Benin - Second Structural Adjustment Program Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15061 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF BENIN SECOND STRUCTURAL ADJUSTMENT PROGRAM (CREDIT 2283-BEN) NOVEMBER 21, 1995 Country Operations Division West Central Africa Department Africa Region This document has a restricted distribution and may be used by recipients only in the perforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA franc (CFAF) The CFA franc is tied to the French franc (FF) in the ratio of FF 1 to CFAF 100 following the January 12, 1994 devaluation of the CFA franc from a ratio of FF 1 to CFAF 50. The French franc is currently floating. FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS BCEAO Banque des Etats de l'Afrique de l'Ouest COBENAM Benin Maritime Company ESAF Enhanced Structural Adjustment Facility GDP Gross Domestic Product ICR Implementation Completion Report IMF International Monetary Fund PE Public Enterprise PFP Policy Framework Paper PIP Public Investment Program SAC Structural Adjustment Credit SAF Structural Adjustment Facility SCO Onigbolo Cement Company SDA Social Dimensions of Adjustment SONACOP Petroleum Distribution Company SONAPRA Cotton Company SONAR National Insurance Company SONICOG Palm Oil Company SSS Save Sugar Company UEMOA West African Economic and Monetary Union UNDP United Nations Development Program VAT Value Added Tax  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Preface ....: i Evaluation Summary. ii PART I: Program Implementation Assessment .I A. Program Objectives and Design .I B. Achievement of Objectives .2 C. Bank and Borrower Performance .8 D. Sustainability, Assessment of Outcome and Lessons Learned .9 PART 11: Statistical Annexes .13 Table 1: Summary of Assessments ........................................... 14 Table 2: Related Bank Credits ........................................... 15 Table 3: Project Timetable ........................................... 15 Table 4: Credit Disbursements: Cumulative Estimated and Actual ................................ 16 Table 5: Key Program Indicators ........................................... 16 Table 6: Studies Included in Project ........................................... 16 Table 7: Status of Compliance with Conditions for Tranche Release ............................. 17 Table 8: Bank Resources: Staff Inputs ........................................... 19 Table 9: Bank Resources: Missions.9 .................. 9 APPENDICES Appendix A: Borrower's Contribution to the ICR This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF BENIN SECOND STRUCTURAL ADJUSTMENT PROGRAM CREDIT 2283-BEN PREFACE This is the Implementation Completion Report (ICR) for the Second Structural Adjustment Program in Benin, for which credit 2283-BEN in the amount of US$55 million (SDR41.3 million) equivalent was approved on June 26, 1991 and made effective on October 15, 1991. The credit was closed on December 31, 1994, 18 months after the original closing date. The first tranche, released upon effectiveness, was fully disbursed by January 1992; subsequent tranches were released in May 1993 and August 1994, and the credit was fully disbursed by September 1994. Cofinancing for the Adjustment Program was provided by the Swiss and Dutch governments. Cofinanciers have received copies of the report and have not submitted specific comments. This ICR was prepared by Alain D'Hoore, AF4CO, of the Africa Region and reviewed by Ngozi Okonjo-Iweala, Division Chief, AF4CO, and Franz Kaps, Senior Operations Adviser, AF4DR. It was approved by Olivier Lafourcade, Director. Preparation of this ICR was begun during the Bank's completion mission, from April 3 to April 14, 1995. It is based on material in the program files. The borrower contributed to preparation of the ICR by cooperating with the completion mission and providing its own evaluation that is included as an appendix to the ICR.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF BENIN SECOND STRUCTURAL ADJUSTMENT PROGRAM CREDIT 2283-BEN EVALUATION SUMMARY A. Introduction 1. Benin adopted its first Bank-supported Structural Adjustment Program (SAL I) in 1989, in the midst of a political, economic, social and administrative crisis. The main focus of SAL I was on public sector reformn and the creation of an incentive framework supportive of private sector development. The political crisis eventually paralyzed government action in the course of 1989 but the implementation of the program resumed in 1990, as a National Conference established an interim government and set a timetable for elections in early 1991. Despite these problems, SAL I recorded significant achievements in banking and public enterprise reform, in government resource mobilization and in trade reform and deregulation. B. Program Objectives 2. The second Structural Adjustment Program (SAL II) was negotiated in 1990, as it had become apparent that the reform prograrn undertaken under SAL I needed to be pursued further. The general objectives of SAL II, covering the period 1991-1993, were to: (i) raise real GDP growth to 4 percent per annum by 1993; (ii) contain the rate of increase of domestic costs and prices (GDP deflator) to less than 3 percent per annum in order to improve the competitiveness of the economy given the fixed exchange rate arrangement; and (iii) accelerate the return to a viable balance of payments position by pursuing policies to expand exports and substitute for imports in order to limit the current account deficit to the equivalent of 9 percent of GDP by 1993, eliminating all external payments arrears, and increasing the net foreign assets of the banking system. 3. SAL II also continued the reform program undertaken under SAL I, with measures to (i) improve the government's financial position by reestablishing an equilibrium in the primary current balance in 1991 and a surplus thereafter; (ii) pursue the administrative restructuring of key ministries and a revised program of civil service departures, targeting an average of 2,000 departures per year over four years; (iii) continue the restructuring of the financial system, and establish an appropriate judicial and supervisory framework for sound financial intermediation; (iv) pursue the rationalization of the public enterprise sector through further divestitures, privatization, and improvements in the financial performance of enterprises remaining in the government portfolio; and (v) further improve the trade regime and the incentive structure for private investment. The program also included two new elements linked to Social Developments of Adjustment (SDA): (i) an emergency rehabilitation program for critical administrative and social infrastructure, the "Programme d'Urgence"; and (ii) measures to lay the basis for a more thorough reform of the educational system.  -iii- C. Implementation Experience and Results 4. Macroeconomic objectives were generally met or even exceeded. GDP growth was steady, and reached an average of 4 percent per annum, compared to projections of 3.4 percent. Inflation averaged 2.1 percent per year, against a target of 3 percent. In 1994, however, in the aftermath of the January devaluation of the CFA franc, inflation reached 54 percent on an end-of-period basis. The current account deficit was also lower than SAL II targets for the period, averaging 7.1 percent of GDP. A cotton boom, brought about by improved sectoral policies was a major contributor to domestic growth and exports. 5. Public finance generally improved over the program period and most program targets were met. Revenues as a share of GDP reached their pre-crisis level of 13 percent, while the tax base was broadened and taxation of domestic and imported goods was made less distortionary. The growth in current expenditures was contained, and as a result, the primary current balance moved from a small deficit in 1991 to a surplus of 2.6 percent of GDP in 1993. The overall deficit similarly improved, reaching 6 percent of GDP in 1993. The civil service departure program, which targeted 8,000 departures over the four-year period from 1991 to 1994, was only partially successful, as only about 5,000 pennanent civil service positions were eliminated. Audits contributed to the reorganization of several ministries. 6. After the collapse of the public-owned banking system in 1988 and 1989, a new private commercial banking system has emerged in Benin, as five new banks have started to operate since the beginning of the adjustment program. The government has continued the cleanup of the three publicly-owned banks that had failed before SAL I. Loan recovery efforts have only produced partial results. The government has continued, albeit at a slower pace, its disengagement process from productive activities. The process of privatization, liquidation or restructuring public enterprises (PE) had been initiated under SAL I and was continued under SAL II. Actions were completed on 5 of 16 targeted enterprises. Other restructuring, liquidation or privatization attempts are still in the process of being completed. Overall, the financial performance of the PE sector has improved. 7. Incentives for efficient private activity have partially improved under SAL II. Trade reform was an area of significant progress. In 1994, a new tariff structure was adopted that gave Benin one of the most liberal trade regimes of the region. Several price controls were removed in 1991, but some important controls still remain. Little improvement was recorded in the performance of the judicial system, and the planned revision of several components of the regulatory framework (labor, commerce and investment codes, procurement code) did not take place under SAL II. 8. The government's social strategy has been slowly redesigned, and its capacity in this area has been developed, over the program period. Spending under the "Programme d'Urgence" led to the rehabilitation of several schools and community health centers. The government's new education policy has also been redesigned. The Ministry of Education was restructured following an organizational audit.  -iv - D. Summary of Findings and Key Lessons Learned 9. Most macroeconomic objectives, as well as several structural reform objectives were effectively achieved under SAL II. In the implementation of the program, however, several difficulties were encountered with respect to compliance with conditions of tranche release. Compliance was achieved after several waivers were granted, and with a significant delay relative to the original schedule. Following Benin's move towards a multi-party democracy, parliamentary opposition was an important factor in slowing down or blocking progress in implementation especially since the government did not hold a continuous majority in Parliament given the multiplicity of parties. Various difficulties were also encountered in the PE divestiture program, as several privatization attempts proved difficult to complete. Though several exogenous factors contributed to many of these difficulties, they raise issues of governnent commitment to reform as a whole in the face of expected or actual social or political opposition. 10. Despite various successes, important reform efforts still need to be completed, especially in the PE sector and in private sector promotion, while commitment to macroeconomic stability is maintained. Macroeconomic outcomes are still sensitive to external factors as the economy is even less diversified than five years ago and structural weaknesses still remain in the fiscal and the external positions of the economy. For example, adverse movements in world cotton prices, by affecting 95 percent of exports revenues, could significantly affect the ability to import, and could generally hinder Benin's development efforts. To achieve significant improvement in overall welfare, growth must accelerate and scarce budgetary resources need to be allocated to social and economic priorities. Il. Bank performance in design, appraisal and supervision of the SAL was generally satisfactory, although the SAL design included too many detailed conditions for tranche release which sometimes tended to divert attention and focus from the broad policy objectives to a narrow look at issues. 12. Borrower performance was also generally satisfactory although there was a considerable amount of learning by doing in the new democratic environment. This tended to slow things down and to result in requests for waivers, in particular when either Parliament's priorities or assessment of issues differed from that of the executive branch. 