Senegal - Investment Promotion (SOFISEDIT) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4488 PROJECT PERFORMANCE AUDIT REPORT SENEGAL - SOFISEDIT I PROJECT (LOAN 987-SE) May 12, 1983 Operations Evaluation Department 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.  FOR OFFICIAL USE ONLY ABBREVIATIONS BCLAO Banque Centrale des Etats de 1-Afrique de l'Ouest BIAO Banque Internationale pour l'Afrique de l'Ouest BICIS Banque Internationale pour le Commerce et l'Industrie - Senegal BNDS Banque Nationale de Developpement du Senegal BOAD Banque Ouest Africaine de Developpement CCCE Caisse Centrale de Cooperation Economique DEG Deutsche Entwicklungsgesellschaft KfW Kreditanstalt fur Wiederaufbau SGBS Societe Generale de Banque au Senegal SAR Staff Appraisal Report SOFISEDIT Societe Financiere Senegalaise pour le Developpement de 1'Industrie et du Tourisme SONEPI Societe Nationale d'Etude et de Promotion Industrielle USB Union Senegalaise de Banques UMOA Union Monetaire Ouest Africaine 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.  PROJECT PERFORMANCE AUDIT REPORT SENEGAL - SOFISEDIT I PROJECT (LOAN 987-SE) TABLE OF CONTENTS Page No. Preface ................................................................ i Basic Data Sheet .......................................................ii Highlights ............................................................. iii PROJECT PERFORMANCE AUDIT MEMORANDUM I. RATIONALE FOR ESTABLISHING SOFISEDIT........ .....1........ A. Background............................................ 1 B. Alternatives.......................................... 2 II. LOAN OBJECTIVES........................................... 4 III. INSTITUTIONAL DEVELOPMENTS............................. . 5 A. Progress in Institution Building...................... 5 B. SOFISEDIT's Relationship with SONEPI.................. 6 IV. OPERATIONAL PERFORMANCE.............................. 7 V. FINANCIAL PERFORMANCE........ .......................... 9 VI. LOAN UTILIZATION................................... ...... 9 VII. EFFECTIVENESS OF BANK SUPERVISION EFFORT ................. 10 VIII. CONCLUSIONS.......................................... ... 10 Attachment A Comments Received from the Borrower .................. 12 Attachment B Comments Received from the Borrower .................... 13 PROJECT COMPLETION REPORT I. Introduction ......................................... 26 II. Environment ............. ................................ 27 III. Objectives of the Loan ................................... 27 IV. Utilization of the Loan .................................. 28 TABLE OF CONTENTS (continued) Page No. V. Operations ................................... ......... 28 Approval .................................................. 29 Commitments ............................................... 29 Disbursements ...................................... 29 Projects Financed ........................... ......... 31 VI. Financial Performance ................................... 33 Quality of Portfolio ................................ 34 VII. Institutional Aspects ................................ 35 Management and Staff ....................................... 35 Appraisal ................................................. 36 Supervision ............................................... 36 Promotion ................................................. 36 VIII. Resources ............................................... 37 IX. Economic Impact ................................. ....... 37 X. Bank's Role and Lessons Learned ....................... 38 XI. Conclusions .............................................. 39 Annexes: 1 - Sector Distribution of Medium- and Long-term Loans Outstanding ........................................... 40 2 - Subprojects Approval under Loan 987-SE -................. 41 3 - Comparison of Projected and Actual Operations ............ 42 4 - Cumulative Disbursements ................. ............. 43 5 - SOFISEDIT's Loan Operations by Type of Projects ..... .... 44 6 - Sectoral Breakdown of SOFISEDIT's Operations -............. 45 7 - Comparison of Actual and Projected Income Statements ...... 46 8 - Comparative Statement of SOFISEDIT's Projected and Actual Balance Sheet, 1975-79 ..................... 47 9 - Terms and Conditions of Borrowings up to December 30, 1979 .... ......... ............... o ....... 48 10 - SOFISEDIT's Loan Operations - Regional Distribution of Approvals ...... -.. ..... . ........... ...... 49 11 - Distribution of Loan Operations by Maturity .............. o. 50 12 - Distribution of SOFISEDIT's Loans by Size ....... ........51 13 - Arrears as of March 1980 ..... o ................. ... ...52 PROJECT PERFORMANCE AUDIT REPORT SENEGAL - SOFISEDIT I PROJECT (LOAN 987-SE) PREFACE This report presents an audit of performance under Loan 987-SE for US$3 million made by the Bank to the Societe Financiere Senegalaise pour le Developpement de l'Industrie et du Tourisme (SOFISEDIT), a privately con- trolled development finance company, together with an IFC investment of US$240,000 in the share capital of SOFISEDIT. The Loan and the IFC investment were approved on May 17, 1974, and the loan became effective in November 1974. The original closing date of December 1978 was extended twice, first to December 1979 and then to December 1980. SOFISEDIT received two additional Bank loans in 1976 (Loan 1332-SE) and 1981 (Loan 1973-SE and Supplementary Credit 1136-SE) in the amount of US$4.2 million and US$6.5 million, respec- tively. The Project Performance Audit Memorandum (PPAM) is based on the attached Project Completion Report (PCR) prepared by the Western Africa Regional Office of the Bank, on the Staff Appraisal and President's Reports, the summary of the Board discussion, a study of the project files and discus- sions with Bank and IFC staff. The PCR describes adequately the project experience, explains the Bank's role in the establishment of SOFISEDIT, and considers persistent shortcomings in institution building. The PPAM examines critically particular aspects of the project experience and provides comple- mentary comments on certain aspects of project implementation and the Bank's role. In particular, the PPAM questions the rationale for establishing and supporting a new financial intermediary in the Senegal's circumstances. Comments received from the Borrower have been taken into account as appropri- ate -in finalizing the report and are reproduced as Attachments A and B.  - ii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET SENEGAL - SOFISEDIT I PROJECT (LOAN 987-SE) KEY PROJECT DATA As of 01/31/83 Original Disbursed Cancelled Repaid Outstanding Loan Amount 3.0 3.0 - 1.06 1.94 Cumulative Loan Disbursement FY75 FY76 FY77 FY78 FY79 FY80 FY81 (i) Planned 0.4 1.2 2.3 3.0 3.0 3.0 3.0 (ii) Actual 0.1 1.0 2.1 2.6 2.8 2.8 3.0 (iii) (ii) as % of (i) 25 83 91 87 93 93 100 OTHER PROJECT DATA Actual or Original Re-estimated Board Approval 05/74 05/21/74 Loan Agreement 05/74 05/24/74 Effectiveness - 11/22/74 Loan Closing 02/31/78 12/31/80 Total Project Cost (US$ million) 3.0 3.0 MISSION DATA Month/ No. of No. of Man- Date of Item Year Weeks Persons weeks Report Reconnaissance 01/70 2.5 2 5.0 03/70 Identification 11/72 3.0 3 9.0 02/72 Preparation 07/73 1.5 1 1.5 07/73 Appraisal 11/73 3.0 1 3.0 05/74 Total 10.0 18.5 Supervision I 05/75 2.0 2 4.0 10/75 Appraisal (SOFISEDIT II) 12/75 2.0 2 4.0 09/76 Supervision II * 12/76 0.6 1 0.6 01/76 Supervision III * 02/77 0.8 1 0.8 04/77 Supervision IV * 07/77 1.0 1 1.0 10/77 Supervision V * 06/78 2.0 2 4.0 06/78 Supervision VI * 02/79 2.0 1 2.0 03/79 Supervision/ Identification ** 12/79 1.5 2 3.0 03/80 Appraisal (SOFISEDIT II) 04/80 2.0 2 4.0 10/80 Total 13.9 23.4 FOLLOW-ON PROJECTS SENEGAL - SOFISEDIT II (Loan 1332-SE) approved on September 21, 1976, in the amount of US$4.2 million. SENEGAL - SOFISEDIT III Project (Loan 1973-SE and Credit 1136-SE approved April 21, 1981 in the amount of US$6.5 million. * Mission combined with supervision of Loan 1332-SE. ** Mission combined with identification of SOFISEDIT III.  - iii - PROJECT PERFORMANCE AUDIT REPORT SENEGAL - SOFISEDIT I PROJECT (LOAN 987-SE) HIGHLIGHTS This was the first of three Bank loans extended to the newly estab- lished SOFISEDIT, a specialized institution to provide long term financing to industry and tourism. Since its inception, SOFISEDIT has been plagued with difficulties in part due to the depressed economy, the small size of the market and the competition from entrenched local banks and in part due to the inability of its management, in a difficult environment, to turn the situation around. Its role and effectiveness continue to be questionable, as its institutional development remains anemic; it accounts for a small share of the total investment in industry and tourism; and its viability continues to be uncertain. Also, SOFISEDIT's establishment, based as it was on a deficient Bank appraisal effort, did not contribute to the deepening of the financial system as it provided little, if anything, that the existing array of institu- tions could not have furnished. In the face of a small and highly competitive financial market and an adequate banking infrastructure capable of handling long term financing in industry, the need for creating a new financial intermediary was not fully established. In particular, the rejection of USB as a channel for Bank funds, a financial institution judged at that time as efficient and which had a Government mandate to finance industrial projects, is not fully explained. The proposed endowment of the new institution with an array of privileges over the rest of the banking community, thereby according it a "quasi-monopoly" status, can hardly be viewed as felicitous; understandably, such preferential treatment was never sanctioned and implemented. The difficult and painful process of building up a new institution ab initio, particularly in a con- strained environment, had not been fully appreciated at appraisal, while the sectoral policy environment, including imminent changes with telling conse- quences, was not analyzed in the requisite depth. The Bank's traditional preference for and support of specialized DFCs rather than multi-purpose banks was apparently applied rather uncritically (PPAM, paras. 2-8). Institution building, which embodied the thrust of the Bank's effort, has been only partially achieved, despite the fact that SOFISEDIT has been in operation for eight years and has received substantial technical assistance inputs, including secondment of Bank staff (PPAM, paras. 9-13). SOFISEDIT's operational and financial performance has not been satisfactory, and the institution has been experiencing operating losses every year since its establishment. Its portfolio contains a high proportion of ailing sub- projects and the level of arrears is high (PPAM, paras. 15-20). Despite its intensity and constructive suggestions, the Bank's supervision effort has not - iv - had a perceptible and lasting impact on SOFISEDIT's institutional development and operations (PPAM, para. 21). The project experience is instructive in many respects. It re- affirms the critical importance of a circumspect appraisal effort and the need for sector work preceding project preparation in order to appreciate better the workings of the financial mechanisms in the country, to identify gaps in the financial structure and institutional arrangements and to enhance the Bank's capability to design purposeful projects; it suggests the need to consider carefully the trade-off between creating a new as opposed to using an existing institution, especially in constrained environments; it invites attention to the structure of ownership and, by extension, to the composition of the institution's Board of Directors in certain environments, in order to ensure commonality of purpose in the decision-making process; it evinces the importance of strong and imaginative leadership, both at the board and manage- ment levels, to avoid frustration of an entity's development potential; it suggests that the ability of a specialized institution to finance working capital requirements tends to enhance its competitive position; and it demonstrates the need not only for close supervision but also for devising appropriate mechanisms (e.g. development of comprehensive action plans) to ensure effective Bank supervision leading to tangible results. - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM SENEGAL - SOFISEDIT I PROJECT (LOAN 987-SE) I. RATIONALE FOR ESTABLISHING SOFISEDIT A. Background 1. The Societe Financiere Senegalese pour le Developpement Industrial et Touristique (SOFISEDIT) was created as a specialized institution to provide long term financing to industry and tourism. It was incorporated in June 1974 and started operations in November 1974. SOFISEDIT's authorized and paid-in capital amounted to CFAF 650 million (US$2.6 million), of which the Government and public sector institutions (Central Bank, BNDS, USB) held 46% and private Senegalese shareholders 6%. IFC, CCCE, DEG, Fidelity International, and three foreign controlled commercial banks operating in Senegal held the remaining 48%. In 1981, SOFISEDIT's authorized capital was increased to CFAF 1,300 million (US$4.7 million), with BOAD, the West Africa regional develop- ment bank, joining the group of foreign shareholders. IFC's share rose to US$400,000 (7.7%). As a result of the change in ownership structure, the Government controlled shareholdings reached close to 50%. 2. Before the establishment of SOFISEDIT, long term credit to industry in Senegal had been extended only by the Caisse Centrale de Cooperation Economique (CCCE), directly or through the Banque Nationale de Developpement du Senegal (BNDS).-!