Senegal - Energy Sector Rehabilitation Project

Dammtaf The World Bank FOR OFmFCIL USE ONLY CR />/bSc Report No. P-4325-SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 18.3 MILLION (US$20 MILLION EQUIVALENT) TO THE REPUBLIC OF SENEGAL FOR AN ENERGY SECTOR REHABILITATION PROJECT May 20, 1986 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.  CURRENCY EQUIVALENTS Currency Unit - CFA Franc2 CFAF) US$1 - CFAF 412 - CFAF 1 - US$0.00243 CFAF 1,000 - US$2.43 MEASURES AND EOUIVALENTS One kilovolt (kV) - 1,000 Volts One Megawatt (MW) - 1,000 kilowatts (kW) One Gigawatt hour (GWh) = 1 million kilowatt hours (kWh) One barrel (bbl) e 0.16 cubic meter One ton of oil equivalent (t.o.e.) = about 7 bbl of crude oil ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BADEA - Banque Arabe pour le Developpement Economique en Afrique BOAD - Banque Ouest-Africaine de Developpement CCCE - Caisse Centrale de Cooperation Economique CIDA - Canadian International Development Agency CSPT - Compagnie Senegalaise des Phosphates de Talba EdF - Electricite de France EEOA - Compagnie des Eaux et de l'Electricite de l'Ouest Africain ESIE - Ecole Superieure Interafricaine d'Electricite FAC - Fonds d'Aide et de Cooperation GOS - Government of Senegal KfW - Kreditanstalt fuir Wiederaufbau NDIA (DE) - Ministere du Developpement Industriel et de l'Artisanat, Direction de lVEnergie OMVG - Organisation pour la Mise en Valeur du fleuve Gambie OIVS - Organisation pour la Mise en Valeur du fleuve Senegal OPEC - Organization of the Petroleum Exporting Countries SAED - Societe d'Amenagement et d'Exploitation des Terres du Delta du Fleuve Senegal et des Vallees du Fleuve Senegal et de la Faleme SAR - Societe Africaine de Raffinage SENELEC - Societe Nationale d'Electricite UNDP - United Nations Development Program UPDEA - Union des Producteurs, Transporteurs et Distributeurs d'Energie Electrique d'Afrique FISCAL YEAR Government: July I-June 30 SENELEC: January-1-December 31 1/ The CFA Franc is tied to the French Franc (FF) in the ratio of FF 1 to CFAF 50. The FF is currently floating. 2/ Currency exchange rate prevailing at the time of negotiation. However, the current exchange rate is US$1 = CFAF 360.  FOR OMCAL USE ONLY SENEGAL ENERGY SECTOR REHABILITATION PROJECT CREDIT AND PROJECT SUMKARY Borrower: Republic of Senegal Beneficiaries: SociItfe Nationale d'Electricite (SENELEC) GOS (Ninistry of Industrial Development) Amount: SDRs 18.3 million (US$20 million equivalent) Terms: Standard IDA- Relending Terms: Out of the US$20 million equivalent, the Government would relend US$18 million equivalent to SENELEC, as follows: (i) US$15.5 m4llion equivalent at the prevailing Bank interest for 20 years, including 5 years of grace; and (ii) US$2.5 million equivalent at the prevailing Bank interest for 20 years including 10 years of grace to finance the proposed technical assistance and training components of the project. SENELEC would bear the foreign exchange risk on its share of the Credit. Colenders: A consortium of cofinanciers would provide about US$41 million equivalent toward project costs. Project The proposed project would assist Senegal in Description: optimizing its use of energy resources by eliminating price distortions and by adopting conservation measures; reducing the cost of generation; improving system reliability and reducing losses through upgrading of transmission and distribution networks, particularly in the Dakar area; and strengthening the institutional arrangements in the sector through a program of managerial and financial rehabilitation. The proposed project consists of: (a) a 40 MS diesel plant with related engineering services and completion of the rehabilitation of the existing Cap des Biches steam plant; (b) construction of about 50 km of 220 kV and 18 km of 90 kV transmission lines and associated 90 MV substations, together with rehabilitation of existing 90 kV lines and substations; (c) rehabilitation of distribution system, mainly in Dakar; his document has a restricted distribution and may be used by rsipients only in the peror of thdr ofca dutieL Its contents may not oterwe be disclosd without World Baok autborintionL  - il - (d) technical assistance to implement SENELEC's rehabilitation program and training; (e) an industrial energy conservation program; and (f) studies related to petroleum supply, household energy and the operation of the National Energy Fund. Project Benefits The main benefits of the Project would be to and Risks optimize use of energy resources in Senegal by reducing the cost of power generation and progressively eliminating price distortions. The proposed project consists of normal power utility works, which pose no unusual risks. Estimated Cost: USS million equivalent Local Foreign Total Generation 