Benin - Country economic memorandum (Vol. 3 of 4) : The public enterprises sector

Report No. 4686-BEN Benin Country Economic Memorandum (In Four Volumes) Volume IIl: The Public Enterprises Sector March 15, 1984 Western Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distributon 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.  CURRENCY EQUTVALENTS Currency Unit = CFAF US$1.00 = CFAF 355-= CFAF 1,000 = US$2.81 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) 2 - 0.62 mile (mi) 1 square kilometer (km ) = 0.386 square mile (sq. mi.) 1 metric ton (m ton) = 2,204 pounds (lb) 1 hectare (ha) 3 2.47 acres 1 cubic meter (m ) = 1.308 cubic yards FISCAL YEAR January 1 - December 31 1/ The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of FF 1 to CFAF 50. The French Franc is currently floating. Throughout the text the CFAF/dollar equivalents are established using the rate of CFAF 355/$.  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AGB Socifte d'Alimentation Generale du Benin BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest BBD Banque Beninoise de Developpement BCB Banque Commerciale du Benin BOAD Banque Ouest Africaine de Developpement CAA Caisse Autonome d'Amortissement CARDER Centre d'Action Regionale pour le D6veloppement Rural CATS Cooperative Agricole du Type Socialist CCCE Caisse Centrale de Coop6ration Economique (France) CEB Compagnie Electrique du Benin/Communaute Electrique du Benin CNCA Caisse Nationale de Credit Agricole CPU College Polytechnique Universitaire DEP Direction des Etudes et de la Planification DPE Direction de la Planification d'Etat EC European Communities ECOWAS Economic Community of West African States EDF European Development Fund ENiJ Ecole Normale Superieure FAC Fonds d'Aide et de Cooperation (France) FAS Fonds Autonome de Stabilisation et de Soutien des Prix de Produits Agricoles FED Fonds European de Developpement FLASH Faculte des Lettres, Arts et Sciences Humaines eNI Fonds National d'Investissement FRA/GTZ The German Association for Technical Co-operation FSA Faculte des Sciences Juridiques, Economiques et Politiques FST Faculte des Sciences Techniques GRVC Groupement Revolutionnaire a Vocation Cooperative IBETEX Industrie Beninoise des Textiles IDA International Development Association IFAD International Fund for Agricultural Development INSAE Institut Nationale de la Statistique et de l'Analyse Economique INEEPS Institut National pour l'Enseignement de l'Education Physique et Sportive INSS Institut National des Sciences de la Sante INE Institut National de l'Economie INSJA Institut National des Sciences Juridiques et Administratives MDRAC Ministere du Developpement Rural et de l'Action Cooperative MPSAE MinistereduPlan de la Statistique, et de l'Analyse Economique OBEMAP Office Beninoise des Manutentions Portuaires OCBN Organisation Commune Benin-Niger des Chemins de Fer et des Transports PAC Port Autonome de Cotonou PAM Programme d'Alimentation Mondiale SBEE Soclte BMninoise d'Eau et d'Electricite SCO Societe des Ciments d'Onigbolo SNAFOR Societe Nationale pour le Developpement Forestier 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.  ABBREVIATIONS AND ACRONYMS (continued) SOBEPALH Societe Beninoise de Palmiera Huile SOBEMAC Societe Beninoise des Materiaux de Construction SOBETEX Societe Beninoise des Textiles SONACEB Societe Nationale de Commercialisation et d'Exploration du Bgnin SONACI Societe Nationale des Ciments SONACOP Societe Nationale de Commercialisation des Pro4uits Petroliers SONAFEL Societe Nationale des Fruits et Legumes SONAGRI/SONAPRA Societe Nationale pour la Production Agricole SONAPECHE Societe Nationale d'Armement et de Pache  VOLUME III BENIN: THE PUBLIC ENTERPRISES SECTOR Table of Contents Summary and Conclusions I. Sector Background ............................................O.1 -Growth of the public enterprise sector. 1 -Economic Functions of Public Enterprises. 3 -Institutional and Regulatory Environment ..........5 -Recent Policy Changes......... 10 II. Public Enterprise Sector Impact on the Economy . . .13 -Impact on Public Finance ................. . 13 -Impact on Banking ....16 -Impact on the economy ... ......... ............. .18 III. Major Problems Affecting the Public Enterprises. 19 -Description of Enterprise Sample ..19 -Major Problem Areas . ........................ .25 IV. Recommende IDA Assistance ..... 36 -Project Objectives......... 36 -Project Design ..37 List of Exhibits ... ........ 39 APPENDIX A: CASE STUDIES........... . 59 Save Sugar Project. 61 Onigbolo Cement Project ...... . .......67 IBETEX ............ 73 SOBETEX........ .... .. ... ........ ... 79 Oil Palm Sector. 83 SONACOP ....... . . .92 AGB . ..98 La Beninoise .........................102 COBENAM ............................106 SONAL .. ....... 113 CIB .B.......116 Trans Benin .......... . ....... 