Benin - Public Enterprise Sector Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY cP. flvr4K'- Report No. 5467-BEN STAFF APPRAISAL REPORT PEOPLE'S REPUBLIC OF BENIN PUBLIC ENTERPRISE SECTOR REHABILITATION PROJECT November 18, 1986 West Africa Projects Department Industrial Development and Finance Division This docment 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 auth'oreation.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$1.0 = CFAF 345 1/ CFAF 1 million = US$2899 Sw F 1.0 = US$.56 SDR 1.0 - US$1.1776 WEIGHTS AND MEASURES 1 meter (m) 2 3.28 feet (ft) 1 square meter (m ) = 10.76 square feet (sq ft) 1 kilometer (km) 2 = 0.62 mile (mi) 1 square kilometer (km ) = 0.38 square mile (sq mi) 1 hectare (ha) 2.47 acres 1 metric ton (mton) = 2,205 pounds (lb) I hectoliter (hl) = 26.4 gallon (gal) FISCAL YEAR January 1 - December 31 1J The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of FF 1 to CFAF 50. The French Franc is currently floating.  FOR OFFCAL USE ONLY ABBREVIATIONS AND ACRONYMS AGB - Foodstuff Imports and Distribution ("Societe d'Alimentation G4nerale du Benin") BCEAO - Central Bank for West African Countries ("Banque Centrale des Etats de l'Afrique de l'Ouest") BBD - Development Bank ("Banque Beninoise pour le Developpement") BCB - Commercial BAnk ("Banque Commerciale du Benin") CAA - Debt Management Agency ("Caisse Autonome d'Amortissement") CEN - Cabinet ("Conseil Executif National") CIB - Ceramics Manufacture ("Ceramique Industrielle du Benin") CNCA - Agricultural Credit Bank ("Caisse Nationale de Credit Agricole") COBENAM - Shipping ("Compagnie Beninoise de Navigation Maritime") CTR - Commision for Training and Redeployment ("Commission pour la Formation et le Red6ploiement du Personnel") FNI - State Investment Fund ("Fonds National d'Investissement") IBETEX - Textile Manufacturing ("Industrie Beninoise des Textiles") IGE - State Auditing Body ("Inspection Generale d'Etat") ISC - Interministerial Steering Committee ("Comite Directeur") MJSE - Ministiy of Justice in Charge of State Enterprises OCBN - Railways ("Organisation Commune Benin Niger des Chemins de Fer et des Transports") ONP - Pharmaceuticals Imports and Distribution Company ("Office National de Pharmacie") PHU - Project Management Unit ("Cellule du Projet") PPF - Project Preparation Facility SCB - Cement Production ("Societe des Ciments du Benin") SOBEPALH - Palm Oil Company ("Societe Beninoise de Palmier a Huile") SOBETEX - Textile Printing Company ("Societe Beninoise des Textiles") SOGECOB - Consumer Goods Imports ("Societe Generale de Commerce du Benin") SONACI - Cement Production ("Societe Nationale des Ciments") SONACOP - Oil Products Distribution ("Societe Nationale de Commercialisation des Produits P6troliers") SONAFEL - Fruits and Vegetables ("Societe Nationale des Fruits et Legumes") SONATRAC - Freight Forwarding and Consignment ("Societe Nationale de Transit et Consignation") SOTRACOB - Freight Forwarding and Consignment ("Socift6 de Transit et de Consignation du Benin") SPA - Senior Project Advisor TRANSBENIN - Trucking Company ("Soci6t6 des Transports Routiers du Benin") UMOA - West Africa Monetary Union ("Union Monetaire Ouest- Africaine") rThis 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 authoization.  BENIN PUBLIC ENTERPRISE SECTOR REHABILITATION PROJECT TABLE OF CONTENTS Page DOCUMENTS CONTAINED IN PROJECT FILE ........................... i-ii CREDIT AND PROJECT SUMM4ARY ........................... iii-v I. INTRODUCTION .1 II. THE PUBLIC ENTERPRISE SECTOR . . 2 A. Economic Settinge............. ...................... 2 B. Past Expansion of the Public Enterprise Sector 3 C. Performance of the Public Enterprise Sector. 9 D. Recognition of Sector Issues .12 III. REFORMING THE PUBLIC ENTERPRISE SECTOR . .13 A. IDA's Policy Dialogue with the Government .13 B. Delineation of the Public Enterprise Sector .14 C. Public Enterprise Sector Managemet .17 D. Financial Viability of Enterprises .19 IV. THE PROET........................ 21 A. Objectives.. . ....... . ... 21 B. Project Description .21 C. Relationship to Sector Reforms .21 D. Rehabilitation of Selected Enterprise s 22 E. Assistance for Training and Redeployment of Personnel .28 F. Project Management .29 G. Status of Project Preparation and Implementation Schedule .30 H. Project Preparation Facility. 31 I. Project Cost and Financig ..31 J. Procurement ..33 K. Disbursements of IDA Funds . .34 L. Accounting, Auditing and Reporting Requirements.... 36 V. BENEFITS AND RISKS ..36 A. Benefits .36 B. Risks .37 VI. AGREEMENTS REACHED AND RECOMENDATIONS .. ...... 37 This report is based on the findings of an appraisal mission which visited Benin in May 1984. The mission members were M. Wormser (mission leader), C. Morin (senior counsel), D. Bovet and A. Tarnawiecki (consultants). D. Lavoie, D. Williams and D. Jaekel were responsible for the typing and for the overall presentation of the report.  ANNEXES Page 2-1 List of State-Owned Corporations .. 39 2-2 Institutional Frameork .41 2-3 Major Provisions of Benin's Investment Code .45 2-4 Financial Performance of Selected Public Enterprises.. 46 2-5 Impact of Public Enterprises on the Banking System......... 47 2-6 Financial Flows between the Government and the Public Enterprise Sector...................... .. 50 3-1 Policy Statement .54 3-2 Action Progra. .60 3-3 Public Enterprises Envisaged for Rehabilitation or Liquidation under the Project .67 3-4 Terms of Reference for the Development of a MIS .82 3-5 Terms of Reference for a Study on the Indebtedness of the Public Enterprises .86 4-1 Terms of Reference for Rehabilitation Study .89 4-2 Project Management Organization Chart .94 4-3 Summary Terms of Reference for the Senior Project Advisor 95 4-4 Project Implementation Schedule .97 4-5 Projected Quarterly Disbursements of IDA Credit ........ 98 AP IBRD 18443R.  BENIN PUBLIC ENTERPRISE SECTOR REHABILITATION PROJECT DOCUMENTS IN THE PROJECT FILE A. General Code 1. Table Ronde des Partenaires au Developpement Economique et Social de la Republique Populaire du Benin, Rapport de Presentation, Cotonou; 1983. (5 vols) 129.214 (1-5) 2. Benin, Country Economic Memorandum; August 1983. LEAP-gen 3. Catram, Etude du Transit International des Marchandises au Benin; Octobre 1983. 129.925 4. Miscellaneous Working Papers and Financial 221.928 (A4-1 Statements on BCB, BBD and CNCA. A4-2, A4-3) 5. Benin, Plan Comptable National; 1982. Benin-182 6. Republique Populaire du Benin, Perspectives de Trafic sur l'Axe de Transport Cotonou - Niamey, Fouchier; October 1983. 221.928 (A-6) 7. Andre Hovine, Les Finances Publiques au Benin; April 1983. 221.928 (A-7) 8. Study of Labor Law in Benin, Liz Hunt; 1982. 221.928 (A-8) 9. Benin - Accounting and Auditing Profile, LEAP-Accounting Uche Mbanefo; May 1983. procedures B. Documents relating to the Project 221-928 (B-I thru B-LI) 1. Groupe de Travail du Comite Interministeriel des Entreprises Publiques, Rapport sur les Entreprises Publiques, Nora; April 1967, Paris. 2. Law 82-008 of December 30, 1982 governing the relations between the State and State-owned enterprises. 3. Decree No. 84-59 of January 26, 1984 setting an interministerial committee to review quarterly reports from public enterprises.  - ii - 4. Decree No. 85-271 of July 12, 1985 setting up a Project Unit to manage the public enterprise sector rehabilitation project. 5. Decree 84-4 of January 9, 1984 setting up an interministerial steering committee to supervise the implementation of the Public Enterprise Sector Rehabilitation Project. 6. Operational Budget for the Project Management Unit. 7. Technical Assistance Requirements. 8. D. Bovet (Consultant), Reports on Benin Public Enterprises; 1982 and 1983. 9. A. Tarnaviecki (Consultant), Reports on Visits of Benin Public Enterprises; June 1984. 10. Plan for Dissemination of Benin's National Accounting Plan, Cotonou; August 1984. 11. Project Cost and Financing.  - {ii - BENIN PUBLIC ENTERPRISE SECTOR REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: People's Republic of Benin. Beneficiaries: - Selected Public Enterprises. - Ministry of Justice in charge of State Enterprises. IDA Credit: SDR 12.8 million (US$15 million equivalent). Terms: Standard IDA terms. Co-financing: Swiss Agency for Development Cooperation Sw F 15 million (US$8.4 million equivalent). On-lending Terms: Funds would be passed on by the Government to beneficiary enterprises as loan or equity or a combination of both according to the financing plan of each enterprise rehabilitation program. Loans would have maturities ranging from 3 to 12 years, including 1 to 3 years of grace at an interest rate of 12% per annum. The Government would bear the foreign exchange risk. Project Description: This project aims at assisting Benin in rehabilitating its public enterprise sector. At the sector level, the project will support the Government in implementing an agreed program of reforms aiming at (a) improving the management and operation of the public enterprise sector and (b) curtailing State involvement in the economy, encouraging private sector participation and more careful screening of new public undertakings to ensure their economic and financial viability. At the enterprise level, (a) diagnostic studies will be conducted for selected public enterprises to assess their potential viability, and liquidation plans will be prepared for those enterprises found uneconomic, and (b) rehabilit- ation will be undertaken in two stages for those enterprises diagnosed as viable; in a first stage, an emergency program will be implemented to arrest their further deterioration; in a second  - iv - stage, a full rehabilitation program setting specific conditions for efficient and profitable operation, will be carried out. The project comprises technical assistance, a credit component for enterprise rehabilitation, and financing of training and redeployment of staff laid off. Project Benefits: The project would rationalize the management of the public enterprise sector and improve its impact on the economy. Improvements in the institutional framework, pricing policies, monitoring systems, and increased enterprise autonomy should enhance enterprise efficiency and profitability. Liquidations and better screening of new projects will reduce budgetary drains caused by uneconomic public undertakings. Rehabilitation programs for selected public enterprises should reverse their negative impact on the budget and on the banking system and set a new model for the relationship between the State and public enterprises. Project Risks: A first risk attached to this project is that the proposed reforms, which represent a significant departure from policies pursued in the past, would encounter political or social opposition during their implementation, in particular the more sensitive changes (e.g. enterprise liquidations and personnel reductions). However, the commitment of the Government as reflected in a Policy Statement and actual steps taken since 1982 provide reasonable assurances in this regard, with the conditionality attached to the release of IDA funds providing additional safeguard towards ensuring implementation of the agreed reforms. Assistance in training and redeployment of staff being laid off would also alleviate the social cost of this program. A second risk is the uncertainty of private sector response to the Government's privatization policy underway. This risk is alleviated by the increasingly positive response shown recently by both foreign and local potential investors.  -v- Estimated Costs: a/ Z of Base Foreign Local Total Cost ----US$ million-- Technical Assistance 3.7 1.9 5.6 18 Enterprise Rehabilitation li.8 11.2 23.0 73 Training and Redeployment Assistance - 2.9 2.9 9 Total 15.5 16.0 31.5 100 Financing Plan: IDA 9.6 5.4 15.0 47 Swiss Government 5.9 2.5 8.4 27 Government 8 B.1 8.1 26 Total 15.5 16.0 31.5 100 a/ Net of taxes and duties. Estimated Disbursements: IDA Fiscal Year FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 -- -- -US$ million------ Annual 1.5* 2.1 2.3 2.3 2.2 1.8 1.3 .9 .6 Cumulative 1.5 3.6 5.9 8.2 10.4 12.2 13.5 14.4 15.0 * Including the repayment of PPF advances. Estimated Completion Date: December 1994 Economic Rate of Return: N.A. Map: IBRD 18443R. WAPID November 1986  BENIN PUBLIC ENTERPRISE SECTOR REHABILITATION PROJECT I. INTRODUCTION 1.01 From a limited involvement in the economy until the mid-1970's, the State expanded its control over most of the productive sectors and services including agricultural processing, manufacturing, mineral production, banking, transportation, public utilities, consumer goods, imports and distribution. The 57 public enterprises in existence in Benin account for three-fourths of the industrial production, and about 55% of domestic banking credit outstanding to enterprises (June 1985). Inadequate start-up conditions, conflicting objectives, an inefficient regulatory and institutional framework, lack of monitoring systems, and deficient management led to a rapid deterioration of their performance and financial condition. So far this deteriorating situation has had a limited impact on public finance as most of the funding was channelled through the banking system, but it represents today a major contingent liability on the economy. The domestic banking system which had heavily financed the expansion and operation of the public enterprise sector has been destabilized by growing arrears on its loans to state-owned firms. 1.02 The Government, in recognition of the worsening situation of public enterprises and of their negative impact on economic growth and public finances, took a number of remedial steps in April 1982, but these were only partially implemented due to limited financial resources and lack of adequate technical expertise. In 1983, Benin requested IDA to assist in the rehabilitation of the public enterprise sector and IDA's dialogue with the Government over the following two years led to the design of the proposed project. Its objectives would be to help the Government implement the major policy changes needed to rehabilitate the sector. Specifically, the project would help (a) redirect State involvement in the economy towards priority areas of public management; (b) reform the regulatory and institutional framework within which public enterprises operate; and (c) rehabilitate selected enterprises which can be made economically and financially viable. Over the last years, the Government in its policy dialogue with IDA on the public enterprise sector, has demonstrated its commitment to reforming the sector. It has now agreed on an Action Program which forms the core of this project. IDA's continued involvement through financing of this project will provide Government with the support it Is seeking for implementing such a program.  -2- II. THE PUBLIC ENTERPRISE SECTOR A. Economic Setting 1. Background 2.01 lenin is a small country in West Afric covering about 112.600 km ; it is bordered by Nigeria in the east, *ogo in the west, and Niger and Burkina in the north (Map IBRD 18443R). Benin has 150 kms of shore, and extends over 700 km. from north to south. It has a population of 3.8 million (1984). With a 1985 GNP per capita of US$267, Benin ranks among the least developed countries. The country's economy is dominated by the primary sector, employing three-fourths of the active population, producing 40% of aggregate domestic output and generating around half the foreign earnings. The secondary sector, despite rapid expansion in recent years, accounts for only 15% of GDP. The tertiary sector centers around informal trade and transit services to neighboring cotntries. The exploitation of two known mineral resources, oil and limestone, began recently (1982). As a member of the West African Monetary Union (UMOA-"Union Monetaire Ouest-Africaine"), Benin shares a common currency (CFAF), Central Bank (BCEAO-"Banque Centrale des Etats de l'Afrique de l'Ouest") and credit and monetary policies with Burkina, Ivory Coast, Mali, Niger, Senegal, and Togo. 2. Economic Growth 2.02 The relatively high growth rates in the late 1970's reflected the favorable evolution of the economic situation in neighboring countries and the undertaking by the Government of major state projects (Seme Petroleum, Save Sugar and Onigbolo Cement). This situation came to an abrupt end by 1982; a severe drought substantially affected agricultural yields; the closure of the Nigerian market delayed the commercial operation of the completed cement and sugar plants; the stimulus to tertiary sector activity from neighboring countries was sharply reduced with the end of oil and uranium booms and with the closure of the Nigerian border; and capital expenditures settled back to a more modest level. The growth rate of the economy fell below 2% during 1983 - 1984. A modest recovery in GDP growth occurred in 1985 owing mainly to an exceptional performance of the agricultural sector. 3. Public Finances 2.03 The financial position in the late 1970's, although increasingly burdened by the expansion of the public sector, also benefitted from high revenues derived from the Nigerian and Burkinabe economies. This favorable situation deteriorated after 1982 as growing outlays on administration drained reduced budgetary resources. An overall budget deficit equivalent to some 102 of GDP appeared in 1983; increasing external current imbalance had to be financed largely by coumercial borrowings; scheduled debt service as a ratio of exports of goods and non-factor services worsened from 2.6% in 1978 to about 20Z in 1983. The foreign asset position of the banking system weakened as the  - 3 - public sector's net position deteriorated, and Benin developed arrears on its external and domestic obligations. The persistence of these trends has given rise in 1986 to occasional delays in meeting the monthly payroll. 4. Prospects 2.04 In the years ahead, economic slowdown in neighboring countries is expected to continue to constrain demand in Benin's industrial and service sectors. High state expenditures without simultaneous increase in revenues should result in further deterioration of the public finance position. Even taking into account the relative improvement in the trade balance expected after completion of the large industrial and petroleum projects, rising interest payments could keep the current account deficit above 10% of GDP through 1990, and contribute to the accumulation of arrears on external debt payments. Sustaining real per capita income over the next few years will therefore require dramatic measures to improve efficiency of key s,ectors of the economy predominantly organized as state enterprises during the 1970's, and to optimize the use of scarce budgetary resources. B. Past Expansion of the Public Enterprise Sector 1. Origin 2.05 The public enterprise sector emerged in 1974 when the Government adopted policies aimed at shifting key sectors of the economy from foreign domination to state leadership. Previously, the State had ownership interests in less than half a dozen firms, mostly in traditional areas of public involvement (e.g. railways, power). The objectives of the new policy were to strengthen national control over economic development in line with planned priorities. The Government considered tighter control over the economy to be more likely to optimize resource allocation, accelerate growth, and bring about social improvements. 2.06 Most public enterprises were created between 1974 and 1978, as shown in the chart below:  -4- Pace d Pubic Ents,pd. Ceafion 15 10 r I X ) F-1 m I I P.. 10 1970 70 71 72 73 74 75 76 77 7s 79 8D oYer of Cotion = '.':4:d~~~~~W Bgnls-26M a/ Sample of 31 enterprises. Increased State control was achieved in a variety of ways. First, the Government took over several firms from their foreign owners against -ompensation. This was the case in the banking sector, where all three foreign banks were merged into a single state-owned commercial bank; similarly, the interests of the six international oil companies operating in Benin were bought out to form a national petroleum distribution company. Second, in cases where the Government had minority holdings, it increased its share and its active control of the enterpribe. This occurred in the cement and textile sectors. Third, the State created a number of new public enterprises reducing the economic importance of existing private enterprises in their sector of activity. Since 1974, all major new ventures in Benin have been set up as state-owned companies. 2. Role of Public Enterprises 2.07 Public enterprises are now predominant in Benin's nodern sector. The 57 public and semi-public enterprises encompass all sectors of the economy and employ approximately 28,000 persons. They absorbed about 55% of d,aestic credit outstanding to enterprises (June 1985), represent 75% of Benin's external debt service. They also account for three-fourths of industrial production. They are set up as State companies ("Societes d'Etat"), mixed economy enterprises ("Societes d'Economie Mixte") or public establishments ("Offices"). 2.08 Benin's public enterprises were set up in industrial and service sectors (Annex 2-1). Industrial public enterprises encompass agro-processing (oil palm products, fruits and vegetables, cotton), and traditional import-substitution activities (textiles, brewery, cement  -5- from imported clinker, ceramics and sugar). Public enterprises in service sectors are involved in utilities (power, water supply, telecommunications), import and distribution (foodstuffs, garments and appliances, pharmaceuticals, and petroleum products), transport (railway, port, trucking, bus companies, shipping, and freight forwarding), finance, and hotels. 3. Conditions of Creation 2.09 Poor Desig. Many Beninese public enterprises were plagued from the outset with flawed project design. New ventures were not always based upon reliable economic appraisal. Three agro-industrial firms were created on the basis of exaggerated yield estimates; the design of a major textile project (IBETEX) did not adequately identify the high product quality, substantial working capital, and reliable marketing partners required to compete effectively in Europe. Promotion by foreign suppliers of their equipment regardless of project economics led to unviable investments, e.g. CIB (industrial ceramics). 2.10 Low Equity. Another source of problems, associated with the hasty creation of numerous public undertakings was the inability of the State to contribute adequate equity. This was particularly the case for ventures such as IBETEX (textiles), SONAFEL (fruits and vegetables), and TRANSBENIN (trucking) in which low initial capital and inability to add capital later (para 2.21) led to a spiral of increasing indebtedness and financial losses. Similarly, the ill-fated 50 provincial enterprises created in the mid-1970s, now dissolved, were not provided any initial equity. 2.11 Conflicting Objectives. State corporations often had unclear or conflicting objectives, social as well as commercial: distribution companies suffered from policies of low margins and a uniform price throughout the territory regardless of tr-asportation costs without compensatory subsidies (pharmaceutical, foodstuffs, petroleum). These social objectives had unwanted outcomes, including high consumer prices and windfall profits for private intermediaries in areas where public enterprises could not distribute profitably, and promotion of high-margin luxury goods rather than price-controlled basic commodities. 2.12 Inadequate Staffing. Staffing of newly created state-owned firms was often poor; the managers put in charge of Benin's public firms during the period of peak enterprise creation in the mid-1970s were generally civil servants without business experience. This caused numerous commercial errors, sometimes leading to the bankruptcy of the firm. Enterprises were also required to absorb a high number of graduates irrespective of their specific staffing needs.  -6- 4. Institutional Framework 2.13 The content of the law governing relationships betwpen the State and public enterprises is discussed in Annex 2-2; maJor features, as they function in practice, are reviewed below. While each public firm is rnder the tutelage of a technical supervising ministry ('Ministire de Tutelle"), at least five other ministries also share the oversight function. The General Manager of an enterprise must work within a management committee, and ministerial interference considerably limits his autonomy (see chart below); the heavy and sometimes confusing system of tutelage reduced management's powers and accountability without providing the State with effective control over the operation of its public enterprises. 116S11lutIpL FRACEM DF VsW IC EuiWRWlS POLelit llureu 2D iec ( rty No iora Aiitry Sp ll rsing ministy e_ itrh rcomparcne, ry or Pd onirdstry of Ldmr m lnim ry of Fo14mbe r f Jueting tvricing --vanrisusm nt re, irteefimrpo (PriUnioandParty rppresel tAtitivs d a . Te ulr oBaringdeiribg --ofmientd m -ao cmivest me rfr bu et Rtfiin -Aaditing of the accounts for the preceding year. apndm tuo i _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I Ibord or Direc er nwi Direter _twm Comtt Owr_n Ckmeittee 2.14 Board of Directors. The Board of Directors ("Conseil d'Admialstration") is legally respousible for administering the enterprise and for setting overall policy. For fully state-owned compa-nies, the Board consists of ez maximunu of 14 members representing the various-ministries, the employees (Union and P-arty representatives), and various agencies. The number of Board members of mixed compaies is determined on a case-by-case basis. The Board's8 legal. powers include approval of operating and Investment budgets for the following year and of the accounts for the preceding year, and their submission to the  Cabinet (CEN-"Conseil Executif National") for final approval. In practice, however, the Boards often play a minor role, and the supervising minister retains veto power over all Board decisions. Some Boards have never been set up, others seldom met, even at times of major difficulties, e.g. that of the country's development bank-"Banque Beninoise pour le D6veloppement" (BBD). 2.15 Enterprise Management. Management of public enterprises, according to law, is vested in a Management Committee ("Comite de Direction") which includes the General Manager, technical directors and employees representing the Union and the Party. In practice, this Committee has often been ineffective and management is carried out by the General Manager, appointed by decree of the cabinet (CEN). Many of the Manager's decisions are subject to successive approvals by the Board, the technical supervising ministry, and often the CEN. All significant decisions including contracting, pricing, investments, borrowings, budget, hiring and firing of staff have effectively been removed from enterprise management and raised to the governmental level. 5. Management Information Systems and Control 2.16 A new National Accounting Plan was introduced in January 1983, based on the OCAM System ("Organisation Commune Africaine et Mauricienne") and oriented towards a value added concept. Notwithstanding an ILO financed training program, implementation has been slow due to a lack of qualified accountants. Lack of adequate source information is compounded by the absence of even a simple Management Information System (MIS). Lack of information on public enterprise operations considerably reduced effective Government control. The Finance Ministry is unable to identify operating subsidies which may be required to sustain an enterprise's operations because it has no current data either on the public enterprise sector or the enterprise itself. Budgets presented to the CEN are far from accurate. An Interministerial Task Force created in January 1984 was to receive quarterly reports on enterprise activity, but this requirement is not being met. 2.17 Three auditing bodies are supposed to monitor the financial condition of each public enterprise. The first is the State Inspection Commission (IGE-"Inspection G4nerale d'Etat"), formed in 1976 by merging the former Finance Ministry Inspectorate with the Presidential Inspectorate. This Commission carries out ad hoc investigations as directed by the Office of the President. Second, Accounting Commissioners ("Commissaires aux Comptes") are appointed to each public enterprise by the CEN. Their responsibility includes verifying the enterprise's cash accounts twice a year and all accounts at least once a year. Third, the Ministry of Justice in charge of Inspection of State Enterprises (MJSE) is expected to carry out external auditing of the public enterprises. These numerous auditing bodies in fact have limited capabilities, principally due to the lack of trained accountants and auditors in the country. None of them succeeded in improving accounting standards or in ascertaining the enterprises' financial position. Out  - 8 - of the 57 public enterprises, only 10 have provided audited financial statements on a regular basis; 35 have provided them irregularly, after long delays and without auditors certificatiot,. 6. Investment Code 2.18 Benin's 1982 Investment Code, the details of which are in Annex 2-3, defines incentives for four types of investments. The first regime (Regime A) applies to public or mixed enterprises with investments above CFAF 50 million (services) or CFAF 500 million (other enterprises). This regime grants exemption from turnover tax, as well as various reductions in import duties in initial years of operations; full exemption from profit taxes in the first two years of operation, and partial exemption in the following three years. The second regime (Regime B) applies to private enterprises with investments ranging from CFAF 100 million to CFAF I billion and provides comparable benefits to those granted under Regime A. with slightly more generous relief from import duties but less favorable taxation on profits in the early years of operations. For important foreign undertakings (above CFAF 1 billion) with long gestation periods, Regime C provides all advantages of Regime B, in addition to guaranteed stability of fiscal and financial legislation for 10 years. Finally, private small and medium size enterprises (CFAF 20 to 100 million) benefit from Regime D, slightly more favorable than Regime B. This Investment Code provides adequate incentives for private investments in Benin. 