6.2 27.0 33.2 Transmission 2.7 7.5 10.2 Distribution 6.5 9.6 16.1 Engineering 0.3 1.3 1.6 Technical Assistance 0.2 1.2 1.4 Training - 0.8 0.8 Energy Conservation and Studies 0.2 1.7 1.9 Base Cost 16.1 49.1 65.2 Contingencies: Physical 1.2 3.4 4.6 Price 2.5 8.5 11.0 Total Project Cost 19.8 61.0 80.8 Interest During Construction 3.3 3-3 Total Financing Required 23.1 61.0 84.1 Financing Plan: IDA : IDA Lending Terms - 20.0 20.0 Cofinanciers - CCCE : 5% - 28.0 28.0 - AfDB : 10.55% - 8.0 8.0 - BOAD : 12% - 5.0 5.0 Sub-Total 41.0 41.0 SENELEC 22.9 - 22.9 Local Industry 0.2 _ 0.2 Total 23.1 61.0 84.1  - iii - Estimated Disbursements: IDA FY 87 88 89 90 91 Annual 4.3 5.7 4.9 3.4 1.7 Cumulative - 10.0 14.9 18.3 20.0 Rate of Return: 17Z Staff Appraisal Report: No. 5808-SE Maps: IBRD No: 1910ORl: SENEGAL - Electricity Supply System IBRD No. 19101R1: SENEGAL - Dakar and Cap Vert Region Transmission Network RAPEG May 1986  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF SENEGAL FOR AN ENERGY SECTOR REHABILITATION PROJECT 1. I submit the following report and recommendation on a proposed development credit for the equivalent of SDR 18.3 million (US$20 million equivalent) on standard IDA terms to the Republic of Senegal to help finance a proposed Energy Sector Rehabilitation Project. Additional external financing for the project would be provided by France, through a loan from Caisse Centrale de Coope.ration Economique (CCCE) of US$28 million equivalent, a loan from the African Development Bank (AfDB) of US$8 million equivalent, and a loan from the West African Development Bank (BOAD) of US$5 million equivalent. PART I - THE ECONONY Economic Structure and Past Developments 2. A report entitled "Senegal: Country Economic Memorandum" (5243-SE) was distributed to the Executive Directors on November 5, 1984. Country data appear in Annex I. 3. Three-quarters of Senegal's territory lies in the Sahel, which suffers from low rainfall and periodic droughts. The mainstays of the traditional economy are millet cultivation and nomadic cattle-raising for domestic consumption, and groundnut cultivation for export. The modern sector of the economy is concentrated in Dakar, the capital, a city of over one million inhabitants, the economic base of which consists of excellent port facilities, an important industrial sector, and a small but fast-growing tourism industry. With a population of 6.3 million in mid-1984, Senegal's per capita GNP for 1984 was estimated at US$380. 4. At Independence in 1960, Senegal lost its privileged position as the center of French West Africa, and subsequently had to adapt to reduced economic, administrative and political circumstances. In the latter part of the 1960s, income from groundnuts (the principal export) fell due to unfavorable weather and lower export prices resulting from the loss of EEC special preferences. Over the decade, the Senegalese economy marked time as real output increased at a rate estimated at 2.5 percent per annum, i.e. below the estimated rate of population growth. 5. Economic management became even more difficult during the 1970s as a result of the growing unreliability of agricultural production and its linked effects on domestic incomes and on fiscal and export revenues. During the 1970s, Senegal's groundnut production was hit by sharp climatic Aluctuations, and despite higher rates of private and public investment,  - 2 - average GDP growth did not rise above that of the previous decade. The same pattern of sharp year-to-year fluctuations around a 2.5 percent growth trend has continued since 1980. However, the Government no longer has the leeway to cushion these fluctuations through increasing its borrowing and expenditures. 6. Fluctuations in physical output are aggravated by the price volatility of Senegal's major exports and imports. For example, in 1974, the overall terms of trade improved by over 21 percent, due to exceptionally high prices for phosphate rock, Senegal's second export commodity; however, this improvement was almost entirely wiped out the following year by declines in export prices for both groundnuts and phosphates. Increases in imported oil and rice prices in the late 1970s brought a further deterioration in the terms of trade, causing a total loss in national income of roughly 6 percent between 1974 and 1982. 7. This deterioration in terms of trade, along with two successive years of drought in 1979 and 1980, plunged the economy into an acute financial crisis, from which it is still recovering. The onset of this crisis led the Government to launch a five-year economic and financial recovery program, whose main objectivet were to stabilize the economy during the first two years and then to achieve an economic growth rate of 4 percent per annum in the following three years. This program was sup orted by an Extended Fund Facility (EFF) of US$243 million equivalent, appro'lb1 by the IMF in August 1980, and a Structural Adjustment Loan/Credit (SAL) of US$60 million equivalent approved by the Bank in December 1980. 