Senegal - Second Terres Neuves Resettlement and Eastern Senegal Technical Assistance Project

FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1627a-SE REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR A RESETTLEMENT AND TECHNICAL ASSISTANCE PROJECT June 23, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CJRRENCT EQUIVALENTS Currency Unit - CFA Franc (CFAF) EXCHANGE RATES Currency Usnit Off icial loating (as of December 31. 1974) US$1 CFA? 230.21 CFAF 225.oo CFPA 1,000 US$4.20 US$.4.u CPAP 1,000,000 US$44,200 US$4W444 The CFA F'ranc ij officially valued at the equivalent of FF 0.02. As the French franc i3 now floating relative to the US dollar, the US dollar/ CFAF exchange rate is subject to chance, The eaxchange rate on December 31, 1974 of US$1 - CFAF 225 was retained for conv9rsions made in this report, FISCAL' YR July 1 - June 30  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR THE TERRES NEUVES II RESETTLEMENT AND EASTERN SENEGAL TECHNICAL ASSISTANCE PROJECT 1. I submit the following report and recommendation on a proposed dev- elopment credit to the Republic of Senegal for the equivalent of US$2.0 mil- lion to help finance a resettlement and technical assistance project that is a follow-up to credit 254-SE of June 18, 1971. The credit would be on standard IDA terms. PART I: THE ECONOMY 2. A report entitled "The Economy of Senegal" (212-SE) was distributed to the Executive Directors on September 10, 1973. Country data appear in Annex I. Past Development 3. During the 1960s, the Senegalese economy experienced virtual stagna- tion, as real output increased less rapidly than population, and per capita GNP declined. Two factors were responsible for this situation. First, with Independence, Senegal lost its privileged position as the center of French West Africa and therefore had to adjust to reduced economic, administrative, and political dimensions. Secondly, the difficulties of adaptation to the new situation were compounded in the latter part of the decade when ground- nut production fell by 50 percent due to unfavorable weather and falling export prices. In 1971, a combination of several favorable factors includ- ing the recovery of weather conditions, increased incentives for rural pro- duction, promising results of rural diversification, and a successful drive to promote industrial exports seemed to mark the beginning of a period of considerably higher growth. As it turned out, the economic upturn was brief, as 1972 brought the Sahel's most severe drought in this century. 4. In 1972, agricultural and livestock production fell by more than 25 percent, setting back the standard of living of the rural population (representing 70 percent of the total) below the level reached in the early 1960s. Food emergency operations helped avoid widespread starvation, but notwithstanding this aid, both the fiscal and balance of payments situations sharply deteriorated in 1973 and early 1974. 5. During 1973, the balance of payments situation was characterized by substantial reserve losses. At the end of the year, total net reserves stood at minus US$31 million, the lowest level since Independence. The main underlying factors in 1973 were a sharp drop in groundnut production and exports (somewhat mitigated by exceptionally high world market prices) and  -2- a continued increase in imports, mainly of foodstuffs. Even unusually high aid inflows, including substantial food aid, were not sufficient to finance the deteriorating trade balance. In 1974, both imports and exports (goods and non-factor services) increased markedly, by an estimated 45 and 73 percent respectively, following rapidly rising prices and slightly higher quantities of Senegal's major exports (groundnuts, phosphate and petroleum products) and imports (food, petroleum and general imports). The more rapid climb in exports resulted in a narrowing of the goods and non-factor services deficit from an all-time high of US$88 million in 1973 to an estimated US$35 million in 1974, which is about a normal figure for Senegal. Net private capital outflows increased, however, to an exceptionally high figure of US$33 million. This was largely due to: i. an increase in trade credits to finance exports; ii. accelerated repayments of private foreign debts; and iii. repatriation of equity capital after Government increased its ownership of a number of foreign-owned corporations. The phosphate mining company Taiba (in which Government increased its owner- ship from 3% to 50%) alone transferred US$52 million on these accounts. Net foreign reserves dropped further to a level of minus US$44 million at the end of 1974. The worsening external position of Senegal obliged monetary authori- ties to draw in December 1974 the US$5.8 million gold tranche with the IMF, and in January 1975 the country's full US$19.2 million allocation under the IMF oil facility. 