/ BNDS, the only development bank, and four commercial banks,2 mostly foreign owned, were extending short and medium term loans up to seven years, which was the rediscountable limit set by the Central Bank for the West African Countries (BCEAO). This policy apparently created a shortage of long-term finance, particularly for certain projects with a longer gesta- tion period in industry and tourism. In addition, the commercial banks tended to extend credit to large, well-established and foreign-controlled companies, thus inhibiting the development of indigenous entrepreneurs. In the Govern- ment's view, setting up a new institution which would not be "aligned" with any particular bank and would have broad international contacts would help mobilize foreign long term funds, attract foreign investors and play a pro- motional role in economic growth (SAR, para. 3.16). The new institution would receive preferential treatment under a "convention d'etablissement," which 1/ BNDS' main shareholders are the Senegalese Government (73%), CCCE (16%), BCEAO (6%), and three other institutions (5% each). 2/ USB, owned by the Senegalese Government (51%), Credit Lyonnais (37%), and three German, Italian and U.S. banks (about 4% each); BICIS, owned by the Banque Nationale de Paris (37%), the Societe Financiere pour les Pays d'Outre-Mer (51%) and private Senegalese (12%); BIAO, owned by the First National City Bank (49%) and the Compagnie Financiere France- Afrique (51%); SGBS, a subsidiary of the Societe Generale, with about 10% held by private Senegalese investors. - 2 - essentially provided for: priority over other banks in long term financing in industry and tourism; rediscounting facilities with BCEAO for term loans exceeding seven years, which was above the prevailing limit for the other institutions; and exclusion of Government guaranteed loans in determining the rediscountable ceiling fixed by BCEAO (SAR, paras. 3.05 and 4.10; PCR, paras. 5.07 and 5.09). 3. The Government's proposal and request for Bank assistance first came up in 1970. However, the Bank concluded at that time that the business outlook did not justify the establishment of a new financial intermediary, and suggested instead that one of the commercial banks (USB) expand its activity to long term lending (SAR, para. 4.01). In 1972, the Government raised again with the Bank the question of establishing a new specialized institution, which would fill the gap in long term financing for industry and tourism that was expected to result from the projected growth of these sectors and the alleged inability of the existing institutions to support the forthcoming volume of investment. The Bank concurred that the investment prospects in Senegal had improved sufficiently to warrant the creation of a new entity (PCR, para. 1.01). However, this decision may be questioned given the exis- tence of an adequate banking infrastructure in the country already involved in term financing of industrial projects, the substantial costs and effort involved in building up a new institution, and the scarcity of managerial talent and technical expertise in Senegal. B. Alternatives 4. Since the late 1960's, BNDS was facing management and financial problems which had seriously affected its credit rating. In 1970, the Govern- ment transferred the responsibility for medium and long term financing to industry from BNDS to USB, and decided that BNDS should specialize in opera- tions in the agricultural and agro-business sectors. At appraisal, the Government felt strongly that BNDS should continue to focus on agricultural lending and on its reorganization effort already in progress. In view of these circumstances, it is understandable that the Government and the Bank did not consider further BNDS as a channel for funding industrial projects. USB, on the other hand, had developed into a dynamic institution, had expanded rapidly its lending to manufacturing projects, and had gained considerable experience in industrial financing over the years. At the time of appraisal, USB was considered a sound and well-managed enterprise, with a good profit record (SAR, para. 3.09). The existence of an institution of USB's stature certainly raises the question of the potential benefit of setting up a new financial intermediary. Allegedly, the Government felt that 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 the other banks wanted to avoid this (SAR, para. 4.02). Thus, the Govern- ment dismissed the USB alternative and pressed for the creation of a new institution. 5. The Bank, on its part, accepted the Government's rationale and went along without considering more thoroughly the real need and broader implica- tions of establishing a new entity. Given the presence of entrenched finan- cial intermediaries and the small size of the financial market in Senegal, - 3 - SOFISEDIT as a new institution was bound to face stiff competition. To guard against such an eventuality, the Government pledged to accord SOFISEDIT preferential treatment (para. 2), a particularly unsettling element of which was that all existing and future institutions were to be prevented from making long term loans to industrial and tourism enterprises unless SOFISEDIT decided not to finance such projects or was prepared to invest jointly with them.1 But the priority treatment and the resultant monopolistic position of SOFISEDIT could not have been reasonably expected to be granted without the prior consent of the regional authority, i.e. the West African Monetary Union (UMOA), which the Bank failed to obtain; and right from the beginning, SOFISEDIT either did not receive or lost almost all privileges promised at the time of approval.2! 6. Being SOFISEDIT's principal shareholder, the Government also expec- ted to exercise some degree of discretion or direction in industrial lending. However, this desideratum could have been more effectively met by granting the same privileges to USB which was a Government controlled entity. In the same vein, it is hard to see why the Banking community would have objected to USB achieving a competitive edge had it been selected as a channel for Bank funds (para. 4), but it would not have objected to the creation of a new and equally privileged institution, particularly since they would have had no control over its Board. Furthermore, foreign long term resources could have been mobilized more effectively by an established institution, such as USB, rather than a newly-founded entity. In this respect, USB was about to begin extending long term financing to small and medium scale industries drawing on loans recently obtained from ADB and KfW.3/ Finally, the difficulties of building up a new institution in the face of scarce managerial and technical expertise in the country also did not receive due attention at appraisal; capability to appraise and process tourism projects presumably could have been developed with much less effort by USB than by a new institution. 7. Alternatively, steps could have been taken with UM0A to extend rediscounting facilities to ten (or more) years for all banks, possibly with some-adjustment in rates. This could have increased the availability of long term funds, given the dominant participation of foreign banks in the ownership structure of the Senegalese banks. Apparently, such a proposal was already 1/ Aside from providing SOFISEDIT with a "niche", this "privilege" purported to ensure adequate screening of all investment projects and to develop stricter appraisal standards in the banking community. 2/ The Bank did not raise the issue of SOFISEDIT's preferential treatment or priority during the appraisal of the second loan to SOFISEDIT (Decem- ber 1975), probably because it had not appreciated fully SOFISEDIT's weak competitive position and organization, or felt that reopening of the issue would be frustrated because it lacked rational underpinning. 3/ The Borrower points out that USB had not been able to utilize the KfW loan (Attachment B, p. 1). under serious consideration by BCEAO and UMOA at the time of appraisal and was adopted by the Senegalese Authorities shortly after the establishment of SOFISEDIT. Thus, the "privilege" to be afforded SOFISEDIT could not be implemented as regional rules superseded national regulations. This possibi- lity, which put all banks on an equal footing, was not considered at the time of appraisal. 8. In general, the evidence suggests that the existing banking in- frastructure was adequate and demonstrably capable of handling long term financing in industry and tourism. The problem, if there was one, was rather an inadequate policy framework which inhibited long term financing and not the dearth of capable financial institutions, a matter which was not examined carefully at appraisal. Given that well-established commercial banks were active in industrial lending and had a strong competitive edge, the arguments presented in the appraisal report for establishing a new, specialized financial intermediary are not convincing. SOFISEDIT's raison d'etre and serviceability is questionable even to date, as it remains a small institution (8 professionals and 3 managers), accounts for a very small share of total industrial and tourist investment, its institutional development remains anemic, and its situation has persistently been precarious (paras. 15 to 19 and 21).1/ The Borrower concurs that "even today, SOFISEDIT is still practically on the fringe of the financial system".2/ II. LOAN OBJECTIVES 9. Once the decision was taken to support the Government's proposal, the major objectives of the Bank loan were: (a) to assist the Government in the successful establishment of the new financial intermediary which would promote the creation, expansion and modernization of viable enterprises in industry and tourism, including the development of small scale industry in 1/ Bank staff feel that alternatives were not as clear nor as attractive as suggested by the audit. Although not stated unequivocally, USB was in fact a much weaker and poorly managed institution than indicated in the appraisal report and, as it turned out later on, it had to be bailed out by the Government. Also, most commercial banks, including USB, were serving the needs of expatriate companies and were generally reluctant to make term loans particularly for new projects and to more risky local firms. Furthermore, when the establishment of SOFISEDIT was envisaged, the Bank's stated policy was still centered on a specialized DFC rather than on multi-purpose banks. Finally, the 1973-75 recovery was impres- sive and most observers then felt that the Senegalese economy would enter a period of more rapid growth and substantial productive invest- ments. Owing to international and local developments, the recovery was unfortunatly short-lived and many investments were postponed indefi- nately. This evolution is reflected in the share of total loans outstan- ding in favor of industry: 35% in 1975 and 14% in 1979. 2/ Attachment B, p. 13. - 5 - close cooperation with SONEPI; (b) to provide technical assistance for insti- tution building; and (c) to make available to the new institution foreign currency resources. Beside the provision of medium and long term loans, SOFISEDIT would invest in equities, underwrite securities and guarantee credits from other sources. III. INSTITUTIONAL DEVELOPMENTS A. Progress in Institution Building 10. Because of the lack of qualified personnel at middle and senior management levels, the loan provided for external technical assistance in the amount of US$200,000 (subsequently raised to US$445,000), to help SOFISEDIT organize and start operations. Two Bank staff members filled the positions of Deputy Director General and Director of Investments, appointed for a two-year term. They took office in mid-1974, but their appointments had to be extended for another year.l/ In 1976, another expatriate became Head of the Finance and Administration Department and remained until the end of 1980. The advi- sors were instrumental in the formulation of internal operational procedures and appraisal and supervision guidelines, performed day-to-day operational and administrative tasks, and offered "on-the-job" training to their Sene- galese counterparts (PCR, paras. 7.01 and 7.02). The experts' impact was particularly significant in the field of appraisal and, originally, the established standards appear to have been quite good.! However, the high turnover of the small professional staff appears to have subsequently eroded the quality of SOFISEDIT's appraisals, particularly with respect to market analysis, investment costs, financing plans, capital structure, and imple- mentation schedules.2/ Far more limited success was achieved in supervision and loan collection, as established procedures were not applied forcefully. SOFISEDIT's organization has remained weak and the mix of the staffs tech- nical expertise has been unbalanced (only one engineer). Loan approvals have been very slow due to cumbersome procedures. Despite the stagnation of SOFISEDIT's lending operations, promotional efforts were systematically undertaken only since 1976 (PCR, paras. 7.05 and 7.06). 1/ The appointment of the one Bank staff had to be extended further for another year in order to fill the vacant position of the Deputy Director General. 2/ SOFISEDIT's guidelines have been copied widely by other DFCs in the region (PCR, para. 7.04). Bank staff assert that SOFISEDIT's appraisal standards have been of higher quality than those of other local insti- tutions and have, to a certain extent, resulted in upgrading the stan- dards of other domestic and regional banks. 3/ For a different viewpoint expressed by the Borrower, see Attachment B, pp. 1-2,4. - 6 - 11. Technical assistance to SOFISEDIT was terminated at mid-1978, at a time when the need for outside expertise was growing because of SOFISEDIT's inadequate management in the face of difficult circumstances, inability to retain its trained staff,!! need for intensification of its promotional effort and weak loan supervision. In these circumstances, and given that funding was available, the termination of technical assistance was clearly premature (PCR, para. 10.02). In 1981, and in connection with the third Bank loan, six man-years of advisors and short term consultants had to be provided in order to strengthen SOFISEDIT institutionally. 