8. The recovery program consisted of an economic stabilization plan (agreed with and monitored by the IfF), introduction of new producer incentives, reorientation of the public investment program, a change in the national policy on parastatal enterprises, and a package of structural reforms in the agricultural sector. The objectives of this program were sound but the implementation schedule proved too ambitious. Despite delays caused by a record low 1980/81 groundnut crop and by the change of President in early 1981, the Government did achieve significant progress in financial arrears reduction, parapublic sector management and introducing new industrial incentive policies. However, in other areas, and especially in the reform of agricultural policies and institutions and in reduction of the current account and fiscal deficits, the results were disappointing. The SAL second tranche of US$16.2 million was cancelled on June 30, 1983. Recent Economic Developments 9. The overlay of acute structural and financial problems which Senegal had suffered for a number of years was compounded in 1983/84 by the return of severe drought conditions. These reduced by almost 40 percent the volumes of agricultural crop production available both for export (groundnuts and cotton) and for domestic consumption (mainly cereals). The drought, probably the second most severe since 1972/73, had a negative impact on the level of economic activity in 1984, on Senegal's balance of payments and, indirectly, on its public finances.  -3- 10. While there are some encouraging signs of growth in sectors not directly affected by the drought (e.g., fishing and tourism), a sustained recovery in output and employment is still some way off, not only because of climatic aberrations, but also as a direct result of the nersistent financial crisis and the contraction in domestic demand. Although the economy appeared to have recovered strongly in 1982 and 1983 from the effects of the two preceding drought-affected years, restoring real per capita income to its 1979 level, GDP fell by an estimated 4.0 percent in 1984; it would have been even lower without the growth in fisheries, petroleum refining and other export-based industries, notably fertilizers, for which a 200,000 tpy phosphoric acid plant came on stream at mid-year. Preliminary figures suggest that the effects of the recession which took place in 1984 continued well into 1985. With an estimated one million ton cereal crop and an improved production of groundnuts in 1985/86, the outlook for recovery in 1986 is much more promising. 11. Over the last two years, Senegal has pursued its financial stabilization program in close consultation with the IMF. Credit outstanding with the IMF at end-June 1985 was equivalent to 260 percent of Senegal's quota of SDR 85.1 million. In August 1983, following the announcement of measures to eliminate subsidies on petroleum, rice and other products, an IMF standby arrangement was agreed for 1983/84, with commitments to observe strict public employment limits and domestic credit ceilings. This program, aimed at reducing the current account deficit by more than three percentage points of GDP and reducing the overall fiscal deficit from 9 to 4.8 percent of GDP, was successfully completed. A new standb- arrangement covering an 18-month period to June 1986 was approved by the IMF Board in January 1985, and performance is judged by the DMF to be satisfactory up to the end of December 1985, the period covered by the last review. 12. The first meeting of the Consultative Group for Senegal was held in December 1984 and endorsed the Government's medium-term adjustment program for the period 1985-1992. Since the CG meeting, the Government has prepared an action plan of specific policies and reform measures to implement the objectives outlined in the medium-term adjustment program. The main objectives of the program are to establish an incentive environment which maximizes the exploitation of the growth potential, particularly in agriculture and industry, and to improve economic management. The Government's strategy to accomplish these objectives is, on the one hand, to progressively withdraw the State from direct involvement in production activities and to promote private sector initiative through a change in incentive policies, and, on the other hand, to achieve greater efficiency of public resource management through improvements in the quality and management of public investments, the streamlining and reform of the parapublic sector, and the generation of public savings. The first phase of this program is being supported by a Structural Adjustment Credit (SAL) which was approved in February by the Executive Directors. Details are given in Report No. P-4213-SE dated January 10, 1986.  -4- 13. A major constraint on the Government's finances and the balance of payments is the serious and growing burden represented by service of the external foreign debt. Over the past four years, debt has been rescheduled four times with the Paris Club and as well as with the banks, and debt service is projected to average around US$300 million per year over the next four years. This will represent an average debt service ratio of about 21 percent and is almost certain to require a continuation of debt relief for a few more years until the adjustment program has had time to take effect on the economy. Producer and Export Incentives 14. The structural adjustment program addresses the need to improve Senegal's trade balance by adjusting relative prices in order to encourage export production and to discourage growth in imports of food, energy and consumer goods. Under the SAL, the objective is to revise the export premium system introduced in 1981 with a view to basing it on industrial value added in international prices. During 1986, there is to be a full revision of the structure of the customs tariff, to be followed by a progressive removal of non-tariff protection over the next two years. Between February 1982 and January 1985, the Government doubled the retail price of rice, the main food staple in urban areas, in order to reflect higher import costs, eliminate consumer subsidies and to provide a measure of protection for domestic rice production. The Government is committed to maintaining this nominal rate of protection at a level of at least 25 percent. Cereals are marketed mostly through private channels; the official floor prices for producers were raised by about 10% for the 1984/85 season and b- around a further 20X for 1985/86. There was also a substantial increase in the producer price for groundnuts for the last season, in order to maintain comparability with prices offered on tha parallel market. Electricity tariffs and petroleum product prices were also increased in 1985 to eliminate subsidies and to reduce the operating deficits of SENELEC and the petroleum refinery. Investment Program 15. The outlook for investment has deteriorated since the establishment of the structural adjustment program in 1980. While the latter imposed ceilings on the investment program to re-establish macroeconomic equilibrium, implementation of even the reduced program has become difficult. In the present climate, a careful screening of new investment projects is particularly needed, together with increased attention to rehabilitation and maintenance needs. The necessary institutional reforms for improving the Government's programming, budgeting and monitoring of investment projects are expected to be put into place this year under the SAL. The objective is to put in place a system of three-year rolling investment programs starting with FY87. In the meantime, an interim two-year investment program (1985-86) has been prepared and reviewed by the Bank. In view of the difficult public finance situation, the Government's ability to generate public savings for financing its investment program will remain very constrained during the  -5- next few years, and the investment level itself will be largely determined by the availability of concessional foreign resources. Some public enterprises, however, such as SONATEL and SENELEC should be able to generate funds for investment during this period, and the share of private investment is expected to increase as the financial situation begins to improve. Parastatal Sector 16. Reform of the large parastatal sector in Senegal continues to be a high priority. Over the last year, the Government has taken some significant steps to reduce the budgetary burden presented by non-viable or inefficient public enterprises. In the agricultural sector, a number of agencies are being wound up and about 2,000 staff have been laid off. For others, a redefinition of 'asks and a reduction in staffing numbers has been decided. For some of the most important public enterprises, the Government has moved to improve performance by negotiating multi-year contrats-plans which set out production and financial objectives for company operations and spell out the reciprocal obligations of the Government and enterprise managers. To date, the Government has signed seven contrats-plans, and several others are well advanced. A comprehensive policy guideline and action program was adopted by the Government in 1985 and progress is being assisted by an