13. Key lessons learned from SAL II include the following: (i) Adjustment operations extending over a three year period with an emphasis on macroeconomic stabilization may be of limited effectiveness for institutional reform given the short time frame in which they are generally set. To the extent that institutional reforms require a well-defined long-term strategy, a deep understanding of existing institutional structures and broad-based ownership from stakeholders, they raise issues that cannot properly be addressed in a short-term, policy-oriented operation. (ii) More attention needs to be given to both achieving and maintaining a broad consensus on the reform program, especially in a new democratic environment. When initial support which was closely linked to Benin's political transition waned, inadequate attention was given to public information and debate on the need for further economic reform. Furthermore, the role of democratic institutions needs to be understood and the implication of this role on the timing and process of reform adoption needs to be recognized. Reform programs may slow down while governments leam to manage the new  -v - policy processes required in a democracy. In support thereof, information dissemination and training ought to be made available to the various actors. 14. The outcome of the operation can be rated as satisfactory and the reforms achieved appear sustainable. In many policy areas, objectives were met or exceeded. The operation is being followed by a SAL III designed to consolidate the reforms in the first two SALs and to help strengthen the supply response to the CFA franc devaluation. An economic management support project takes up some of the key challenges on the institutional side. The design of both operations takes into account the lessons learned from SAL II.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF BENIN SECOND STRUCTURAL ADJUSTMENT PROGRAM CREDIT 2283-BEN PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROGRAM OBJECTIVES AND DESIGN 1. Benin adopted its first comprehensive adjustment program in 1989 after it had become apparent that the piece-meal approach to reform that it had started as early as 1982 was not adequate to address the fundamental weaknesses of its economic strategy and the causes of the mounting economic crisis. Almost two decades of state domination and mismanagement of the economy under a marxist-leninist regime had left an economic structure saddled with poorly designed, low-return public investments, a heavy external debt, an incentive framework hostile to formal private activity, an inefficient public-dominated modem sector, a bankrupt financial sector, and an unusually high degree of informalization. The collapse of the banking sector in 1988 and early 1989 provided a trigger to structural adjustment. 2. The main focus of the First Structural Adjustment Program (SAL I) was on public sector reform and the creation of an incentive framework supportive of private sector development. SAL I could not be implemented as planned, as a social and political crisis developed and eventually paralyzed government action in the course of 1989. In February 1990, a National Conference established an interim government and a referendum on a new constitution, and set a timetable for elections in early 1991. The severe crisis in 1989 had led to a sharp fall in government revenues and the accumulation of additional wage arrears to public employees. Despite these problems and the requirements of the political transition, the 1990 interim government recorded significant achievements in the economic reforn program in various areas, especially in the banking and public enterprise sectors, in government resource mobilization and in trade reform and deregulation. 3. Objectives of SAL II. A two year program was not expected to complete the deep reforms that were considered necessary, but the 1989 crisis made clear that even the objectives set under the first program would only partially be achieved. As a result, negotiations toward a second program (SAL II) started in 1990 while SAL I was being implemented. The general objectives of SAL II, covering the period 1991-1993, were to: (i) raise real GDP growth to 4 percent per annum by 1993; (ii) contain the rate of increase of domestic costs and prices (GDP deflator) to less than 3 percent per annum in order to improve the competitiveness of the economy given the fixed exchange rate arrangement; and (iii) accelerate the return to a viable BOP position by pursuing policies to expand exports and substitute for imports in order to limit the current account deficit to the equivalent of 9 percent of GDP by 1993, eliminating all external payments arrears, and increasing the net foreign assets of the banking system. 4. SAL II continued the reform program undertaken under SAL I, with measures to: (i) improve the Government's financial position by reestablishing an equilibrium in the primary  -2- current balance in 1991 and a surplus thereafter; (ii) pursue the administrative restructuring of key ministries and a revised program of civil service departures, targeting an average of 2,000 departures per year over four years; (iii) continue the restructuring of the financial system, and establish an appropriate judicial and supervisory framework for sound financial intermediation; (iv) pursue the rationalization of the public enterprise sector through further divestitures, privatization, and improvements in the financial performance of enterprises remaining in the government portfolio; and (v) improve further the trade regime and the incentive structure for private investment. The program also included two new elements: (i) an emergency rehabilitation program for critical administrative and social infrastructure, the "Programme d'Urgence" and (ii) measures to lay the basis for a more thorough reform of the educational system. 5. The Bank and the IMF have coordinated assistance in support of the government's adjustment program, in particular through joint missions for the preparation of PFPs in 1991, 1992, 1994 and 1995. A three-year SAF arrangement for 1989-92 has been followed by a three- year ESAF arrangement covering 1993-95. 