120   SUMMARY AND CONCLUSIONS i. The role of public enterprises in Benin has grown sharply since the mid-seventies, when policy decisions were taken which adopted this organizational form as a key element of economic policy. The objective in some sectors was to place major activities entirely in public hands. In other sectors, public enterprises were created to compete with private firms in order to ensure reasonable service and prices to Beninese consumers. Following a period of up to eight years experience with these enterprises, the Government of Benin determined that the economic performance of the enterprises as a group was not fully up to expectations. In order to remedy the situation the Government set up commissions to study ways of rehabilitating several enterprises and restructuring the sector. At the Government's request, a Bank economic mission visited Benin, including a review of the public enterprise problems and prospects as one of its major goals. This review focuses on the overall performance of the enterprises and their impact on the economy, and on an assessment of major problem areas confronting particular groups of enterprises. Greater detail is provided for a sample of twelve public enterprises in the form of case studies. The report presents preliminary views based on brief visits to Benin, and is designed to serve as a basis for discussion with the authorities and as an aid in developing a useful program of financial and technical assistance. In many ways, the report reinforces and confirms policy decisions taken by the Government in April 1982. Growth of Public Enterprises ii. The Government of Benin adopted policies in 1974 directed at strengthening national control over the economy, providing public sector competition in key sectors, and accelerating economic development. To do so, the Government increased its holdings in certain firms, expropriated certain companies, and created a number of new enterprises from scratch. The establishment of public enterprises was concentrated in 1974 and 1975; altogether, over three-quarters of the public enterprises in existence today were created after 1973. iii. Benin's public enterprises numbered some 60 firms (as of mid-1982) engaged in most economic sectors, particularly in industry and agricultural processing, commerce, transport, and finance. These firms can be categorized as major new projects, other industrial enterprises, import houses, or service enterprises. Briefly, the first category includes three projects currently underway or recently completed: Onigbolo cement and Save sugar, both jointly owned with the Nigerian Government and largely based on the Nigerian market; and Seme petroleum, involving offshore crude production for export. The total investment in these three projects is likely to exceed CFAF 150 billion. Other industrial enterprises include agricultural processing (SOBEPALH and SONICOG oil palm products, SONAFEL fruits and vegetables, SONAGRI cotton), textiles (IBETEX and SOBETEX), cement production from imported clinker (SCB and SONACI), and ceramics (CIB). A large group of import enterprises includes such items as foodstuffs (AGB), petroleum products (SONACOP), books (SONAPAL), and pharmaceuticals (ONP). Finally, the services include many public enterprises such as those in transport (Air Benin, OCBN railway, PAC port, Trans Benin trucking, COBENAM shipping), finance (BCB; BBD and CNCA banks), and hotels (ONATHO).  - ii - iv. Complex institutional arrangements govern the activities of the public enterprises. For both state companies (100 percent Government-owned), and mixed economy companies (partially Government owned), guardianship is provided by a Ministry (Ministere de Tutelle). In addition, Accounting Commissioners and Government Commissioners review accounts and decisions, the Planning Ministry draws up investment plans and leads the development of new enterprises, the Ministry of Inspection of Public Enterprises (MIEPSEP) reviews the enterprises' finances and monitors their performance, and a board of directors plays in some cases major administrative roles. The complexity of this institutional network tends to reduce incentives and autonomy for public enterprise decision-makers. v. Institutional and financial problems in the sector prompted a Government commission to recommend policy and operational changes. In April 1982, a broad set of decisions was taken to merge or liquidate certain enterprises and to adopt policy measures aimed at improving productivity and management. These measures address a number of highly important concepts, and several of them have already been implemented. Productivity bonuses, training, accounting standards, financial control and pricing policies are all introduced as means to improve public enterprise performance. The decisions taken are a highly positive step towards sector rehabilitation. Impact on the Economy vi. The public enterprise sector presents a low financial return from the treasury viewpoint, has led to arrears with the banking system, and has had a mediocre impact on the economy overall. vii. At least CFAF 15 billion of public funds have been invested as equity in public enterprises, along with debts guaranteed in excess of CFAF 135 billion. In exchange, the contribution of public enterprises has been limited to taxes collected (CFAF 3 to 6 billion per year). No dividends have been collected from public enterprises during the years 1979-1981, with the exception of one minor account. Increasing public outflows are expected over the next several years, as past losses financed by short-term bank credit are absorbed by the Treasury, rehabilitation investments are undertaken, and cash infusions are required for several major new projects. It is estimated that public funding of at least CFAF 10 billion annually may be required by the public enterprises in the short-term. viii. The banks are heavily exposed to the public enterprises, which account for over 60 percent of all domestic borrowings. Arrears have posed serious problems. Ten public enterprises maintain less-than-satisfactory banking relations with the commercial bank, and these total balances outstanding exceed the bank's reserves. Twelve public enterprises are in arrears to the development bank, on original loan amounts exceeding the bank's reserves. This situation has partially arisen because of the explicit or implicit Government guarantees involved. The Government will be required to intervene in certain cases to protect the soundness of the banks.  - iii - ix. Overall, public enterprises represent about 75 percent of modern industrial output in Benin. They employed 28,000 persons in 1980 or 40 percent of the formal sector labor force. There are some indications, however, that employment policies have caused inefficent absorption of manpower by the public enterprises and that consumer prices have not always benefited from public enterprises involvement. The latter problem is related to situations where a public enterprise holds a monopoly on importing a given product, and in some cases also holds a monoploy on the distribution of the goods which are required to be sold at a uniform price throughout the country. Not orgainzed to meet demand, the public enterprise must often sell to distributors who disregard official retail prices and obtain high margins at the public enterprise's expense. Major Problems and Recommendations X. The mission found that two-thirds of the public enterprises studied had major financial problems. A number of firms had also encoutereed major difficulties in initial project design, technical, managerial, and pricing areas. Generally, the poor financial situation of many public enterprises has resulted from misjudgements at the initial stage, from managment and maintenance problems, and from inadequate government pricing policies. The weak international economy and restrictions on imports by Nigeria have also created marketing problems recently. xi. Initial design problems range from confused objectives to weak appraisal and unfortunate choice of technical partners. Projects suffering from over-optimistic assumptions at the design stage are difficult to redress later on. Building up the project analysis capability of the relevant Ministries (Directions d'Etudes et de Planification) is therfore an urgent priority. An IDA project could contribute to that end. xii. Institutional arrangements pose a heavy burden on decision-making at the enterprise level. Not only do bureaucratic controls eliminate the incentive for risk-taking and responsible managment by the enterprise manager, but they are ineffective as presently practiced. The mission recommends simplifying the supervision arrangements and granting operational autonomy to the enterprises within a set of agreed objectives and resource levels. This would set the basis for an objective assessment of performance and could be used as a basis for performance incentives. xiii. Benin's enterprises suffer from a lack of experienced business managers, and from a lack of exposure to practices in similar industries elsewhere. Inadequate planning is one of the consequences of the weak management. The introduction of training schemes, carefully thought-out performance bonuses and greater cooperation with foreign technical partners would greatly improve the performance of the public enterprises. xiv. Delayed maintenance owing to inadequate production planning or pressures on enterprise cash flow has been a major technical problem for the enterprises. Rehabilitation plans should be developed for firms whose equipment has seriously deteriorated. Such rehabilitation, together with training of mechanics, could be financed in part by an IDA project.  - iv- xv. Large public enterprises in Benin rely to a considerable extent on unhindered access to the Nigerian market. Complications involving the sale of Save sugar and Onigbolo cement in Nigeria indicate the importance of thorough negotiations early-on in the project design cycle regarding conditions of market entry, quantities and prices. Recent import cutbacks by Nigeria have hurt sales of traditionally successful public enterprises such as negotiations between the Governments concerned, both on specific and general issues. xvi. Low fixed prices for the outputs of several public enterprises have caused very serious problems and distortions. This is particularly true for cement, grain, beverages, transport enterprises and the utilities. The result is consumer subsidies, opportunities for private speculation and excess profits, and a cash drain on the public enterprises. The mission, therefore supports the decision taken in April 1982, to allow higher imported input costs to be passed through on the price side. Monopolies held by public enterprises for the importing or distrubuting of certain commodities have proved inefficient, as noted by the government. Measures to increase competition in those sectors should be taken. xvii. Financial problems arise from cumulative operating losses, inadequate initial equity, excessive debt leveraging, and slow payments by the rest of the public sector. In several cases, equity has clearly been insufficient to permit achieving objectives, and borrowings have been over-utilized to finance expansion. A network of unpaid bills between the enterprises and with Government have exacerbated liquidity problems. Financial re-structuring will be necessary for a number of public enterprises, based on individual rehabilitation plans. For many enterprises, cash injections will need to be in the form of equity or long-term debt. In other cases, debt re-schedulings are being sought as well. An IDA project could assist in making funds available on a flexible basis. For those enterprises which are in serious trouble and have negative prospects, closing should be considered. Recommended IDA Assistance xviii. The actions required at enterprise and