7. Pricing Policies 2.19 Prior to the reform undertaken in the context of this project (para 3.22), prices or profit margins for imported and domestically produced goods and services were subject to the following controls: a) Imported consumer goods of a strategic nature are subject to price approval by the Ministry of Commerce. The price allowed is based on specified distribution margias above the documented import cost. This category concerned 25 items (including potatoes, sugar, powdered milk and rice). b) Other imported goods do not require prior approval of price, but must be priced in accordance with specified margins above import cost at wholesale and retail levels. Control is exercised by field inspectors from the Ministry of Commerce. This second group included all non-strategic imported items. c) Basic domestically produced goods (e.g. cement, beer, soft drinks, textiles) and essential services (e.g. electricity, railways, freight forwarding) are subject to prices or tariffs fixed by the Government. d) Agricultural export commodities (e.g. cotton, palm fruit, palm kernels, groundnuts) are subject to prices set annually by Government decree ("bareme").  - 9 - 2.20 The pricing system has not allowed many enterprises to achieve financial viability. Excessive delays were incurred in granting needed increases, and these were often inadequate (e.g. transit tariffs, soft drinks, beer). 8. Financing of Public Enterprise Investments 2.21 Poor pricing, combined with inadequate investment financing practices has led to financial distress of many enterprises. As noted in para 2.10, initial capitalization was often minimal, as was the subsequent financing of expansion investments. In the case of La Beninoise (brewery), investments of over CFAF 6 billion were made between 1977 and 1982 without any equity contribution by Government, leading to excessive indebtedness and financial instability. In other instances, the Governmert did not provide annual operating subsidies to compensate for the social objectiveb it had assigned to some enterprises (para 2.11) or for delays in granting needed price adjustments (para 2.20). 2.22 Reinvestment of an enterprise's earnings, when these existed, was also limited as allocation of profits is specified by law, rather than decided on the basis of the specific requirements of the individual enterprise. Public enterprises are required to transfer 70% of their profits to the Treasury, reducing their ability to finance necessary maintenance expenditures, and overtime impairing their production capabilities. C. Performance of the Public Enterprise Sector 1. Overall Financial Results 2.23 The poor financial performance of Benin's public enterprises reflects the major problems arising from their conditions of creation and of operation (paras 2.05-2.22). Two-thirds of the public enterprises are encountering major financial problems, ranging from chronic losses to negative net worth or lack of liquidity (see chart below). Financial data available for 28 of the 57 public enterprises show a combined after-tax loss of about CFAF 3 billion on annual sales of CFAF 113 billion in FY1985, and many enterprises involved in textiles, cement and distribution exhibit negative net worth. Over half of these enterprises have a debt-equity ratio exceeding five to one and about 40% of them have a negative net working capital position. The enterprises' financial situation has further deteriorated in the last two years, with the slowdown of Nigeria's economy, a major market for Beninese production. For example, the well-run textile printing firm (SOBETEX), one of the most profitable public enterprises until 1982, started to show losses in 1983 with capacity utilization falling below 15% when its Nigerian market collapsed. Financial results for selected public enterprises are shown in Annex 2-4.  - 10 - INDICATORS OF PUBUC ENTERPRISE FINANCIAL PERFOMACE Percent Firms a 0 25 50 75 00 Net Losses Excessive Debl- Equity Ratio b Negative Net Worth Negof Nei Working Copito ased an raost recen fidd nol daaaobe tobr a xmple of 28 Publc entrse. bDefid a negaClve or geot thon 5:1. Souroe: Bank stall olVsb . 2. Impact on the Banking Sector 2.24 Public enterprises have relied heavily on the banking sector to sustain their deteriorating financial situation. As of December 1984, more than CFAF 57 billion of public enterprise loans were outstanding. The sector absorbed half of all medium term credit to Beninese enterprises and virtually all the long term credit. 2.25 Poor performance of Beninese public enterprises resulted in growing arrears with the banking system, affecting today about 80Z of public enterprise loans. At the same time the decrease in the Government's revenues since 1981 has in turn reduced the Government's stable deposits with the banking system, critically impairing the financial viability of the three state-owned banks. The Development Bank (BBD-"Banque Beninoise pour le Diveloppement") and the Agricultural Credit Bank (CNCA-"Caisse Nationale de Credit Agricole") have been particularly affected. They are both heavily illiquid, and critically dependent on BCEAO financing (well in excess of their regulatory rediscounting limits). The Commercial Bank (BCB-"Banque Co merciale du Benin") holds the largest public enterprise portfolio but is in a slightly better situation, collecting over 70Z of the country's banking deposits. Cumulatively, the three banks have an estimated negative net worth exceeding CFAF 40 billion.  - 11 - 3. Impact on Public Finances 2.26 The poor performance of the sector has had so far a limited direct impact on public finances (see Table below), as funding has been provided mostly by the banking system. Only CFAF 32 billion had been invested by the Government in the sector from 1979 through 1983, mostly as equity or loans. This compared with about CFAF 25 billion received by the Government from public enterprises, as dividends, taxes, etc. over the same period. These inflows to the Government are declining. Business and excise tax inflows have dropped since 1981 and most public enterprises were exempted from part of their tax obligations (e.g. contribution to a State Investment Fund (FNI-"Fond National d'Investissement")) in 1982. The potential impact of public enterprises on public finances, however, through guarantees and other contingent liabilities, is far greater than the rather limited drain indicated above. It is estimated that Government guarantees granted to public enterprises exceeded CFAF 114 billion over the same 1979-1983 period (of which CFAF 69 billion are accounted for by the Save and Onigbolo projects), a substantial contingent liability on Benin's public finances. The table below summarizes the flow of funds between State and public enterprises, while further details are given in Annex 2-6. PUBLIC ENTERPRISE SECTOR SUMMARY OF FINANCIAL FLOWS, 1979-1983 (CFAF million) Dirwct Outfias Direct Inflow Equity inestents 12,440 Dividends 480 Net lending 13,720 Business Taxes 13,330 Operatig subsidies 150 a/ Payron, excise txes 7,920 Debt repayments by CAA, 5,410b/ ContrX tions to FNI 3,030 Total outflows 31.720 Total inflws 24.760 Exes Otflcw 6,960 r T.1iHt Liabilities 114,000 a/ Miulinm estbiate. b/ 1981-1983 partial data. Source: Missi analysis of CAA and Treasury data.  - 12 - 4. Liquidity Crisis 2.27 The deterioration of Benin's public finances and the tight position of domestic banks have exacerbated the illiquidity of most public enterprises faced with recurring losses. Enterprises have not received the necessary price increases or operating subsidies (para 2.21), and their access to domestic banking credit has declined over the last three years as the banks' own liquidity position worsened (para 2.25). As a last resort, state-owned firms have built up arrears towards Government and other public enterprises to maintain a minimum liquidity position. The whole public enterprise sector now rests on an intricate system of unpaid bills among the enterprises, the banks and Government. Unpaid taxes from public enterprises have exceeded CFAF 19 billion over the 1979-1983 period, and ad hoc arrangements are made between them to compensate interlocking debts. A number of public enterprises now enforce strict procedures of payment in cash for services rendered (e.g. freight forwarding); others negotiate arrangements with the banks before depositing receipts, to prevent their accounts from being automatically debited to cover arrears. These practices further contribute to inefficiency. D. Recognition of Sector Issues 2.28 The rapid deterioration of the performance of Benin's public enterprise sector and the urgent need for remedial measures have been recognized by Government since the late 1970's. Some preliminary remedial steps were taken during the 1979-1982 period. A National Commission ("Commission Nationale des Bilans") was created in 1979 to review public enterprise finances and recommend management changes. Two other commissions followed, and as noted previously a set of decisions were taken in April 1982 by the Central Committee of the Party and the CEN, as follows: a) Liquidations. The liquidation of unviable enterprises was decided and substantial layoffs have occurred. Most of the 50 provincial enterprises, insufficiently capitalized and ill-conceived from the start, were disbanded. Other weak enterprises were merged. b) New management teams. Management was replaced in several enterprises. c) Price increases and review of monopolies. Increases were granted in the prices of several commodities to reflect costs (e.g. cement, beer). Public enterprise monopolies were ended for importation and distribution of wheat, rice, and pharmaceuticals, and a commission was formed to review other state monopolies. d) Reform of the institutional framework. The membership of Boards of Directors was reduced; audit was strengthened both in the enterprise and in each supervisory ministry.  - 13 - e) Management and production incentives. A commission headed by the Labor Minister was charged with studying introduction of performance bonuses for enterprise managers and staff. The previous practice of paying wages for a thirteenth month regardless of performance, was abolished. 2.29 These decisions were consolidated in the following two years. Over 2,000 employees of public enterprises have been laid off from dissolved enterprises since 1982. The Government stated its objective to seek partial or total privatization in selected sectors previously reserved as state monopolies. Private potential investors have been approached for possible partnership in the areas of transit and distribution. A February 1984 Presidential Circular reiterated the previous decisions concerning the sector, including those listed in para 2.28 (b) to (e). 2.30 Although reflecting its commitment to a far reaching reform of the sector, these early Government efforts were constrained by the country's lack of financial resources and of technical and managerial expertise. Not all the liquidations which had been decided in 1982 were carried out. Mergers were not always accompanied by remedial measures to ensure the viability of newly created enterprises (e.g., SOGECOB, a freight forwarding company which combined two bankrupt companies in 1982, was not provided any additional equity). Only a limited number of enterprises underwent changes in their management teams. The performance-based incentive system envisaged in the 1982 decisions was not implemented. Changes in the legal framework governing public enterprises were insufficient to substantially improve the decision-making process. Against this background, the Government requested IDA's assistance in its rehabilitation efforts. III. REFORMING THE PUBLIC ENTERPRISE SECTOR A. IDA's Policy Dialogue with the Government 3.01 An IDA economic mission visited Benin in June 1982 and focussed on the analysis of issues facing the public enterprise sector. Its findings, summarized in a Country Economic Memorandum (Ref. A-2), were discussed with the Government in February 1983. The report concluded that crucial policy and institutional changes, combined with external financial and technical assistance, would be required to rehabilitate the sector. In response to the Government's request for IDA's assistance in dealing with these issues, several preparation missions led to the design of a program of sector reforms. 3.02 This program, addressing the range of problems noted in Chapter II, involves (a) redirecting the role of the State towards priority areas of public management; (b) improving the Institutional framework governing the State-Enterprise relationships; (c) strengthening the control and incentive systems; and (d) improving enterprise efficiency and financial viability. The program described below has been formulated by the Government in consultation with IDA,  - 14 - and forms the basis of the proposed project. It is reflected in a Policy Statement and a related Action Program outlining specific reform proposals with a detailed calendar for their implementation (Annexes 3-1 and 3-2). This document was reviewed and agreed upon at negotiations, and assurances of its implementation by the Government were obtained. In August, 1985, the Government formally adopted these two documents. A joint review by IDA and the Government of the progress in implementation of the Action Program will be conducted every six months, starting in March 1987. This program and its implementation status are described in the following paragraphs (3.03 - 3.24). B. Delineation of the Public Enterprise Sector 1. Role of the State 3.03 The Government has decided to rationalize and reduce state involvement in the economy. A specific objective in the Policy Statement is to restrict State ownership to those enterprises which: (a) are of a vital or strategic nature; (b) are so large in scale that Government participation is required; (c) require State involvement to attract foreign capital; or (d) perform essential public services that meet social needs and thus do not attract private commercial interest. In order to translate this policy objective into practice, the Government is taking specific steps to reduce State ownership and encourage private sector initiatives through: (a) the liquidation of selected enterprises; (b) the pursuit of privatization of others; and (c) restrictions on future State investments. Specific steps are discussed in the following paragraphs. 2. Liquidation of Non-Viable Enterprises 3.04 The Government has undertaken to physically close down uneconomic public ventures. At negotiations it announced that it had decided to end the operation of IBETEX (textiles), CIB (industrial ceramics), and TRANSBENIN (trucking). In addition, since negotiations, the Government has advised IDA that it now envisages to close down ten additional public enterprises including TAB (Beninese airlines) and OBAR (land reclamation). A short description of the three enterprises which are being closed is presented below, and further details are in Annex 3-3. 3.05 IBETEX is an integrated cotton spinning, weaving, and garment-making factory located in Parakou destined for local and export market. Since its inception, this mixed-economy company has had numerous problems with its foreign partners, its European market, and the quality of its cotton. Scaled-down operations aimed at the local market still yielded heavy operating losses. IBETEX was placed in liquidation in 1982. In that year, it lost about CFAF 600 million on sales of CFAF 500 million. Options to rehabilitate the plant were studied but were not found economical. The Government decided in 1985 to terminate IBETEX operations. IBETEX is insolvent, with outstanding debts of CFAF 10 billion and liquidation of its assets is now underway.  - 15 - 3.06 CIB was a small manufacturer of ceramic tiles and bathroom appliances, with 80% Government ownership. Inadequate equipment, disagreement with the foreign technical partner who supplied the equipment, and product design flaws had caused deterioration of its financial position. Accumulated losses (CFAF 900 million) exceeded its equity base by more than six times. No reasonable proposals for the rehabilitation of CIB were developed. In 1985, the Government closed down CIB and initiated the sale of its remaining assets. 3.07 TRANSBENTN was a small trucking firm owned jointly by the Government and a group of private truckers; the private shareholders have never been supportive of the firm's objectives. Inadequate capitalization and high costs in the face of a very competitive private sector prevented the company from operating profitably. TRANSBENIN recorded annual losses varying between CFAF 100 and 200 million on revenues slightly over CFAF 100 million, and had a negative net wo-th. TRANSBENIN was disbanded at the end of 1985. 3. Privatization 3.08 For activities other than essential public services, strategic or vital sectors, and which may attract private interest, the Government will seek increased private sector participation. This may take the form of bringing private investors into state-owned companies, increasing the private sector's share in mixed-economy companies, or opening up to private competition sectors previously subject to state-monopoly. The Government will seek foreign investors, after giving priority to nationals with the requisite financial and business qualifications. 3.09 The Government has drawn up a list of sectors suitable for privatization. These generally -epresent activities which are potentially profitable and thus attractive to private investors: freight forwarding, import of consumer gcods and equipment, construction, hotels, data processing and textiles representing together 12 public enterprises. Of these, the Government has selected nine enterprises to be the initial focus of privatization efforts. At negotiations, the Government's privatization strategy for each of the activities was reviewed and agreed upon with IDA, and the Government agreed to exchange views annually with IDA (starting in March 1987) on progress achieved towards implementation of this privatization strategy. 3.10 The rationale for privatizing the above mentioned sectors is as follows: a) Freight forwarding. By virtue of its geographic location, Benin can play a key role as a transit corridor to the landlocked countries of the interior (e.g. Burkina, Niger). In order to compete efficiently with alternate routes via Lome or Lagos, the Government would like to attract competent private entrepreneurs (domestic and foreign) who would be able to raise efficiency standards in this activity.  - 16 - b) Imports and distribution. This is traditionally a private sector activity, in which public participation has proved inefficient. The Government has approached potential foreign technical partners and local investors for two enterprises in this sector. c) Construction. This activity (roads and buildings) has traditionally been in the private sector in Benin until SONACOTRAP was created and acquired the used equipment of a foreign contractor. Difficulties have been encountered in managing the firm, and strong private competition remains. This firm and its assets are likely to attract private investors. d) Hotels. The state-owned enterprise ONATHO competes with private sector hotels and it may be possible to interest private firms in purchasing or managing its properties. The largest ONATHO hotel is currently managed by a foreign firm under contract. e) Data Processing. The state-owned data processlng firm is notphly inefficient and is one of the causes of delayed rcatistics in Benin. Technical and management assistance is required and could be effectively provided through private lore' or foreign partnership. f) Textiles. Privatization is being sought for this activity which belongs naturally in the private sector. The SOBETEX operation has consistently been well managed with the help of a foreign partner, but currently requires new marketing initiatives and a capital injection. Private partners might be interested in purchasing part of the Government's shares. 3.11 The Government has demonstrated over the past year its commitment to this policy of selective privatization. As noted earlier (para 2.29), discussions have been held with potential foreign partners in the transit and freight forwarding, hotels and textiles sectors. State monopoly has been ended in the areas of transit, computers and distribution (food and pharmaceuticals) where the private sector is now allowed to compete. 4. Future State Investments 3.12 A root problem of Benin's public enterprise sector has been poor investment planning. As noted in para 2.09, several pub'.ic enterprises (e.g. IBETEX, CIB) were undertaken without appropriate economic or financial analysis, resulting in heav- losses. The Government has decided. in the context of thIs projetL, to .ubject any proposed new public enterprise to a full technical, ecouomic and financial evaluation of its viability and of its impact on public finnces. The Government has agreed that no investment in the public enterprise sector would be undertaken unless: (i) the economic rate of  - 17 - return is at least 1OZ; (ii) the financial ratc of return is at least 12%; (iii) the projected debt service coverage is at all times higher than 1.3; and (iv) in the case of an investment requiring external financing, the foreign exchange earnings or savings more than cover the investment's debt service. The evaluation of any investment proposal will also demonstrate that it is optimal from the technical, economic and financial viewpoints. The Government has agreed to consult IDA on any proposed new investment in the public sector; furthermore, that its investments in industrial and commercial enterprises shall not exceed at any time during the life of the project annual limits to be set in agreement with IDA on the basis of a yearly review of the public investment program. In the first such review, a limit of CFAF 2.3 billion for the 1986 program was agreed. C. Public Enterprise Sector Management 1. Rehabilitation Programs 3.13 The Government will introduce the concept of rehabilitation programs as a tool for setting and clarifying State-Enterprise relations and mutual obligations. Rehabilitation programs, similar in concept to contrats-programmes developed in France and Great Britain, would cover a multi-year period and be updated annually. They would guide enterprise managers and supervising ministries alike, and also form the basis for a monitoring system and performance evaluation of the enterprise and its managers. The Government would apply this concept on a pilot basis to the selected enterprises to be rehabilitated under this project (see Chapter IV). On the basis of experience to be gained, this concept would be extended to other public enterprises. The content and implementation of the rehabilitation programs to be prepared under this project are discussed in more detail in paras 4.04 through 4.18. 2. Redefinition of the Institutional Framework 3.14 The Government is reviewing the legal framework governing public enterprises and has agreed during negotiations on a detailed plan for institutional reform. The objective of the institutional reform would be to clarify and rationalize the role of the various bodies involved in the supervision and management of public enterprises (i.e., the Technical Supervising Ministry, the Board of Directors, the General Manager, and the Management Committee) thereby enhancing efficiency of their operations by (a) avoiding overlapping responsibilities and conflicting authorities, (b) decentralizing decision-making power, and (c) allowing enterprise mnagement greater autonomy and accountability. These changes will require revisions of the existing laws and regulations. A draft revised legal framework has now beeu prepared, which the Government has agreed to enact before July 1987. 3.15 Technical Supervising Ministry. The Supervising Ministry would be responsible for generally guiding and monitoring the activities of the enterprise in line with Government sector policies. It would play a major role within the Interministerial Steering Committee  - 18 - (para 4.23) during preparation of the enterprise rehabilitation program, and would exercise responsibility for enterprise oversight. For enterprises without formal rehabilitation programs, the Supervising Ministry would be given the lead role in guiding the enterprise activities by defining its objectives and strategies, approving detailed investment and operating budgets, and monitoring and evaluating enterprise performance. The Supervising Ministry would exercise its authority through the Board of Directors. 3.16 Board of Directors. The role of the Board of Directors would be reinforced, to give it the responsibility for overall guidance and oversight over the enterprise including the formulation and approval of its strategy and policies. A specific objective of the reform will be to clarify the Board's powers relative to those of the Supervising Ministry. In the case of a fully state-owned enterprise, the Board would ensure that the enterprise operates within broad guidelines set by the Supervising Ministry. The Board's effectiveness is expected to be enhanced by expanding its representation beyond the enterprise shareholders to include representatives of the private sector or relevant entities (e.g. u:.lversities). The Board should meet at least once every three months. 3.17 General Manager and Management Committee. The General Manager would be responsible for day-to-day management of the enterprise. The reform would aim at increasing both the autonomy and accountability of the General Manager, to whom the Board could delegate such powers as (a) spending within approved budgets; (b) negotiating with suppliers and banks; (c) organizing production methods and schedules; and t:l) hiring and firing of staff. The Management Committee would be re-defined as an advisory body assisting the General Manager, without any independent powers. 3.18 Personnel. Reductions in personnel are likely to be among the most sensitive aspects of public enterprise sector reform. Nonetheless, they will be necessary as part of the proposed project. The Government has expressed its readiness to imnlement layoffs required to complete the enterprise rehabilitation programs or liquidation plans. Through financing of a training and redeployment program (para 4.22), IDA will assist in financing the execution of this crucial reform. The Government has already carried out major personnel reductions in a number of companies: in IBETEX employment has been cut from 1,600 to about 200 over the past five years; in AGB personnel has been reduced by about 300 employees in 1984 and 1985; layoff programs are also being prepared for the Cotonou Port ("Port Atutonome de Cotonou"-PAC), for the Pharmaceuticals Import and Distribution Company (ONP-'Office National de Pharmacie") and for transit companies (SONATRAC and SOTRACOB). The Government has also decided to grant enterprise managers greater autonomy in the hiring and firing of personnel, and new regulations to that effect would be introduced in connection with the revision of the existing legal framework governing public enterprise operations (pata 3.14).  - 19 - 3. Management Information System 3.19 A MIS is needed to effectively monitor the operation of public enterprises. The objective would be to provide both Government and enterprise management with timely financial and othier information. Reports would be produced on the performance of individual public enterprises and on the sector as a whole. A major constraint affecting the development of a MIS will be the limited capability of enterprises to generate the basic information. To be effective, the MIS, at least initially, will have to be simple and be adapted to the limited information available. The Government has selected consultants to develop such a system. These consultants are expected to begin their assignment in March 1987, and the new system would be implemented starting in January 1988. Terms of reference are in Annex 3-4. Furthermore, Tableaux de Bord (monitoring systems) for each enterprise will be devised as part of each rehabilitation program (para 4.14), as well as specific performance indicators. 3.20 The shortage of trained accountants is a major constraint to improving MIS in jublic enterprises in Benin. The Government has devised with the assistance of ILO a plan for implementation over the next few years of the recently-developed National Accounting Plan (para 2.16). This is expected to go a long way in reducing the shortage of trained accountants. A recently approved IDA Technical Assistance Project (Credit 1530-BEN) also includes training of accountants. As accounting capabilities develop in Benin's enterprises, the initial MIS to be developed under this project will be expanded. 4. Incentives 3.21 Experience in other developing countries (such as Kenya, Hungary, and Pakistan) underlines the desirability of a performance-based incentive and bonus scheme in parallel with increased enterprise autonomy and accountability. In the framework of the proposed project, the Government would design and implement such a scheme. At the managerial level, performance criteria would be specifically spelled out in the rehabilitation program (para 4.14) to serve as the basis for a managers incentive scheme. At the employee level, bonus schemes would be the responsibility of the enterprise management. The Government has undertaken in the Policy Statement to have employee bonus schemes designed by enterprise managers in time for implementation by fiscal year 1988 for the first time. D. Financial Viability of Enterprises 1. Revenues of Enterprises 3.22 In parallel with the institutional improvements noted above, changes in the pricing system are required. The Government is determined to move towards a policy of reliance on market forces in setting price levels in competitive situations. For monopolies and public services, prices would take into account the product or service  - 20 - cost. In April 1986, the list of Imported products subject to Government price setting has also been reduced from 25 to 11 products of a strategic nature. In addition, the Government has agreed that manufacturing enterprises benefitting from financial assistance under this project will be allowed to determine prices of their products in accordance with market forces. For these enterprises, removal of price controls will be a condition of disbursement of funds (paras 4.07 and 4.17). The Government has also undertaken to implement other specific pricing reco.mmendattons which may be contained in rehabilitation programs to be prepared under the project (para 4.12). 