6. During 1972 and 1973, under the impact of the drought, public fin- ances also took a serious turn for the worse. Public savings net of amortiza- tion, which had substantially improved during the preceding years, were all but wiped out in 1972/73 and 1973/74. Revenues were affected by the decline in economic activity. Recurrent expenditures were further increased by a rise in salaries to compensate for the rapidly increasing cost of living, substantially higher debt service payments and perhaps most importantly, heavy consumer sub- sidies which resulted from maintaining low domestic prices in the face of skyrocketing food import prices. Thus, at mid-1974, :Ln spite of a US$46 million higher transfer to the stabilization fund from groundnut sales than the pre- vious year, the public finance situation was more difficult than it had been since 1960. Prospects 7. Weather conditions will remain critical to Senegal's growth prospects. But with the rapid development of irrigated agriculture which started in the 1960s, the agricultural development of areas less affected by rainfall fluctuations (Casamance, Eastern Senegal) and substantial gains in industry, tourism and fisheries, by 1980 weather conditions should be a less decisive factor than today. The Fourth Development Plan (1973/74-1976/77) continues to give highest priority to rural development (36 percent of the total), housing/public utilities (18 percent) and transport infrastructure (16 percent). Industry and tourism, quite  -3- justifiably, see their share increase from 5 to 10 percent of the total. Assuming average rainfall conditions, Senegal's growth in real terms in the remainder of the 1970s will be of the order of 4.5 percent or about 2 percent per capita, which is still a considerable improvement over the past decade. 8. The balance of payments will continue to be under pressure during 1975, and will remain weak in the medium-term. In 1975, the effects of the good 1974/75 harvest will be largely offset by the expected deterioration in the terms of trade, due to a 20 to 25 percent fall in groundnut prices. This may lead to a further fall in reserves of about US$15 million during the year. For the period 1976-78, it is estimated that the terms of trade index for Senegal will continue to fall, mainly as a result of an expected drop in phosphate prices. Therefore, as no major increase in the export volume is anticipated, Senegal's exports are expected to stagnate in the coming years. After 1978, a new phosphate mine is planned to come into production, while phosphate prices are expected to resume their upward trend. These prospects combined with a favorable long-term outlook for groundnut production could result in a healthier balance of payments position towards the end of the seventies. 9. Faced with the difficult situation in public finance, the Governme.7t took a number of steps in November 1974 which are expected to put public finances on a sounder footing. Consumer prices for rice, sugar, and groundnut oil were raised to bring them more closely in line with world market prices. Thus, the rice subsidy was completely eliminated (an increase of 70 percent in the consumer price), the price of sugar was increased by 90 percent (leav- ing a subsidy of about 20 percent) and that of groundnut oil was raised by 43 percent (leaving a subsidy of about 20 percent). However, high world market prices for wheat required an increase in domestic flour prices which the Government is reluctant to pass on to the consumer and which may lead to a subsidy on bread. At the same time, when subsidies were reduced, Government salaries were raised by 16 percent on the average, but ranging from 60 percent for the lower salaries to 3 percent for the higher salaries, to compensate for the rapid increase in basic food prices. Following the five-fold increase in world market phosphate prices and the revision of the tax agreement between the Government and the major phosphate mining company in the country, Government revenues from this sector will be considerably increased in the coming years. However, the good 1974/75 harvest is unlikely to augment Government revenues because of the drop in groundnut prices. These developments are expected to raise net public savings after debt service from the low level of about US$5 million in FY75 to about US$35 million in FY76. 10. During FY75 the increased domestic resources available to finance public investment will be mostly absorbed by payments for the Government's purchase of a 50 percent interest in the phosphate mining enterprise, which is the main source of future additional income. In the following years through 1980, projected trends in revenue and expenditure should permit the generation of investable surpluses (after foreign debt service), equivalent to 20-25 percent of public investment, assuming the public development program  grows only slightly faster than the overall economy. Yet, there is considerable scope to expand the development effort and to raise the share of public invest- ment above its historically low level of 5-6 percent of GDP. Moreover, while the improvement in domestic resource mobilization will ease the balance of payments situation - particularly import demand - moderately, it will not be enough to restore overall equilibrium in the medium-term. Given our assump- tions on gross capital inflows, an annual overall gap in the balance of payments averaging US$25 millLon a year will emerge in the years 1976/78. Part of this gap could probabLy be financed through access to the IMF facilities including the second oil facility, but additional foreign exchange resources will still be needed. In sum, Senegal has taken important and commendable steps to rationalize the structure of domestic consumer and producer prices, and mobilize additional public savings. Yet, the economy remains vulnerable because of its negative reserves, the volatility of world market conditions for groundnuts, and the risks of drought. In view of these factors, external lenders should be prepared to finance not only all foreign exchange costs but also a high proportion of local costs of high priority projects, particularly those which have a low foreign exchange component. Creditworthiness 11. The terms of foreign aid to Senegal have been progressively harden- ing over the years. The proportion of grant aid declined from 85 percent in the mid-sixties