6. Cofinancing for SAL II was provided by the Swiss and Dutch governments through grant agreements. B. ACHIEVEMENT OF OBJECTIVES' 7. The program was initially conceived to cover the period from 1991 to 1993. Most objectives relate to this period. However, various delays in implementation led the program to be extended to 1994. In January 1994, Benin along with other CFA zone countries devalued the CFA franc by 50 percent. The analysis of macroeconomic objectives and outcomes below covers mostly the period 1991-1993 for which relevant comparisons can be made. 8. Growth. Growth has exceeded the program objectives, averaging 4 percent during 1991- 93, compared with average SAL II projections of 3.4 percent. Sectoral policies and projects have led to a boom in cotton (which is grown by 40 percent of farmers) - an increase of 150 percent in volume of production over the last 5 years - and reasonable growth in other subsectors. Indeed, years of above average growth correspond to years of exceptional cotton growth; for examnple, in 1991, agricultural growth reached 8 percent in real terms, due to growth of cotton production of over 35 percent. Agricultural growth in turn has supported growth in otier sectors, especially commerce, transportation and other services. Formal transit trade to landlocked countries (Burkina Faso, Niger), for which Benin competes with Togo, constitutes an important part of activity in the service sector. Growth in that sector has been enhanced by the crisis that started in Togo in 1991. Key program objectives and tal macroeconomic indicators are presented in Table 5 in annex.  -3- 9. Inflation. Inflation during the 1991-93 period averaged 2.1 percent per year, below the SAL II target of 3 percent. Since Benin is part of the West-African Monetary Union (UMOA), objectives and instruments of monetary policy are set and managed within this supranational system in collaboration with the government. Money supply grew by almost 75 percent from 1990 to 1993, but prices remained stable. The relation between money and prices seems unusual, but it reflects the emergence of new private banks and the increase in money demand to the domestic monetary system, after the collapse of the banking system in 1989 and the substitution towards currency and banking services from other countries that had taken place at that time. Since the end of 1992, however, a more normal relationship seems to have been reestablished between money supply growth, prices and real growth. 10. Although inflation performance in 1994 should not be compared with that of previous years because of the extraordinary character of the devaluation, it shows potential weaknesses in monetary performance. The initial impact of the devaluation on prices, accommodated by monetary growth, was clearly limited to about 30 percent over a few months. But the money stock subsequently grew sharply out of line to the likely increase in money demand, as a result of a larger than expected increase in net foreign assets. This, combined with various inflationary triggers, such as civil service nominal wage increases, led to an additional increase in prices of about 20 percent in the last 4 months of 1994. 11. External developments. The current account deficit was also lower than the SAL II targets for 1991-93, averaging 7.1 percent of GDP over the period, relative to a SAL II target of 10.1 percent. Growth in the volume of domestic exports averaged about 10 percent per year over the program period and was almost entirely due to the boom in cotton production. In 1992 and 1993, lower world prices contributed to a relative decline in domestic exports receipts but the recovery of prices in 1994 and the devaluation led to an increase of 5 percentage points in the domestic-export-to-GDP ratio. As a result, cotton contributes an even larger share of domestic exports than before and export diversification has not taken place. Imports grew by about 6 percent from 1990 to 1993. Following the January 1994 devaluation, the volume of domestic imports contracted by almost 30 percent in 1994, their nominal value in CFA franc increased by over 40 percent and the current balance improved, showing a deficit of only 3.1 percent of GDP. 12. The capital account of the balance of payments showed a small improvement over the period, though its structural dependence on foreign aid in the form of official grants and debt relief has not changed significantly. In 1994, the devaluation induced a sharp drop in the trade deficit, at unchanged levels of net foreign capital. As a result, external reserves increased sharply, which in turn was a major cause of the sharp increase in the money supply. 13. Public finance. The ratio of central government revenues to GDP reached its pre-crisis level of 13 percent in 1993 above the SAL II target of 12.3 percent. This was achieved through a  -4 - broadening of the tax base which contributed to the elimination of several tax distortions. Important reforms included the introduction of a single-rate VAT in 1991, and various reforms in tax administration and the structure of taxation. 14. Current expenditures declined from 14.1 in 1990 to 12.9 percent of GDP in 1993, while the primary current balance moved from a small deficit to a surplus of 2.6 percent of GDP in 1993. The overall deficit (on a commitment basis) declined from 10 percent of GDP in 1990 to 4.7 percent in 1993 but rose to 6.7 percent in 1994. Personnel expenditures (wages and pensions) decreased from 8.4 percent of GDP in 1990 to 7.5 percent in 1993, against an objective of 6.9 percent, then decreased substantially in 1994 to 6.2 percent of GDP. Non-wage recurrent expenditures increased from 2.8 percent of GDP in 1990 to 3.2 percent in 1993, and 3.9 percent in 1994. Overall, public finance objectives of SAL II were thus largely met. The key measures to control growth in the wage bill were a civil service departure program and a policy of containment of nominal wages. Though there was some effort to limit wage growth, average wages rose sharply above inflation: on a December-to-December basis, average civil service wages grew by 4.4 percent in 1991, 13.1 percent in 1992 and 5 percent in 1993. Only in 1994 did real wages fall, as a result of larger than expected inflation. As a result, from 1990 to 1993, the wage bill, including pensions, increased by 7.5 percent in nominal terms, and about 1 percent in real terms up to and including 1993. 