Benin - Industrial Development Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. P-2720-BEN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE PEOPLE'S REPUBLIC OF BENIN FOR AN INDUSTRIAL DEVELOPMENT PROJECT March 3, 1980 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit: CFA Franc (CFAF) US$1 = CFAF 210 CFAF 1 million = US$4,762 The CFA Franc is pegged to the French Franc at the fixed rate of CFAF 1 = FFO.02 and floats vis-a-vis the US dollar. ABBREVIATIONS BBD Banque Beninoise pour le Developpement BCB Banque Commerciale du Benin BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest CCI Chambre de Commerce et d'Industrie du Benin CNCA Caisse Nationale de Credit Agricole CNE Caisse Nationale d'Epargne CNPA Centre National de Promotion Artisanale CPPE Centre de Perfectionnement du Personnel d'Entreprise IBETEX Industrie Beninoise des Textiles IDA Association Internationale pour le Developpement ILO International Labor Organization OPEC Organization of Petroleum Exporting Countries SONACOTRAP Societe Nationale de Construction SONAGIM Societe Nationale de Gestion Immobiliere UNDP United Nations Development Program UNIDO United Nations Industrial Development Agency FISCAL YEAR Government: January 1 - December 31 BBD: October 1 - September 30  FOR OFFICIAL USE ONLY BENIN INDUSTRIAL DEVELOPMENT PROJECT Project Summary Borrower: People's Republic of Benin Beneficiary: Banque Beninoise pour le Developpement (BBD) Amount: US$10.0 million Terms: Standard IDA Terms Relending Terms: US$8.6 million from the proceeds of the Credit would be relent to BBD at 8.0 percent per anntum for eighteen years including five years of grace, to be repaid accord- ing to a fixed amortization schedule. The balance (US$1.4 million) would be made available as a grant by the Government to BBD to finance technical assistance and studies. Project Description: The Project's objectives are to make available to Banque Beninoise pour le Developpement (BBD) needed term resources for financing small and medium-scale investments in the industrial sector and through the provision of technical assistance to help build up BBD's capacity to identify, promote and assist industrial projects. The project would also offer an opportunity to advise the Government and the Beneficiary on industrial and financial sector issues and policies. Estimated Costs: The project cost is estimated at US$13.6 million including US$1.3 million in taxes. Foreign exchange costs would be about US$9.1 million or 74 percent of net of taxes cost. A summary cost table follows: Prolect cost net-of-taxes A. Industrial Investments US$ Thousand Local Foreign Total 1. Small-scale and labor intensive investments 722 1,878 2,600 2. Medium-scale investments 2,308 6,000 8,308 3. Technical Assistance 200 1,200 1,400 Total 3,230 9,078 12,308 | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization  - ii - Following is a table indicating the financing plan for the various project components: Prolect Financing Plan US$ Thousand A. Industrial Investments IDA BBD Entrepreneurs Total Small-scale and labor-intensive investments 2,600 288 2,888 Medium-scale investments 6,000 3,231 9,231 Total Investments 8,600 3,519 12,119 B. Technical Assistance 1,400 50 5 1,455 TOTAL 10,000 50 3,524 13,574 US$ Thousand Estimated Disbursements FY81 FY82 FY83 FY84 FY85 Annual 650 2,269 2,853 3,168 1,060 Cumulative 650 2,919 5,772 8,940 10,000 Appraisal Report No. 2719-BEN dated February 26, 1980  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECODMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE PEOPLE'S REPUBLIC OF BENIN FOR AN INDUSTRIAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed development credit to the People's Republic of Benin for the equivalent of US$10.0 million on standard IDA terms to help finance an industrial develop- ment project. US$8.6 million out of the proceeds of the Credit would be relent to Banque Beninoise pour le Developpement for 18 years including 5 years of grace, with interest at 8 percent per annum. Part I - The Economy 2. The latest economic report on Benin (Report No. 2079-BEN, issued in May 1979) was the result of a basic economic mission which visited the country in fall 1977. The paragraphs below are based on this report, but include updated information. Introduction 3. Following independence in 1960, there were numerous changes in Government emanating from the rivalry between the three kingdoms which had traditionally formed the country. No single leader was able to maintain a dominant role until the revolution in 1972 which brought to power the military Government of President Kerekou. 4. The new regime took immediate steps to replace the foreign domination of the modern sector and strengthen the Government's involvement in the agricultural sector. These measures initially disrupted the economy since there was an inadequate number of trained Beninese to replace the departing expatriates. However, the Government also pursued conservative financial policies which resulted in budgetary surpluses and the maintenance of the debt service ratio at less than five percent. 5. Benin has now enjoyed a comparatively long period of political stability under which a blend of pragmatic nationalism and socialist philoso- phy has emerged. Following the adoption of a new constitution Lieutenant Colonel M. Kerekou was recently confirmed President of the Republic for a 3-year term by a newly-elected National Assembly. Mtr. Kerekou has in turn appointed a civilian dominated government. 6. The nation is poised for a period of moderate growth propelled by major investments in the industrial sector. But Benin's near-term prospects should be assessed with caution because they are dependent on a few key factors: strength of the Nigeria and Niger markets, success of key industrial projects and, continuation of a prudent budgetary policy.  -2- Recent Economic Developments 7. With a population of 3.2 million people and a GNP per capita of $230 per annum, Benin remains one of the least developed countries as defined by the U.N. Over the 1972-78 period, the country enjoyed an average real GDP growth rate of 4% and a sound public finance position. Exports are little diversified (mainly oil palm products, cotton, and cocoa), and a large resource gap (25% of GDP over 1972-78) has been recorded. Foreign reserves have remained at about one month's imports; a decline in late 1978 has subse- quently been reversed. 