IDA-financed TA project for parastatal reform. Long-term Prospects 17. Senegal's long term economic prospects depend very much on the success of its medium-term adjustment program. This program seeks to create an improved base for development, both by correcting the unsustainable imbalances an the government budget and on the external accounts, and by improving the institutional and incentive environment for economic activity, part of which involves reducing Government's involvement in the economy. The Government's development strategy continues to emphasize the promotion and diversification of agricultural and export-oriented activities. The agricultural program calls for the development of rainfed areas less susceptible to drought, such as Casamance and Eastern Senegal, and increased incentives for domestic millet and maize production to replace imported rice. Agricultural research is being reoriented, with the objective of lowering the costs of yield-raising agricultural techniques and better adapting them to local constraints. Irrigated cereal production is being developed in the arid northern part of the country along the Senegal River. Construction is proceeding on the two large dams planned for the Senegal River by the "Organisation pour la Mise en Valeur du Fleuve Senegal" (OMVS); the first (Diama) should be completed this year and the second (Manantali) would be completed in 1988. The Government's new agriculture policy aims at eliminating the present high level of state subsidies required on irrigated rice production, which otherwise would severely constrain the pace of new irrigation development, by a combination of cost-cutting and transfer of production activities to the private sector.  18. The US$250 million ICS phosphoric acid/fertilizer project started commercial operations during 1984, and Senegal's attractive investment code is expected to help attract other export industries, as the international economy improves. Export diversification is necessary to offset the probable limits on growth of earnings from grounduuts, phosphates and fish exports. Senegal's groundnut exports suffer from increasingly irregular production due to recent drought conditions, from an increased supply to EEC markets of competing vegetable oils, which have tended to narrow the price premium previously enjoyed by groundnut oil, and by restrictions imposed by some European countries for health reasons on the import of groundnut cake for animal feed. 19. The assistance provided to Senegal in support of the Government's 1980-85 stabilization program has helped the country survive a period of extraordinary economic difficulty and to start to address some of its most difficult long-term problems. However, the overextended public sector, as well as heavy domestic arrears and external debt service charges, continue to impose serious burdens on pub'lic finance and on the current account of the balance of payments. The Treasury will not be able for a few years to absorb additional recurrent cost charges from development projects for a few years, and will continue to need high shares of foreign financing for the investment program and for budgetary assistance on concessional terms. However, the actions taken so far indicate the firmness of the Government's commitment to tackle these problems. PART II - BANK GROUP OPERATIONS IN SENEGAL 20. As of March 31, 1986, the Bank Group had approved 60 operations in Senegal for a total of US$642.8 million, consisting 36 IDA credits, 11 Bank loans, five blends of Bank and IDA funds, five IFC operations, two blends of Bank and IFC funds, and one blend of Bank, IDA and IFC funds. Physical execution of projects is progressing reasonably well, although some operations are affected by the shortage of counterpart funds due to the Government's continuing difficult public finance situation. Annex II contains the Status cf World Bank Operations in Senegal. 21. Until a few years ago, our assistance was mostly project-oriented with a strong emphasis on diversification of the economy and improvement and expansion of basic infrastructure. The acuity of the financial crisis of the past several years and the magnitude of the structural distortions in the economy has led to a major shift in our strategy, which now has the following main objectives. First, to assist the Government, supported where appropriate with technical assistance and structural adjustment lending operations, to improve the production incentive environment and the efficiency of economic management, and restore in the medium-term a sound financial basis for development efforts. Second, to promote the long-term growth and development of the economy by underpinning the structural adjustment operations through well-prepared investment, rehabilitation and sectoral adjustment operations within a framework of appropriate sectoral  -7- policies. Third, to improve our knowledge of economic, social, institutional and the administrative frameworks to better tailor policy reforms to the country's absorptive capacity. Finally, to contribute to improved aid effectiveness in Senegal by acting as the focal point for aid coordination between donors and the Government, and at the same time assisting the latter to strengthen its own planning and aid coordination ability. 