15. The sharp increase in revenues contributed to an increase in government funding of its public investment program. However, the share of the PIP financed by foreign donors has continued to be very high and has only marginally decreased. It averaged 92 percent over the program period. The budgetary contribution to investment increased from CFA franc 2 billion in 1991 to 3 billion in 1993 and 6.3 billion in 1994. 16. Administrative restructuring and civil service departure. SAL II targeted a reduction of 16 percent in the civil service, over a four-year period, which required the elimination of 2,000 permanent positions each year from 1991 to 1994. No departures were recorded in 1991. In 1992, a total of 2,609 permanent civil servants and military left under the Voluntary Departure Programn. In 1993, a total of about 700 civil servants left, including 490 redundancies from the Ministry of Rural Development; there was an additional departure of 1,600 "temporaries" whose situation had never been regularized, as well as a small number of departures identified through a preliminary review of civil service registers. In 1994, there were no significant departures. In total, against the objective of 8,000 permanent civil (and military) over the 4-year period from 1991 to 1994, about 3,300 permanent agents of the civil service left the public sector under the second Voluntary Departure Program and an additional reduction of 1,700 permanent positions was achieved through attrition and a hiring freeze. 17. Several organizational audits were also completed during the program period and led to the restructuring of some important ministries. It is apparent that some of these reorganizations  -5 - have improved administrative efficiency, for example in the Ministry of Finance and the Ministry of Rural Development, although it is in general difficult to make a more comprehensive assessment. 18. Financial sector reform. Since the collapse of three government-owned commercial banks in 1988 and 1989, a new private commercial banking sector has emerged. Five entirely private commercial banks are now active in Benin under the supervision of the new Banking Commission created in October 1990 within the framework of the West African Monetary Union (UMOA). 19. The cleanup of failed banks has proceeded, albeit slowly. Some asset recovery actions, such as offsets and sales of seized assets have exceeded objectives while loan recoveries reached only 63 percent of targeted objectives. Major private debtors, small in numbers but representing the largest share of assets, have resisted recovery efforts, as the judicial system was too weak to cope with their legal tactics. More important than the financial objectives of the cleanup effort, are its implications on the soundness of banking sector. New banks have relatively small credit portfolios; in addition to the fact that the new banks have had to build their credit and business knowledge from the start, monetary and financial policies before the BCEAO reform of October 1993 had discouraged efficient business lending. The devaluation constituted the first test of the soundness of credit portfolios of new private banks. For many of them the devaluation also brought windfall valuation gains, given their net foreign asset position. 20. Public enterprise reform program. The public enterprise restructuring program had started even before the first adjustment program and a relatively fast disengagement process had begun in 1988. For example, 5 large privatizations were completed between 1988 and the first half of 1991, and liquidation proceedings started for 16 other enterprises with a significant indebtedness. 21. SAL 11 targeted sixteen public enterprises for action, i.e. liquidation, privatizations or restructuring. Out of sixteen, actions on only five were effectively completed. A major success was achieved in the sale to a foreign investor of the Beninese brewery, which was one of the two conditions of effectiveness of SAL II. Several other privatization attempts were unsuccessful, either because calls for bids did not attract bidders, or because offers received by the government were considered unacceptable. Though the overvaluation of the CFA franc prior to the devaluation might have made Benin unattractive to some foreign investors, the contents of "cahiers de charge" for several privatization experiences also reveal several non-economic concerns from the government that may have discouraged prospective investors. In other cases, the firms in question were of limited economic weight, if not altogether closed. Two firms, the Save Sugar Company (SSS), which is not operating, and the Onigbolo Cement Company (SCO), are jointly owned with the Government of Nigeria, and, though agreements as to the form of  -6- privatizations were declared to have been reached, political events in Nigeria effectively prevented their actual implementation. 22. Trade policy. Trade reform was to be introduced in two phases. In a first phase, undertaken in 1990 and 1991 as part of prior actions of SAL II, the government adopted a simplified taxation structure of imports, the elimination of remaining import licensing requirements and various measures aimed at strengthening customs and tax administration. 23. The second phase, which was implemented in early 1994, included the adoption of a simplified rate structure, coupled with a reduction of the maximum rate from 63 percent to 20 percent, and the elimination of reference values and their replacement by the full CIF value of goods as the basis for tariff assessment. The trade regime of Benin has become one of the most liberal in the region. 24. Private sector and incentive structure. The overall policy stance regarding private sector development depends on the macroeconomic environment, the legal framework and the performance of the judicial system, the taxation and trade regime, private sector promotion efforts, financial sector reform, privatization as an element of the business climate, and discriminatory treatment in law and government practices. 25. As noted above, the stabilization of the Beninese macroeconomy has been successful under the two consecutive SALs. Thus, a key necessary condition for private sector growth has been achieved under the program. 