to 50 percent in FY72. Faced with a severe shortage of public savings, the Government borrowed heavily on the Eurodollar market in the past two years, in order to avoid a slowdown in public investments and to finance acquisitions and participations by the public sector. Starting in FY74, this led to a substantial increase in the public debt service which is expected to absorb about 70 percent of public savings in FY75. This ratio should decrease again in the coming years, following the marked improvement expected in the public finance situation. Senegal's external debt service is still very low, at about 5-6 percent of export revenues. But because of low foreign exchange reserves and heavy dependence on one crop, Senegal will have to remain prudent in its public debt management. Indeed, further borrowing at commercial terms during the years 1976 to 1978 would probably increase the ratio of debt service to export earnings to about 7 percent and if the expected improvement in terms of trade does not occur after 1978, the ratio would increase to above 10 percent by the end of the decade. This suggests that foreign aid should continue to be given on highly concessionary terms. PART II: BANK GROUP OPERATIONS IN SENEGAL 12. The Bank Group has had 22 operations in Senegal to date. Total lending amounts to US$114 million (net of cancellations), including thirteen IDA credits, four Bank loans, two blends of Bank and IDA funds, two IFC opera- tions, and one blend of Bank and IFC funds. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of May 31, 1975 and notes on the execution of ongoing projects.  - 5 - 13. Execution of these projects, apart from the Railway Project and the Site and Services Project, is moving forward without exceptional delays. The procurement for the railway has been slow due to time consuming contract approval procedures, but most project components have now been received or ordered. The Site and Services Project is about one year behind schedule, although physical execution is now progressing satisfactorily. Terracing of the first sub-site for Dakar was finished in November 1974 with an unexpected cost reduction. The Bank Group and Senegal held discussions recently on delays in reorganizing the executing agency, Office des Habitations a Loyer Modere (OHLM), and in implementing Government's commitment to reorient its housing policy in favor of lower income groups. Some of the agricultural projects, such as the First Terres Neuves Project and the Casamance Rice Pro- ject, were hampered by delays in receiving the Government's counterpart contribution; however, owing to efforts of the project authorities, physical implementation of these projects is proceeding generally according to schedule. Two agricultural credits (140-SE and 404-SE, para 21) provided for technical assistance designed to facilitate the reorganization of the Office National de Cooperation et d'Assistance au Developpement (ONCAD); while this program failed to achieve meaningful results for some time, the Government recently took a number of steps to strengthen ONCAD's management and financial operations (see Annex II) and continues to consult with IDA on further measures to be taken. 14. In view of Senegal's need for substantially higher capital inflows, the scale of Bank Group lending is expected to increase significantly in the future. The Bank Group share of foreign aid disbursements (including grants) is expected to increase from about 6 percent in 1970-71 to 24 percent over the 1974-80 period. By then the Bank Group is likely to be the largest aid donor. This will increase the Bank Group's share of the outstanding and disbursed debt from 12 percent at the end of 1973 to about 25 percent by 1980. IBRD/IDA share in public debt service will probably go up from 2.2 percent in 1973 to about 13 percent by 1980. 15. The objectives of Bank Group project lending in Senegal fall under four main headings. Priority will continue to be rural development, including development of irrigation in the Senegal River Valley Region (e.g., the Debi- Lampsar engineering credit recently signed), intensification of groundnut production and diversification into new crops and new regions (e.g., the Sine Saloum project recently signed and the proposed Eastern Senegal Livestock Project, a proposed second stage of credit 252-SE in Casamance and the project described in this report). As in the past, our agricultural lending is expected to exceed one-third of the total. Secondly, we shall assist diversification of the economy by lending for the growing sectors of tourism and industry (e.g., the proposed tourism infrastructure project on the Petite Cote and a possible Ship Repair Project, based on studies financed under Loan S-3SE, since these latter studies were undertaken, the market prospects for such a project have been considerably altered by virtue of changes in the pattern of international oil consumption, reopening and possible enlargement of the Suez Canal and other developments affecting the number and size of ships that will require repair  - 6 - facilities of the type envisaged -- these market prospects are now being reviewed). Thirdly, we shall continue investment for modernizing and expanding the country's infrastructure (e.g., two proposed highway projects and a proposed fishing wharf at Dakar Port). Finally we shall continue lending to reorient and expand the country's education system, as in the Second Education Project. PART III - THE AGRICULTURAL SECTOR 16. Agriculture plays a central role in Senegal's economy, employing over 70 percent of the total labor force. Although it contributed