22. The structural adjustment credit which was approved by the Executive Directors on February 4, 1986, is conceived as the first in a series of such operations to promote central incentive policy changes and improved economic management objectives over the medium-term. The IDA lending program will also include complementary project lending and sector operations which will be increasingly policy oriented and highlighting sectoral strategies, investment programs and institutional reforms. Finally, as described below, the on-going project portfolio also supports the development of sound economic growth in the productive sectors as well as the rehabilitation of infrastructure. 23. In agriculture, past operations have aimed at improving the productivity of traditional food and cash crops, supporting diversification into new crops and regions, and enhancing forestry outputs and agricultural research. At the core of the Government's development strategy in agriculture is the promotion of rainfed cereals production and the exploitation of the irrigated rice farming potential in the Senegal River Valley. In addition to an Irrigation Technical Assistance Project, approved in October 1985, to help restructure the River Valley Development Agency (SAED), including preparation of a specific schedule for the latter's disengagement from production activities, the Fourth Irrigation Project under preparation would help rehabilitate and expand rice perimeters. Sector operations are also under preparation in support of inputs and marketing activities for the development of rainfed food crops. 24. Past projects have strongly supported modernization and expansion of the country's infrastructure in all modes of transport: highways, rail, port and airport. But with the stagnant economy and heavy past investments, emphasis is now being placed on better utilization and maintenance of existing facilities. To this end, three projects were approved during FY84: a Fifth Highway Project addresses the Government's limited capacity to provide funds for road aaintenance; the Dakar Container Port Project includes rehabilitation and maintenance of the Port of Dakar; and the Technical Assistance Project for Urban Management and Rehabilitation emphasizes maintenance and rehabilitation of urban infrastructure in support of industrial development. 25. As in infrastructure, the Bank is supporting the rehabilitation, modernization and expansion of the major public utilities. In electric power, an engineering credit, approved in 1980, led to sector reorganization proposals. In telecommunications, the Bank supported the rehabilitation, modernization and expansion of local and long distance facilities through two operations to-date, and has played a major role in  convening a donors' meeting on the sector in 19G4. A project to further address the principal constraints facing the sector, with primary emphasis on institutional development, is being submitted to the Executive Directors for their consideration on June 17, 1986. Finally, in the urban water supply and sanitation sector, an engineering credit, approved in 1979, laid the groundwork for the Eleven Centers Water Supply and Sewerage Project which was approved in March 1985. 26. While Bank strategy has supported the emphasis on financing productive projects and rehabilitation needs, it also recognizes the need to support the social sectors, with due consideration to the capacity of both the Government and users to bear the recurrent costs involved. In education, efforts have been directed at primary education and at technical and vocational training to support activities in the productive sectors, and in health, efforts have been directed at primary care in the rural regions. 27. As it became increasingly clear that many of Senegal's economic and financial problems run across the board and could not be addressed exclusively through project lending, the Bank program began to shift in the late 1970s towards multi-sectoral technical assistance and structural adjustment lending. Two operations in support of this effort are currently being implemented. In the parapublic sector, a Second Parapublic Technical Assistance Project was approved in July 1983 to help consolidate results already achieved under the first project and to begin rehabilitation of some key public enterprises through detailed action plans. A Technical Assistance Project for Economic and Financial Planning was approved in August 1980 to help the Ministry of Planning evaluate priority projects and monitor the investment program and the Finance Ministry to strengthen its debt management capability. A follow-up project is being prepared to consolidate progress made in improving economic management. 