Benin - Fourth Highway Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-3043-BEN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE PEOPLE'S REPUBLIC OF BENIN FOR A FOURTH HIGHWAY PROJECT April 27, 1927 This document has a restricted distribution and may be used by recipients only in the performance of their officiad duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - CFA Franc (CFAF) 1/ US$1.00 = CFAF 220 CFAF 1 Million = US$4,546 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES: Metric System Metric British/US Equivalents 1 meter (m) 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 square kilometer (km2) 0.386 square mile (sq. mi) 1 metric ton (m ton) 2,204 pounds (lb) 1 hectare (ha) 2.47 acres 1 cubic meter (m3) 1,308 cubic yards LIST OF ABBREVIATIONS AND ACRONYMS CARDER Centre d'Action Regionale pour le Developpement Rural CERFER Centre Regional de Formation en Entretien Routier, Togo DRP Direction des Routes et Ponts (Directorate of Roads and Bridges) DTT Direction des Transports Terrestres FAC Fonds d'Aide et de Cooperation FED Fonds Europeen de Developpement MTPCH Ministere des Travaux Publics, de la Construction et de l'Habitat STI Services des Techniques Industrielles (Equipment Maintenance Division) 1/ The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of FF 1 to CFAF 50. The French Franc is currently floating.  FOR OFFICIAL USE ONLY PEOPLE-S REPUBLIC OF BENIN FOURTH HIGHWAY PROJECT CREDIT AND PROJECT SUMMARY Borrower: People&s Republic of Benin Amount: SDR9.3 million (US$11.3 million equivalent) Terms: Standard IDA terms Co-lender: OPEC Fund for International Development - US$6.0 million Project Description: The objectives of the proposed project are to continue efforts started under earlier Bank Group operations to strengthen the Directorate of Roads and Bridges (DRP), particularly by improving its capacity to carry out effective routine and periodic road maintenance. Speci- fically, the project is designed to: (i) continue the program for rehabilitation of paved and gravel roads; (ii) improve the organization and administrative proce- dures of DRP; (iii) train field, workshop, and office staff at different levels to carry out road maintenance tasks; and (iv) institute axle-load control and road safety programs. A major benefit of the project would be its institution- building impact. The most tangible benefit, however, would be derived from the road rehabilitation program in the form of vehicle operating cost savings which would be passed on to users. There are about 400,000 inhabitants in the direct areas of influence of the roads. There is no major risk associated with the project, as it is mainly a con- tinuation of efforts under the Third Highway Project which is progressing satisfactorily. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Costs (net of taxes) (US$ Million equivalent) Local Foreign Total Rehabilitation of gravel roads (including materials research) 2.8 6.0 8.8 Rehabilitation of paved roads 1.2 4.6 5.8 Administrative improvements 0.1 0.1 0.2 Training 0.3 0.3 0.6 Workshops 0.2 0.8 1.0 Axle-load control and road safety program 0.2 0.2 0.4 Sub-total 4.8 12.0 16.8 Contingencies 1.2 2.4 3.6 Total 6.0 14.3 20.3 Financing Plan: Local Foreign Total -----------US$ million----------- IDA 3.0 8.3 11.3 OPEC Fund - 6.0 6.0 Government 3.0 - 3.0 6.0 14.3 20.3 Estimated Disbursements: (US$ Million equivalent) FY82 FY83 FY84 FY85 Annual 5.5 2.7 2.2 0.9 Cumulative 5.5 8.2 10.4 11.3 Economic Rate of Return: About 30 percent. Staff Appraisal Report No.: 3212 BEN dated April 9, 1981 Map: IBRD 15423  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE PEOPLE'S REPUBLIC OF BENIN FOR A FOURTH HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the PeopleTs Republic of Benin for an amount in various currencies equivalent to Special Drawing Rights 9.3 million (US$11.3 million) on standard IDA terms to help finance a Fourth Highway Project. Additional financing for the project would be provided by the OPEC Fund for International Development in the amount of US$6.0 million on terms to be established in a separate agreement between the Borrower and the OPEC Fund. PART I - THE ECONOMY 1/ 2. The latest economic report on Benin (Report No. 2079-BEN, issued in May 1979) was the result of a basic economic mission which visited the country in fall 1977. The paragraphs below are based on this report, but include updated information. Annex I provides basic country data. Introduction 3. After independence in 1960, a period of instability characterized by frequent changes in Government prevailed until the revolution in 1972 which brought to power the military Government of President Kerekou. The new regime immediately took steps to replace foreign dominance in the modern sector and strengthen the Government's involvement in the agricultural sector. These measures initially disrupted the economy since there was an inadequate number of trained Beninese to replace the departing expatriates. Yet, the Government also pursued conservative financial policies which resulted in budgetary surpluses and the maintenance of the debt service ratio at less than 7 percent. 