8. The Agricultural sector, which generates income for about 60 percent of the population and which generated 37 percent of the GDP in 1978, has not substantially increased its output over the past decade. Foodcrops have at best followed the growth of population. Cotton production peaked in 1972 at 50,000 tons but has since fallen to around 15,000-20,000 tons. Palm oil production continued to increase in the mid-1970s, but output has been reduced following a severe drought in 1976. Institutional changes, insufficient price incentives, lack of financial resources and the absence of technical assistance are the main reasons for this unsatisfac- tory performance. Since 1974 the Government has experimented with a number of organizational and policy approaches to the sector's problems, but conflicts between agencies, a desire for centralized control, and a neglect of extension services have seriously eroded the efficiency of the sector. 9. The industrial sector is still undeveloped due to a lack of skilled manpower, smallness of the local market and institutional con- straints. It employs less than 2 percent of the labor force, contributes 12 percent to GDP (1978) and consists mostly of agricultural processing and import-substitution activities. The sector achieved an 11 percent annual growth rate during 1972-76, but slowed down to 4.0 percent during 1977-78 because of a fall-off in demand from the Nigerian market. Currently, Benin is beginning to exploit its natural resources through several major industrial projects, for example, the Onigbolo cement factory (limestone), the Save sugar plant and the Seme offshore oil field. 10. The tertiary sector (mainly transport and commerce) constitutes the second most important activity of the economy, accounting for 41 percent of GDP (1978) and employing almost 40 percent of the labor force. The port of Cotonou has traditionally provided access to the sea for landlocked Niger and the western part of Nigeria. The volume of transit trade through Cotonou Port was insignificant as late as 1974, but rose to 330,000 tons in 1977. This transit trade, however, declined in 1978 due to Nigerian import restrictions. 11. There has been a significant improvement in the central Government's current financial situation over the last decade. The chronic current budget deficits of the 1960's, financed by French Treasury transfers, were eliminated during the first half of the seventies. During 1976-78 the budget registered current surpluses averaging a high 23 percent of current  - 3 - revenues. The Government has controlled the growth of current expenditures, which did not increase in real terms during the 1972-1977 period. The 1976-1977 surplus was due to the sudden rise of tax revenues resulting from the growing transit trade to Nigeria and also, to a lesser extent, to the development of Beninese industrial activities. Some levelling off or decline in public revenues related to the Nigeria trade, combined wi- expected heavy demands on the Treasury for investment projects, will probably tighten the budget picture in coming years. 12. Prices have also been kept under control and the overall rate of inflation (on an implicit GDP deflator basis) has declined from 11 percent in 1976 to 8.5 percent in 1977 and 5 percent in 1978.1/ Thus, inflation in Benin continues to be considerably lower than in neighboring countries, owing to the commercial sector's vitality and the Government's policies of wage restraint and limited spending. Should import prices continue to rise and domestic food shortages occur again, inflation might however be expected to pick up slightly to 6-7 percent in 1980. The increased economic activity induced by the implementation of new investments is likely to maintain this trend in the following years and inflation is forecasted at 8-9 percent for 1981 and 1982. 13. The Government is committed to broad-based socio-economic policies, but a key concern hitherto has been to keep wages and salaries low because of limited public revenues. In real terms, both public and private sector salaries have declined. Cash incomes of the farmers may have increased slightly; the losses resulting from the drop in cotton production probably having been made up by increased exports of maize to Nigeria. Thus, in Benin, the gap between urban and rural income has not increased in recent years. Education is one of the Government's top priorities. It is in the process of implementing reforms aimed at both adjusting the education system to the needs of the country, and reducing the high cost of formal education which absorbs 40 percent of the Government's recurrent budget. Health faci- lities are still poor, and the social indicators for Benin (literacy, life expectancy, etc.) remain well below the average for low income developing countries. The 1978-80 Development Plan 14. A Three-Year Plan (1978-80) was issued in October 1977, setting out the Government's economic goals. Its stated objectives are to raise the general standard of living, to achieve independent national direction of economic policies, and to promote broad participation in the conception and implementation of economic and social changes. Investment allocation proposed in the Plan favors large-scale projects. The major items are: a 40,000-ton sugar project at Save (US$210 million); a 500,000-ton cement plant at Onigbolo (US$159 million); the Seme offshore oil production project (US$120 million), estimated to yield about 20 million barrels and the Cotonou Port extension (US$50 million), financed by IDA and seven other agencies. These projects together account for some 45 percent of the investment foreseen in the Plan. The sugar and cement projects are joint ventures with the Nigerian Government, 1/ IMF staff estimates.  - 4 - with Nigerian marketing and financing guarantees. Work on Cotonou Port is underway. The production of sugar, cement and oil should commence around 1983. 15. Based upon an analysis of the major projects and Benin's financing possibilities, Bank staff estimate that only 70 percent of the planned US$1.1 billion investment will materialize, and will be disbursed over five years rather than three. The Government's review of implementation of the first year of the Plan (1978) revealed that only 36 percent of the projected volume of investment materialized. Furthermore, the deepseated problems facing the rural sector are not really addressed in the Plan. The low rate of investment in agriculture is partly due to the lack of viable projects, which in turn is related to institutional problems, the absence of effec- tive extension services, and poor marketing arrangements for export crops. However, the several large projects in the Plan will push the overall public investment rate to 19 percent of GDP on average over the 1978-83 period, compared with 10 percent over 1972-77. Prospects 16. The medium-term outlook for economic growth in Benin is moderately optimistic. Real GDP growth during 1979-85 is expected to average 5-6 percent per annum. The downside risks to Benin's economy are the reliance on Nigerian demand which has been weak over the past year, and the negative impact of problems which may arise in implementing the large projects. The benefits from these projects are, in turn, dependent upon price agreements (specifically with Nigeria in the case of cement and sugar). Benin's growth prospects will, moreover, depend on effective pricing and marketing policies in the rural sector. In the long-term, Benin's growth potential will be limited by a poor resource base to perhaps 4 percent per year, and even the achievement of this rate will depend on the ability of Government to channel resources and orient programs (in social and economic infrastructure, training, marketing, etc.) to the development of food and cash crops. 