12. For a variety of reasons, the Board of Directors has not been able to play a constructive role in the conduct of SOFISEDIT's operations and to map out a strategy for the development of the institution. The diversity of SOFISEDIT-s shareholders, the conflicting interests of Board members,.2 and the infrequent representation of some shareholders were major factors that weakened the potential influence of the Board on SOFISEDIT's operations and development. In a difficult environment, SOFISEDIT's management has not been able to turn the situation around. 13. SOFISEDIT's development and performance record (paras. 15 to 19) to date clearly suggest that the institution building objective of the loan has been only partially achieved, despite the fact that SOFISEDIT has been in operation for eight years and has been receiving substantial technical assis- tance inputs. B. SOFISEDIT's Relationship with SONEPI 14. A subsidiary objective of the Bank loan was to promote close cooper- ation between SOFISEDIT and SONEPI, a mixed public company charged with the task of developing small industrial enterprises owned by Senegalese. SONEPI's main activities included preparation of feasibility studies, search for Senegalese investors to sponsor feasible projects, training, and extension of assistance in project preparation and operational matters (e.g. organization, management, production techniques, financing). At appraisal, the intention was to upgrade SONEPI-s appraisal capability and to build up its equity participation and guarantee funds through long term loans by SOFISEDIT (SAR, paras. 2.26, 2.28, 2.31, 4.19 and 4.20). SOFISEDIT would finance projects in the small scale segment of industry appraised by SONEPI. However, cooperation between the two institutions never became close, in part due to SONEPI-s persistent weaknesses. This deprived SOFISEDIT of investment oppor- tunities which, although they may have not been very significant in volume, were nonetheless important goals of industrial policy. Despite bilateral assistance during 1975-81, SONEPI's performance did not improve materially because, inter alia, of the inadequate project appraisal and advisory work performed. This prevented the development of confidence in the institution by 1/ SOFISEDIT could not match the salaries offered by its competitors (see Attachment B, p. 4). 2/ However, the Borrower states that these conflicts should not be exagger- ated (Attachment B, p. 3). - 7 - banks and customers. The third Bank operation (Loan No. 1973-SE and Credit 1136-SE, approved in April 1981) provides considerable assistance to strength- en SONEPI and to expand its activities.-/ IV. OPERATIONAL PERFORMANCE2/ 15. SOFISEDIT's appraisals, commitments and disbursements from 1975 on have persistently been well below projected levels, as a result of the depressed economy and poor investment climate; changes in the banking regula- tions (para. 5) which put all financial institutions on equal footing and increased competition by well established local banks3/; the fact that commercial banks, which have strong ties with established industrial clients, tended to associate SOFISEDIT only in the financing of the most difficult and risky projects; SOFISEDIT's inability to accommodate working capital require- ments; the Government's inability to accord SOFISEDIT preferential treatment in long-term financing as stipulated in the "Convention d'Etablissement," despite its commitment; the erosion of SOFISEDIT's capital base (paras. 12 and 18); and the overly optimistic forecast of operations (PCR, paras. 2.02, 5.03 and Annex III, and 5.06). SOFISEDIT's projected operations were pro- foundly affected by unrealistic assumptions concerning the growth of the industrial and tourism sectors, reinforced by the SOFISEDIT's presumed near- monopoly position. It was expected at appraisal that the industrial sector would maintain historical growth rates (4.7% annually on average); the favor- able trend in exports would continue; the plans for a free port and free trade area in Dakar would be implemented; the industrial investments listed in the 1973-77 Development Plan would be realized; and that the Government's invest- ment promotion policies as well as SONEPI-s performance would stimulate further investments (SAR, paras. 2.02, 2.03, 2.11, 2.20 to 2.31). 16. The appraisal accepted these projections and premises rather uncrit- ically. The project list included in the Plan as well as SONEPI's institu- tional capability and potential were not reviewed at the requisite depth. The chances of development for the free trade zone were not seriously investi- gated; at the time of appraisal it was already clear, according to reports from bilateral aid sources, that there would be very slow progress, if any. The shortage of qualified local entrepreneurs, the limited capital accumula- tion by interested project promoters and the lack of natural resources, had not been fully appreciated. In assessing export prospects, product quality, marketing, the impact of cumbersome bureaucratic procedures and of the small size of the local market on prospective foreign export-oriented investment apparently were not given sufficient weight. The difficulties of re-orienting 1/ For a different opinion by the Borrower see Attachment B, pp. 4-5. 2/ For details, see PCR, paras. 5.01-5.07. 3/ Competition became stiffer from 1976 on when BCEAO required commercial banks to direct 60% of their lending to priority sectors, including industry and tourism. -8- an inward-looking industry towards exports were also underestimated at appraisal, as the system of protection, export incentives, and taxation were clearly in need of reform. Industrial growth during 1975-79 slowed down to 2.3% per annum, further exacerbating the situation. Thus, except for tourism, forecasts of industrial investments and, by extension, of SOFISEDIT's opera- tions proved unrealistic. 17. During 1975-79, SOFISEDIT approved 71 subprojects, of which 10 were subsequently either withdrawn or cancelled because of the adverse economic conditions. About one-half of SOFISEDIT's assistance went to new projects, which is commendable. The sectoral distribution of the subprojects supported was in line with the country's development potential, with tourism accounting for 24% of total lending. The regional distribution of subprojects, both in number and amount, suggests a heavy concentration (by two-thirds) in Cap Vert, in part due to inadequate infrastructure and incentives to promote disper- sion. The size distribution of loans indicates support for medium and relatively larger enterprises, with 32% of the loans ranging from US$220,000 to US$440,000 and 52% exceeding US$440,000. This skewness is in part due to the financing of tourism which has a relatively higher capital intensity. Ex ante calculations of financial and economic rates of return appear satis- factory (PCR, para. 9.02). However, an ex post recalculation of rates of return may be very different in view of the high cost overruns and operating difficulties of most subprojects. 18. Equity investments amounted to a negligible 4% of total portfolio. Co-financing by local commercial banks accounted roughly for 75% of total project term lending, which is somewhat high in the face of a low volume of business and SOFISEDIT's urgent need to increase its lending activity. Extensive co-financing was dictated by SOFISEDIT's limited initial capitaliza- tion and the subsequent erosion of its capital due to operating losses which, given the stipulated debt/equity ratio (originally 3:1 and since 1977 4:1) and the company's policies to ensure prudent lending, restricted its lending capacity to a small share of most projects. SOFISEDIT would rarely take the lead in consortium financing and, generally, at least one other financier was involved in its investments..!/ About 60% of SOFISEDIT's lending was medium term (up to 7 years), while 65% was less than 10 years, suggesting a limited role in long-term financing, particularly in the manufacturing sector. As stated pointedly in the PCR (para. 5.17), this level of long-term financing "is not by itself sufficient to economically justify SOFISEDIT's existence." Even though SOFISEDIT has supported 28% of medium and long-term lending to industry and tourism, it contributed only about 10% to the total investment in these sectors, which further attests to its limited role in term financing. 1/ For SOFISEDIT's concern about the risks involved in equity financing, see Attachment B, pp. 5-6. V. FINANCIAL PERFORMANCE!l 19. SOFISEDIT has mobilized US$5.3 million equivalent in long-term credits from official sources (KfW, CCCE, BOAD). As of the end of 1979, Bank funds accounted for 44% of SOFISEDIT's total resources (PCR, paras. 8.01 and 8.02). SOFISEDIT has been experiencing operating losses every year since its establishment, despite an adequate spread (3-5%), due to the low level of operations and the need to make provisions for the rising level of bad debts. The performance of SOFISEDIT-s equity investments has been particularly disappointing, with provisions for losses amounting to 70% of equity port- folio. Administrative expenses (4%) are high, but in part they reflect the relatively low level of activity. As of February 1982, 70% of SOFISEDIT's loan portfolio was affected by arrears. This worrisome level of arrears has persisted over the past several years and should be attributed to a confluence of factors: adverse economic conditions, support of new and riskier projects affected to a much greater extent by the vicissitudes of the economy, inade- quacies in SOFISEDIT's appraisals, lack of a properly organized supervision and collection effort, and project implementation problems. Of 42 subprojects in operation, 24 are facing difficulties and only 15 are operating satisfac- torily. Though provisions reportedly are adequate and the loans are secured with collateral and third party guarantees, the fact remains that SOFISEDIT's portfolio contains many high-risk loans and equity participations, which clearly affect its operational performance and undermine its financial viabil- ity. The cumulation of losses eroded SOFISEDIT's small initial capital and, at the Bank's insistence, SOFISEDIT's authorized and paid-in capital was increased in 1981 from US$2.6 million to US$4.7 million. Although this is a first step in the right direction, unless a comprehensive action plan is devised and successfully implemented to improve SOFISEDIT's organization, operations and overall performance, the quality of its portfolio could worsen further and thereby endanger SOFISEDIT-s financial position. VI. LOAN UTILIZATION 20. The PCR provides no information on subproject implementation and operational experience, and this precludes a meaningful ex post evaluation of the Bank supported subprojects.V! Based on subproject approval data, the utilization of the Bank loan appears satisfactory and, on the whole, consis- tent with the Government's industrial policy objectives. The closing date was extended for two years, to December 1980, but over 90% of the loan had already been disbursed on schedule (PCR, paras. 4.01 and 4.02). The loan, excluding the technical assistance component (para. 10), supported ten subprojects for an estimated total cost of US$12 million. Of the ten subprojects, four were 1/ For details, see PCR, paras. 6.01-6.05; SOFISEDIT's views and need for remedial action are detailed in Attachment B, pp. 6-12. See also Attach- ment A. 2/ The same holds for SOFISEDIT-s assistance to subprojects not supported by Bank funds (para. 17). - 10 - in tourism and accounted for 46% of the Bank loan. The rest were manufac- turing subprojects in the small to medium range, well diversified in terms of sectoral distribution, and with regional dispersion reflecting the pattern of industrial clustering emerging in the country. Five of the ten subprojects were new and the remaining expansion. Ex ante economic and financial rates of return seem satisfactory. SOFISEDIT was the sole lender, at medium term, in three of the Bank supported subprojects; it co-financed with three local banks, again at medium term, another three; and it extended long-term finan- cing to three additional subprojects which was blended with medium-term funds from commercial banks. SOFISEDIT's share in co-financed subprojects amounted to 33% of the total project costs, with long-term funding limited to only US$700,000. VII. EFFECTIVENESS OF BANK'S SUPERVISION EFFORT 21. The Bank at an early stage, but particularly since 1978, had become fully aware of SOFISEDIT's precarious position and inability to survive as a specialized development bank limited to term financing of industry and tourism, and conveyed its concern to SOFISEDIT's main shareholders, including the Government. At the same time, the Bank suggested and discussed with SOFISEDIT's management and the Senegalese Authorities possible actions that SOFISEDIT could take to overcome its difficulties. Aside from the need for more active promotional and organizational effort (improvement of SOFISEDIT's image in the business community, increase in share capital, mobilization of foreign resources, entry in new areas of activity, improvement of internal administration, and increased involvement of the Board of Directors in policy- making by creating an executive committee), the idea of merging SOFISEDIT with BNDS or USB was considered but found impractical. Other alternatives included the possibility of SOFISEDIT's involvement in housing, construction or commer- cial banking, although such an involvement would divert SOFISEDIT from its development function.1/ However, SOFISEDIT-s Board and management have not been receptive and, as a result, the Bank so far has not had an appreciable impact on SOFISEDIT's development and operations. VIII. CONCLUSIONS 22. In the face of a small and highly competitive financial market and an adequate banking infrastructure capable of handling long term financing in industry, the need in the first place for creating a new financial interme- diary was questionable. In addition, the difficult and painful process of building up a new institution ab initio, particularly in a constrained environment, had not been fully appreciated at appraisal. The sectoral policy environment, including imminent changes with telling consequences, was not analyzed in the requisite depth, as were not the possibilities of utilizing existing entities as channels for Bank financing. 