3.23 Many enterprises have suffered losses in the past due to the Government's reluctance and delays in approving price adjustments (para 2.20). The Government has now streamlined the procedures for price setting or approval, reducing to 60 days the processing time. In addition, it has undertaken (in the context of the review of the institutional framework - para 3.14) to amend the regulations concerning the allocation of public enterprises' earnings to improve their financial autonomy and capacity for self-financing. 2. Enterprise Liquidity and Indebtedness 3.24 The problem of interlocking debts among public enterprises themselves and vis-a-vis the banking system and the Government needs to be addressed in the context of the sector's rehabilitation. As a first step, consultants financed under the project (TORs in Annex 3-5) were selected in July 1985 to undertake a study (completed in August 1986). The purpose of this study was to estimate the debts of public entiErprises, prepare a matrix of reciprocal debts, and propose alternative ways to reduce excessive accumulated debts, including cancellation of interlocking debts, transfers of debts to the Government, rescheduling and conversion of debts to Government into equity. The magnitude of public enterprise indebtedness far exceeds financial resources to be made available under this project; its resolution could best be envisaged in the broader context of a restructuring of the Beninese banking system overall, as part of an adjustment program. By providing term resources and equity to beneficiary enterprises through disbursements for goods and services, IDA would through this project contribute to a limited extent to their financial restructuring (para 4.32).  - 21 - IV. THE PROJECT A. Objectives 4.01 The proposed project would assist Government efforts to rehabilitate the public enterprise sector. At the sector level, the project would help implement the program of policy reforms described in Chapter III. At the enterprise level, it would assist in the design and implementation of rehabilitation programs for selected public enterprises found viable on the basis of diagnostic studies. B. Project Description 4.02 The project would comprise: (a) a technical assistance component to help in (i) project management; (ii) the preparation and execution of the agreed action plan for sector policy reforms; (iii) the preparation of enterprise diagnostic studies, liquidation plans or rehabilitation programs; and (iv) audits; (b) a credit component to help finance the implementation of IDA-approved emergency and full rehabilitation programs for selected enterprises; and (c) assistance in training and redeployment of staff laid off as part of enterprise rehabilitation programs. C. Relationship to Sector Reforms 4.03 The Government's program of reforms is embodied in a Policy Statement together with an Action Program for implementation (Chapter III). Major steps have already been taken in the course of project preparation and the conditionality attached to the release of IDA funds will further ensure satisfactory implementation of agreed reforms: a) During project preparation. In August 1985, the Government formally adopted the Policy Statement and Action Program agreed upon at negotiations (para 3.02), and these two documents were updated in October 1986. The Government has started implementation of specified key steps in areas of liquidations (actual liquidation of three uneconomic state enterprises), institutional arrangements (agreement on a plan to reform the legal framework), enterprise monitoring (selection of consultants for a MIS study), pricing (reform of the price control system) and financ'al discipline (completion of the indebtedness study). b) During project implementation. Some of the agreed reforms will require a longer time frame to be fully implemented (e.g. implementation of the MIS, reform of the law governing public enterprise operations); some enterprise-specific reforms will require a detailed study of the conditions of the enterprise's operation (e.g. determination of appropriate price levels and subsidies). Effectiveness and disbursement conditions will ensure that key remedial measures for each enterprise to be rehabilitated are actually undertaken by the Government  - 22 - (para 4.07 and 4.17), and no further rehabilitation program shall be approved by IDA unless progress in implementation of the overall program of policy reform is satisfactory (para 4.17). D. Rehabilitation of Selected Enterprisez 4.04 The project provides for the preparation and financing of rehabilitation programs for selected enterprises, the viability of which would have been established by consultant studies to be undertaken in two phases: (a) Phase I: a diagnosis will assess the viability (technical, economic and financial) of the enterprise. If the enterprise is deemed unviable, a liquidation plan will be prepared. For an enterprise found viable, an emergency program would be drawn up containing such immediate steps as warranted to arrest its deterioration; and (b) Phase II: for those enterprises deemed viable, a full rehabilitation program will be designed, which would subsequently be negotiated between the State and the enterprise. IDA will take part in the financing of goods and services needed to implement emergency programs and full rehabilitation programs that it will have approved. The phasing of the rehabilitation process is described below, with further details in Annex 4-1, and status of studies undertaken so far is described in para 4.29. 1. Phase I: Enterprise Diagnosis 4.05 In this first phase, specialized consultants will review each enterprise to determine its viability (technical, economic and financial). In case the diagnostic study concludes that the enterprise cannot be made viable, the consultants would prepare a liquidation plan containing specific proposals for winding up the operation and liquidating the assets. If, on the other hand, the enterprise is deemed potentially viable, the consultant will prepare an emergency program whenever this is warranted to arrest its deterioration. The need for such emergency programs may arise from the dramatic lack of liquidity hampering the operation of many public enterprises, which are unable to even meet their most pressing needs, and for which some emergency financing is required pending the implementation of the full rehabilitation program. The emergency program will also list key remedial measures (e.g. pricing, organizational changes) identified as necessary during the diagnostic study. 4.06 Expenditures to be included in emergency programs would meet the following criteria: (a) they would be limited to those enterprises whose potential viability has been clearly demonstrated in the diagnostic study; (b) they would be essential for the enterprise to continue its operation; (c) they would be relatively small (in the range of 10-30%) in relation to the overall expected financial needs of the full rehabilitation program; and (d) they would have a short economic pay-back period. They could include maintenance expenses, repairs, spares, urgently needed technical assistance, working capital.  - 23 - 4.07 Each diagnostic study, containing either a liquidation plan or an emergency program would be submitted (in draft) by the consultants to the enterprise management, the Government and IDA within three months of the beginning of the study; IDA would give comments on this draft, and a revised version, taking into account these comments, would be provided by the Government to IDA for final review and approval within six months of the begining of the study. In its review, IDA will, inter alia, satisfy itself that the enterprise to be rehabilitated has the managerial capability required for the successful implementation of the rehabilitation ptogram. Funds disbursed to beneficiary enterprises under emergency programs would be treated as a liability of the enterprise towards the Government pending determination of the financial plan under the full rehabilitation program (paras 4.12 and 4.13). Approval by IDA (for at least four enterprises envisaged for rehabilitation) of a list of rehabilitation measures identified in diagnostic studies and related implementation schedule, would be a condition of credit effectiveness. Furthermore, conditions of disbursement of each emergency program would be its prior approval by IDA, and the execution of key remedial steps listed therein including (for manufacturing enterprises) the removal of all price controls on their products (paras 3.22 and 4.05). 2. Phase II: Full Rehabilitation Program 4.08 In the second phase, a comprehensive rehabilitation program will be prepared by the consultants for those enterprises diagnosed as viable. The consultants will make recommendations on the enterprise's corporate strategy, its organization, needs for physical rehabilitation, expansion programs if any, financial restructuring requirements and monitoring systems. A financing plan will be prepared, as well as a detailed action plan which would summarize each rehabilitation program and spell out the mutual obligations of the Government and of the enterprise. The action plan may also call for renegotiations of existing loans with local banks. Procedures for preparing and implementing rehabilitation programs have been recorded in a supplemental letter to the Development Credit Agreement. Key aspects of the rehabilitation program are described below. 4.09 Corporate Strategy. The consultants will review and make recommendations as needed to redefine the enterprise's corporate strategy,, role, policy, product lines and market, sector organization and regulations and, as appropriate, privatization prospects. 4.10 Organization. The consultants will review and make recommendations on the organization of the enterprise, the adequacy of its management and personnel, personnel policies, technical assistance requirements, and the institutional framework for the enterprise's operation. When a reduction or a change in personnel is recommended, the consultants will propose, as appropriate, a specific program for training and redeployment of personnel, including an estimate of the cost of such program.  - 24 - 4.11 Physical Rehabilitation. Taking into consideration what has already been provided for under the emergency programs, the consultants will assess needs in spares, new equipment and other physical assets; they will review production methods and maintenance policies. When recommending changes in equipment or production processes, they will provide an estimate of the cost involved and the economic rate of return of the proposed investment. They will review any expansion plan envisaged by the enterprise. The program would primarily focus on the rehabilitation of existing facilities, although a few enterprises have already designed or are undertaking expansion programs. In such cases, the consultants will assess the economic and financial viability of the proposed expansion and the implementation capability (managerial, technical and financial) of the enterprise, and will make a recommendation on whether or not to proceed with it. They will estimate the related needs for financial and technical assistance. 4.12 Financial Rehabilitation. The rehabilitation program will aim at restoring or achieving the enterprise's financial viability. One of the necessary conditions for financial rehabilitation would be an adequate pricing policy in line with the Government's stated objective of reliance on market prices (para 3.22). The consultants will project the enterprise's financial position and make recommendations as to the appropriate price structure. 4.13 A second condition for financial rehabilitation will be the restructuring of the balance sheet of the enterprise to (a) restore a satisfactory liquidity position; and (b) reduce indebtedness to a level cormensurate with the enterprise's capability to service its debt. The financial restructuring proposal would take into account funds provided as part of the emergency program, and would generally meet the following minimum standards: (i) the working capital should be positive, which would often entail conversion of debt maturities from short term to medium or long term; and (ii) the debt service coverage ratio should be above 1.3, which may require injection of fresh equity and/or conversion of long-term debt into equity. The indebtedness study (para 3.24 and Annex 3-5) provided some of the basic data needed by consultants to prepare a sound financial restructuring plan for each enterprise. This sLudy would determine, among others, the actual debt of each enterprise vis-a-vis Government, local banks, and other public enterprises showing the part of these debts which can be offset by receivables of the enterprise and proposing alternative solutions to reduce excessive indebtedness. The participation of Beninese banks will be essential in the financial restructuring of enterprises and will be sought, in the form of bilateral negotiations between the banks and the enterprises. 4.14 Monitoring Devices. Another element of the rehabilitation program will be to strengthen the MIS of the enterprise in coordination with the overall sector MIS study (para 3.19 and Annex 3-4). The consultants will review accounting practices, compliance with the National Accounting Plan, external and internal reporting requirements, and auditing procedures. They will set up Tableaux de Bord (monitoring  - 25 - systems) specific to each enterprrse, and recommend criteria for periodic evaluation of the management's performance (para 3.21). 4.15 Financing Plan. The consultants will provide an estimate of the financing required for carrying out the rehabilitation program, covering the physical, financial and organizational restructuring of the enterprise. They will prepare a financing plan, indicating how funds would be provided to the enterprise (loan or equity) to meet the financial restructuring proposal. In case of a loan, the consultants would make a recommendation on the repayment schedule and grace periods. Loans from the Government to beneficiary enterprises would have maturities ranging from 3 to 12 years, inclusive of grace periods from 1 to 3 years, at an interest rate of 12Z p.a., which is in line with the average rate applicable to industrial activities in the UMOA countries. The foreign exchange risk would be borne by the Government. 4.16 Action Plan. The consultants would design an action plan specifying the mutual obligations of the Government and those of the enterprise towards achieving the objectives of the rehabilitation program. The action plan will also serve as a monitoring device for implementation of the rehabilitation program and, as mentioned in para 3.13, will be similar to the Contrat-PrograDme in concept. The commitments of the Government will typically include the provision of financial resources (equity, loans), authorization for lay offs to achieve a desired staffing level, price increases, rescheduling of debts to the State, authorization for incentive/bonus schemes, changes in lnstitutional setup and/or in sector regulations. The obligations on the part of the enterprise would usually comprise a definition of enterprise objectives and performance targets, corporate strategy including marketing policy, production programs, investment programs, pricing policies, staffing, bonus schemes and MIS improvements. The action plan will, as appropriate, call for renegotiation with the banks to achieve financial restructuring objectives specified in the rehabilitation program (para 4.13). The action plan will cover an appropriate multi-year period and be in a monitorable form, and will identify key reforms which would have to be undertaken prior to the provision of finance. 