26. On the legal framnework and the performance of the judicial system, evidence, primarily from judgments of market participants, indicates that there are important deficiencies in the system. Possibly the clearest evidence is pointed out above in the section on loan recovery efforts. 27. As part of the overall reform program, investment, labor and commerce codes had been revised by the government under SAL I but they contained several inadequate provisions, with an anti-private sector bias and public sector emphasis inherited from the previous administration. It was agreed under SAL II that these revisions to the codes would be reviewed. The revision of the labor code has only recently been completed. A new investment code was still being reviewed in mid-1995. Finally, little progress on price controls was achieved under SAL II. Many price controls had been removed before and as part of SAL I. In May 1991, controls on six products were removed. The continuation of remaining price controls was initially to be reexamined but this reexamination did not take place under SAL II. These price controls and other government pricing decisions are small in number but some are arguably important - cement, rice, petroleum products, bread, milk, school supplies, public utility tariffs. The adoption of a new public procurement code followed a path roughly similar to that of the labor  -7- and investment codes. After several revisions, a new code was approved by the government in January 1994 but has since awaited approval by Parliament. These measures have been incorporated into SAL III (see below). 28. Private formal activity still faces significant hurdles in Benin. Practices to open a new business are cumbersome and susceptible to politicization. Public sector preference and governmental attitudes toward private sector are also revealed through individual practices of discrimination, either in the application of existing laws, tax codes and other regulations, or through direct interventions of government actors in private investment decisions. There were several attempts at creating vehicles for private sector promotion during SAL II, most of which were limited in scope. The government initiated a broad-based discussion on private sector issues by gathering stakeholders, i.e. private sector representatives, donors, and government at a Roundtable at the end of 1994 to identify key policy measures and new initiatives. 29. Social dimension of adjustment (SDA). The SDA component of the program originally contained two parts: a long-term, institution-building component, in the context of a proposed IDA-financed Economic Management project, and a short-term, social spending component, the "Programme d'Urgence". The institution-building component aimed at: (i) developing the capacity of government and non-government institutions to identify, analyze and understand poverty issues and to design effective programs to deal with them; (ii) undertaking some actions, such as a labor-intensive public works program; and (iii) setting a comprehensive policy framework in which donors, government and other stakeholders - including beneficiaries themselves - would be able to coordinate, design and improve such programs. An important step in this process was the organization of the Donor roundtable in Geneva in April 1992. Initial achievements included the creation of dedicated public agencies or commissions and their representation in existing economic policy making structures, the training of their staff and the design of an overall SDA strategy. A health services program and a few other initiatives were also undertaken. The Economic Management project which was aimed at supporting institutional development did not take off as a result of various disagreements between government and the Bank, and was eventually restructured in 1995. To the extent that precise objectives were not formally spelled out, it is difficult to assess the degree to which SAL 11 effectively achieved them. 30. In 1990, discussions started between the Bank, UNDP and the government on the setting up of a program to address critical problems of social and educational infrastructure which had been inherited from the economic and political crisis that preceded SAL II. Normal channels of external assistance and public investment were deemed inadequate to address these critical needs in the required form, and a "Programme d'Urgence" was set up. After its launching in late 1990, several problems emerged, in particular in the form under which the program would be managed and in the availability of information required to design the preliminary components of the program. After 18 months of discussions, the program effectively started in March 1992. The  -8 - program, which was still active in 1994, was plagued by numerous difficulties, including misunderstanding on the part of the Beninese administration as to the nature of projects to be undertaken, limited monitoring capability and slow Bank procedures to approve projects. Only about CFA franc 3 billion of financing (or less than 1 percent of the overall public investment program over the period) was carried out under the "Programme d'Urgence", mainly for the rehabilitation of schools and community health centers, and the purchase of equipment and vehicles for these centers. 31. Education policy. As in the SDA component of the program, education policy objectives were not quantified or formally articulated in the design of the operation. SAL II generally supported education objectives through requirements as to budgetary allocations for education, including higher allocations for non-wage expenditures and limits on university scholarships which were disproportionately consuming financial resources to education, and the reorganization of the Education Ministry following its organizational audit. These measures were seen as laying the ground for a more thorough reformn through another IDA-financed education sector adjustment operation. In the event, this operation did not take place as planned and was later replaced by an Education Development project which was signed in June 1994 and became effective in July 1995. Therefore, limited achievements were recorded in education policy outcomes as a result of SAL II per se. C. BANK AND BORROWER PERFORMANCE Bank performance 32. The design of SAL II was largely drawn from SAL I, in recognition of the fact that most reforms undertaken under the first program had not been completed and would need to be sustained. Though additions to the basic design of SAL I were few, the new adjustment operation was very broad, covering a range of detailed reform issues. As a result, the program lacked focus and was possibly too detailed. The program included two sets of 15 conditions for tranche release, ranging from very specific actions to broad policy reforms. In retrospect, some actions were probably too specific, especially concerning the public enterprise reform process. As a result, one of the central objectives of the adjustment program, the improvement in the economic environment for private activity, was eclipsed by a narrow focus on public sector concerns. 