only 38 percent of GDP in 1974, the sector's leverage on the economy is and will remain considerable through its impact on exports and its purchasing power for locally-produced goods and services. Groundnuts and millet are the country's main agricultural products, and groundnuts are the country's princi- pal export. During the last four years, groundnuts have comprised between 35 and 55 percent of total exports and generated about 60 percent of value-added in the agricultural sector. Millet continues to be the staple food grain although rice and wheat consumption are increasing rapidly, particularly in urban areas. Since 1968 Senegal has suffered from a series of severe droughts and in 1968, 1970 and 1972 abnormally large food imports were needed to meet demand. The 1972 drought was the worst and during it agricultural and live- stock production fell by more than 25 percent. Weather has been better in the last two years, but even in years of normal rainfall, domestic agricultural production meets only about 60 percent of the country's food requirements, and food imports absorb 15-20 percent of total export earnings. 17. A Bank Group sector mission visited Senegal in 1974 to assist the Government in assessing the relative merits of its various agricultural development options. The mission pointed out that scope for significant in- creases in productivity and for developing a small farm structure capable of generating acceptable incomes existed through harnessing the country's water resources, primarily the Senegal River Valley, but also those of the Casamance Region. However, the development of irrigation potential in Casamance and the Senegal River Basin would not affect the Groundnut Basin and other areas of the country which must continue to rely on rainfed agriculture and in which the bulk of the population lives. For these areas, the sector mission con- cluded that, by adopting currently available technology, incomes from a typical rainfed farm can be increased by about 30 percent. Even with this increase, farmer incomes and standards of living will remain low by any criteria. 18. Small-scale rainfed farming accounts for 95 percent of production. There is a limited though increasing amount of irrigated development in the Delta of the Senegal River and in the Casamance Region and commercial farming is restricted to a few vegetable-growing operations and a large sugar cane plantation in the Delta. The small farm sector consists of about 360,000 farms, most of which range in size from 3 to 10 hectares. The cropping pat- tern is very similar throughout the country, with millet/sorghum and ground- nuts each occupying about half of the cropped area. Simple animal-drawn  equipment is widely used and there is virtually no mechanized farming. Per capita annual incomes from a typical farm average about US$85. Rural incomes are significantly lower in the undeveloped areas of the Senegal River Valley, the northern area of the Groundnut Basin and in the relatively undeveloped area of Eastern Senegal. The use of improved seeds, fertilizers and pesticides is slowly expanding assisted by government subsidies, but despite this, pro- duction remains low because of poor soils and erratic rainfall and the country is increasingly unable to feed its growing urban population. Imports of cereals have amounted to 400,000 to 440,000 tons in recent years, of which 150,000 to 200,000 tons have been rice. 19. Agricultural development potentials and population densities differ between regions. In much of the north and east of the country, climatic con- ditions are suitable only for extensive livestock production. The Senegal River Valley has potential for irrigation development, but requires the con- struction of major infrastructure to regulate the river. The bulk of the rural population is concentrated within about 100 miles of Dakar in the heavily populated Groundnut Basin where population densities vary from 20 to SO/km . In this area the combination of population pressure, poor soils, and low rainfall makes the potential for increasing production and incomes limited. The potential for increasing and diversifying crop production is greater to the south and southeast where rainfall is higher and more reliable. Yet even in these areas, soils are generally shallow and pcor, and the presence of river blindness puts a limitation on the population in the area. 20. In the years immediately following Independence, Government assigned low priority to the agriculture sector in allocating public investment and recurrent expenditures. Since then, however, increasing priority has been given to agriculture. Thus while only 4-6 percent of the current budget now goes to agriculture, the sector's share of the investment budget has increased steadily and currently amounts to between 20 and 25 percent. In November 1974 Government raised the producer prices for groundnuts (by 40 percent), millet and sorghum (7 percent), rice (20 percent) and cotton (55 percent) as incen- tives to their increased production. The consumer subsidy for imported rice (which cost the Government about US$30 million in 1973/74) was abolished at the same time. These actions illustrate Government's determination to increase domestic production and reduce reliance on imports of food. 21. Credit 404-SE provides for annual consultations between IDA and the Government on the level of fertilizer subsidies. A consultation was held in April 1975 during negotiations of the Sine Saloum Project. The Government confirmed that its policy was to raise progressively prices for fertilizers to market levels as a means of ensuring their efficient use. An agreement was reached that consultations between the Government and the Bank would be held in October/November of each year to discuss the price for the following campaign.  -8- 22. Two Bank Group projects (140-SE, 404-SE) have provided medium-term credit through the National Development Bank of Senegal to help farmers pur- chase draft animals, animal-drawn equipment and fertilizer. In May 1975 the Bank Group approved a project for Sine Saloum, the southern part of the Ground- nut Basin, to diversify and improve farm practices. The First Terres Neuves Project (254-SE) was a pilot scheme to test the feasibility of settling farmers in the southeast of the country where climatic conditions are more favorable than in the Groundnut Basin. The project proposed in this report would build on the experience gained during the implementation of the first project, and would provide for the continuation of the resettlement and for a plan covering the period 1980-85 to develop the rural sector of eastern Senegal with a view to ensure that settlers, established farmers and livestock owners make full use of the region's relatively reliable rainfall. In the interim, the Govern- ment has asked for financial assistance from the Bank Group over the period 1975-80 for a livestock development project in Eastern Senegal that was pre- pared under a Bank executed UNDP technical assistance project. A Bank mission visited Senegal to appraise this project in May-June 1975. 23. The Casamance Project (252-SE) is improving extension and credit services to 5,000 farmers in order to expand rice cultivation by 12,000 ha. Government has indicated its desire to expand the scope of this successful project and a follow-up project will be appraised later this year. The Bank Group has also assisted the private sector by financing through IFC a fertili- zer factory (SIES), and a small irrigated truck farmer operation producing vegetables for the export market (BUD Senegal). 24. Regulation of the Senegal River in order to permit irrigated develop- ment is being sought jointly by Senegal, Mauritania and Mali within the Organi- zation for the Development of the Senegal River Basin (OMVS). OMVS, helped by UNDP, has prepared an ambitious, long-range development program that ulti- mately could permit development of year-round irrigation on 430,000 ha along the river of which about 220,000 ha would be in Senegal. The program would also include power generation and improvement of navigation on the river. Two potential regulatory dams have been studied by OMVS: a multipurpose dam at Manantali, Mali, and the Delta Dam at Diama, Senegal. Although some parts of the OMVS program as recently conceived may be overly ambitious, the over- all concept is sound and obviously of very high priority, and the Bank has been actively reviewing with other donors the merits and feasibility of the entire program since July 1974. Planning for irrigation projects is already starting, and IDA approved the Debi-Lampsar Irrigation Engineering Project in April 1975. It will provide engineering and related studies for 5,000 ha of double-cropping, using waters during the dry season from the Diama reservoir as soon as the dam becomes operational, as now planned, in about 1980.  -9- PART IV: THE PROJECT 25. In 1969, the Government of Senegal asked IDA to help finance a reset- tlement project providing for the migration of 1,000 families from heavily pop- ulated areas of Senegal's Groundnut Basin to less populated areas of Eastern Senegal. Following appraisal of the project in 1970, the Government and IDA agreed in 1971 under Credit 254-SE (US$1.3 million) to implement a pilot re- settlement scheme, involving some 300 settler families, and to prepare a larger second phase project. 26. The pilot project has shown that resettlement can be viable and in June 1974, the Government proposed to the Association a second phase project involving the resettlement of 2,000 families. However, the appraisal mission found from reconnaissance soil surveys and information supplied by the consul- tants, that there was insufficient vacant land in Eastern Senegal with suitable soils for settlement on the scale envisaged by the Government. Moreover, in the future, vacant land is most likely to be found in scattered pockets near existing villages. Spot checks made by the Ministry of Health revealed also that 20 to 60 percent of the established populations near some of the sites proposed for new settlements have symptoms of onchocerciasis (river blindness). Thus, ti.e Association could only recommend further settlement by at most 600 families in the vicinity of the pilot project area which is safe for resettlement. 27. In July 1974, an IDA mission appraised the project. Negotiations were held in Washington from May 27 to June 2, 1975. The Senegalese delegation was led by Mr. Sih Sarr, Director of Financing of the Plan, Ministry of Planning and Cooperation. 28. An appraisal report No. 685a-SE is being circulated separately to the Executive Directors. Annex III provides a credit and project summary, and the attached maps (IBRD 3110R and 11273) show the project area. The Project Area 29. The project area covers the administrative region of Eastern Senegal comprising about 60,000 km2, of which 30,000 km2 have been set aside for national forests and the large national park of Niokolo Koba. A good and relatively reliable rainfall ranging from 600 mm to 1,500 mm, and a small pop- ulation totalling some 200,000 rural inhabitants are the region's main positive features; a lack of infrastructure, poor soils and the incidence of river blind- ness are its principal drawbacks. Poor water supplies for human and animal consumption have been a major obstacle to voluntary migration of farmers and to cattle-raising. Eastern Senegal's 35,000 farms produce 40 percent of Senegal's cotton and support cattle herds numbering some 300,000 head.  - 10 - Project Description 30. The project would continue settlement in an area of some 900 km in and adjacent to the pilot project area, and prepare a master plan for the region, including investment proposals for an integrated regional agricultural develop- ment project. The resettlement component would make full use of the infra- structure constructed for the pilot project, and test variations of settlement techniques that would be appropriate for future resettlement activities. The master plan would provide the basis for investment proposals for a project to commence in about 1980 when Government's ongoing and planned projects are due to terminate. This plan would determine the prospects for continuing resettle- ment in Eastern Senegal, and ensure that established farmers and livestock owners make the best use of the region's relatively good rainfall. 31. During the four-year implementation period 1976-79, the project would: (a) establish nine new villages for 450 settler families, and install 150 families in existing villages; (b) construct eight settlement officer houses, nine stores, 12 classrooms, 76 km of village access tracks, and 25 km of secondary roads; (c) construct nine wells for new villages and rehabili- tate about 15 wells for existing villages accepting settlers; (d) provide settlers with tools and grants for manual land clearing, subsistence allowances, and credit facilities for agricultural inputs and mechanical land clearing; (e) provide farm extension services; and (f) provide the staff and consultant services required to prepare a regional plan, and investment proposals for the development of the agricultural sector in Eastern Senegal. Resettlement Component 32. Resettlement would follow most of the arrangements established by the pilot scheme, with three important exceptions. First, 150 families would be settled in existing villages to test whether this could be a satisfactory method of settlement for the future that could make use of the small but scattered pockets of vacant land (paragraph 26). Second, to reduce costs and ensure that settlers contribute fully to the development of their holdings, the project would encourage settlers to clear their holdings entirely by hand or to repay the  - 11 - cost of mechanical clearing instead of each receiving 2 ha of land mechanically cleared free of charge -- the practice established by the pilot scheme. Finally, to encourage the removal of stumps and roots, a requirement for promoting improved cultivation techniques and land use, settlers would be allocated 4 ha of land on installation and the balance of their 10 ha holdings only as their land is properly cleared. Organization and Management 33. Government is planning to establish a regional development agency for Eastern Senegal, but has not finalized its plans for the agency nor decided the future roles of Societe des Terres Neuves (STN) and Societe pour le Develop- pement des Fibres Textiles (SODEFITEX) in the region. However, as STN will continue to be responsible for resettlement, it would have primary responsibility for implementing the project. As for the pilot project, STN would recruit and transport settlers; install settlers in new and existing villages; provide tools and payments for land clearing, subsistance allowances, and agricultural credit on behalf of Banque Nationale de Developpement du Senegal (BNDS); and arrange for mechanical land clearing and for the construction of wells, roads, tracks, stores, classrooms and staff housing. During the first year of the project, while government considers its plans for a regional development agency, STN would obtain assistance from SODEFITEX to provide settlers with agricul- tural extension services. For this purpose, it would sign a contract with SODEFITEX with terms and conditions acceptable to the Association. At the end of this contract, Government would review and agree with the Association arrangements for continuing agricultural extension services to settlers. The review would take account of Government's latest plans for the regional agency, and of the effectiveness of the contract between STN and SODEFITEX. Future arrangements w-uld not preclude a renewal of this contract, should this be considered the most effective solution for the project. (See Section 3.01(c) of the draft Credit Agreement.) It would be a condition of effectiveness that STN and SODEFITEX had signed a contract covering agricultural extension services for the first project year. (See Section 6.01(a) of the draft Credit Agree- ment.) Regional Planning and Technical Assistance 34. No attempt has been made by the Government to coordinate planning in the region. As a consequence, projects have been implemented in isola- tion, and Government departments and agencies have not coordinated their activities. However, as investments in the region have been relatively small, this lack of coordination and planning has not affected ongoing projects. Yet with the evidence that land for agricultural development may not be in plentiful supply and with the increased development activity planned for livestock owners and farmers, plus the Government's desire to continue re- settlement, effective land use planning and resource management are becoming critical issues in Eastern Senegal.  - 12 - 35. The project's regional planning activities would be carried out in two stages. In the first stage, the project would help the Government pre- pare a draft master plan that would bring together and analyze information on the region including health surveys, recommend a development strategy, and provide draft terms of reference for the preparation of investment propo- sals. In the second stage, the project would help the Government prepare detailed investment proposals for a project suitable for external financing. The latter would be undertaken only upon agreement between the Government and the Association on the draft for a regional plan and on the terms of reference for the preparation of investment proposals prepared by the Ministry of Plan- ning. The project would help the Ministry of Planning carry out the surveys and studies first by seeking technical assistance from the World Health Organ- ization (WHO) concerning the health survey and analysis of the problems that river blindness and other diseases may pose for development; and second by employing consultants financed by the project to prepare the plan and invest- ment proposals. Project Cost and Financing 36. Project , c i estimated at US$3.4 million net of taxes. Total project cost, includin.g about US$0.5 million in taxes, would be US$3.9 million. Costs include a foreign exchange component of US$1.4 million, or 42 percent of the cost net of taxes. Physical contingencies and expected price in- creases would amount to 26 percent of total base cost estimates, which are at mid-1975 prices. The proposed IDA credit of US$2.0 million would cover the foreign exchange costs and US$580,000, or 23 percent, of local currency costs for a total of 59 percent of total costs net of taxes and duties. The remaining local costs totaling US$1.94 million would be met from government budgetary alloce-'ons (US$1.38 million), by BNDS (US$0.47 million), and by settlers (US$0.09 million). 37. The IDA credit, together with most of Government's contributions, would be deployed as follows: (a) CFAF 445.1 million (US$1.98 million) as a grant to STN to cover the cost of civil works (CFAF 153.0 million) , mechanical land clearing (CFAF 45.0 million), vehicles for STN and manual land clearing tools for settlers (CFAF 18.0 million), salaries and operating expenses (CFAF 148.1 million), and settler recruitment and installation (CFAF 81.0 million); (b) CFAF 82.8 million (US$0.37 million) to the Ministry of Planning for the regional plan to cover the costs of consultants (CFAF 70.8 million) and counterpart staff (CFAF 12.0 million); and (c) CFAF 205,3 million (IJS$0.91 million) as an unallocated reserve.  - 13 - Incremental on-farm costs would be financed as follows: Government would provide CFAF 27.2 million (US$0.12 million) in the form of a fertilizer subsidy; BNDS would finance short and medium-term credit expected to total CFAF 105.8 million (US$0.47 million); and settlers would contribute the equivalent of CFAF 19.1 million (US$0.09 million) representing the upkeep for oxen and implements. Agricultural Credit Arrangements 38. Under the pilot project, cotton inputs were financed and cotton was marketed under a national package program introduced by the Cotton was marketed under a national package program introduced by the Cotton Development Company of France (CFDT) and now managed by SODEFITEX. STN was responsible for credit management, input supplies and marketing for crops other than cotton. This arrangement has worked satisfactorily and would be contin- ued in the second project during the first two years of the settler's installa- tion. During this period, however, STN would work with representatives of ONCAD and with the settlers to establish cooperatives that would enable the settlers to participate in the Agricultural Credit Program (PA), and thus eliminate the need for STN to maintain a long involvement in providing credit to settlers. The Government has not worked out the details for transferring STN's responsi- bilities to cooperatives for input supply, credit and marketing in either the pilot or the second project. The Government would consult with the Associa- tion on the details and the timing for the transfer during the first year of project implementation. (See Section 4.05 of the draft Credit Agreement.) 39. In the meantime, BNDS would channel credit to settlers through STN. The requirements during the four-year project period for short-term credits for fertilizers, seeds and insecticides, and medium-term credits for draft oxen and implements would total CFAF 105.8 million. STN would guarantee repay- ments as long as it maintains control of groundnut marketing. STN would also be responsible for determining the value and collecting repayments of the long- term credits for mechanical land clearing. Short, medium, and long-term credit would bear interest at 2% above the Central Bank rediscount rate (currently 5.5%). Seasonal loans would be repaid in 9 months and medium-term loans over a maximum of 5 years with a minimum grace period of one year. Long-term loans would be repaid over 10 to 15 years with a grace period up to three years. Procurement 40. Most expenditures for project buildings, roads, wells, mechanical land clearing, vehicles and equipment totalling about US$1.7 million would be spread over three years and would include a variety of items that prevent bulking to make contracts attractive to international bidders. Contracts for three wells required in 1975, totalling US$0.1 million, would be awarded on the basis of competitive bidding advertised locally in accordance with local procedures which are satisfactory to the Association. Because of their small number and the