17. Benin's public finance and balance of payments situation may fluctuate more over the next five years than has been the case in the preceding half-decade. In the mid-1970s, conservative public policies led to budget surpluses and a stable trend in foreign reserves. This partly reflected, however, the lack of sizable new initiatives in public investment. The situation is now changed with the implementation of the Three-Year Plan which places heavy demands on the Treasury for counterpart funding, and steps up the pace of capital and intermediate goods imports matched by foreign financial inflows. The balance of payments will undergo fluctuations between now and 1985 under the impact of the major projects. Since the large projects underway will heavily influence the trade balance and public finances, their successful implementation is essential for Benin's medium term outlook.  18. Benin's total external debt (including undisbursed), which until the end of 1978 had remained relatively low, amounting to US$260 million with a debt service equivalent to 5-6 percent of the country's exports, is expected to rise substantially as investments increase and borrowing conditions harden. The debt service ratio is projected to reach 22-27 percent of --ports in the mid-80s. This ratio is high, but up to 80 percent of the debt service is accounted for by the large projects, two of which are guaranteed by Nigeria. Nevertheless, this points up Benin's vulnerability. Were any of the major projects to encounter serious problems (cost overruns, inefficient management, or unprofitable pricing agreements with Nigeria) then the debt burden could quickly become unmanage- able. The low level of Benin's traditional exports (only 19 percent of GDP in 1972-77) does not permit much flexibility in this respect. 19. In view of the country's low per capita income, the growing need for external funding of priority projects in an expanding economy, and Benin's narrow export base, it will be necessary to increase the volume of foreign financing on concessionary terms. Benin is expected to be able to finance no more than 10-15 percent of its overall public investment program. Thus foreign donors should continue to provide a large share of total project costs, including the financing of local costs. PART II - BANK GROUP OPERATIONS IN BENIN 20. To date the Bank Group has extended nine credits to Benin, plus two supplementary credits totalling US$67.8 million. Three of the credits were for agriculture (19 percent of total lending), four for highway con- struction and maintenance (59 percent), and one for the extension of port facilities. The ninth operation was an education project focussing on training of rural youth. Annex II contains a summary statement of Bank Group operations in Benin as of December 31, 1979, as well as notes on the execution of ongoing projects. 21. IDA's first operation in Benin was the Hinvi Agricultural Development Project (1969), which provided for oil palm plantings and food crop development and the construction of an oil palm mill. The project was successfully completed in 1974. The second agricultural credit was the Zou-Borgou Cotton Project (1972). This operation, co-financed by FAC, was aimed at expanding cotton and fooderop production in the Zou and Borgou provinces. Due to organizational upheavals, managerial problems and frequent policy revisions in the agricultural sector during its implementa- tion, the project failed to achieve its main objective, resulting in a severe decline of Benin's cotton program. The Performance Audit Report for the Zou-Borgou project (Sec M78-353) was issued in April 1978 and that for the Hinvi Agricultural Development Project (Sec M78-451) in May 1978. The third project, Technical Assistance (1977), is scheduled for completion in June 1980. Its objectives are to reverse the Zou-Bourgou Project setbacks, to strengthen the country's agricultural institutions and to prepare follow-up rural development projects. The first of these, in the Borgou Region, is due for appraisal in mid-1980.  - 6 - 22. The Bank Group's involvement in the transport sector in Benin began in 1969, when the Bank acted as Executing Agency for a UNDP "Land Transport Study". This study led to the financing of a four-year (1970- 1974) Highway Maintenance Project. Under the first project, the Government department then responsible for maintenance was reorganized and a training program was carried out (Completion Report N. Sec. M77-758 of October 25, 1977). The Second Highway Project, co-financed by USAID, comprised princi- pally the reconstruction of 320 km of the Parakou-Malanville road, Benin's most important north-south trunk road which links Cotonou to the Niger border, and the continuation of the road maintenance program. This project was completed in June 1977 with the help of a supplementary credit of US$9 million due to severe cost overruns. The Third Highway Project, approved in November 1977, provides for the rehabilitation of a 107 km section of the southern part of the north-south axis (between Godomey and Bohicon) and the expansion of the maintenance program, including the elimination of the backlog in resurfacing bituminous and laterite roads. In addition, a Feeder Roads Project, which provides for the construction and maintenance of about 1,270 km of feeder roads and for the preparation of a long-term feeder road development program in support of agriculture, was approved in FY77. A first Port project was approved in FY78. Its major objective is to raise the cargo capacity of the port of Cotonou from 720,000 tons per year to about 1,100,000 tons by providing about 660 m of additional berth capacity together with additional storage facilities. The project includes technical assistance to improve the efficiency of port operations, cargo handling and the operations of the Cotonou-Parakou railway. 23. The First Education Project, which was approved in FY 74, provides for the improvement of rural youth training programs and the construction and equipment of a skills upgrading center in Cotonou. The project includes a pre-investment study for a follow-up training/education project currently under preparation. 