33. The program was based mostly on the operational experience of government and Bank staff, not on recent pieces of economic and institutional analyses that had been discussed and shared with government and stakeholders at large. Indeed several studies were undertaken as part of the initial phase of the program itself. When the quality or relevance of some of these studies was found to be inadequate, as in the case of the petroleum distribution sector study or the competitiveness study, implementation of reforms had to be postponed.  -9- 34. Supervision missions were adequate and timely. Progress issues, especially concerning the status of compliance with tranche release conditions, were readily and clearly identified and reported in aide-memoires. In several instances, however, the Bank was slow in providing agree(d response or feedback. 35. Donor coordination was satisfactory at the early stages of the program but, according to donor representatives, deteriorated at a later stage. However, coordination issues with respect to implementation of SAL II per se were limited. Borrower performance 36. The inter-ministerial Commission Nationale de Suivi de l'Application du Program d'Ajustement Structurel (CNSAPAS), established in 1989, continued under SAL II to oversee implementation and to monitor progress. Detailed progress reports were submitted to the Bank on a regular basis. 37. The program encountered most difficulties with respect to compliance with conditions of tranche release. As a result, the second tranche was released 14 months, and the third tranche almost two years, behind intended schedule. 38. Waivers were eventually requested and granted for four of these conditions. In three cases, further expected delays in parliamentary approval were taken to justify the granting of the request for waivers. In addition, several conditions were considered fulfilled or substantially fulfilled even when limited progress was accomplished toward the objectives they were intended to achieve (e.g. civil service reduction and organizational audits, specific measures for the recovery of loans, action plan for SCO, insurance regulation, implementation of annual portions of public investment rolling plan, privatization strategy for palm products parastatals). 39. The slowness of Parliament to give priority to some issues considered crucial by the executive branch was often a major obstacle to the actions of the government. However, many of these difficulties raise issues of government commitment to the overall reform program in the face of expected or actual social or political opposition. When political opposition or administrative bottlenecks became apparent, the government did not respond by devoting more resources where they were needed, by seeking alternative routes to effect new reforms or by stepping up efforts to achieve consensus on the continuation of the reform program. D. SUSTAINABILITY, ASSESSMENT OF OUTCOME AND LESSONS LEARNED 40. Assessment of outcome. In many policy areas, objectives were met or exceeded. Overall, the performance of the operation was satisfactory.  - 10- 41. Macroeconomic outcomes, in terms of growth, stability, inflation and external balance, were largely successful, especially compared to other countries in the sub-region and given the constraint of an overvalued exchange rate. However, even if these objectives may have seemed ambitious at the onset, an average real growth per capita of 1 percent per year is too low to significantly increase overall welfare. The CFA franc devaluation of January 1994 has removed an important disincentive to private investment. Given its past record of reform, Benin stands to gain much from the devaluation, if it manages to sustain the degree of real depreciation and removes remaining hurdles to private activity and investment. Monetary events in 1994 also illustrate potential problems in the control of inflation and the interaction of external, fiscal and monetary developments. Other structural weaknesses remain. The fundamental budget deficit is still large, especially when account is taken of public enterprise borrowing. External balance remains fragile, as exports earnings are highly concentrated and foreign capital is still largely public. Indeed, the Benin export sector has become more concentrated as a result of the success of cotton and the decline of the small crude oil sector. 42. In the area of public enterprise reform, much remains to be done. The effective degree of disengagement from productive activities by the state is often exaggerated by the number of enterprises that were liquidated or privatized over the last decade. A substantial public enterprise sector still remains, operating in sectors as diverse as transport, agro-business, communications, infrastructure, finance and energy. Although the size of the PE portfolio has dramatically declined in terms of numbers of enterprises from 1988 to 1994, it has only been reduced by about a fifth on the basis of the economic weight of PE's. The efficiency of the economy, and its attractiveness to private investors, would be strongly enhanced by an acceleration of the PE reform program. 