policy levels for Benin's public enterprises call for financial and technical assistance which IDA could help provide. At the sector level, a public enterprise project would aim to help bring about appropriate pricing policy and government-enterprise relations; to introduce a multi-year system of agreed objectives and resources; to assist in strengthening the enterprises' financial performance; and to help in reassessing the role of Government involvement in certain economic activities. At the enterprise level, the goals would be to assess the enterprise's viability, help develop a rehabilitation plan, and assist in its implementation. xix. A line of credit could be made available to assist in financing enterprise rehabilitation. Funds would be disbursed against agreed programs in a flexible format. IDA could support increased Government equity in the enterprise, operating subsidies, or loans for equipment, inputs or working capital. The credit would be allocated with a view to assisting only promising enterprises, to spreading the funds over a representative group of firms, and to obtaining Government commitments for necessary policy changes.  xx. Technical assistance would include the development of rehabilitation plans, provision of resident managers and technicians, and short-term consultancy services. Management would also be strengthened by a training program building on existing efforts and the technical assistance to be provided. xxi. While detailed project design depends on further discussions with the Government of Benin, the general objectives and main components of an IDA project would be those indicated above.   I. SECTOR BACKGROUND 1.01 Public enterprises have become the predominant organizational form for economic activities in Benin, responding to political orientations adopted in 1974. Government policy decisions taken at that time encouraged a leading role in the economy for publicly-controlled commercial, industrial and service organizations as of mid-1982, there were sixty public enterprises operating at the national level. They account for approximately three-quarters of the output of Benin's modern industrial sector, and receive over half of the nation's domestic banking credit. This chapter sketches the expansion of the public enterprise sector in recent years, reviews the economic role of key enterprises, discusses the institutional and regulatory environment, and summarizes recent policy and organizational changes made by the government. GROWTH OF THE PUBLIC ENTERPRISE SECTOR 1.02 The Government of Benin adopted policies in 1974 aimed at transform- ing foreign domination of the modern economy into state leadership and control of key sectors. Although Benin achieved independence in 1960, numerous aspects of its modern sector had remained under the economic control of foreigners, e.g., the petroleum distribution firms, banking, Benin's public utility and the beverage industry. In other key sectors of the economy, such as transit activities, foreign firms existed alongside private Beninese enter- prises. In a small economy like Benin, this meant that considerable economic power -- in some cases virtual monopolies -- resided in the hands of those who were not necessarily directly responsive to Benin's priorities. Thus, the objectives of the change in policy governing the organization of key elements of modern sector activity were to strengthen national control over the eco- nomy, to provide public sector competition to private sector firms, and to help accelerate the economic development of the country in line with planned priorities. 1.03 The Government's objectives in this area were implemented by pur- chasing increased shares in existing enterprises, by expropriating certain firms (against compensation), and by creating a number of new enterprises to compete with existing firms in a given economic activity. For instance, the Government increased its holdings in both SCB (clinker grinding plant) and SOBETEX (textile printing) to 51 and 49 percent respectively in 1975. In the key banking sector, three foreign banks were expropriated and merged into a single, state-owned commercial bank (the BCB) in 1974 and 1975. The interests of six international oil companies operating in Benin were bought out between 1976 and 1978 to form a national petroleum distribution company (SONACOP). Numerous other public enterprises were created in order to provide a public presence in various sectors, without necessarily acquiring monopoly powers. Thus, a wholly state-owned enterprise (SONAFEL) was created in 1975 to grow and market fruits and vegetables, in competition with other domestic producers and canned imports. A shipping company (COBENAM) was established in 1974 which competes with foreign steamship lines on an equal basis for the carriage of Benin's imports and exports.  -2- 1.04 The establishment of public enterprises -- created from scratch or obtained by acquiring or increasing the share of Government ownership in an existing firm -- was concentrated in the years 1974 and 1975, declining gradually in subsequent years. Figure 1.1 presents this trend graphically, for a sample of thirty public enterprises. The details of this evolution of the public enterprise sector are given in Exhibit 1.1. Three-fourths of the enterprises created since 1970 were newly-established firms, while the remain- ing quarter represented organizational changes within ongoing activities. Figure 1.1 PACE OF PUBLIC ENTERPRISE CREATION 0) 0 c rS 0 1r te3 7 07 --I-------Ta fcrain U2-4 4-0 0) 4-40 7 0 71. 7Z 73 74. 775 76 77 78 79 80