4. Benin has now enjoyed a comparatively long period of political stability under a tight, centrally controlled one-party system. Following the adoption of a new constitution, Lieutenant Colonel M. Kerekou was recently confirmed in early 1980 as President of the Republic for a three-year term by the National Assembly. Mr. Kerekou has in turn appointed a civilian-dominated Government. 5. The nation is poised for a period of moderate growth propelled by major investments in the industrial sector. But Benin's near term prospects should be assessed with caution, because they are dependent on a few key factors: the Nigeria and Niger markets, success of key industrial projects and continuation of a prudent budgetary policy. 1/ The text of this section is essentially the same as that included in the President-s Report for the Borgou Province Rural Development Project which was distributed to the Executive Directors on March 12, 1981.  -2- Recent Economic Developments 6. With a population of 3.3 million people and a GNP per capita of $250 (1979) per annum, Benin remains one of the least developed countries as defined by the U.N. Over the 1976-80 period, the country enjoyed an average real GDP growth rate of 4.6 percent, and a sound public finance position. Exports are limited (US$170 million per annum) and little diversified (mainly oil palm products and cotton). A large resource gap, 20 percent of GDP, is shown over the 1975-80 period according to Central Bank statistics. The gap is, in fact, smaller due to the substantial volume of informal, unrecorded exports, primarily to Nigeria. Also, an important part of the remaining shortfall is financed by a sustained inflow of workers remittances and capital grants, leading to only a modest reliance on medium- and long-term borrowing. 7. Agriculture, which employs about 70 percent of the population and generates about 40 percent of GDP (1980), has not substantially increased its output over the past decade. With respect to export crops, cotton peaked in 1972 at 50,000 tons but has since fallen to around 15,000-20,000 tons. Palm oil production continued to increase until the mid-1970s, but output has been reduced since a severe drought in 1976. Institutional changes, insuffi- cient farmgate prices, lack of financial resources and the absence of techni- cal assistance are the main reasons for the unsatisfactory performance of export crops. Foodcrop production, although beset by many of these problems has fared somewhat better with sustained demand from Nigeria. The situation of the sector in general is slowly improving under renewed Government support through producer price increases, less interference with market forces, and better climatic conditions. 8. The industrial sector is still undeveloped due to a lack of skilled manpower, smallness of the local market, and institutional constraints. It employs less than 2 percent of the labor force, contributes 11 percent to GDP (1979), and consists mostly of processing of agricultural products and import- substitution activities. The sector achieved an 11 percent annual growth rate during 1972-76, but slowed down to 4.9 percent during 1977-80 because of a fall-off in demand from the Nigerian market. Currently, Benin is beginning to exploit its natural resources through several major industrial projects: the Onigbolo cement factory (limestone), the Save sugar plant and the Seme off- shore oil field. 9. The tertiary sector (mainly transport and commerce) accounts for about 40 percent of GDP (1980), and employs almost 40 percent of the labor force. The port of Cotonou has traditionally provided access to the sea for landlocked Niger and the western part of Nigeria. The Niger traffic through Cotonou Port rose from 180,000 tons in 1973 to 529,000 tons in 1977, and total transit traffic including Nigerian traffic rose to a peak level of 900,000 tons in 1979, and then declined slightly during 1980. 10. As a result of a prudent budgetary policy, Benin has been run- ning current surpluses averaging about 4-5 billion CFA during the last five  - 3 - years. The government followed a conscious policy of controlling current expenditures (which showed no increase in real terms during 1972-79) through limits on salaries of civil servants and holding down maintenance expendi- tures. It also derived increased revenues from the rise in cross-border trade with Nigeria and from increased small-scale industrial activities (textiles, beverages). However, the overall budgetary position has been in deficit because of substantial expenditures on investments and government lending in support of unprofitable state enterprises. In 1979, the overall deficit of the central government budget rose to 16 billion CFA, nearly 3 times the average level of the previous four years. This substantial shortfall was the result of the government's efforts to mobilize resources for an accelerated implementation of the Three-Year Development Plan (see para. 15). The defi- cits have been financed mainly from external sources and domestic borrow- ing. For 1980, a 50 percent rise in the deficit was estimated, concurrently with a quadrupling of domestic borrowing. 