43. Much remains to be done also in the area of civil service and administrative reform. An overall public sector strategy is still lacking. A significant reduction of 6,000 permanent positions in the civil service has been achieved from 1988 to 1994 but it was considerably smaller that the large expansion that took place from 1979 to 1986, when the civil force more than doubled. The fact that significant deficiencies in qualified personnel may exist in some sectors of the administration should not detract attention from the fact that other sectors may be overstaffed, or that the role of the state has to be revised and may be considerably reduced in yet other sectors. The Beninese administration also needs to pursue additional reforms to become an efficient provider of core public services. Planning capacity on a sound economic basis remains weak. The process of allocating limited budgetary resources to social and economic priorities needs to be improved. 44. Finally, policy makers need to continue efforts to support and promote private sector development. Progress in taxation and the trade regime, in macroeconomic stability, in the quality of financial intermediation, as well as in deregulation, the provision of infrastructure and  privatization will not lead to the dramatic increase in private investment that is required to achieve rapid growth unless the overall policy environment is perceived by the private sector to be conducive to long-term investment in productive activities. 45. Sustainability. Given the record of achievement in various parts of the reforn program, the prospects for sustainability of SAL II are positive. The successful maintenance of a reasonable degree of fiscal discipline makes a dramatic shift unlikely. The same is true of trade policy, domestic taxation and deregulation, even if past achievements need to be consolidated. Although much remains to be done in the areas of public enterprise and public administration reform, the direction of previous adjustment operations has not been challenged and the Third Structural Adjustment Program contains several measures to address these issues (see Para. 47 below). Overall, the achievements under SAL II are considered sustainable. 46. Lessons learned. Key lessons learned from SAL II are: (i) Adjustment operations extending over a three year period with an emphasis on macroeconomic stabilization may be of limited effectiveness for institutional reform given the short time frame in which they are generally set. To the extent that institutional reforms require a well-defined long-term strategy, a deep understanding of existing institutional structures and broad-based ownership from stakeholders, they raise issues that cannot properly be addressed in a short-term, policy-oriented operation. (ii) Even at the microlevel, well articulated reform strategies should precede plans and their implementation. The civil service reduction program during the two SALs in Benin is a case in point. Without the benefit of a clearly defined strategy, this program failed to achieve its intended objectives, yet was largely perceived as socially costly and created staffing problems in several ministries. (iii) More attention needs to be given to both achieving and maintaining a broad consensus on the reform program, especially in a new democratic environment. When initial support which was closely linked to Benin's political transition waned, inadequate attention was given to public information and debate on the need for further economic reform. Furthermore, the role of democratic institutions needs to be understood and the implication of this role on the timing and process of reform adoption needs to be recognized. Reform programs may slow down while governments learn to manage the new policy processes required in a democracy. In support thereof, information dissemination and training ought to be made available to the various actors.  - 12- (iv) The SAL I lesson that "firmness on the part of donors when a program has gone off track can contribute to the emergence of a better basis for program implementation" also applies to SAL II where the pace of reforms was considerably slower than envisaged. No credit tranche in either SAL was released without a request for waivers. While each specific waiver was clearly justified, the repeated recourse to waivers may undermine the resolve of the Government to devote the required attention and resources to completing difficult reforms. 47. SAL III. Adjustment efforts are being pursued in a Third Structural Adjustment Program, supported in part by an IDA Adjustment Credit (Cr. 2727-BEN). Its main objectives are to strengthen the supply response to the devaluation of the CFA franc and consolidate reforms initiated under SAL I and II in two main areas. First, it will support improved incentives for private sector development through further simplification and rationalization of foreign trade taxation, a deeper restructuring of domestic indirect and direct taxation, additional changes in the regulations governing commercial activity, investment and the labor market, and public enterprise divestiture. Second, it will support improved management of public resources and delivery of public services by restructuring current expenditures, improving public investment programming and execution, and reorganizing key ministries. This adjustment operation has taken into account lessons learned from SAL I and II in several respects. It has narrowed down the scope of the reform program, encouraged government to undertake various public information initiatives, and made tranche release conditions smaller in number and more clearly defined. Though the focus on institutional reform is reinforced, the actual implementation of specific measures will be carried out under parallel projects and supported by additional economic and sector work. A key component of these efforts will be the Economic Management Support Project (PAGE, Projet d'Appui a la Gestion Economique) which aims to strengthen management and planning in key economic and sector ministries.  - 13 - IMPLEMENTATION COMPLETION REPORT REPUBLIC OF BENIN SECOND STRUCTURAL ADJUSTMENT PROGRAM CREDIT 2283-BEN PART II: STATISTICAL ANNEXES Table 1: Summary of Assessment Table 2: Related Bank Credits Table 3: Project Timetable Table 4: Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Program Indicators Table 6: Studies Included in Project Table 7: Status of Compliance with Conditions for Tranche Release Table 8: Bank Resources: Staff Inputs Table 9: Bank Resources: Missions  -14- Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial I Negligible Not applicable Macro Policies I/ Sector Policies I Financial Objectives / Institutional Development Physical Objectives I' Poverty Reduction I Gender Issues