1/ Since 1981, SOFISEDIT has been extending term financing to fisheries, another priority sector. - 11 - 23. The rejection of USB as a channel for Bank funds, an institution judged at that time as efficient and which had a Government mandate to finance industrial projects, cannot be fully explained. Moreover, the proposed endow- ment of the new institution with an array of privileges over the rest of the banking community, thereby according it a "quasi-monopoly" status, was not entirely felicitous; such preferential treatment was never sanctioned and implemented. Appraisal and processing capability for tourist projects could have been developed by any of the existing banks, if it did not already exist, while mobilization of foreign resources could have been undertaken more effec- tively by a more entrenched institution rather than a newly emerging and untested entity, provided an appropriate policy environment was in place. SOFISEDIT's role and effectiveness is questionable to date, as it remains a relatively small institution, accounts for a very small share of the investment in industry and tourism, and. its viability remains uncertain. SOFISEDIT's establishment, based as it was on an inadequate Bank appraisal effort, did not contribute to the deepening of the financial system. 24. The institution building objective of the loan has been only par- tially achieved, despite the fact that SOFISEDIT has been in operation for eight years and has received substantial technical assistance inputs. Even recently, a complement of expatriate advisors had to be dispatched to strengthen SOFISEDIT institutionally. Appraisals are in need of improvement in important aspects, while supervision and loan collection continue to be deficient. SOFISEDIT's operational and financial performance has not been satisfactory (paras. 15 and 19) and it has been experiencing operating losses every year since its establishment. Its portfolio contains a high proportion of ailing subprojects. About 70% of SOFISEDIT's loan portfolio is affected by arrears. The Bank-s supervision effort has not had a perceptible and lasting impact on SOFISEDIT's institutional development and operations. 25. The project experience affirms the critical importance of a circum- spect appraisal effort and the need for sector work preceding project prepar- ation in order to appreciate better the workings of the financial mechanisms in the country, to identify gaps in the financial structure and institutional arrangements and to enhance the Bank's capability to design purposeful proj- ects. It indicates the need to consider carefully the trade-off between creating a new as opposed to using an existing institution, especially in constrained environments. It suggests that institution building is a long, drawn out process which requires planning, commitment of the institution and incisive follow-up, particularly in cases where foreign technical experts are employed, given the need to ensure a smooth transition and continuity of operations following their departure. It points to the need for due attention to the structure of ownership and, by extension, to the composition of the institution's Board of Directors, in order to ensure commonality of purpose in the decision-making process. It evinces the importance of strong leadership to avoid frustration of an entity's development potential. It suggests that the ability of a specialized institution to finance working capital require- ments tends to enhance its competitive position. Finally, it demonstrates the need not only for close supervision but also for devising appropriate mechanisms (e.g. development of comprehensive action plans) to ensure effective supervision leading to tangible results. - 12 - FORM NO. 788B LA A VC D IO (1-74) IBRD LANGUAGE SERVICES DISION CONTROL No. E-727/83 IDATE: February 9, 1983 ORIGINAL LANGUAGEt French (Senegal) DEPT, OED TRANsLaToR: TS:cc ATTACHMENT A COMMENTS RECEIVED FROM THE BORROWER Translation of cable dated 2/7/83 from Dakar TLX No. 630 - ATTN. MR. SHIV S/ KAPUR, DIRECTOR OED We acknowledge receipt of your letter of December 6, 1982 concerning the evaluation report on the SOFISEDIT Project, for which we thank you. We confirm that we have no particular comments to make on this report. We are currently drawing up a recovery plan that will cover all the points raised in the report and will be discussed by the Board,. We share, however, your view that the role, place and means of SOFISEDIT in the national institutional investment financing system ought to be redefined in the framework of a policy formulated by the State and the stockholders. We have already set this viewpoint out in a report submitted to the Board in October 1982. Regards Amath Samb President-Directeur Ggneral, SOFISEDIT -13 - FORM NO. 7C8 (1-74)CONTROL No. E-533 ATE: ORIGINAL LANGUAGE: French Senegal) [OEPT. OED ITRANSLATOR" RP: P7 COMMENTS RECEIVED FROM THE BORROWER AgTCEN Bf1 Mr. Shiv S. Kapur Director OED World Bank 1818 H Street Washington, D.C. 20433 February 28, 1983 Dear Sir: I am in receipt of the draft PPAL on the SOFISEDIT Project (Loan 987-SE), and wish to make the follQ~wing comments. From the outset you insist that it was neither necessary nor appropriate to establish SOFISEDIT. You maintain that the local banks, and USB in particular, would have been fully capable of carrying out the role assigned to this new organization. I was not involved in the preparations for the establishment of SOFISEDIT, so I will not express any opinions on this point. It is up to the Bank officials concerned with the appraisal of SOFISEDIT to defend their decision. Comment However, I must point out that USB had proved incapable of reflected in PPAM utilizing a line of credit provided by KfW long before SOFISEDIT was established, para. 6, footnote and this was, in fact, withdrawn from it and transferred to SOFISEDIT, which 3. used it up over the agreed periods. CommentI agree with you that the work of Mr. Mombru and Mr. Jetha for reflected SOFISEDIT was outstanding; but I do not agree that the quality of appraisal in PPAM para. 10, has eroded since their departure. I maintain that quality has remained foot- note 3 high, and that not too much should be made of professional staff turnover. Of all the staffers who left the service of SOFISEDIT, I believe that only the one in charge of promotion was really missed. The other departures ATTACHMENT B -14- Page 2 of 13 were of no consequence, and it was even necessary for me to dismiss one member whose behavior had caused tension within the organization. As for the others, how could I have retained them when they were being offered considerably better positions elsewhere precisely as a consequence of their experience with SOFISEDIT? In general, you are extremely critical of me, and the least I can say of your comments is that they are both ungracious and discourteous. They are also based on a completely abstract view of the problem, and take no account of the concrete realities which I have to face throughout my service with SOFISEDIT. In any case, you could not be expected to take account of these realities, since you are completely ignorant of them. It is easy to theorize inWashingtonover what should have been done in Dakar, concentrating only on abstract theories and disregarding the specific characteristics of the setting in which the activities were taking place. You insist that SOFISEDIT should never have been established, and to this end you have adduced, amongst other possible arguments, certain ones which attribute all the responsibility for its misfortunes to me and deny me any merit; for example: "established procedures were not applied forcefully", "SOFISEDIT's organization has remained unstructured", "promo- tional efforts were somewhat systematically undertaken (only since 1976, but without tangible results)," "ineffective management, inability to retain its trained staff." It would be wearisome to consider in turn all the,complaints you raise against me. You summarize these by asserting, without the slightest ATTACHMENT B - 15 - Page 3 of 13 qualification, that "the poor performance can be blamed only on the former President General Manager" (sic - Translator). I am inclined to believe that these exaggerations and dogmatic judgments reveal a mind unwilling to take account of reality. At all events your conclusions are not based on logic; close and objective analysis of the facts would have inevitably made you more prudent, or at least more mod- erate in your assertions. Leaving this aside, I personally do not believe that technical assistance should go on forever, especially when it is so expensive. Sooner or later the nationals of developing countries must take control of their own destinies. How can this be achieved if they are merely content to receive unending assistance? What you refer to as "the conflicting interests of Board members" should not be exaggerated. Although it is true that representatives of local banks at times tended to defend their particular interests rather than Reference made behave as Board members of SOFISEDIT, it should not be deduced from this that in PPAM there were constant conflicts within the Board. These members' attitudes para. 12, foot- are perfectly understandable provided one knows that at that time there were note 2. few investment projects available and each bank wanted its share. If SOFISEDIT's management had been, as you say, "ineffective," the other banks would not have regarded it as a competitor. I am also surprised to learn from you that there was a "poor rapport Text of PPAM, between management and Board." On the contrary, I maintain that there was para. 12 modi- a good rapport, except perhaps in the case of one expatriate member who fied. tried to impose the standards applied in his country when assessing investment projects and for this reason abstained from or opposed the adoption of most subproj ects. - 16 - ATTACHMENT B Page 4 of 13 You refer a second time to what you call the "inability to retain Comment reflected its trained staff." To keep these staffers it would have been necessary to in PPAM para. 11 pay them salaries at least equal to those offered elsewhere, thereby consid- footnote 1. erably increasing overheads, and you have already insisted that "administrative expenses are high." As regards the relationship between SOFISEDIT and SONEPI, you again insist that "cooperation between the two institutions never became Comment close, in part due to SOFISEDIT's* persistent weaknesses. This deprived reflect- ed in SOFISEDIT of investment opportunities." PPAM, para.14 I believe this to be totally incorrect. First of all, I am on foot- note 1. the best of personal terms with the present President Managing Director of SONEPI, as I was with its former President. It would have been surprising if this personal relationship had not been reflected in our professional activ- ities. In fact, SONEPI projects are not the sort that banks would rush to participate in, and most of them were subject to SOFISEDIT approval. When- ever any of these were rejected, it was solely because of their inherent shortcomings. You say that aspects of SONEPI "prevented the development of con- fidence in the institution by banks." If that is true, who do you believe finances the investment projects sponsored by SONEPI? Your arguments should at least be consistent! *Translator's Note: The original English PPAR has "in part due to SONEPI's persistent weaknesses". The French version of the report has "SOFIDESIT" here instead of "SONEPI". - 17 - ATTACHMENT B Page 5 of 13 You state that SOFISEDIT was to grant SONEPI long-term loans to enable the latter to build up its equity participation and guarantee funds. That is true; but the value of any principle depends on the extent to which it can be applied in practice. In this connection I would point out that the IBRD loan to SOFISEDIT is governed by precise conditions; in particular, SOFISEDIT's obligation to repay principal and interest within specified periods. Since SONEPI receives as payment for the guarantees it grants a margin of only 1% per year of those guarantees, I should like to know how it could have repaid any SOFISEDIT loan when the rate of interest would have had to be at least that chraged by IBRD, i.e. 7% or 8%, not to mention repayment of principal. The situation as regards equity participation would be even worse, since dividends, if there were any, would not be distributed until long after project take-off. Some of your comments on operational performance are correct. However, others require qualification. Regarding equity participation, I stated in a memorandum to the Reference government in 1979: "...It should be emphasized that this policy (on to pp. 5-6 equity participation) involves enormous financial risks. None of the enter- is made in PPAM, prises in which SOFISEDIT participates is yet capable of paying any dividends. para. 18, foot- In fact, almost all of them are in such difficulties that SOFISEDIT has had note 1. to establish a reserve fund of CFAF 53 million to cover depreciation of their securities. In this situation it is doubtful whether the policy in question should be continued, since to date its results have been virtually negative." ATTACHMENT B - 18 - Page 6 of 13 Para. 18 The regulations governing SOFISEDIT's general policies limit its in PPAM refers participation in any subproject to 20% of its available equity. As a result, approv- ingly a bank must participate with SOFISEDIT in any subproject whose financial to this limit as requirements are greater than the total of the SOFISEDIT loan and the self- prudent lending. financing component. I can see no grounds