24. The emphasis in future IDA operations in Benin will shift from transportation to agriculture and rural development. Two rural development projects are envisaged for FY81 and FY83. The lending program will also probably include support for the development of the SEME oilfield and urban development in Cotonou. PART III - THE INDUSTRIAL SECTOR AND FINANCIAL INSTITUTIONS The Industrial Sector 25. Benin's industrial sector is still embryonic, contributing only about 12 percent of GDP and employing about 2 percent of the labor force. Fueled by exports to Nigeria (an estimated three-fourths of Benin's indus- trial output find their way into Nigeria), industrial growth has been rapid: between 1971 and 1976 value added increased 26 percent a year in real terms, turnover 21 percent and investment 35 percent. Modern industry accounted for most of this growth: the traditional artisan sector only a small percentage.  - 7 - 26. Modern industry comprises about 75 firms, of which 63 are located in Cotonou, Porto Novo and Parakou. These firms are mostly involved in agricultural processing, manufacturing and construction. Eight firms (all nationalized) account for three-fourths of total sales. They are primarily producers of cement, textiles, oil processing and beverage industries. Most of the remaining firms are small and privately owned. `ley include food processing, beverages, vehicle assembly, mechanical worKshops, bakeries, furniture making, paint, perfume and other consumer goods. An interesting cooperative (COBEMAG) producing agricultural implements -animal drawn carts and ploughs- has been operating in Parakou since 1976. It is wholly owned by its 150 workers. 27. Vegetable oil processing accounted for about one-fourth of industrial output during 1972-76. But the palm crop was severely affected by insufficient rainfall in recent years and marketed palm oil production declined sharply from 38,500 tons in 1975/76 to 9,400 tons in 1978/79. Palm fruit and palm kernels production dropped by about 50 percent during the same period. 28. Manufacturing has traditionally been oriented towards import- substitution. It includes a shoe factory, a modern brewery, a flour mill and clinker grinding plants. There are, however, some export oriented industries such as the integrated textile plant in Parakou (IBETEX). This is a joint venture (48 percent state ownership) with European firms with the capacity to produce about 3,200 tons a year of made-up articles and garments. 29. Small-scale enterprises, though common in the commercial field in Benin, are not well-developed in manufacturing. Only eight firms currently benefit from the Investment Code provisions for "small-scale" Beninese entrepreneurs, according to a 1977 industrial survey. The artisan population is quite large. A limited 1979 survey by the Ministry of Industry identifies some 10,000 master-artisans. As elsewhere in Africa, tailoring, metal working and woodworking are the most important crafts (23, 16 and 13 percent respectively). 30. Benin's transit role to Niger and Nigeria has led to a rapid growth of the road transport industry which carries 70% of all freight and 90% of all domestic passenger traffic. Although Government nationalized the two main transport agents, and created a national Truckirg Company (Trans-Benin) as well as regional transport companies, 350 small operators (with less than four trucks each) still handle the bulk of the traffic. 31. Benin's construction industry has a turnover of CFAF 6.5 billion in 1976 up from CFAF 2 billion in 1970-75. Foreign contractors handle most civil works but building construction remains in the hands of local firms whose capacity is constrained by the lack of equipment and capital. To lessen foreign domination on the sub-sector, Government established two public companies, Societe Nationale de Construction et des Travaux Publics (SONACOTRAP) in 1976, and Societe Nationale de Gestion Immobiliere (SONAGIM) in 1978.  - 8- Industrial Promotion and Training 32. No institution is specifically equipped to promote industry: "Bureau Central des Projets", a planning ministry agency in charge of industrial assistance focuses mostly on large-scale, government sponsored projects included in the Plan. The "Direction de l'Industrie" within the "Ministere de l'Industrie et de l'Artisanat" has only a regulatory and statistical function. The "Centre de Perfectionnement du Personnel des Entreprises" (CPPE) provides low level clerical and vocational training. The "Centre de Formation Administrative et de Perfectionnement" (CEFAP) trains Government and public sector employees. The only institutions catering to the needs of entrepreneurs and managers of small or medium-scale enterprises are the Chamber of Commerce (CCI) and Banque Beninoise pour le Developpement (BBD). CCI has successfully organized several training sessions for its members and managers of public enterprises. It also plans to organize its industrial extension service with the advice of UNIDO. BBD's "Direction des Etudes et de la Promotion" is the most active promotional agency, but it lacks engineering and managerial expertise. 33. Although the Government has been officially encouraging the formation of artisan cooperatives, no concrete measures have been taken and channels to deliver assistance to artisans have yet to be established. Prospects and Issues in Benin's Industrial Sector 34. Industrial Policy. The industrialization of Benin is considered essential to its development and the Three-Year Plan foresees an industrial growth rate much higher than that for the whole economy. Government has assigned three objectives to industry: (i) satisfy the immediate needs of the population, (ii) produce agricultural inputs and (iii) process agricul- tural products. To affirm public leadership over the sector, the State has taken over eight major firms which account for three-fourths of industrial sector sales, mostly in the cement, textile, oil processing and beverage industries. The state has been encouraging cooperatives for small-scale enterprises, but it keeps a pragmatic and positive attitude towards private enterprises in an effort to direct the strong business community from commerce to industry. The liberal investment code of 1972 is still effective and provides substantial incentives to enterprises investing more than CFAF 25 million, including exemption from import duties on equipment and machinery, reduction of up to 75 percent in import taxes on raw materials, exemption from the domestic turnover tax, etc. Incentives are granted on a case by case basis following a review of each project's merits and requirements. A special system (Regime D) benefits small Beninese entrepreneurs investing at least CFAF 10 million and employing more than 10 employees; these pay no duties on imported equipment and raw materials. In addition they are exonerated from the turnover tax for five years. The investment code is not likely to be amended until the Second Development Plan is adopted (1981); improvements then to be sought include the abolition of export taxes, the elimination of the minimum investment requirement of CFAF 10 million, and the listing of all industrial activities reserved to private intiative. At negotiations, the Beninese delegation indicated that BBD would keep IDA informed of any proposed changes.  - 9 - 35. Despite a recent slackening in demand due to a fall-off in demand from the Nigerian market, Benin's industrial sector is expected to continue in the next five years the fast growth rate it enjoyed during the 1972-76 period. This growth would primarily result from the large industrial and transport projects identified in para 13 above. Benin's favorable location on. everal transit routes, its proximity to the large Nigerian market, its low wage structure, the Government's positive attitude towards private enterprises and a liberal investment code provide substantial incentives to help broaden the base of Benin's industrial development. 36. Although prospects have improved in recent years, obstacles to a better performance of the industrial sector remain substantial. First, artisanal and industrial enterprises suffer from various operational constraints such as low capacity utilization, irregular supply of equipment and raw materials, lack of technically competent personnel and poor managerial practices. Second, Benin offers a rather narrow market and a large share of Benin's industrial growth in recent years can be attributed to formal and informal exports into Nigeria. Certain risks are inevitable in this dependence on a single external market. Third, although Government's attitude towards industrial entrepreneurship is essentially pragmatic, its socialist philosophy inevitably deters private investment. Finally, very little technical or financial assistance is currently available to artisans and entrepreneurs. Financial Institutions 37. Besides the Central Bank (BCEAO) the banking system comprises three state-owned, highly specialized banks. "Banque Commerciale du Benin" (BCB), specialized in commercial banking operations, resulted from the merger of three previously French-owned commercial banks. With 15 branches, 80 percent of total loans and 75 percent of total deposits, it is Benin's biggest bank. "Caisse Nationale de Credit Agricole" (CNCA) was established by the Government in 1976 as the apex organization for regional and local agricultural savings and loan institution. "Banque Beninoise pour le Developpement" (BBD) is the country's main term-lending institution. Credit Policies and Interest Rates 38. As a member of the West African Monetary Union (UMOA), Benin shares a common currency (CFAF), Central Bank (BCEAO) and credit and monetary policies with Ivory Coast, Niger, Senegal, Togo and Upper Volta. Under its operating guidelines, BCEAO controls money supply and credit expansion by providing liquidity to the banking system. Since 1976, the Central Bank has also decided to apply a formalized sectoral credit policy directing funds towards priority sectors, which has yet to be fully implemented. Finally, to improve the use of liquid funds within each country and the Union, BCEAO operates a money market for daily operations between the commercial banks and the Central Bank. Benin has so far practiced a policy of low interest rates. Thus, preferential loans (Government, housing, crop financing and small-scale entreprises) command an average interest rate of 7 percent whereas BCEAO authorizes a maximum of 8.5 percent, based on a preferential discount  - 10 - rate of 5.5 percent. Other loans command an average interest rate of 9.5 percent whereas BCEAO authorizes a maximum of 13 percent, based on a normal discount rate of 8 percent. Under the proposed project, BBD has agreed to increase its lending rate to small- and medium-scale enterprises to 8.5 per- cent and 11 percent respectively. As of June 1978, credit outstanding in the economy amounted to 43 billion CFAF (US$205 million) of which more than three-fourths was short-term. 39. The banking system is almost exclusively dependent upon Central Bank refinancing which is subject to an overall country ceiling. Within this limit, the Government is entitled to borrow 20 percent of the preceding year's tax revenues and the balance is available for the banking system. Each bank can claim Central Bank refinancing for up to 35 percent of its lending operations. At present, loans by the banking system to the economy are covered by Central Bank refinancing (79 percent), Government surpluses (12 percent) and public or private deposits (5 percent). As the country is now embarking on a substantial development program led by the public sector, Government surpluses and parastatal deposits will in part be withdrawn to finance new investments and purchases of equipment abroad. Furthermore the Government might be compelled to draw on the Central Bank up to its statutory limit, thus curtailing the amount of refinancing available to the banks. To compensate for smaller deposits and tighter rediscounting, the banks must search for alternative sources of finance. The proposed line of credit for small and medium-size industrial projects will provide BBD with the alternative resources it needs to fulfill its developmental role. Banque Beninoise pour le Developpement 40. A government-owned institution with a share capital of CFAF 1 billion (US$4.8 million), BBD became Benin's specialized term-financing bank for all economic and social development projects in 1975. It grants medium- and long-term loans, occasionally with equity participation, to all sectors of the economy whether public or private. BBD has had an impressive rate of growth and stands out as a well managed and profitable institution. Its 113 member staff is organized into five departments responsible for project promotion and supervision, credit applications, accounting and finance, administration, and legal matters. Policies and Procedures 41. BBD's By-Laws define its policies and operating guidelines. Equity participations are limited to 25 percent of a company's share capital and their sum cannot exceed BBD's unimpaired capital and reserves. BBD's exposure in each project is limited to 90 percent of total project cost for SMEs, 65 percent for industrial enterprises and 50 percent for other projects. There is however no limit placed on individual loans in relation to BBD's equity. At negotiations, BBD agreed to amend its By-Laws to include an exposure limit in relation to its own equity, acceptable to the Association as well as a maximum debt/equity ratio of 5:1 (Project Agreement, Section 2.07). BBD's interest rates now range from 6.5 to 8.0 percent for indigenous SSEs, from 9.0 to 11 percent for other industries and from 9.5 to 12 percent for  - 11 - trade and services. BBD's procedures are generally efficient. Appraisals cover most aspects of project evaluation and, following the Bank's identifi- cation mission of November 1978, now include economic rate of return calculations and monitoring of employment creation. Supervision of problem projects is good but it should be generalized to all projects. Loan col- lection procedures are well established and efficient. BBD accounts are currently reviewed by a "commissaire aux comptes" whose investigations, consistent with the practice in the region, are only superficial. Although competent, the "commissaire aux comptes" is not familiar with the long form audit as required by IDA. Consequently audits under this project would be carried out by a firm of auditors acceptable to IDA (Project Agreement, Section 3.02). 