high cost of works undertaken by local contractors, alternative arrange- ments would be followed for the other items: feeder roads and village access tracks (US$0.6 million) would be constructed and improved by the Ministry of Works or the Army Engineering Corps, six wells would be constructed and 15  - 14 - improved (US$0.3 million) by Government well building brigades; low cost village stores and junior staff housing (US$0.2 million) would be constructed with direct labor employed and materials purchased by STN; and mechanical land clearing (US$0.5 million) would be carried out on force account using Govern- ment owned and operated equipment. Contracts for vehicles and equipment (US$0.1 million) would be awarded on the basis of local suppliers' quotations. Farm inputs (US$0.6 million) would be supplied by ONCAD. The remaining project costs comprise personnel and management expenditures (US$0.8 million) and grants and allowances to settlers (US$0.4 million) that would be unsuitable for compe- titive bidding. Consultant services (US$0.3 million) would be obtained accord- ing to the Association's normal procedures. Disbursements 41. The proceeds of the development credit would be disbursed to cover: (a) 80% of the total cost of civil works (US$544,000); (b) 60% of the local cost of vehicles and land clearing tools or, if they are imported for the project, 100% of the foreign exchange cost (US$48,000); (c) 80% of the total cost of mechanical land clearing (US$160,000); (d) 80% of personnel costs of STN and SODEFITEX (US$318,000); (e) 100% of the foreign cost of consultant services (US$320,000); (f) 80% of the total personnel costs for the Ministry of Planning counterpart staff (US$42,000); and (g) US$568,000 would be kept unallocated. Marketing Arrangements 42. The incremental production of groundnuts, cereals, and cotton would be very small compared to Senegal's total output of these crops, and would not have a great impact on the markets. All project cereals are expected to have a ready local market. ONCAD has a marketing monopoly for groundnuts, which it buys through cooperatives and sells to domestic processors; SODEFITEX has a marketing monopoly for cotton and operates its own ginneries. Govern- ment sets producer prices for cotton and groundnuts which, at present levels, provide good incentives to project farmers; all of the project's production of these two crops would have a ready domestic or export market.  - 15 - Benefits and Justification 43. Without the possibility of migration offered by the project, many settlers would have been landless and dependent on relatives and friends for their subsistence. For hicse settlers the project would provide otherwise unobtainable income opportunities. The net value of farm production, including the food consuned by the fa m.ily, would rise from about US$400 to about US$1,300 between Year 1 and Year 10 of participation for families moving to new villages, and from about US$300 to about US$1,100 for families moving to eristing villages. During the same period settler families are expected to increase from 5 to 10 members, mainly as a result of continued migration of relatives from the de- parture area and consequently per capita incomes are expected to increase from about US$80 to about US$130 and from about US$70 to about US$110, respectively. Prior to their departure, the per capita incomes of settlers would mostly be amongst the lowest 25 percent of the rural population and would be between US$30 and US$70. Hence the project would provide settlers with adequate financial incentives. 44. The project tod increase the annual output of seed cotton by about 1,500 tons, of unshelled groundnuts by 2,800 tons, and of cereals by 3,500 tons. It would improve the livelihood of 6,000 members of settler families, and would contribute about CFAF 300 million (US$1.3 million) net annually to Senegal's foreign exchange earnings. The project roads, water supply and social infrastructure imaprovements would also benefit about 10,000 members of existing farm families in the project area. 45. The economic rate of return would be about 14%. The calculations are based on the Bank's price projections for groundnuts, cotton and cereals. Costs include all expenditures on infrastructures, settler recruitment, trans- portation, installation, supervision, farm inputs and family labor costed at the value of production oL a family engaged in subsistence agriculture. Whien family labor is costed at zero the rate of return is 20%. Benefits take account of the probability of a drought occuring in 1 out of 4 years. An overall reduction of benefits of 25%, or an increase in capital costs of 15%, would lower the rate of return respectively by 7 and 3 percentage points. In view of the experience gained in the pilot project, the risk that benefits would fall by 25% is low unless world market prices fall much more than ex- pected, and cost overruns are unlikely to exceed 15%. Therefore, the project is expected to have a satisfactory rate of return. 46. The project's pre-investment components would permit the Government to make detailed plans for the development of Eastern Senegal for the period 1980-85. They would determine the scope for further resettlement in Eastern Senegal and would assess the extent of the threat to the region posed by river blindness. Effective development of the resources and potential of Eastern Senegal can be accomplished only with complete information on such issues.  - 16 - PART V: LEGAL INSTP.T.ElITS AND AUTHORITY 47. The draft Credit Igreet between the Republic of Senegal and the Association, the Rec.omweiAnvion cf th;e Co