4.17 Negotiation and Processing of Rehabilitation Programs. The full rehabilitation program in draft form will be submitted by the consultants to the enterprise management, the Government, the creditor banks and IDA. This would give IDA the opportunity to review and comment prior to its finalization. Negotiations on the proposals contained in the draft rehabilitation program will be held between all Beninese parties involved. The revised draft rehabilitation program, including its action plan, will be submitted to the CEN (Cabinet) through the Interministerial Steering Committee (para 4.24) for decision, and a final rehabilitation program will be provided to IDA for review and approval. This approval by IDA may require field visits by specialists. No full rehabilitation program shall be approved by IDA unless progress in the implementation of the overall program of sector reforms is satisfactory. Furthermore, as appropriate, disbursements by  - 26 - IDA for approved full rehabilitation programs will be conditional upon the implementation of key steps specified in such programs in addition to those already listed in the emergency programs (para 4.07). In particular for manufacturing enterprises which did not benefit from an emergency program, the removal of price controls will be made a condition of disbursement of funds for the full rehabilitation program. 4.18 Implementation of Rehabilitation Programs. If deemed necessary by the Government and IDA, the assistance of the consultants involved in the preparation of the rehabilitation programs would be extended to assist in the implementation of the rehabilitation programs for an initial period. A joint review by the Government and IDA would be conducted every six months to assess actual implementation progress, identify additional or remedial steps, and generally update and adjust the rehabilitation programs as appropriate. 4. Selection of Enterprises Envisaged for Rehabilitation 4.19 Eleven enterprises have initially been selected by the Government in consultation with IDA to be studied by consultants for liquidation or rehabilitation under the project, which is considered a manageable task. These enterprises fall into five subsectors: food and beverages, import and distribution, shipping and transit activities, textiles and cement. Subsectors and firms were selected on the following basis: (i) they illustrate problems common to many enterprises of the public sector; (ii) none of them is so large as to absorb an excessive share of project funds; (iii) they are not already being assisted under other IDA projects; and (iv) they have a substantial impact on the performance of the overall public enterprise sector. As a group they account for about one-fifth of the public enterprises in Benin by number, one-third of the sector's revenues and one-fifth of its employment. Several enterprises in the sample operate in subsectors that the Government has decided to open to the private sector (paras 3.08 through 3.11). In the event potential privatization partners are forthcoming in the course of preparation or implementation of a rehabilitation program, the emphasis of IDA's assistance would be directed towards helping the Government achieve privatization on optimal terms by financing the required technical assistance. Profiles of each enterprise to be studied under the project are provided in the table below, and further details are available in Annex 3-3.  - 27 - Profiles of Enterprises envisaged for ohabilit or Liquidatim % of State BaErprise Activity rp Mor problm S(RAFEL Productim and Processig 100% Poor desia of plants of fnJits and vegetables la B&iinise Brewery 100% Price controls, excessive indeedness, il -d Il= Distriutionr AGB Foodstuff rt100% Conflicting objectives; price an dL ;ols poor plang; ovderixete&les . CUP Pb ls 100% Conflicting cbjectives; -nport and distribution -daendw netcork resilting in excessive opertingcosts. SOG3 Househld eletrical 100% FinEaial difficulties ppliance d clothing ihport irerited from wo sod distriliutim insolvent fims wbich were merged into it. Sipping and Transit EOX RdShipping operation 51% Decrease in traffic. S(NATRAC Trasit Ccpany 100% Ineffective operatios. SORACB Transit cwvpany 52% Gxfzaa forarders. Tectil.es SEl Tectile Printing 49% Closing of Nigerian market. SCB Clinker grinding 50Z Pricin policy; poor locatio. atiQi Climker gririg 100% Pricing policy.  - 28 - 4.20 About US$9.4 million of the IDA credit are set aside for enterprise rehabilitation (para 4.31). This appears reasonable on the basis of information available on the eleven enterprises selected, preliminary findings of studies underway, and taking into account other funding sources available (para 4.33). A reliable estimate of the financial needs of each enterprise to be rehabilitated will only emerge from the final diagnoses and emergency programs, which would then provide a basis for adjusting the scope of the project. Should financing availability be insufficient to cover all eleven enterprises, some of these, to be chosen in agreement between IDA and the Government, may have to be deleted from the scope of the project. Conversely, if fund availability allows, additional public enterprises could be selected jointly by IDA and the Government for prospective rehabilitation following the same process of consultant study as described above. An initial list of enterprises which could be rehabilitated under this project will be agreed upon on the basis of available diagnostic studies prior to credit effectiveness. 4.21 The three largest recent investment projects in Benin, even though they are operating as public enterprises, are not envisaged for IDA assistance under this project. Two of these, Onigbolo (cement) and Save (sugar) projects, have been excluded because of the unusual nature of their problems and the magnitude of their potential financial needs. They together represent an initial investment of nearly US$300 million and are now operating at minimal levels of capacity. Their major problem arises from their inability to find an outlet for their products as Nigeria, co-owner of both ventures and co-guarantor of their debts, has not lived up to its commitment to absorb the output from these enterprises. Their difficulties are being addressed in the context of the Bank's dialogue with Benin and Nigeria rather than under this specific project. A third major state project, Seme (petroleum), is being assisted by two IDA credits (1207-BEN and 1503-BEN). E. Assistance for Training and Redeployment of Personnel 4.22 To alleviate the social cost of personnel reduction, the project includes a component to finance training and redeployment of personnel to be laid-off in the course of enterprise restructuring and liquidations. In September 1985, the Government set up a Commission for Training and Redeployment (CTR) composed of union representatives, of the tutelle ministry, and of enterprise managers. The CTR would design enterprise specific training and redeployment programs that would include inter alia financing of education fellowships (locally or abroad) or of productive investments for employees seeking to start their own business. The CTR will make use of recommendations contained in rehabilitation studies (para 4.10). Enterprise specific training and redeployment programs would be submitted by the Government to IDA for approval, and their implementation would be overseen by the CTR.  - 29 - F. Project Management 1. Summary 4.23 An Interministerial Steering Committee (ISC-"Comite Directeur") has been set up and given the overall responsibility for project preparation and implementation. To prepare and execute a number of sectorwide reforms, specialized task forces have been set up, reporting to the President of the ISC. The ISC is assisted for day-to-day management by a Project Management Unit (PU W-"Unite du Projet?), headed by a Project Coordinator supervising the consultants involved in the preparation of enterprise rehabilitation programs. The Project Coordinator is supported by a Senior Project Advisor, an expatriate expert financed under the project. A detailed organization chart for project management is in Annex 4-2. This project will require intensive IDA supervision, particularly during the crucial start-up period. 2. Interministerial Steering Committee (ISC) 4.24 The ISC was set up in January 1984 by Presidential decree to generally oversee project implementation. It is chaired by the Minister of Justice in Charge of State Enterprises; its Vice President is the Minister of Plan and Statistics, its Secretary the Minister of Finance and Economy. ISC members include representatives of all ministries or institutions directly involved in project implementation, among which are the Ministry of Labor, and the Ministry of Coumerce. Supervisory ministries would be included in the ISC on an ad hoc basis for those enterprises under their jurisdiction. The ISC's major tasks are: (a) to follow up on the work of specialized task forces for preparation of sector reforms and supervise implementation of policy reforms (para 4.25); (b) to select and supervise consultants in the preparation of enterprise rehabilitation programs; (c) to review the consultants' proposals and make recommendations for decision by the CEN; (d) to supervise the implementation of emergency and full enterprise rehabilitation programs; (e) to report to the CEN on progress of the project at the sector and enterprise level; and (f) to recommend remedial actions as needed to achieve the objectives of the project. 3. Task Forces for Sector Reform 4.25 To prepare a number of sector reforms, the Government has set up three specialized task forces, reporting to the President of the ISC. One of these is charged with the preparation and implementation of the pricing reforms (paras 3.22 and 3.23). Another is responsible for the review of the legal framework (paras 3.14 thru 3.18). Finally, a third group is responsible for the formulation and follow up of a strategy for privatization of enterprises or sectors intended to be op.ned to the private sector (paras 3.08 thru 3.11). These task forces comprise specialists of relevant ministries, lawyers and businessmen.  - 30 - 4. Project Management Unit 4.26 The PMU, created by the Decree of July 12, 1985 (Ref. B-4) as the executive arm of the ISC, is responsible for day-to-day management of the project. Headed by a Project Coordinator, the PMU is an operational entity with a light structure. it includes: (a) a Senior Project Advisor to generally assist the Project Coordinator as consultant (TORs in Annex 4-3), who also coordinates the wora of all other consultants and of their local counterparts (para 4.27); and (b) Beninese staff with requisite experience comprising an engineer/economist, a financial analyst, a lawyer, an accountant and a disbursement officer. A detailed budget for the PMU is available in the Project File (Ref. B-6). After completion of this project, the PMU would continue to monitor operation of public enterprises. 5. Technical Assistance Requirements 4.27 Technical assistance requirements would total 318 man months over the project period for (a) preparation and execution of sector policy reforms (TORs in Annexes 3-4 and 3-5) (51 man-months); (b) consultaucy services to prepare diagnostic studies, liquidation plans, emergency and full rehabilitation programs (106 man-months); (c) project management and PMU training (98 man-months); and (d) audits (63 man-months) (para 4.39). The cost is estimated at US$3.8 million based on the actual cost for those contracts already concluded and experience in the region. Further details are available in the Project File (Ref. B-7). 4.28 The magnitude of this technical assistance is on account of the complex nature of this project in Benints environment, the multiplicity of subsectors to be assisted, each requiring specialized expertise currently unavailable in the country, and the need to have appropriate quality control and to strengthen management skills vi.thin the PMU. Valuable transfer of know-how is expected to be derived from the presence of external experts, in sector management as well as in technical aspects relating to enterprise operation. G. Status of Project Preparation and Implementation Schedule 4.29 The Senior Project Advisor was hired in November 1984 aud .ook up his position in Cotonou in January 1985. Consultants for studies on shipping and transit, distribution and agroindustrial activities started work in February, 1985, on the basis of terms of reference and contractual arrangements agreed with IDA. The PMU is now fully staffed. Five diagnostic studies (covering enterprises in two subsectors - agro-industrial and shipping/freight forwarding) have been completed in draft by external consultants and were reviewed with the Government during a November 1985 field mission. On the basis of these studies, the Government decided to liquidate one of the enterprises (SONAFEL - fruit and vegetable processing), to intensify the search for private partners for the two freight forwarding enterprises (SONATRAC and SOTRACOB) and to rehabilitate two other enterprises (COBENH Shipping  - 31 - and La Beninoise Brewery) through reorientation of their operations. A diagnostIc study on a sixth enterprise (AGB - import/distribution subsector) under preparation will be ready by December 1986. An IDA mission scheduled in January/February 1987 will seek final agreement with the Government on the rehabilitation prospects of each enterprise studied so far, and implementation of the first emergency program would start in March 1987. Full rehabilitation programs for the first beneficiary enterprises (in draft form) would also be available for review in March 1987, and the implementation of IDA approved rehabilitation programs would stretch over 3 - 5 years starting July 1987. The project is expected to be completed by December 1994. A project implementation chart is in Annex 4-4. H. Project Preparation Facility 4.30 PPF advances for a total amount of US$1,500,000 were approved by IDA on June 11, 1984, August 19, 1985 and November 11, 1986 (P-287 BEN) for project preparation. These PPF advances provide financing towards (a) the cost of the Senior Project Advisor (US$270,000); (b) operating costs of the PMU (US$180,000); (c) enterprise diagnostic and rehabilitation studies (shipping/freight forwarding, agrcindustries, import and distribution) (US$960,000); (d) start-up of sector reform studies (US$50,000); and (e) unallocated (US$40,000). I. Project Cost and Financing 4.31 The estimated project cost and financing are summarized in the table below. Further details are available in the Project File (Ref. B-il). Project Cost and Financing a/ (US$ million) Local Foreign Total x Technical Assistance Consultant Services IDA .5 2.2 2.7 71 Swiss Government .2 .9 1.1 29 Government - - - - Total .7 3.1 3.8 100 a/ Cost net of taxes and duties; amounts shown in this table include PPF financing and unallocated.  - 32 - Local Foreign Total Z Operation of the PMU IDA .3 .6 .9 50 Swiss Government - - - - Government .9 - .9 50 Total 1.2 .6 1.8 100 Total Technical Assistance IDA .8 2.8 3.6 64 Swiss Government .2 .9 1.1 20 Government .9 - .9 16 Total 1.9 3-7 5.6 100 Training and Redeployment IDA 2.0 - 2.0 69 Swiss Government .6 - .6 21 Government .3 - .3 10 Total 2.9 - 2.9 100 Enterprise Rehabilitation Programs IDA 2.6 6.8 9.4 41 Swiss Government 1.7 5.0 6.7 29 Government 6.9 - 6.9 30 Total 11.2 11.8 23.0 100 Total Project Cost IDA 5.4 9.6 15.0 47 Swiss Government 2.5 5.9 8.4 27 Government 8.1 - 8.1 26 Total 16.0 15.5 31.5 100 4.32 Total project cost (net of taxes) is estimated at US$31.5 million, of which US$15.5 million (49%) are foreign costs. The project cost includes US$3.8 million of consultant services (para 4.27), US$1.8 million of operating costs of the PMU (rental expenses, salaries, communications, equipment, travel), US$2.9 million for training and redeployment (para 4.22), and US$23.0 million for enterprise rehabilitation. The latter amount, to be adjusted on the basis of diagnostic studies as they become available, includes equipment, civil  - 33 - works, spares, raw materials, services, and other costs related to lay offs, working capital, and conversion of debts into equity. Government contribution to project financing would be limited (about 26% of project cost) on account of the tight budgetary situation prevailing in Benin. Government would finance 75% of the local cost of the PMU (base salaries of staff, telephone and telex), 10% of the cost of the fund for training and redeployment of personnel laid off as part of rehabilitation programs, and on average 30% of total costs of enterprise rehabilitation programs, mostly in the form of conversion of debts into equity. IDA would finance 62% of the foreign cost of the project, and about 34% of its local costs (US$5.4 million). IDA funds would finance primarily goods and services but also on a declining basis over the project period, salary supplements above Government scales required to hire and retain suitable local staff of the PIMU. This declining scale and arrangements for adequate financing of the PMU during and beyond the project period were agreed at negotiations. IDA would contribute to the financial restructuring described in paras 4.12 and 4.13 only inasmuch as some of its funds would be passed on by the Government to the beneficiary enterprises as term loans or equity (para 4.15). 4.33 The Swiss Agency for Development Cooperation will provide co-financing for an amount of Sw F 15 million (US$8.4 million equivalent). These funds would cover in priority the cost of consultancy, rehabilitation, training and redeployment of staff laid off related to the three public enterprises in the import/distribution subsector (SOGECOB, ONP, AGB) as well as to any other enterprise that may be subsequently agreed upon between IDA, the Swiss Government, and the Beninese Government. Swiss funds would be provided to the Government as a grant and administered by IDA. J. Procurement 4.34 Award of contracts for consultancy services would follow the Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency. Goods and civil works to be procured will be grouped as far as possible into appropriate bidding packages and procured according to the Guidelines for Procurement Under World Bank Loans and IDA Credits. Unless IDA shall otherwise agree, contracts for goods costing more than US$350,000, and for civil works costing more than US$1 million shall be awarded following International Competitive Bidding (ICB). Goods manufactured locally would be given a preference margin of up to 15% of the CIF bid price or the applicable custom's duty and import taxes, whichever is less. Similarly, local contractors would be given a preference margin of up to 7.5%. Goods costing more than US$50,000 but less than US$350,000, and civil works costing less than US$1 million shall be procured through Local Competitive Bidding (LCB), in accordance with local procedures acceptable to IDA. Goods valued at less than US$50,000 within an aggregate limit of US$2.5 million will be procured through prudent local shopping. All procurement decisions, whose estimated costs exceed US$100,000 equivalent would be subject to IDA's prior review. Financing of workiig capital up to an aggregate  - 34 - amount of US$1.5 million would be made against evidence of purchase of stocks which would be procured according to normal commercial practices. K. Disbursements of IDA Credit 4.35 Disbursements of IDA credit would be against: (i) 100% of consultants expenditures (US$1.2 million); (ii) a declining share of PMU staff salary allowances (100%, up to US$35,000; 80%, up to US$65,000; and 40%, up to US$85,000); (iii) 100% of other eligible expenditures of PMU (rental expense, office supplies, equipment, maintenance, travel, vehicles, and training (US$615,000)); (iv) 100% of a list of expenditures for each emergency and full rehabilitation program as agreed between IDA and the Government (US$8.6 million); (v) 100% of approved expenditures for redeployment and training of staff laid off as part of rehabilitation programs (US$2.0 million); (vi, 100% of the withdrawn PPF amount (US$1.5 million); and (vii) unallocated (US$1.0 million). These arrangements are summarized in the table below: Allocation and Disbursement of IDA Credit (US$ million) Z of Expenditures Item Amount to be financed Goods and services for 8.6 100% rehabilitation programs, including emergency program Operating costs of the project management unit with: (a) operating costs other .62 100% than salary allowances (b) salary allowances .08 100Z up to $35,000 80% up to $65,000 40% up to $85,000 Consultants' Services 1.2 100% Expenditures for training and redeployment of staff 2.0 100% Refunding of Project. Preparation Facilities 1.5 100% Unallocated 1.0 4.36 IDA funds would be disbursed over a period of nine years. Final date for submission of rehabilitation programs to IDA would be June 30, 1992 and the closing date of the credit would be June 30, 1995.  - 35 - The quarterly disbursement profile is shown in Annex 4-5, and is summarized below; it reflects past experience with comparable IDA projects in the region. Summary Disbursement Profile FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 Annual 1.5 2.1 2.3 2.3 2.2 1.8 1.3 .9 .6 Cumulative 1.5 3.6 5.9 8.2 10.4 12.2 13.5 14.4 15.0 4.37 Disbursement procedures would be as follows: a) Emergency and Rehabilitation Programs. Disbursement requests under emergency or rehabilitation programs would be submitted by beneficiary enterprises with full documentation to the PMU f or review and approval. In the course of this review, the PMU would be responsible for ensuring that each disbursement request is part of an agreed rehabilitation program. Once approved, the PNU would either (i) request payment from the subsidiary account to be opened by the PMU in a primnary bank; or (ii) transmit with appropriate instruction a payment request to CAA who would disburse out of the revolving funds to be opened at the BCEAO (para 4.38). CAA would supervise the State's equity participation (when funds are provided as Government equity) and would be responsible for the loan documentation and collection (when funds are provided as loans). Disbursement requests above US$20,000 equivalent would be submitted by CAA with full documentation to IDA; those below that amount would be reported to IDA on a monthly Statement of Expenditures (SOE), with supporting documentation to be retained by the PMU for review by IDA during supervision missions. b) Project Management Unit. Expenditures for the PMU eligible for IDA financing would be reimbursed on the basis of a SOE submitted monthly; c) Training and redeployment of staff. Training and redeployment financing needs duly approved by the Association (para 4.22), will be disbursed on the basis of a SOE submitted monthly. d) Technical Assistance. SOEs would be prepared by the Project Coordinator for contracts approved by IDA. 4.38 Revolving Funds: To accelerate disbursement, a revolving fund of US$0.5 million would be set up under the IDA credit, and one of US$0.4 million under Swiss financing. Both revolving funds would be deposited in special accounts at the Central Bank for West African Countries (BCEAO). These special accounts represent about four months  - 36 - of expenditures to be financed under the project. Furthermore, the PMU would set up an account in a primary bank which would be operated on an imprest basis and replenished from time to time from the proceeds of the special accounts to be opened at the BCEAO. This primary account would be used for small expenditures (below US$4,000) and would be maintained below US$150,000. Unless otherwise agreed, all project expenditures would be channeled through the subsidiary account opened at the primary bank by the PMU or through the special account to be opened at the BCEAO. L. Accounting, Auditing and Reporting Requirement 4.39 As part of its Action Program (Annex 3-2), the Government has undertaken to accelerate the implementation of the recently introduced National Accounting Plan, with financing from the IDA Technical Assistance credit (para 3.20 and Ref. B-10). External auditors acceptable to IDA would annually review (a) project accounts kept by the PMU, (b) the special accounts at the BCEAO and the PMU subsidiary account, (c) financial statements of each beneficiary enterprise, and (d) SOEs. Audit reports should be submitted to IDA within six months of the end of each fiscal year. The cost of audits would be financed under the project (para 4.27). The Government will also submit quarterly progress reports on the implementation of sector policy reforms and on the preparation and implementation of the emergency and full enterprise rehabilitation programs. Finally, the Government has undertaken to prepare a Completion Report within six months of the credit closing date. V. BENEFITS AND RISKS A. Benefits 5.01 The project is expected to help rationalize the management of the public enterprise sector, thereby improving its overall impact on the economy. At the enterprise level, emergency programs for selected enterprises would arrest their deterioration, and the full rehabilitation programs would restore their economic and financial viability. The rehabilitation programs will also benefit the sector as a whole by setting a model for relationship between the State and the enterprises, clarifying mutual obligations. At the country level, important benefits to public finances are expected to accrue from the implementation of agreed sector reforms. The reduction and improved screening of new state investments, and the privatization/liquidation efforts will enable the State to redirect its scarce financial and managerial resources towards priority areas of public management. Policy changes emphasizing the role of the private sector should foster the development of local enterpreneurship and help attract foreign investors. The technical know-how associated with the provision of private capital should help the country enhance its competitiveness in a number of key sectors of the economy. The reform in the institutional framework of public enterprises, monitoring systems, personnel and pricing policies, and increased management autonomy will provide  - 37 - essential ingredients for enhanced efficiency of the public enterprise sector thus improving the situation of the banking sector by reducing public enterprise loan arrears. B. Risks 5.02 The first risk is that the proposed policy reforms although supported by the Government would encounter political or social opposition during project implementation. This risk is substantial. considering the significant departure of the new program from policies followed until 1982 and the sensitive nature of some of the proposed reforms (e.g. liquidations). However, the Government's commitment as reflected in the Policy Statement and other public statements on the reorientation of public sector policies, backed up by actual steps taken since 1982, provide reasonable assurances in this regard. The expected benefits on the public finance situation would, as they materialize, sustain the momentum for continuation of the efforts undertaken. The conditionality attached to the release of IDA funds would also act as additional safeguard, ensuring satisfactory implementation of the agreed reform program. Assistance in training and redeployment of staff being laid off as part of rehabilitation programs will also alleviate their social cost. Another risk would be that the private sector, especially foreign, would not be sufficiently responsive to the privatization efforts. The interest expressed recently by private investors in several sectors, alleviates this risk. VI. AGREEMENTS REACHED AND RECOMMENDATIONS 6.01 At negotiations, the following agreements were reached with the Government: a) it will carry out the Action Program (para 3.02); b) it will biannually jointly review with IDA progress in the implementation of the Action Program and of individual rehabilitation programs (paras 3.02 and 4.18); c) it will submit annual audits by independent auditors acceptable to IDA on (i) project accounts, (ii) financial statements of beneficiary enterprises, (iii) the special accounts at BCEAO, (iv) the account to be opened by the PMU in a primary bank, and (v) SOEs (para 4.39); and d) it will submit quarterly progress reports to be prepared by the Project Coordinator (para 4.39). 6.02 At negotiations, understandings were reached with the Government on procedures for preparing and implementing rehabilitation programs (p$ra 4.08). 6.03 Conditions of effectiveness of the credit will be:  - 38 - a) &.2proval by IDA (for at least four enterprises envisaged for rehabilitation) of a list of rehabilitation measures identified in diagnostic studies, and the related implementation schedule (para 4.07); and b) approval by IDA of the initial list of beneficiary enterprises (para 4.20). 6.04 Conditions of disbursement of each emergency and full rehabilitation program will be: a) its prior approval by IDA (para 4.07 and 4.17); and b) the execution of key remedial steps specified therein (para 4.07 and 4.17); and c) for beneficiary manufacturing enterprises, the removal of all price controls on their products (para 3.22). 6.05 With the above assurances and conditions, the Project is suitable for an IDA credit of US$15 million equivalent to the People's Republic of Benin. WAPID November 1986  BEI PUILIC ENMPIRE SECIM REHABILrTICtN PRWEr LISr OF PUBLIC WEBRSl a/ Aa=M ACLIVLrY EUIS __NA__ CNP Pharncetical Office National de Phaiiae.e ---- hN~TItNIL D --- TAB Airlines Trazuports PArkis du B&nin SMIC G Palm oil products SociAt Nationals r l'Iidustrie des Gorps Gras IA BEINLSE Brm%Nryati La B&dnoik SEEE Waterd Pbwer Soclet4 B4rnloise d Electte et d'Eau SON= Printed Textiles Socit4 B6ninolse des Textiles OBEDN Mimse Office B&nimois des Mines 9CB Cuents Socigt4 des Clmits dui B6nin SSCKI Cements SociAtd Natimale des Ciimnts EJME Mines Swacd LBA ULJ.Areb SOD Cemnts SociAit des Cfments d0rnjolo SSS Sugr Soci6t4 Sucrilre de SavA CZm Rural DWepmt Office nins dAnt Rural 9(!