42. BBD has in the past, carried the foreign exchange risk on some foreign borrowings. So far, its exposure has been minimal since half of the CFAF two billion borrowed is denominated in French Francs (which has a fixed parity vis-a-vis the CFAF) and the other half in US$ (which has depreciated vis-a-vis the CFAF) and with a large spread (6 to 8 percent). Nevertheless, BBD confirmed during negotiations its willingness to set aside, each year, an amount equal to 2 percent of the outstanding on these borrowings as a provision for exchange risk on past borrowings. In addition BBD has agreed not to carry the foreign exchange risk on its future borrowings. Dispositions satisfactory to IDA will be taken by BBD before December 31, 1980. (Project Agreement, Section 3.06). Operations 43. The structure of BBD's US$56.6 million portfolio (CFAF 11.9 billion in 1977/78), of which three-fourths are for several large equipment loans and one-fourth for a multitude of small social loans, is a reflection of the transition BBD has undergone since 1975, from a multipurpose bank to a devel- opment bank. With equipment lending now accounting for two-thirds of its US$30 million yearly approvals, BBD's operations are geared towards development lending. BBD's portfolio affected by arrears represents almost 43 percent of its total portfolio. However most of these are technical arrears on state- owned or guaranteed loans often due to start-up delays in project implementa- tion which do not affect the ability of clients to repay. Accordingly, BBD's estimate of doubtful loans (12 percent of its portfolio) and the level of provisions for these (about 5 percent of its portfolio) are considered adequate. Nevertheless, BBD's monitoring of arrears could be improved and a plan to reduce arrears to an acceptable level would be submitted to the Association for its approval not later than October 1, 1981 (Project Agreement, Section 2.11). Financial Performance 44. BBD has grown rapidly and its assets have tripled over a four year period to reach US$68.6 million as of September 1978. With outstanding commitments and approvals of some US$33 million, BBD's resource position shows a term resource gap of about US$20 million. In securing more term resources, BBD is trying to decrease its dependence on BCEAO by locating alternative sources of term finance. It has already succeeded in mobilizing new deposits  - 12 - of approximately US$7.1 million, and has US$4.5 million available from existing lines of credit (Caisse Centrale de Cooperation Economique, USAID, African Development Bank and Algerian Development Bank)l/. In addition BBD obtained recently a US$4.5 million loan from the OPEC Special Fund. This loan would be administered by IDA in conjunction with the proposed Credit. Moreover BBD agreed to increase its capital not later than December 31, 1980 by at least US$2.4 million (Development Credit Agreement Section 3.02). BBD's earnings before taxes have risen steadily from US$300,000 in 1975 to US$700,000 in 1978. Administrative expenses have been maintained at a reasonable level and their share of average total assets has declined from 2 to 1.2 percent in 1978. Prospects and Issues 45. BBD's strategy for the future is not only to continue its current role as the main source of term financing for all clients, public and private, outside the agricultural sector, but also to intensify its promotional, appraisal and supervisory services for small and medium-scale industries. BBD currently has a pipeline of projects amounting to CFAF 7 billion or US$33 million for the next three years. Projects under consideration include bakeries, ice-making, packaging, textile, food processing, charcoal making, transport, metal working, etc. BBD's pipeline, lending program and past performance show that its financing of small and medium industrial projects could easily reach US$15 million over the next four years if its project preparation capability is rapidly upgraded. 46. BBD's Departement des Etudes et de la Promotion (DEP), which is in charge of promoting and assisting SME's, is clearly understaffed; it needs the services of an experienced industrial engineer with managerial experience to assist in identifying, promoting and supervising SHE investment projects. To fulfill its promotional role vis-a-vis local entrepreneurs, DEP - in liaison with the Chamber of Commerce and Industry -- would also require expertise in preparing and implementing training and promotion programs. Due to the unavailability of local personnel experienced in these fields, outside technical assistance would be provided under the project. In addition, BBD has been encountering some difficulties keeping its accounts up to date and optimizing its liquidity management. A review by a firm of experienced external consultants of the financial department's functions and procedures would be carried out under the project. 47. Financial forecasts show that BBD resource requirements until 1984 would reach an estimated CFAF 12.8 billion (US$61 million) until 1984. This would be met by an increase in capital, deposits, central bank rediscount and lines of credit. BBD's projected financial ratios show that its financial position would remain sound throughout the period; the term-debt/equity ratio would remain below 5:1 and the total debt/equity ratio would stay around 8:1. Profitability would remain stable relative to net worth because the forecasted increase in average interest rate from 8.2 percent in 1978 to 9.5 percent in 1981, would be gradually matched by the increase in administrative and financial expenses. 1/ In 1978 BBD's average cost of funds stood at 4 percent of total assets.  - 13 - PART IV - THE PROJECT Project History 48. Following an official request by the Minister of Plan, an iden- tification mission visited Benin in November 1978. It concluded that there was a need in Benin for alternative sources of long-term foreign exchange resources to finance productive investments in the industrial sector, and that, subject to improvements in its financial management and promotional role, BBD could become an adequate channel of Bank Group assistance. The project was appraised in the field from April 8 to 20, 1979. Negotiations were held from January 16 to 18, 1980. The Beninese delegation was led by Mr. Baba Moussa, Director General of BBD. The Staff Appraisal Report No. 2719-BEN is being circulated separately to the Executive Directors. Annex III of this report provides supplementary project data. 49. The main thrust of the proposed IDA credit would be to provide an alternative source of term financing, to build up BBD's capacity to identify, promote and assist industrial projects and to advise the Government on industrial and financial sector issues (export strategy, employment creation, artisans role, investment code). Specifically the project seeks to bring the Government to focus not only on large-scale projects, but also on small manufacturing and artisan industries. To achieve these objectives, the project would be supported by a line of credit to BBD for the financing of industrial projects and a technical assistance program to strengthen the institution. An advance of US$320,000 under the Project Preparation Facility was granted in December 1979 to ensure an early start of the technical assistance and for the preparation of ad hoc feasibility and engineering studies. Project Costs and Financing 50. The project will cost US$12.3 million net of taxes, of which US$9.1 million is foreign exchange. Taxes are estimated at US$1.3 million. The proposed IDA credit of US$10 million would therefore represent 81 percent of total project cost net of taxes. It would finance 100 percent of total foreign expenditures. In addition, it would finance US$0.9 million of local expenditures (7 percent of total project cost) under the small-scale and technical assistance components. 51. US$8.6 million from the IDA credit proceeds would be onlent to BBD as a line of credit to finance economically and financially sound investments in the following areas: Small-Scale and Labor Intensive Investments (i) At least US$2.6 million of the line of credit (30 percent) would benefit small-scale investments defined as projects  - 14 - costing less than US$238,000 (CFAF 50 million). BBD would be authorized to finance 90 percent of the investment cost (CFAF 45 million or US$214,000) of such projects; IDA would finance 100 percent of BBD's loans. BBD would be expected to finance about 25 to 30 investments in the typical areas of wood and metal working, food processing, road transport, fisheries, tailoring, repair and maintenance activities. Artisanal enterprises would also be eligible for financing under this component. Moreover, as an incentive for employment generation in medium-scale industry, any industrial project creating employment at a cost per job of US$10,000 or less would be eligible for a loan at conditions similar to those for small- scale enterprises (Development Credit Agreement, Section 2.03). Medium-Scale Investments (ii) Up to US$6.0 million of the line of credit would benefit medium-scale investments defined as projects costing between US$238,000 and $2.4 million (CFAF 50 to 500 million). BBD would be expected to finance up to 65 percent of the investment cost of such projects representing their estimated average foreign expenditures (CFAF 325 million or about US$1.5 million). IDA would finance 100 percent of such BBD's subloans. Under this component, BBD would finance 10 to 15 projects in a wide range of activities such as manufacturing of agricultural tools and implements, vehicle assembly, small hotel projects, produc- tion of consumer goods, construction companies (Development Credit Agreement Section 2.03). Terms and Conditions of Sub-Loans 52. The line of credit would be onlent by the Government to BBD at 8 percent for eighteen years including five years of grace. BBD would be charged a commitment fee of 0.75 percent and repayment would be on a fixed amortization schedule of equal, semi-annual payments of principal and interest (Development Credit Agreement, Schedule 2); a fixed amortization schedule is justified to provide BBD with increased resources through roll-over of funds and to ease the administrative burden of frequent schedule readjustments. 53. The terms of sub-loans would vary according to the type of project. Maturities would range from 2 to 15 years. Averages are expected to be about five years for small-scale investments and eight years for medium- scale investments. The grace period on principal repayment could reach up to five years but would seldom exceed three years. The interest rate to medium-scale sub-borrowers would be 11 percent per annum. This rate repre- sents a 1.5 percent increase above BBD's average rate. It would yield a positive return given the low current inflation rate (para. 12) and would give BBD an adequate spread of 3 percent to cover its overheads. Sub-borrowers would also be charged a commitment fee (0.75 percent of the undisbursed balance). The interest rate charged on small-scale and labor-intensive  - 15 - sub-projects would be 8.5 percent per annum, in line with BCEAO's preferential rate (Development Credit Agreement, Schedule 2). To ensure BBD an adequate and consistent spread, the Government has agreed to compensate BBD for the interest lost on its lending on small-scale and labor-intensive projects (Development Credit Agreement, Schedule 2 paragraph 1 (e)). 54. BBD would calculate the investment cost per job and the internal financial rate of return and the economic rate of return of all its sub- projects. All subprojects financed under the line of credit would have, normally, a minimum economic rate of return of 10 percent, encourage employ- ment creation, and give due consideration to the use of appropriate technology. The foreign exchange risk would be borne by the Government (Development Credit Agreement, Schedule 2, paragraph 1(d)). A free-limit of US$150,000 for individual subloans and an aggregate free-limit of US$2 million would be established. However, the first three sub-projects below the free-limit would be reviewed by IDA. BBD would also limit its long-term borrowings to not more than five times its paid-in share capital and unimpaired reserves (Project Agreement, Section 3.05). Technical Assistance Program 55. Technical Assistance is an important aspect of this project and US$1.4 million of the proceeds of the Credit would be earmarked for this component. The program's objective is firstly to help improve BBD's financial management and strengthen its project identification, promotion and supervision capabilities, and secondly to assist BBD and the Direction de l'Artisanat in the Ministry of Industry in the formulation of an artisan promotion policy and the preparation of a practical cost-effective artisan project component. 