for criticism in that. It is of no significance that "SOFISEDIT would rarely take the lead in consortium financing," since its essential role was to participate in whatever financing was necessary. In a note to the Minister of Finance in July 1979 I stated: "The total of approved uncanceled loans is considerable, since from 1974 to 1978 it reached CFAF 2.8 billion. There was a peak of CFAF 954 million in 1977/78 compared with CFAF 604,757,000 and CFAF 510 million in the three preceding years. "To these CFAF 2.8 billion loans should be added CFAF 105 million in equity participations from 1975 to 1978, so that SOFISEDIT has approved a total of about 40 projects, representing 13% and 34%, respectively, of all medium and long-term bank financing. "This approximately CFAF 3 billion participation has catalyzed about CFAF 14 billion in investments, and will lead to the creation of 3,000 new jobs, representing a total of CFAF 4 billion in wages. "Overall, SOFISEDIT is facing considerable difficulties, but fortunately the causes, which are described below, have been clearly identified and one can therefore deduce what corrective measures would be most effective. ATTACHMENT B - 19 - Page 7 of 13 "The causes of SOFISEDIT's problems are both cyclical and structural. The economic slowdown is a fundamental factor, but structural changes, particularly as regards the rules governing participation by the banks, have played an equally important role. "Unfavorable economic factors, together with the rigidity of certain procedures and a lack of dynamism on the part of promoters, account to a great extent for the problems preventing SOFISEDIT's takeoff and for its poor performance. Reflect- "The general economic slowdown is the reason why investment ed in PPAM, in the sectors covered by SOFISEDIT has been sluggish, but it is para. 15. abundantly clear that industry and tourism have been more severely affected than any others. "As of September 1974, long-term loans to industry represented 59% of those granted to all sectors and medium-term loans stood at 33%, the figures for tourism being 21% and 15%. By June 1978 these percentages had fallen by more than half, except for long- term industrial loans, standing at 49% and 11% for industry and 10% and 7% for tourism. "The reluctance to invest and borrow affects SOFISEDIT even more severely. Loan beneficiaries will wait until the last minute to mobilize the funds provided to them (in order to minimize financing costs), and procedural complications and administrative delays hamper the organization's activities. ATTACHMENT B - 20 - Page 8 of 13 "A further structural problem that SOFISEDIT has had to face is the banking reform of July 1, 1975. Overall, this took no account of the specialized nature of development banks because it eliminated any distinction between these and commercial banks Reflect- and required the latter to take 60% participations in priority ed in PPAM, sectors, which included industry and tourism. para. 15, foot- "The competition thereby caused between the commercial note 3. banks and SOFISEDIT, an institution specializing in the field, has been prejudicial to the latter, whose resources are smaller, more expensive and less flexible, and which, unlike its compe- titors, is unable to provide supplementary short-term loans to investors. "Similarly, the extension of the limit for medium-term loans to ten years has made SOFISEDIT's long-term loans much less attractive, except for investments in tourism, which take longer to produce returns. "Lastly, the regulations limiting SOFISEDIT's participation in any given project to 20% of its available equity prevents it from playing a full role in large-scale projects, which are, nevertheless, the most important ones from the point of view of value added, job creation and the volume of returns which they often produce. "In all, while the measures taken under the general recovery plan are designed to deal with cyclical problems, other specific measures should be proposed to deal with the structural problems. These need not affect community banking regulations, the provisions of which are well justified. ATTACHMENT B - 21 - Page 9 of 13 "These proposals represent a consistent plan of action. "First, SOFISEDIT's turnover and portfolis should be increased and the necessary resources provided for this purpose. Second, additional measures should be adopted to make the organ- ization more competitive. "Increases in turnover, portfolis and resources. "Three types of measures are necessary to achieve this aim: - The Government and the Central Bank should ensure that provisions of the 'Convention d'tablissement' are properly observed. According to these, 'the Government shall grant SOFISEDIT priority for long-term financing of investments in industry and tourism'. "To this end, the Government could entrust SOFISEDIT with the management of an interest subsidy fund to be used for loans to industrial SMEs in accordance with the terms of a joint agreement. The beneficiaries in industry and tourism would permit SOFISEDIT to participate in meeting their financing needs. "The Central Bank, under the terms of its 1975 circular, should give priority to 'local banks enjoying the right to draw on exter- nal lines of credit and other external sources of funds (foreign banks or other institutions and suppliers' credits). It shall ensure that the banks follow its guidelines on this matter.' "In addition, consortium financing of loans to industry, application of the 1975 BCEAO circular, and measures concerned with sectoral policy on loans should all take account of the need to reactivate SOFISEDIT. ATTACHMENT B - 22 - Page 10 of 13 " - SOFISEDIT should increase the range of its partici- pations. It should be allowed to grant commercial loans to its investor clients for the projects which it finances, and its activities should also be extended to maritime credit. "In all, these measures should induce the commercial banks to involve SOFISEDIT in the financing they provide for invest- ments in industry and tourism, and indeed consortium loan financing should be the key principle in the proposed reform. - This increase in activity depends on an increase in resources, since the above measures will produce an immediate expansion in SOFISEDIT's operations. "Since projections show that within 18 months SOFISEDIT will have exhausted the external resources currently available to it, it will be necessary: + to increase its capital immediately by at least 50% (with BCEAO and government participation thanks to a KfW loan), if for no other purpose than to improve its debt/equity ratio. Such an improvement is essential if it is to nego- tiate new external lines of credit and raise its commitment ceiling. + to negotiate new lines of credit, whatever other measures may be taken. Currently, as a result of previous project approvals, it has only about CFAF 900 million available for - 23 - ATTACHMENT B Page 11 of 13 New projects, and, as I have said before, this amount will be exhausted within 18 months at the most. These resources will be used up in a much shorter period if the measures proposed are accepted and implemented, so that the necessary steps should be taken immediately, in cooperation with the Ministry of Economic Affairs and Finance. "These provisions concerning SOFISEDIT's level of activities and resources should be strengthened by supplementary measures. Additional Measures "The banking law eliminated the distinction between commercial banks and development banks; therefore, SOFISEDIT also should be enabled to offer its clients a range of commercial services. "In this way, it could profit from a share of the business generated by its projects, and supervise more effectively the conduct of the enterprises which it finances." It should be clear from the foregoing that I did not wait for your report to identify the causes of SOFISEDIT's poor performance and propose measures which, I believe, would considerably mitigate those problems. As a result, an interest subsidy fund for loans to SMEs has been Mentioned established, SOFISEDIT being responsible for its administration. In addition, in PPAM t paa.2 the Government has decided not to create an autonomous institution to para. 21 foot- not 1handle maritime credit, entrusting this instead to SOFISEDIT. This has note 1. clearly revitalized the organization's activities to a considerable degree. - 24 - ATTACHMENT B Page 12 of 13 I regret that I do not have sufficient time to analyze your report in detail and in depth. However, I must say before ending this letter that while I share some of your opinions, I unhesitatingly reject the rest. For example, I agree when you say: "...SOFISEDIT's level of operations has been persistently below projected levels due to a confluence of factors, but primarily* because of the depressed economy, the small size of the market and the competition from entrenched local banks." In view of this, was it really necessary to make what were at times offensive value judgements, of which the least that can be said is that they are not always inspired by a desire for accuracy and objectivity? Your report ends on a hopeful note, since you say: "...the recent injection of fresh capital, the change in top management, the expansion of its activities into the fisheries sector, and the continued Bank support and super- vision effort would help in SOFISEDIT's recovery." I do not wish to quench your optimism but, even though I left the Comment organization in July 1980, I am well aware that the problem of its survival reflect- has now become acute. ed in text of To end, I wish to quote from a diagnostic report on SOFISEDIT pre- para. 8 of pared by a foreign financial institution in February 1982: PPAM. "...The reform of the Central Bank's rediscounting regulations in 1975 increased competition from the commercial banks, which of course had a closer relationship with their clients, and therefore *Translator's Note: Mr. Ndiaye's underlining. ATTACHMENT B -25- Page 13 of 13 made SOFISEDIT's incorporation into the Senegalese financial system extremely difficult. Even today, SOFISEDIT is still practically on the fringe of the financial system." Yours etc. Is/ Ibrahima NDIAYE Inspector General of Finance Ministry of Finance Dakar, Senegal (Formerly President-Director General of SOFISEDIT) - 26 - PROJECT COMPLETION REPORT SENEGAL - SOFISEDIT Loan 987-SE I. INTRODUCTION 1.01 In February 1970 a Bank mission visited Senegal at the request of the Government to determine the feasibility of creating a new development finance institution specializing in long-term financing for industrial projects. The mission, based upon its findings, concluded that the immediate investment prospects did not justify the establishment of a new institution. In mid-1972 the Government again raised the idea of creating a development bank, this time, with a broader scope, catering to the needs of industry and tourism. In response to this new request, a second Bank mission visited Senegal in November 1972, concluding that the investment prospects in Senegal had sufficiently improved to warrant the creation of a new specialized develop- ment finance institution, and recommended Bank Group support for the proposed institution. 1.02 The proposed new institution, Societe Financiere Senegalaise pour le Developpement Industriel et Touristique (SOFISEDIT), being promoted by the Senegalese Government, was to have an initial authorized share capital of CFAF 650 million (US$2.6 million 1/), being a joint venture between the Government, the Central Bank, local financial institutions, IFC, Caisse Centrale and other foreign institutions. The Government also requested a Bank loan for the proposed institution. 1.03 In June 1973, a Working Group, including representatives of SOFISEDIT's prospective shareholders and SONEPI, 2/ was established to discuss SOFISEDIT's prospective policies, organization and staff, projected operations, relationships with existing financial and promotional institutions within the country, and other related organization matters. The Bank and IFC were associated closely with the Working Group in planning the establishment of the new institution. SOFISEDIT was incorporated in June 1973 and operations began in March 1974. 1.04 In November 1973 a Bank appraisal mission visited Senegal in line with the proposed IFC investment and Bank loan. In May 1974 the Bank approved loan 987-SE in the amount of US$3 million to SOFISEDIT ".... to assist the borrower in financing such productive facilities and resources in the Republic of Senegal as will contribute to the economic and social develop- ment of the country." At the same time IFC approved an equity investment in the amount of US$0.24 million. 1/ Based upon an exchange rate at the time of CFAF 1 = US$0.004 (US$1 = CFAF 250). 2/ Societe Nationale d'Etudes et de Promotion Industrielle. - 27 - II. ENVIRONMENT 1/ 2.01 The period from the approval to the closing date of the first loan spanned 6-1/2 years (May 1974-December 1980). The average per annum growth in GNP during the report period was 2.2%, compared with a population growth of 2.6% per annum. In 1978 GNP per capita was the equivalent of US$340. At the beginning of this period, the Senegalese economy had just begun to recover from the effects of inflation and extremely severe drought, the latter lasting through 1973. Industrial production which declined by 9% in 1973 showed a slight recovery in 1974, increasing by 6.2% in that year, and the trade deficit was considerably reduced due to improved world market prices for groundnuts and phosphate. 2.02 The signs of economic recovery of Senegal in the late 1974, as modest as they were, proved to be short-lived, and by the end of 1976 the treasury was facing a severe cash shortage and the balance of payment deficit had exhausted the country-s foreign exchange reserves. Under pressure from the Central Bank, the Government undertook certain adjustments in its monetary and fiscal policies in order to (a) improve the country's foreign exchange position (b) ease the cash crunch on public finance (c) reduce outstanding credits. The measures taken in these efforts were necessarily tough and had a depressing effect on overall investments and business activity in Senegal. Investors adopted a cautious and "wait and see" attitude, which in effect, did not help the situation. 