11. Prices have been kept under control, and the overall rate of infla- tion was limited to 9-10 percent in 1978/80. The increased economic activity induced by the start-up of major industrial projects is likely to exert continuous pressure on prices in the next few years, with an inflation rate of 11-12 percent projected for 1981/62. 12. The Government is committed to broad-based socio-economic policies, but a key concern hitherto has been to keep wages and salaries low because of limited public revenues. In real terms, both public and private sector salaries have declined. Cash incomes of the farmers may have increased slightly, the losses resulting from the drop in cotton production probably having been made up by increased exports of maize to Nigeria. Thus, Benin is one of the few countries in Africa where the urban-rural income gap has not widened in recent years. Education is one of the Government's top priorities. The Government is in the process of implementing reforms aimed at both adjusting the education system to the needs of the country, and reducing the high cost of formal education which absorbs 33 percent of the Government's recurrent budget. Health facilities are still poor, and the social indica- tors for Benin (literacy, life expectancy, etc.) remain well below the average for low-income developing countries. The Government's objectives are to expand health facilities in the provinces and to integrate modern and traditional medicines, but few resources have been made available to accom- plish these goals. 13. One of the most serious threats to health is the lack of access to clean and potable water both in urban and rural areas. The Government, with the assistance of IDA, the African Development Bank, UNICEF and bilateral aid is undertaking a program to develop public utilities in secondary centers and wells in rural areas. But these investments remain negligible in relation to existing needs. The 1978-80 Development Plan 14. A Three-year Plan (1978-80) was issued in October 1977, setting out the Government's economic goals. Its stated objectives are to raise the general standard of living, to strengthen national economic policies,  - 4 - and to promote broad participation in the conception and implementation of economic and social changes. Investment allocation in the Plan favors large- scale projects. The major items are: the Cotonou Port extension (US$50 million) financed by IDA and seven other agencies; a 40,000-ton sugar project at Save (US$210 million); a 500,000-ton cement plant at Onigbolo (US$159 million); and the Seme offshore oil production project (US$120 million), estimated to yield a total of about 11 to 20 million barrels. These projects together account for some 50 percent of Plan investment. Work on the Cotonou Port is far advanced. The sugar and cement projects are joint ventures with the Nigerian Government, with Nigerian marketing and financing guarantees. The production of sugar, cement and oil should commence around 1982. 15. In fact, the rate of implementation of the Three-Year Plan has been less than 50 percent of Plan objectives. Major difficulties include inade- quate project preparation and coordination, delays in obtaining foreign finan- cial commitments, and insufficient control over project execution. Recently, however, the Government has succeeded in accelerating commitments from foreign aid donors, and total public investment is likely to be some US$750 million in the five-year period 1978-82. This represents an increase in the public investment rate from 10 percent of GDP during 1972-77 to 19 percent in 1978-82. Prospects 16. The medium-term outlook for economic growth in Benin is moderately optimistic. Real GDP growth during 1981-85 is expected to average 5-6 percent per annum. The risks to Benin's economy are a slackening of export demand and the negative impact of problems which may arise in implementing the large projects. The benefits from these projects are, in turn, dependent upon price agreements (with Nigeria in the case of cement and sugar). Benin-s agricul- tural growth prospects will, moreover, depend on effective pricing and market- ing policies in the rural sector. In the long term, Benin's growth potential will be limited by a poor resource base to perhaps 4 percent per year, and even the achievement of this rate will depend on the ability of Government to channel resources and orient programs (in social and economic infrastructure, training, marketing, etc.) towards the development of food and cash crops. 17. Benin's public finance and balance of payments situation may fluc- tuate more over the next five years than has been' the case in the preceding half-decade. In the mid-1970