56. Assistance to BBD would include 18 man-months of consultant services to help organize BBD's data processing capability and improve financial reporting and management, 3 man-years of an industrial engineer services to help BBD's "Departement des Etudes et de Promotion" in the identification, promotion and supervision of industrial investments. An allocation of US$130,000 from the proceeds of the credit would be made for the preparation of engineering and feasibility studies for projects prometed by BBD and US$115,000 to finance the cost of in-house training and fellowships for BBD's staff. BBD would in addition carry out, jointly with the Chamber of Commerce, training programs for SME entrepreneurs. The credit would provide for 2 man-years of the services of a training and extension expert to organize BBD's in-house extension service and carry out studies. An allocation of US$145,000 would be made to finance the cost of training ses- sions. 57. Finally, 10 man-months of consultant services would be provided to advise BBD and the Ministry of Industry's Direction de l'Artisanat on policies related to artisans and to help prepare an artisan project component proposal for a possible follow-up industrial development project. IDA would approve  - 16 - the qualifications, terms and conditions of employment of advisors and short-term consultants financed under the project (Project Agreement, Section 2.06). Provision has been made to finance five man-years of advisors and 28 man-months of short-term consultancies estimated at an average foreign exchange cost of US$8,750 per man-month, plus US$1,600 (net of taxes) per man-month for local expenditures and subsistence. Monitoring 58. BBD would submit to IDA semi-annual operational and financial reports, annual reports and audited financial statements. In addition, BBD would furnish information on staff training, and its coordination with other project-related organizations (Direction de l'Artisanat and the Chamber of Commerce). Procurement and Disbursement 59. BBD is expected to follow usual DFC procurement procedures. Disbursement would be made on the following basis: (1) line of credit: 100 percent of BBD's subloans; (2) technical assistance, consulting services, and training expenses: 100 percent of expenditures. Disbursements under all categories would be fully documented. Benefits 60. Benefits are expected to accrue to the Beninese economy in the form of productive investments, employment creation and institution building. The project would result in the implementation of about 45 financially and economically viable subprojects, representing an investment of about US$12.0 million in industry. The line of credit is expected to contribute to the creation of about 900 jobs at an average cost per job of US$7,100 for SSE/labor-intensive investments and US$19,500 for medium- scale investments. The institutional improvements in BBD would increase BBD's overall efficiency and the quality of its investments. By making credit and technical assistance available, the project would provide the first organized attempt in Benin to upgrade the skills of local artisans and entrepreneurs. Risks 61. The small size of the Beninese economy, the uncertainties surrounding the Nigerian market, the centralized management of the economy and the lack of skilled labor are factors which could prevent sub- project investments from materializing as quickly as expected, resulting in slower disbursements. To balance this the positive factors are the coming into force of the trade provisions under the ECOWAS Agreement, the expectation that the Nigerian market will continue to absorb Beninese products, that state enterprises will undertake substantial investments  - 17 - and that the Government will maintain its pragmatic attitude towards small and medium-scale private investments. The lack of BBD expertise in designing and implementing investment proposals would be addressed by the early provision of a substantial technical assistance package. The project being centered around an efficient and dynamic intermediary should ther-''re be implemented smoothly. PART V. LEGAL INSTRUMENTS AND AUTHORITY 62. The draft Development Credit Agreement between the People's Republic of Benin and the Association and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Associa- tion are being distributed to the Executive Directors separately. 63. Special conditions of the project are listed in Section III of Annex III. Special conditions of effectiveness included in the Development Credit Agreement would be the execution of a Financing Agreement between the Govern- ment and BBD and the amendment of BBD's "Reglement Interieur" to establish an exposure limit and a maximum debt/equity ratio acceptable to the Association. 64. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 65. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments Washington, D.C. March 3, 1980  ANNEX I - I 8 - I 3aXy - SOCIAL rNDrCATORS DATA SHUT 3y 8REFERC1E CaROLPS (ADJUSTED AIRAGES LAJI AJIA (THOUSAND 50. E.) - NOzS. rc!SAfT IT-5 % L) -OTAL 12.6 SA SAME mT EIC'ER AC;L C=LTU4L 33.9 ID5T 2tCEYT OEOGRAP9IC INCOM LNCODH 1960 /b 1970 lb !STIMAlE /b RE10ON /c GROUP /d GROUP I. GNP PER CAPITA (USS) 90.0 130.0 230.0 306.1 209.6 467.5 11110! COK5t_TiON' ER CAPITA (KILOGRAMS o COAL EQUIVALENT) 39.0 42.0 49.0 80.6 83.9 262.1 POFULA-Iolf s.' VITAL STATIST5CS OPULATION MID-TEAR (MILLIONS) 2.1 2.6 3.2 ULAN POPULATION (PE1CDEN OF TOTAL) 9.8 16.3 23.2 17.1 16.2 Z4.6 POPAT5N PRnJECT50NS POPULATION DiN riA 2000 (MILLIONS) 6.0 STATIOlNARY POPULATION (MILLIONS) 15.0 YEAI STATIONARY POPLATION IS RE4DE 2160.0 POPULATION DENSITY nR SQ. IX. 19.0 23.0 28.0 18.4 49.4 45.3 PER SQ. M:. ACRICULILRA LAND 62.0 77.0 94.0 50.8 252.0 149.0 POPUIATION AGE SIRCTUllZ (PERLCENT) 0-14 IRS. 44.2 44.9 46.0 44.1 * 43.1 45.2 15-64 TRS. 53.2 52.6 52.0 52.9 53.2 51.9 65 "RS. AND ABOVE 2.6 2.5 2.0 2.8 3.0 2.J POPUATION GROWTH RAT5 (P2RCtNT) TOTAL 2.2 2.6 2.9 2.7 2.4 2.7 R,3AY .. 7.9 10.6 5.7 4.6 4.3 CRUIDE UIRTH gATE (PER THOUSAND) 51.0 49.0 49.0 46.3 42.4 39.4 CRUDE DEAIR RArE (PER THOUSAND) 27.0 22.0 19.0 17.2 15.9 11.7 GROSS UPRODUCTION RATZE 3.3 3.3 3.3 3.1 2.9 2.7 FAmILY PLANNLSC ACCEPORS ALNUAL (TROUSANOS) .. .. .. USERS (PtRGIYT OF MARID WOM) .. .. .. .. 12.2 13.2 FOOD AM NUTRITION NDEIX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 92.9 101.0 9.0 94.3 98.2- 99.6 PER CAPITA SUPPLY oF CALORIES (PERCm4T OF RIQUIRZXEYTS) 96.0 97.0 87.0 89.5 93.3 94.7 PROTEINS (GRAMS P!R DAY) 54.0 55.0 56.0 55.8 52.1 54.3 Or