2.03 The sectoral distribution of medium- and long-term loans outstanding detailed in Annex I shows that in the areas of manufacturing and tourism, two of SOFISEDIT-s principal areas of activity, the share of loans outstanding from Senegalese banks, fell from 35% in 1974 to 14% in 1978 for manufacturing, while the corresponding figure for tourism was from 16% in 1974 to 7% in 1978. This relative decline in investments in manufacturing and tourism had an impact upon SOFISEDIT's activities in these areas and contributed in part to its lower than projected operations. III. OBJECTIVES OF THE LOAN 3.01 The Bank in granting the loan to SOFISEDIT hoped to achieve three principal objectives: (a) to assist the Government in the successful estab- lishment of an institution, in this case, SOFISEDIT, geared toward the provision of medium- and long-term financing (including equity) to companies in the industrial and tourism sectors, thereby stimulating the further development and growth of these sectors (b) to make available to SOFISEDIT foreign exchange in order to facilitate its role as an effective catalyst 1/ For more details on the economy of Senegal during the review period see Draft Project Appraisal (SOFISEDIT III) October 24, 1980 and The Economic Trends and Prospects of Senegal (Four volumes); Dec. 1979. - 28 - in the development of industry and tourism in Senegal (c) to provide assist- ance (technical and financial) which would serve as a basis for institu- tion building particularly, as regards the identification, recruitment and development of adequate management and technical staff, and the formulation of appropriate operational guidelines and procedures. IV. UTILIZATION OF THE LOAN 4.01 Except for the amount of US$200,000 originally allocated out of the loan to cover the costs related to technical assistance to SOFISEDIT, the entire amount of the loan was earmarked to finance industrial and tourism projects. Because of the higher than anticipated cost of the technical experts, however, and the need to extend their stay (tour of duty) by a total of 3 man years (see para. 7.01 below), the loan agreement was subsequently amended to allow the use of US$445,000 to cover costs of technical assistance. 4.02 The closing date for the submission of subprojects, originally set for December 1976 in the appraisal, was twice extended, first to December 1978 and then to December 1980. Likewise, the date for final disbursement under the loan was extended from December 1978 to December 1979 and finally to December 1980. These extensions were due mainly to (a) a conscious Bank decision to freeze some funds to cover the additional costs of technical assistance, in case it was deemed necessary to extend the term of the two experts financed under the loan and (b) in order to allow SOFISEDIT additional time to utilize the uncommitted balance under the loan which was the result of two subprojects having been approved for refinancing, but later cancelled by the sponsors. 1/ The uncommitted amount of about US$200,000 was finally utilized against the Palm Beach Hotel, approved July 1980. Though the latest closing dates have not as yet expired and there is still a small amount undisbursed, most of the lessons to be learned from the perspective of a project completion report are now apparent. V. OPERATIONS 5.01 SOFISEDIT's operations under the first loan 987-SE overlap with a second Bank loan 1332-SE in the amount of US$4.2 million approved September 1976. At the time of approval of the second Bank loan over 75% of loan 987-SE had already been committed (see also para. 5.05). However, in reviewing SOFISEDIT's operations during the utilization period of the first loan, specific attention is drawn to projects financed under loan 987-SE. 2/ 1/ The two projects approved but later cancelled were Yeri Diakhate - approved in November 1978 but cancelled in June 1979, and SIES approved August 1979 and cancelled June 1980. 2/ Excluding the financing of the technical assistance. - 29 - 5.02 Approvals. Apart from the amount of US$445,000 used to cover the cost of technical assistance to SOFISEDIT, a total of ten subprojects 1/ were financed by SOFISEDIT under loan 987-SE. As Annex II shows the period of approval by SOFISEDIT of subprojects under loan 987-SE spanned from June 1975 to July 1980, with eight of the ten subprojects being approved in 1975 and 1976, and the last subproject in July 1980. 5.03 In terms of overall approvals (including those not financed by the Bank loan), Annex III shows that SOFISEDIT's achievements from 1975 thru 1979 2/ were below forecasts, ranging from a high of 92% of projected approvals for 1976 to a low of 46% of projections for 1978. It should be noted, however, that while SOFISEDIT-s overall approvals fell below projec- tions, its utilization of loan 987-SE was substantially in line with appraisal expectations, except for the amount of US$392,000 allocated by the Bank to meet additional technical assistance cost, if needed, part of which ($147,000) was subsequently released in mid-1978 and applied toward a subproject. 5.04 Commitments. On the average commitments on total operations during the review period were 53% of projections, with 1975 accounting for the highest percentage at 105% of projections (CFAF 437 million) while 1978 accounted for the lowest level, 14% (CFAF 203 million) of projections. The figure for 1979 increased to 56.7% of projections (CFAF 891 million). As may be seen from Annex III, the level of commitments was substantially influenced by the lower than total projected approvals over the review period, all of which was largely the result of an inactive economy and depressed investments. Furthermore, as SOFISEDIT's commitment fees do not begin to accrue till after signature, many clients, following approval by SOFISEDIT, delayed signing till the last minute in order to avoid paying such commitment fees. Based upon available data, the average period between approval and commitments is about 9 months, compared with about 3 month between commitments and disbursements. This lag is considered too great, even for a new institution, and requires SOFISEDIT's attention. The Bank intends to closely monitor this situation over the coming years. Total cumulative commitments during the review period 3/ was CFAF 2.5 billion or 44% of projections of CFAF 5.6 billion. 5.05 Disbursements. As shown in Annex IV SOFISEDIT's disbursements of loan 987-SE went reasonably well, with actual cumulative disbursements exceed- ing projections by a margin of over 30% at the end of the second full year of operations (1976). By the end of 1978, the fourth full year of operations, a total of US$2.8 million (CFAF 700 million) 4/ had been disbursed out of the 1/ Excluding two projects which were cancelled. 2/ Figures for 1980 disregarded as they are still estimates. 3/ 1980 data disregarded in this calculation as they were only estimates. 4/ Using a conversion rate of US$1.00 = CFAF 250. - 30 - loan, representing 93% of the entire line of credit. SOFISEDIT-s overall actual disbursement rate 1/ during the review period, except for the first two years (1975 and 1976) of full operations, 2/ was substantially below projec- tions, dropping to a low of 24% in 1978. Average annual disbursements were 71.5% of projections during the review period, and the following table summarizes SOFISEDIT-s operations for the review period. 3/ Total Operations Projected Actual (CFAF billions) Approvals 6.4 4.0 Commitments 5.6 2.5 Disbursements 4.5 2.3 5.06 Though a more aggressive and imaginative management (see para. 7.06) may have been able to increase the actual level of operations of SOFISEDIT (both in terms of amount and number of projects) during the period under review, it should be noted that a number of factors beyond SOFISEDIT's control contributed to the lower than projected level of approvals, among which factors are the following: (a) poor economic situation and weak investment climate in the country following the short-lived economic recovery after the drought in 1973 (see paras 2.01 and 2.02); (b) changes in the local banking regulations by the BCEAO, putting all banks on the same footing; (c) failure by the Government to keep its commitment to SOFISEDIT as contained in the "Convention D'Etablissement," giving preferential treatment (priority) to SOFISEDIT in the long-term financing of certain industries; (d) overly optimistic appraisal forecast of operations. 5.07 At the time of project preparation and appraisal, existing central banking regulations only allowed for the rediscounting of short- and medium- term loans (up to 7 years) made by local commercial banks, thereby leaving a financing gap in the market, which gap was expected to have been substantially filled by SOFISEDIT, in terms of loans with maturities of longer than 7 years. Within a year of SOFISEDIT's existence (and about 6 months following approval of the Bank's loan), the central (BCEAO) announced new regulations which allowed local banks to rediscount loans up to 10 years. The result of this new policy was the creation of additional competition for SOFISEDIT from well-established local banks in an already limited market for long-term financing. 1/ Disbursements as they relate to all operations during the review period. 2/ During 1975 and 1976, the first two years of full operations, actual disbursements exceeded projections by an average of about 22%. 3/ Excluding 1980 figures which are estimates. - 31 - 5.08 That such an unexpected policy change could have been effected shortly after SOFISEDIT's inception as well as Bank approval was surprising, as it was unlikely that the BCEAO's decision was a sudden one; more likely than not, this policy change was being considered for some time by BCEAO. The Bank did not formally raise this issue with the Government, and if it had, it is not likely that any significant results would have been achieved, given that no formal commitments or assurances on this issue had been sought at the time of original Bank appraisal, as well as the fact that BCEAOs decision on this issue was made within a regional context, affecting all member countries. Perhaps, the appraisal could have gone into a little more depth in this aspect of market investigation for long-term financing in Senegal. Confirmation from BCEAO as to its intent in this area of policy would have been useful, particu- larly in estimating the potential market for long-term loans, and identifying any likely changes in structure in the near future. 5.09 In September 1974, SOFISEDIT and the Government signed a "Convention" wherein the latter undertook to give priority (preferential treatment) to SOFISEDIT in long-term financing of industrial and tourism projects. The relevant document, however, was not specific in describing what these priori- ties were or exactly how they would be implemented, and the Bank at the time of original appraisal and negotiations did not request more specificity. SOFISEDIT to date, has not obtained any particular priority treatment under this convention. Furthermore, the policy change of the BCEAO referred to above (para. 5.07) effectively abolished all distinction between develop- ment and commercial banks in the Monetary Union. 5.10 In retrospect, the Bank, at the time of negotiations of the second SOFISEDIT loan (loan 1332-SE) could have, but did not, raise with the Govern- ment those issues relating to the specific nature and effectiveness of the benefits to SOFISEDIT under the "Convention" as well as the impact of the BCEAO policy changes of SOFISEDIT. 5.11 The original forecast of operations (approvals, commitments and disbursements) for SOFISEDIT was on the optimistic side, and has never been realized, as may be seen from the summary in para. 5.05 above. These pro- jections of operations at the time of appraisal were based substantially upon a list of possible industrial and tourism projects (63 at the time) obtained from the Government by the appraisal mission, and an assumed near-monopoly position for SOFISEDIT in the long-term financing of industrial and tourism projects. Many of these projects have never gotten off the ground due mainly to poor economic conditions and their lack of feasibility, and are still shown in the Government's pipeline of projects. Furthermore, the market niche (long-term financing) assumed to be almost exclusively available to SOFISEDIT by virtue of its expected preferred position has not proven to be a reality (see paras. 5.07 - 5.08). 5.12 Projects financed. During the period covered by this report, a total number of 71 subprojects 1/ with total investment cost of over 1/ Before cancellations. - 32 - CFAF 29 billion were approved by SOFISEDIT. Ten of these subprojects with total cost of CFAF 2.98 billion were financed by SOFISEDIT under loan 987-SE. Subproject loans ranged in size from CFAF 3.5 million to CFAF 160 million, and total subproject cost ranged in size from CFAF 7 million to CFAF 4.7 billion. 1/ The average sub-loan size financed under loan 987-SE was CFAF 70 million, compared to SOFISEDIT's average sub-loan size for all subprojects of CFAF 52.8 million. Average subproject investment cost under 987-SE was CFAF 298.6 million compared with SOFISEDIT's overall average subproject investment cost of CFAF 408 million. 5.13 From the gross total of 71 subprojects approved by SOFISEDIT, (see Annex V), 37 (52%) represented assistance to existing (expansion) projects, while 34 (48%) represented assistance to new projects. In terms of gross amount, CFAF 1.97 billion 2/ went to existing (expansion) enterprises while CFAF 2.5 billion 3/ went to new projects. 