investments 21 53 37 416 953 612 5.05 While medium-term loans will be rediscounted at the Central Bank and equity investments will be financed by SOFISEDIT's own equity, SOFISEDIT will need to finance up to 90% of its long-term loans with foreign borrowings. A Bank loan of $3 million will cover about two thirds of SOFISEDIT's long-term borrowings required to cover long-term loan commitments totalling CFAF 1.1 billion through 1976. KfW and CCCE are expected to finance one third of SOFISEDIT's long-term borrowings; KfW after its present line of credit to USB is fully com- mitted early in 1975, and CCCE on a project by project basis. Projected Profitability and Financial Position 5.06 The financial projections assume that SOFISEDIT will be able to lend at 9-1/2