~APRA Rural 1ve:Inqnt Socidt6 Natiale pour Pration Agricole CARD Rural DeveLopvent Centre d'Action Recale pw le Dt Rral -PUELIC W- [ smaAP Costnrtion Societe de Costruction et des Travc Publics SC2WIM Real Estate SoclAte Nationale de Gestion ImxbiliAre CNRTP Research for Construction, Naterials Centre National d'Essais et de Recherches des Tavawc Publics INC CartInraphic. Institut National de Crtogphie Om=I Nbvie Theatres Office B6d1is de Cinra cm~1~ TV Office de Radlodiffusim et T61hvisim du B&nin CIEPI Printing Office National d'Edition, de Presse et d'TIwrihis SamR Insrance Soci4t4 Nationale d'Assurances et de o uan e CWA Rural Credit Caimse Natinnale de Credit Agricole Wi Lottery Loterie Nationals du B&nin o 1 BEMD.velopnt Bank Banque D&niilse pour le D*eloppamt Bo} Qrcial BaB Bbk C31 Caputers Offe ortiqus  ---I1 FAe SAELI Animal Food Socite Agmo-Animale B6nirD-Arabe Libyenne BELIPECHE Fishlng Societe Benino-Arabe Llbyenne de Peche s9oAFEL Fruit kid Vegetable Processing Societe Nationale pour le D4veloppement des Fruits et LTgumes COBEKAM Navigation Ccopagnie Bninoise de Havigation Mbritine OCCN Railways Organisation Cmmu BinNiger PAC Port Port Autonom de Cotonou TRANBEENIN Trucking SoclAte des Transports Routiers du E4nin CHT Post Office Office des Postes et T41ecomamnications SLtArRAC Freight Fornrding Societe Nationale de Transit et de Ccmsignation S9IRAOOB Freigit Forwarding Societe de Transit et de Coxnsignation du Bbnin OBEMAP StevedhorIng Office BWninoia de Mknutention Portuaire RAVINAR Ships Stpplies Regie de Ravitaillement des Navires CNATHD Hotels Office National du Tourismr et d'H8tellerie --- W4M AND SOCIAL AFFATR-- cmSS Social Security Office Bkninois de S6kurit6 Sociale S.IDMAS Procurement Soci6t4 de Distribution de MIteriel et FcurnitOes Adinistratifs sac=F nn Import and Distribution of Consuwr Goods Soci&t G&.nrale de Comerce du B&-dn AGB Imp-ort Distributimn of Foodstuff SociWt4 d'Allmntatimn Ghzerale du B&nin SCNAR Equmimnt Socg4t4 Nationale d'MquiMeIent SOGEMA Riral )hrkets Sociftd de Gestion des ?irch4s Autonomes SCONACP Petrolam Products Soci4t6 Nationale de Cazmerci-llisation des Produits P4tmllers SOBEMAC Cement Distributiim Soci,&4 Bfninoise des MIteriazx de Construction a/ This list does not include a limited mnber of .mall provinclal enterprises of local interest. - Benin has in total 57 public enterprises. Source: Ministry of Justice in Car of Inspection of State Enterprises OMJSE). ~wm September 1986  - 41 - Annex 2-2 Page 1 of 4 BENIN PUBLIC ENTERPRISE SECTOR REHABILITATION PROJECT INSTITUTIONAL FRAMEWORK FOR PUBLIC AND SEMI-PUBLIC ENTERPRISES Preamble 1. The law No. 82-008 of December 30, 1982 was promulgated to "regulate the relationship between the State, the Offices, the State Companies, the Mixed-economy Companies and those companies in which the State has an equity participation". It superseded a 1974 Ordinance (Ordounance No. 74-75 of December 16, 1974). 1/ This 1982 law constitutes the basic legislation on wholly state-owned enterprises, and provides in its annex a model form of statutes. It also contains some regulations on semi-public enterprises. Article 1 states that both public and semi-public enterprises are to carry out transactions of industrial and/or commercial character for the State, in the public interest. General Provisions 2. Status, Purpose and Equity. Public enterprises (State companies and offices) are set up by decree as legal entities with financial autonomy; they realize economic development programs, either by supplementing private initiatives or by assuming economic tasks of a general interest. Offices are in charge of public services. Except as provided otherwise in the 1982 law, State companies are assimilated to private companies and as such are subject to the jurisdiction of private courts. The statutes of public enterprises specify their initial equity. An increase or decrease of the equity also requires a decree after proposal of the Board of Directors of the company. 2/ 3. Board of Directors and Management. Boards of Directors draw up the general policy of the enterprise in accordance with its purposes and 1/ The Ordinance is an act of the President of the Republic taken with the consensus of the Council of Ministers, while the law is adopted by the Revolutionary National Assembly and promulgated by the President. 2/ Neither the 1982 law nor the model statutes specifically provide for or prevent the possibility of participation by the private sector, although this would obviously require a modification of the statutes.  - 42 - Annex 2-2 Page 2 of 4 monitor its application. A Management Committee, headed by the General Manager, manages the company. 3/ 4i 4. A President chairs the Board of a public enterprise. The President is appointed by decree upon proposal of the Supervisory Ministry ("Ministere de Tutelle"). Other members of the Board represent the Ministers of Planning, Finance, Labor, Industry, Commerce, and the Supervisory Minister (one each) and also include two representatives from the Committee for the Defense of the Revolution, three representatives from labor unions and sometimes up to two other representatives from interested parties. Thus, Board members do not exceed 14 in number, appointed by decree. The Accounting Commissioners ("Commissaires aux Coimptes") (para 8), as well as the General Manager, attend the Board's meetings in an advisory (non-voting) capacity. The Board may also consult any expert It wishes. Length of the mandate of the Board members is undetermined in the law. The Chairman convenes the Board at least twice a year. The Supervisory Minister or the Accounting Commissioners may also convene a Board meeting. The Board takes decisions by a majority vote of at least two thirds of the members (present or represented). The Board has the broadest powers to act in the name of the company. It has in particular the right to review and approve annual forecast operating accounts and investment budgets prepared by the General Manager, and at the end of each fiscal year, the financial statements, inventories, balance sheet, report of company activities and audit report from the Accounting Commissioners. This right of approval is subject to the right of approval held by the CEN (Cabinet). The Board has an a priori control over the main powers of the General Manager (such as borrowing, hiring and firing of executive staff and delegating powers) but most of this a priori control is shared with the Supervisory Minister. 5. Between the Board's meetings, the highest decision-making body is the Management Committee which is responsible for the management of the company. The members of the Committee comprise (a) the General Manager (President), (b) the Deputy General Manager (Vice President), (c) the other Managers, (d) two representatives from the labor union and (e) two representatives from the Committee for the Defense of the Revolution. The statutes do not indicate the frequency of the meetings of the Management Committee, nor how decisions are reached. They only specify that the General Manager exercises his powers in the name of the Committee. 3/ The 1974 Ordinance provided for a Board of Directors (a "political management") and for a general manager assisted by an enterprise committee. 4J The 1982 law provides that the State has at least two representatives in the Board of companies in which it has an equity participation of at least 10%. These representatives are appointed by decree.  - 43 - Annex 2-2 Page 3 of 4 6. The General Manager is appointed by decree upon proposal of the Supervisory Minister. The statutes entrust him with the power "to manage the company and to act in its name, to execute or authorize any act or transaction related to its purpose and to represent the company". However, his role and powers are depleted In practice since (a) he exercises his powers in the name of the Management Comiwttee, and (b) an a priori approval from the Board of Directors and the Supervisory Minister is needed before almost any decision. The General Manager is responsible for preparing forecast operating accounts and investment budget at least one month before the end of each fiscal year and at least five months before the end of each fiscal year, financial statements, inventories, balance sheet and a report of company activities which are verified by the Accounting Commissioners. The General Manager also prepares, since January 1984, quarterly reports in accordance with a format set up by decree. These quarterly reports are also compulsory for semi-public enterprises. 7. Tutelle. A technical Supervisory Minister exercises an overall control over public enterprises. It receives minutes of the Board of Directors' meetings and may convene a Board Meeting to re-discuss any decision. Be may oppose decisions previously taken and refer to the CEN for ruling. The Ministry of Justice in charge of Inspection of Public Enterprises (NJSE) 5/ is also responsible for controlling the management of all public and semi-public enterprises and for assisting them in their operations and internal control. It has a right of a priori and a posteriori control over all financial accounts or statements. 8. Other Controls. (a) The Cabinet (CEN) controls activities of public ent'rprises: (i) it appoints the President of the Board, its members, the General Manager, the Deputy General Manager, the technical managers, and the Accounting Commissioners (Articles 10 and 27 of the 1982 law), (ii) it creates (or winds up) public enterprises, (iii) it Increases or decreases equity, and (iv) it approves annual forecast accounts and investment budgets, financial statements, inventories, balance sheet and report of company activities (Article 30 of the 1982 law); (b) the Accounting Commissioners, appointed for a three year period, can be civil servants or a private audit firm. They must check In depth cash accounts ("Comptes de Tresorerie") at least twice a year and all the accounts at least once a year. They certify in a report that the company has kept its accounts in a regular and accurate manner; (c) in addition to the above-mentioned controls, the 1982 law refers to the control of public enterprises by other State organs, by the "Chambre des Comptes", and by ad hoc commissions which can be set up by the Supervisory Minister. As to 5/ The Ministry in Charge of Inspection of Public and Semi-public Enterprises (MSSE) was instituted in December 1981. Under the previous 1974 Ordinance, there was a council responsible for coordinating and controlling company activities, directly referring to the President of the Republic.  - 44 - Annex 2-2 Page 4 of 4 semi-public enterprises, the law only provides that they are subject to the control of ad hoc commissions, set up by decree. 9. Allocation of Profits. For public as well as semi-public enterprises, the 1982 law provides for the allocation of net profits: (a) 15Z of the net profits are allocated to reserves (5% to a legal reserve, and 10% to an extraordinary reserve fund); 6/ (b) the balance (85%) is allocated as follows: for public enterprises, 15% of the initial net profits constitute a renewal fund for productive investments while the remaining 70Z are transferred to the national budget (42% for the investment and equipment budget, 14% for the operating budget and 14% for the National Investment Fund). For semi-public enterprises, 60% of the Government's share of profits are transferred to the investment and equipment budget and 40% to the operating budget. 10. Penalties. The law specifies severe imprisonment penalties and/or fines for the President and the members of the Board and for the members of the Management Committee of public and semi-public enterprises if they fail in some of their duties, e.g. if they fail to comply with their reporting requirements (para 6), if they embezzle funds, etc. 11. Winding up. The Government determines the terms and manner of a public enterprise's winding up. LEGWA February 1985 6/ No longer compulsory once they reach, respectively 10% of the equity and 10% of the turnover in the best year of operation.  _ 45 Amex 2-3 EEN PUBLIC EURISE SBCR RA N PROJE MuoR pISINS OF E3!IC'S INVESI-q CXDE OF MAY 2D, 1982Y/ Reghie Eligibility Prnwisiscs Genral PrOVISIons All uew enterprises, doestic Equitable cmpersatin in case of expropriation; and foreign. freedan of transfer of capital. RegPie A Public or Mixed enterprises For a mmmu of five years: exeptiu frao turnrwer projects (inmestent above tax; reductin in import duties (75% red&ctimn CFAF 50 million for pubLic for equipient andmauinery, arnd 5C% for services and CFAF 500 million materials); ememptin fran tax on irdustrial an for other enterprises). cmmercial profits during the first mnv years and 50R exptio during the folladng three years. RegPme B Private eaterprises (nveschent For a mndmn of five years: exmptim fran tumwver ranging fron CFAF 100 million tax; exemption from duties on imports of to CFAF 1 bilIen). construction materials and machinery; 50% reductio in import duties for raw naterials; u.mdmn 75% reducti an exPort tax; prwisiona3 e xtim fron tax on Indstrial and cmmarczal profits during the first two years. These pxofits have to appear in a "Special Reserve" accot. The capitazation of this reserve if it is rot distriuted is also provisiwaly exempted from tax. Oterwise it is subject to the ronal tawtim on industrial. anxi camrcial profits; 33% reduction in profit txe during the following three years. Regine C lixrtant unraldng For a mainun of 10 years: guaranteed stability of requring a long gestation econa.c, financial and fiscal legislation; free period (investments above cdoice of t, suppliers, clies; in CFAF 1 bi.lio), addition, Regime B advantages for a madnu duratim of five years. Provides for an establisiment aureement with the Goverret. Ragime D Small amn medium sizecd domestic For a maximn of five years: exemptim from turnover enterprises employing at least tax; exemption fran Import tax on raw materia1s as 15 worlis (investments ranging well as o eqidpents anrd madhinery, madmzm 75% from CFAF 20 million to reduction In export taxes; exemptinm fram tax on CFAF 100 mlinm). industrial and cmmercial profits during the first two years provided at least 50% of profits are reinvested. 1/ As rewisd by Decree 83-254 of July 13, 1983. Noveuber 1984  Aa 2-4 -46- FfCXTAL PEMMANME OF SEJTh PONLT SENPRIS Net Debt/ Pbblic Profit Equity Net Ardtvlty or (Los) Sl Patio Worth Debt --- <AF =Mw i- S9NAQL FTdts and Vegetal Pm ic-tim 4-ad Prolssig (0) 5 . (2,629) 2,835 (BAR Rural Dev(28) 99 .8429 342 9PnDlG 13 P m 1&t 5,363 47 309 14,465 BUIPEM. Flsbbg (195) 146 .5 1,555 739 SANaE al (39) 239 .2 1,042 183 SCB Cuit 1,729 Neg. (85 1,241 SOACI C_ent (5 1,790 Neg. (1. 3,456 Sao ceteae lnt Plant (3, 4,00 22,608 ;gl r exils X4 6,209 15162422 IA EMONOUE Beer and Soft Drinks 156 7,869 7.3 2,075 15,084 RCH9 Pailsxs 334 11,464 2.0 4,194 8,329 PAC Part 5 3,025 .8 17,897 14,441 TAB Airines - 599 n.a. n.a. 210 (ODE 321 2,942 1.8 1 710 3,095 SONARM 48 924 Neg. (947) 6,892 sJIRA(oB 210 673 Neg. (745) 3,805 Camrexc AGO Foodsbelf (421) 1,205 Neg. (4,076) 5.800 C(EE lelc - 1,613 n.a. n.a. 3,996 9CNbDP Petroloeum Products 967 36,137 3.3 3,397 11,231 SOGBOOB ag .OD (258) 1,266 (546) 1,920 S(amE Fa n 19 1,062 5.4 413 2,237 90MIMAS - Eivis timi. Supplies (392) 916 44 64 2 A17 StrENIcc 103 9,785 4.6 463 1,118 Odher s(Nc:RnP Coiutrix