5.14 The sectoral distribution of SOFISEDIT's subprojects is detailed in Annex VI, and shows that the largest single sector in terms of number was tourism, receiving 13 loans 4/ with total amount of CFAF 882 million, followed by food processing, receiving 8 loans amounting to CFAF 401.7 million. In all, SOFISEDIT provided assistance to projects in 12 sub-sectors during the review period, reflecting a relatively broad coverage in terms of economic assistance. 5.15 In terms of loan approvals, Annex XII shows that 29.5% of the number of projects approved by SOFISEDIT between 1975 and 1979 were for amounts less than CFAF 22.0 million. From the point of view of total amount approved, however, only 5.3% of the loan approvals went to projects less than CFAF 22.0 million. While this total amount to small projects may appear relatively insignificant, it is noteworthy that even with its small project staff, and given the high risk factor and administrative cost associated with small projects, SOFISEDIT has been able to do a respectable number of such projects during the review period. It is expected that as more small to medium indigenous entrepreneurs are established, the percentage of SOFISEDIT's loans to this group, in terms of amount, will also grow; this prospect is further brightened by the recent and ongoing positive efforts towards the revitalization of SONEPI, the Government established promotion agency for assistance to Senegalese entrepreneurs. 5/ It should be borne in mind, 1/ Excluding projects approved in 1980. 2/ Before cancellations. 3/ Before cancellations of 1 project with loan value of CFAF 78 million. 4/ After adjustments for cancellations. 5/ See para 2.22 of Draft Appraisal Report (SOFISEDIT III) of October 24, 1980 for more details on prospects for SONEPI. - 33 - however, that industry and tourism are SOFISEDIT-s main thrust, and especially given the capital intensive nature of tourism (mainly hotel) projects, it is likely, and appropriate, that the greater amount (and also percentage) of SOFISEDIT's approvals will continue to be to projects considered to be large in size. 5.16 Annex XI shows that of the total 71 gross approvals by SOFISEDIT during the review period, 27% had maturities between 8 and 15 years. This maturity category also accounted for 41% of the amount of gross approvals by SOFISEDIT. Not surprisingly, when SOFISEDIT-s total approvals are broken down between industry and tourism, it is noted that 67% of loan amount approved for tourism projects had a maturity over eight years, compared with 34% for industry and 41% as the average for all loans approvals over the same period. The longer maturities obviously reflect the influence of tourism projects in SOFISEDIT's portfolio, as these normally carry long repayment periods. Notably, only 16% of SOFISEDIT-s total approvals, in terms of amount, were for maturities between 1 - 5 years, hence its impact has, in fact, been as originally intended, in the areas of loans having the longer maturities. 5.17 Annex XI further reveals that 56% of tourism loans and 35% of all loans approved by SOFISEDIT had maturities longer than 10 years, which indicates that there is, a market niche, though reduced by the policy of BCEAO (para 5.07), still principally available to SOFISEDIT. This target market, however, is not by itself sufficient to economically justify SOFISEDIT's existence, and a more dynamic and aggressive approach coupled with reasonable banking prudence, will have to be pursued in the future. VI. FINANCIAL PERFORMANCE 6.01 SOFISEDIT's comparative Income Statements & Balance Sheets for the years under review are detailed in Annexes VII and VIII. As may be noted from the annexes, SOFISEDIT experienced operating losses for the first three years of its operations, and though modest operating profits of CFAF 10 million and CFAF 19 million were made in 1978 and 1979 respectively these were totally absorbed by provision for portfolio losses as well as cumulative past losses, which amount to date represents about one third of SOFISEDIT's authorized and paid in share capital. 6.02 Compared with projections, SOFISEDIT-s actual gross annual income has averaged 78% for the review years, and this low level of income coupled with higher than projected administrative costs have substantially contributed to SOFISEDIT's losses. Administrative expenses, while exceeding forecast by an average of 60%, have also ranged from 103% of gross income in the first year of operations to a low of 40% in 1979. The average administrative expense/gross income rate during the review years has been 70%. This is obviously a high rate by any standard, and is due mainly to SOFISEDIT's past low level of operations. It is expected that SOFISEDIT's operations will - 34 - increase significantly during the next few years, particularly as a more clearly defined role for SOFISEDIT is being established by the Government and given SOFISEDIT's expected greater promotional thrust as recommended by the Bank. In this regard, the Government has already reaffirmed its commitment to SOFISEDIT, and accordingly has agreed inter alia, to participate in SOFISEDIT's increased equity capital, and has also designated SOFISEDIT to administer loans to the Fishery Industry. Additionally, other measures, such as commenc- ing the accrual of commitment fees within a given period after loan approval, say 30 days, should add to income and speed up disbursements. Discussions will also be held with SOFISEDIT regarding the need to review its interest rate policy and penal interest charges to ensure these are in line with local market conditions, reflect cost of borrowings, consistent with sound banking and provide a reasonable margin. 6.03 Quality of Portfolio. The loans granted by SOFISEDIT have generally been well secured in terms of collateral security and third party guarantees. However, SOFISEDIT's portfolio consists of a number of loans made to inexperi- enced Senegalese entrepreneurs who are experiencing difficulties and in need of technical assistance. In this respect, the portfolio has a number of higher than normal risk loans. Furthermore, several large Government gua- ranteed projects are experiencing problems, in some cases, commercial opera- tions have never begun, though physical construction was completed. Even though these loans are well secured, collections efforts need to be actively pursued, and the Bank intends to closely monitor the situation over the coming years. 6.04 Of a total of CFAF 188 million in equity investments made by SOFISEDIT between 1974-79, over 73% (CFAF 138 million) was made in 1975 and 1976, with only two equity investments totalling CFAF 50 million being made after 1976. SOFISEDIT's constrained equity resources, coupled with the poor operating results of many of the companies in which it had equity (most of them experiencing losses) were reasons why SOFISEDIT could not continue to actively take on new equity investments. Many of these investments may have to be written off in the future, if operating performance of these companies does not improve; efforts now being made to increase supervision staff and intensify follow-up activities should yield positive results, thereby minimiz- ing possible losses on SOFISEDIT's equity portfolio. 6.05 As of March 30, 1980, based upon available data, SOFISEDIT's port- folio consisted of about 11 subprojects in arrears. Though data was not available for proper aging, most of these arrears are over 6 months. As may be seen from the following summary, about 30% of SOFISEDIT's portfolio is affected by arrears. - 35 - (CFAF Millions) a) interest and commissions in arrears 190.5 b) principal in arrears 104.6 c) total arrears 295.1 d) outstanding loan balance affected I by arrears 413.1 e) total loan portfolio 1,389.5 f) percent of portfolio affected by arrears = d - e = 30% g) principal in arrears as percentage of loans affected by arrears = b - d = 25% This problem is due in part to a depressed economy, implementation problems (mainly delays in completion) and the need for more aggressive and closer follow-up. It is not felt that SOFISEDIT-s viability is threatened at this time and actual write-offs have been negligible to date. However, with a level of 30% of SOFISEDIT's Portfolio affected by arrears, SOFISEDIT must intensify its follow-up and collection efforts over the coming years. VII. INSTITUTIONAL ASPECTS 7.01 Management and Staff. At the time of appraisal it was recognized by the Bank that the level of management (middle and senior) necessary for the effective direction and administration of SOFISEDIT, especially crucial during its embryonic stage, would not be immediately available, hence the need for technical assistance during the initial 2 - 3 years. An amount of US$200,000 (subsequently increased to US$445,000) was initially provided in the Bank's loan to cover the foreign exchange cost of four-man years for the two expatri- ate technical assistants, Messrs.Mombru and Jetha, seconded by the Bank to fill the positions of Assistant General Manager and Investments Manager respectively. At the request of SOFISEDIT, the initial period of assignment of Messrs. Mombru and Jetha was extended by one year each, thereafter, Mr. Mombru returned to headquarters in Washington, while Mr. Jetha stayed on for an additional year as Assistant General Manager, in order to train the newly promoted Investments Manager to ensure smooth transition. 7.02 SOFISEDIT's professional staff has remained small, having increased from five (excluding the president and two experts) 1/ at the time of loan effectiveness to seven in 1980. The staff is reasonably experienced and the quality of their work good for a new institution, though the need for some improvements are now evident, given the difficulties with arrears in SOFISEDIT's portfolio. The achievement in staff development and performance is substan- tially attributed to the efforts of the technical assistants who, in addition 1/ One accountant, one engineer, and three financial analyst/economists. - 36 - to performing day-to-day administrative and operational tasks, were also instrumental in the formulation of internal operational procedures and apprai- sal and supervision guidelines. SOFISEDIT's management and professional staff are now entirely indigenous. 7.03 Though the benefits of the technical assistance are clearly evident in SOFISEDIT-s operations (vide para. 7.02), there are still certain areas which require improvement, particularly in supervision activities as well as the timely preparation of legal documents following project approval. SOFISEDIT will also have to improve significantly its promotional activities. A newly installed President who appears aware of, and appreciates the need for, greater efforts in this area should lead to improvements in this area. 7.04 Appraisal. Helping develop SOFISEDIT's appraisal procedures and thereby its capacity as an efficient allocator of resources was one of the institution-building objectives of the line of credit (Loan 987-SE), and a principal task of the technical assistants. It is noteworthy that SOFISEDIT's appraisal standards are good, and include the calculation of both financial and economic rates of return. SOFISEDIT-s operational manual has, on several occasions, been used as a model for other French-speaking DFCs. 7.05 Supervision. This area of activity appears to be one in which SOFISEDIT needs to improve its procedures and focus its attention; such improved supervision will be required if SOFISEDIT expects to properly monitor its investments, thereby minimizing possible losses. This is particularly necessary as SOFISEDIT's portfolio grows both in terms of number and amount, as well as the complexity of the projects it finances. SOFISEDIT's supervi- sion efforts must be intensified, and also take on a client-assistance ori- entation, a thrust which has been basically lacking to date, and one which the Bank has discussed in the past. In the near future, additional supervision staff (analysts) are expected to be added, particularly as projects become more widely dispersed. 7.06 Promotion. Meaningful and aggressive promotional activities have been virtually non-existent in SOFISEDIT. At the time of appraisal, it.was expected that SOFISEDIT and SONEPI (Societe Nationale d'Etudes et de Promotion Industrielle) would cooperate, whereby the latter, a promotional and technical assistance organization would assist Senegalese entrepreneurs formulate and initiate projects, thereby regularly feeding new projects into SOFISEDIT's pipeline. This expectation, however, was realized only for a short period, due mainly to rigidity and bureaucratic procedures of SONEPI. Though SONEPI's activities have begun to show a revival, SOFISEDIT will have to take on a stronger promotional thrust in order to attract new investments as well as play a more meaningful role as an investment and development catalyst. In order for SOFISEDIT to be more effective in this area, additional financial resources, suited to its needs will have to be mobilized (see para. 8.01). - 37 - VIII. RESOURCES 8.01 SOFISEDIT's principal resources at present, in addition to its share capital, are derived from loans received from IRBD (2), KfW (1), CCCE (1) and BOAD (1), totalling CFAF 2.87 billion (See Annex IX for details). Efforts are now underway to double SOFISEDIT's share capital before the end of 1981. Additionally, a third Bank loan is being appraised, all of which, in addition to other expected borrowed funds, should substantially enhance SOFISEDIT's operational capability and flexibility. 8.02 As of the end of 1979 Bank funds accounted for over 50% of SOFISEDIT's borrowed resources and 44% of total resources. All exchange risk associated with the two Bank loans and the KfW loan have been taken by the Government, while the CCCE and BOAD funds do not carry any exchange risk. In this regard, SOFISEDIT and its borrowers have been able to avoid the burden of exchange exposure, thus making its funds attractive to the borrowers. IX. ECONOMIC IMPACT 9.01 In terms of its developmental impact, SOFISEDIT's financing has contributed significantly to the creation of fixed capital formation (CFAF 219 billion in total project cost) and the creation and/or preservation of over 5,000 jobs. Assuming that the average household in Senegal consists of four persons plus the head (wage earner), it is reasonable to say that SOFISEDIT's assistance has directly or indirectly affected over 25,000 persons in Senegal. 9.02 SOFISEDIT calculated the ERR for the larger of its projects. For the 16 projects for which data are available, SOFISEDIT estimates an average ERR of about 30%, with the lowest ERR being 9.6% and the highest being over 50%. It is noted, however, that information on jobs created and economic rate of return are all appraisal estimates, and plans are now underway, to obtain, to the extent practical, ex-post information on actual jobs created and ERR. 9.03 A review of Annex X shows that SOFISEDIT's activities have been heavily concentrated in Cape-Vert area, with 46 (67%) of its projects 1/ and 63% of its investments going to this area. This is partly due to the absence of adequate infrastructure in other regions, coupled with the relatively high business concentration in this area. The Government is now providing incen- tives to businesses establishing in other regions, and more assistance is expected to go into other regions in order to contribute to much needed balanced economic development. 1/ Gross approvals. - 38 - 9.04 SOFISEDIT's financing has gone to 12 different subsectors, and reflects a more even distribution than that shown in the geographical break- down. Understandably, due to the high cost of hotel construction, tourism has taken the bulk of the assistance, accounting for 13 net approvals out of 61 net projects approved (21%), and receiving about 25% of total amount of assistance (Annex VI). 9.05 The average cost per job created by SOFISEDIT's projects is about CFAF 5.8 million, which amount is relatively low compared with other countries, and given the high rate of inflation today. 1/ For subprojects financed under 987-SE the average cost per job is about CFAF 3.5 million. It can be clearly seen that SOFISEDIT has played a meaningful role even though not fully realiz- ing its potential and falling short of expectations. X. BANK'S ROLE AND LESSONS LEARNED 10.01 The Bank's involvement with SOFISEDIT goes back to the original efforts by the Senegalese Government to establish this institution. At that time, the Bank played an active role in assessing the feasibility for such an institution and thereafter, working closely with the various local share- holding groups and Government agencies (see paras. 1.01 and 1.02) to lay the blueprint for the proposed institution. 10.02 In addition to providing a loan equivalent of US$3.0 million along with an IFC equity of US$0.23 million, the Bank also identified the need for and assisted SOFISEDIT in obtaining competent management (two expatriate technical experts) for the initial 3 years (see para. 7.01). The objective of this technical assistance focussed upon the institution building aspects of this project, specifically in order to assist SOFISEDIT formulate operational guidelines and procedures, and train local staff. The records clearly show that the experts made significant contributions to SOFISEDIT-s early develop- ment; however, their departure left a void which was not adequately planned for or filled. Experience from this project shows that institution building is a long-term effort, and must be done continuously on the basis of carefully drawn plans. This is particularly necessary in cases where foreign technical experts are involved, given the need to ensure smooth transition and con- tinuity in operations upon departure of expatriate experts. 10.03 The Bank recognized within about two years of operations, that there were certain weaknesses in the management of SOFISEDIT, but held the expecta- tion that these would be improved upon with passage of time. As time went on, however, the situation did not improve as expected, and the Bank discussed this issue with the Senegalese authorities on a number of occasions. A new president was appointed in mid-1980. 1/ This figure also influenced by the high percentage of investments in hotel projects. - 39 - XI. CONCLUSIONS 11.01 SOFISEDIT's usefulness as a development catalyst, while not meeting up to general expectations, perhaps overly optimistic at the time, have clearly been established. Though several problems (organizational and opera- tional) have been encountered in its early years, many of them are not unusual for a new DFC, and the basic foundation can be said to have been laid for a viable and effective institution in the long run. 11.02 In order to establish realistic expectations of SOFISEDIT and provide a proper sense of institutional direction, the Bank will have to enter into active dialogue with the Government and efforts are already underway, in order to obtain a clearly defined role for SOFISEDIT in the promotion of viable development projects, and the exact extent of Government's commitments to this institution, all of which are vital to the future of SOFISEDIT. In this context the Bank will maintain close and continuing supervision of SOFISEDIT as well as active dialogue with the Government. SENEGAL SOFISEDIT I - Project Completion Report Sector Distribution of Medium- and Long-term Loans Outstanding (Source BCEAO) 09-1974 09-1975 09-1976 09-1977 06-1978 CFAF CFAF CFAF CFAF CFAF Million - Million - Million - Million - Million Agriculture 940 7.3 727 5.1 1,292 7.0 1,406 6.3 1,685 5.5 Mining - - - - 144 0.8 1,544 6.9 1,458 4.8 Manufacturing 4,479 35.0 4,955 34.8 5,569 30.2 3,685 16.5 4,221 13.8 Construction 2,230 17.4 2,091 14.7 2,111 11.4 1,994 8.9 3,539 11.6 Transport 767 6.0 839 5.9 1,342 7.3 2,614 11.7 1,385 4.6 Trade 679 5.3 401 2.8 717 3.9 1,059 4.7 2,910 9.5C> Tourism 2,003 15.7 1,739 12.2 2,340 12.7 2,330 10.4 -2,255 7.4 Others 1/ 1,699 13.3 _3485 24.5 4.927 26.7 7,759 34.6 13,079 42.8 TOTAL 12 797 100.0 1 100.0 18,442 100.0 22,391 100.0 30,532 100.0 of which Private enterprise 8,875 69.4 10,125 71.1 12,616 68.4 15.468 69.1 21,652 70.9 Public enterprise 3,922 30.6 4,112 28.9 5,826 31.6 6,923 30.9 8,880 29.1 1/ Mostly individuals and cooperatives SOFISEDIT Subprojects Approval under Loan 987-SE (CFAF Millions) 1/ Approval- SOFISEDIT's Project Date Type Activity Projerr FINANCING Cost Loan Equity 1) PSOA 6.6.75 N Plaster 385 120 0 2) H. DIOLA 20.8.75 N Tourism 377 120 0 3) SOBOA 20.8.76 E Food & Drink 204 65 0 4) ISLIMA 27.8.76 E Textile 127 63 0 5) SOCITOUR 5.10.76 N Tourism 442 120 0 6) SABIPEC 7.10.76 E Food 110 48 7 /3 7) PALM BEACH 30.4.80 N Tourism 1,255 250-- 20 8) PINSER 26.3.76 N Misc. 49.5 23 0 9) RELAIS FLEURI 20.9.76 E Tourism 11.8 9 0 10) ROTABILLETS 1.7.77 E Misc. 25.3 17.3 0 2,986.6 27 1/ Approval by SOFISEDIT 2/ Based upon approval estimates 3/ Only part of this amount financed under 987-SE, up to available uncommitted balance at the time. SOFISEDIT Comparison of Projected and Actual Operations For period 1975-79 (CFAF Millions) 1975 1976 1977 1978 1979 Total Actual Proj. Actual Proj. Actual Proj. Actual Proj. Actual Prol. Actual Proj. APPROVALS Term Loans 533 790 951.8 1,015 759.5 1,285 1,115.2 1,407 1,129.7 1,540 4,489.2 6,037 Cancellations - - - - - - 436.5 - 305 - 741.5 - Net Loans 533 790 951.8 1,015 759.5 1,285 678.7 1,407 824.7 1,540 3,747.7 6,037 Add: Equity 71.5 43 37 62 35 86 14.5 94 30 103 188 388 Total 604.5 833 988.8 1,077 794.5 1,371 693.2 1,501 854.7 1,643 3,935.7 6,425 72.5% 92% 58% 46% 52% 61% COMMITMENTS Term Loans 385 395 509 900 349.8 1,150 203 1,350 891.2 1,472 2,338 5,267 Equity 52 21 56 53 11.6 74 0 90 0 98 119.6 336 Total 437 416 565 953 361.4 1,224 203 1,440 891.2 1,570 2,457.6 5,603 105% 59% 29.5% 14% 56.7% 43.9% DISBURSEMENTS Term Loans 203.4 155 602.4 545 369.2 910 289.8 1,180 710 1,370 2,174.8 4,160 Equity 37.5 21 41 53 11.6 74 15 90 14.5 98 119.6 336 Total 240.9 176 643.4 598 380.8 984 304.E 1,270 724.5 1,468 2,294.4 4,496 136% 107.6% 38.7% 24% 49% 51% -43 - ANNEX IV SENEGAL - SOFISEDIT Loan SE-987 Cumulative Disbursements (US$ Million) Latest Actual or latest Year Actual Appraisal revised estimated disbursement December Total Estimate estimated as % of appraisal estimates 74 - 0,04 - 75 0,30 0,38 79 76 1.60 1.22 131 77 2.60 2.26 115 78 2,801/ 3.00 93 1/ See Annex 7 for explanations - 44 - ANNEX V SOFISEDIT'S LOAN OPERATIONS By Type of Projects 1/ TOTALz- INDUSTRY TOURISM TYPE No. Amt. No. Amt. No. Amt. New 34 2,521.4 26 1,921.4 8 600 -Cancell. (3) (213.0) ) (213.0) 0 0 -Net 31 2,308.4 23 1,708.4 8 600 Expansion 37 1,967.8 31 1,615.8 6 352 -Cancell. (7) (528.5) (6) (458.5) I (70) -Net 30 1,439.3 25 1,157.3 5 282 Total 61 3,747.7 48 2,865.7 13 882 1, Excludes equity. - 45 - ANNEX VI SECTORAL BREAKDOWN OF SOFISEDIT'S OPERATIONS LOANS (CFAF Millions) Net Gross Approvals Cancellations Approvals Equit No. Amt. No. Amt. No. Amt. INDUSTRY Tourism 14 952 1 70 13 882 45 Fishing & Fish Processing 8 544 4 280 4 264 34 Metal Works 7 444 1 50 6 394 52 Wood Works 4 47 0 0 4 47 0 Const. Mat. 4 323.5 1 33.5 3 290 0 Chemical 7 655 1 78 6 577 0 Rubber & Plast. 1 120 0 0 1 120 0 Food processing & Drinks 8 401.7 0 0 8 401.7 7 Textile 7 328 1 110 6 218 28 Agro-Processing 1 80 0 0 1 80 0 Miscellaneous 8 415 1 120 7 295 22 Transport 2 179 0 0 2 179 0 Total 71 4,489.2 10 741.5 61 3,747.7 188 1/ This figure includes CFAF 20 million in one textile project (ICOTAF) which was cancelled. 1/SOFISEDIT Comparison of Actual and Projected Income Statements For peiod 1975-79 (CFAF Millions) 1975 1976 1977 1978 1979 Total Actual Proj. Actual Proj. Actual Proj. Actual Proj. Actual Proj. Actual Prj. INCOME 1) Interest on Loans 1.5 6 35.8 36 94.3 90 137.3 166 165.9 247 2) Penalty interest 0 0 0 0 0 0 2.9 0 10.7 0 3) Commissions 0.5 0 2.5 0 4.5 0 -3.9 0 6.1 0 4) Income from short-term investments 53.2 50 20.6 49 5.4 45 1.2 38 1.7 28 5) Dividend Income 0 0 0 0 0 0 0 1 0 3 6) Other Income 0.6 0 3.2 0 1.6 0 1.9 0 1.2 0 7) Total 55.5 56 62.1 85 105.8 135 147.2 205 185.6 278 556.2 759 - - - - - - - - - - 73% 4 EXPENSES 8) Administrative 57.4 35 67.3 40 65.9 42 72.1 45 73 48 9) Financial Charges 0.6 4 11.4 21 40 54 61.9 103 90.8 156 10) Depreciation 0 0 0 0 10.5 0 3.1 0 2.6 0 11) Profit (Loss) bef. Prov. & taxes (2.5) 17 (16.6) 24 (10.6) 39 10.1 57 19.2 74 0.4 211 12) Provisions 0 3 0 7 0 15 46 23 165 28 13) Profit/(Loss) bef. taxes (2.5) 14 (16.6) 17 (10.6) 24 (35.9) 34 (145.8) 46 (211.4) 35 14) Taxes 0 0 0 0 0 0 0 0 0 0 15) Net profits (2.5) 14 (16.6 17 (10.6) 24 (35.9) 34 (145.8) 46 1/ Source: SOFISEDIT's Audited Accounts SENEGAL SOFISEDIT I - PROJECT COMPLETION REPORT Pomparattve Statement of SOFISEDIT's Projected and Actual Balance Sheet, 1975-79 (CFAF Millions) 1975 1976 1977 1978 1979 Year ending September Actual Proj.!/ Actual Proj.!' Actual Proj.Y' Actual Proj.i/ Actual ASSETS Current Assets 350.4 650 119.8 604 24.4 525 68.1 438 61.8 Accounts receivables 5.3 18.3 23.4 42.2 84.4 Portfolio focus 203.4 137 747.5 608 1,058.6 1,346 1,259.0 2,214 1,825.5 (less provision) (109.9) Equity 37.5 21 78.5 76 90.2 148 105.2 238 119.7 (less provisions) (3) (10) H (25) (46.0) (48) (86.5) Net portfolio 240.9 155 826.0 672 1,148.8 1,469 1,318.2 2,842 1,748.8 Foreign exchange adjustment - - 30.5 148.4 58.3 Other assets 21.3 42.0 56.6 82.5 135.1 Fixed assets (net) 21.8 22.7 12.2 9.4 9.1 TOTAL ASSETS 639.7 805 1,028.8 1,276 1,295.9 1,998 1,668.8 2,842 2,097.5 LIABILITIES Short-term debts 1.0 10 1.7 20 26.9 30 7.9 40 235.5 Accounts payable 4.8 0 26.1 0 24.9 0 37.9 0 30.7 Long-term debts 26.4 131 370.1 575 623.7 1,263 1,038.5 2,063 1,392.7 Capital 610.0 650 650.0 650 650.0 650 650.0 650 650.0 Plus R.E. or (less losses) (2.5) 14 (19.1) 31 (29.6) 55 (65.6) 89 (211. Net Worth 607.5 664 630.9 681 620.4 705 584.4 739 433.6 TOTAL EQUITY LIABILITIES 639.7 805 1,028.8 1276 1,2Q5,9 1 1,668.8 2,842 2,097.5 If As per appraisal Report. SOFISDIT Terms and Conditions of Borrowings up to 12.30.79 (Millions F CFA) Loan Amount Lending Freign Local Duration Interest Schedule Date Currency Foreign Institution Exchapge Currency Total of Rate Commission Fees of of of Exchange Credit Repayments Signature Loan Risk BIRD 987/SE 660.0 - 660.0 L.T. 7.25 0.75 - From 10/31/78 Dollars Government To 10/31/93 BIRD 1332/SE 880.0 - 880.0 L.T. 8.9 0.75 - From 8/1/80 Dollars Government To 8/1/93 KFW 530.0 - 530.0 L.T. 8.3 0.5 - From 6/30/88 DM To 12/11/2007 12/13/77 Government CCCE 100.0 - 100.0 L.T. 7.5 0,5 - From 4/3/78 FF To 10/31/86 11/23/76 No Exchange Risk BOAD 700.0 - 700.0 L.T. 7.0 0.5 - From 3/31/84 F CFA To 3/31/93 12/9/77 No Exchange Risk 54 M4 9 - ANNEX X SOFISEDIT'S LOAN OPERATIONS Regional Distribution of Approvals Gross Less Location No. % Amt. Cancellations Equity Approvals No. Amt. Diorvel 1 80.0 0 0 0 80.0 Cap Vert 46 67% 2,932.2 9 708 112 2,174.7 ThiAs 11 17 553.5 1 33.5 22 528.0 Casamance 5 7 379.0 0 0 0 379.0 Fleuve 1 1 120.0 0 0 0 120.0 Sine-Saloum 7 8 612.5 0 0 54 546.0 Total 71 100 4,677.2 10 741.5 188 3,747.7 - 50 - ANNEX XI SOFISEDIT Distribution of Loan Operations by Maturity Years Tourism Gross Industry TotaL/ No. Amt. No. Amt. No. Amt. 1 - 5 1 9 14 105 15 714.0 6 - 7 5 308 32 1,614.2 37 1,949.2 8 - 9 1 105 2 143.0 3 248.0 10 - 15 7 530 9 1,048.0 16 1,578.0 14 952 57 3,537.2 71 4,489.2 1/ Before adjustments for cancellations. - 51 - ANNEX XII DISTRIBUTION OF SOFISEDIT'S LOANS BY SIZE1/ For period 1975-79 (CFAF Millions) No. % Amt. % Less than 11.0 11 15.5 81.9 1.8 11.0 - 22.0 10 14.0 163.8 3.5 22.0 - 55.0 13 18.3 477.5 10.7 55.0 - 110.0 18 25.5 1,426 31.8 110 and over 19 26.7 2,340 52.2 Total 71 100.0 41489.2 100.0 1/ Based upon Gross Approvals, and excluding equity. - 52 - ANNEX XIII ARREARS AS OF MARCH 1980 (CFAF Millions) ARREARS Total Balance Int. & Comm. Principal Arrears Outstanding SOCITOUR 20,246 0 20,246 67,500 SABIPEC 5,110 1,400 19,110 48,000 PINSER 3,684 2,000 5,684 23,000 SIFAEMA 1,089 3,750 4,839 18,750 MIMO 1,708 7,000 8,708 17,500 DIALLO 1,199 810 2,009 9,459 SOPESINE 7,226 17,200 24,426 68,000 SENSCIE 113,761 3,333 117,094 3,333 TREFILERIES 12,846 0 12,846 0 S.N.P.T. 23,650 54,000 77,650 90,000 TOURING SENEGAL 0 0 2,500 2,500 190,519 104,593 295,112 413,042