28. Given the need to focus Senegal's public investment program on high-priority rehabilitation and maintenance needs and developmental recurrent costs, improved donor coordination is now assuming increased importance. The Bank is pursuing its economic dialogue with Senegal in close coordination with the IMF and bilateral and multilateral donors. In this connection, the Bank convened a first meeting of the Consultative Group in December 1984, at which agreement was reached on the policy measures and assistance levels and aid coordination mechanisms needed to enable Senegal to overcome its economic and financial difficulties. The Bank followed up on this meeting by preparing a structural adjustment operation as well as by organizing sector meetings of interested donors on telecommunications and power; further sector meetings are planned during 1986 for the agriculture, industry and water supply sectors. A second CG meeting is also planned for late-1986 to consider the Government's new investment program. 29. The Bank Group's share in total external aid disbursements to Senegal over 1980-83 averaged approximately 20 percent, of which roughly two-thirds was IDA-financed. The Bank Group's share in outstanding  medium/long-term (NLT) debt was 19% at end-1984 and is projected around 24% by 1990. The Bank Group's share in uMLT in external debt service payments (excluding IMP) rose from 3.7% in 1980 to 16% in 1984, but is projected to decline to around 8Z in 1990, under an assumption of no new debt renegotiations between 1986 and 1990. PART III - THE ENERGY AND POWER SECTORS Energy Resources and Consumption 30. Senegal's energy economy is based on fuelwood and imported oil. In 1984, the primary energy supply was about 2 million tons of oil equivalent (t.o.e.) of which 60 percent came from wood, and 40 percent from imported oil. Natural forest could supply fuelwood equivalent to about I million t.o.e. annually, but 90 percent of this potential is in eastern Senegal and Casamance, far from the urban consuming centers of western Senegal. Consequently, fuelwood resources closer to the urban centers are being rapidly depleted. In 1984, imports of crude oil and petroleum products for domestic consumption amounted to about 720,000 tons, accounting for 18 percent of the country's imports and costing the equivalent of 32 percent of export earnings. In 1972, those percentages were 3 percent and 4 percent, respectively. Senegal's other indigenous resources comprise a share of the untapped hydro potential of the Senegal and Gambia rivers (combined total estimated at 1,400 MW and 7,500 GWh); some petroleum resources whose exploration is being promoted under the Petroleum Exploration Project (Credit 1323-SEN, February 8, 1983), a small natural gas deposit; and about 4 million tons of peat (1.6 million t.o.e.). There is potential for wind and solar energy, whose commercial prospects have not yet been established. 31. Senegal's annual per capita consumption of final energy (about 0.25 t.o.e.) is similar to that of other sub-Saharan African countries. Fuelwood and charcoal are the principal sources of energy for household cooking, although small amounts of LPG are used in urban areas. Petroleum products are used principally for electricity generation (35 percent), for industry (25 percent) and for transport (20 percent). The household sector consumes about 75 percent of final energy and industry/transport about 20 percent. Energy Sector Organization 32. The Ministry of Industrial Development and Crafts (NDIA) has the main responsibility for the energy sector. It controls the power sector through its Department of Energy (DE) and the petroleum sector through its Department of Mines and Geology (DMG), and is also responsible for energy conservation and the development of new and renewable energy resources. The Ministry of Hydraulics is responsible for the development of water resources, including hydro power. At present, coordination between the two Ministries is adequate. A National Energy Committee, chaired by the  - 10 - Minister, MDIA, reviews energy policy options and makes recommendations to the National Energy Commission, which is chaired by the Head of State and is responsible for policy decisions. The Department of Energy, NDIA, acts as a technical secretariat to the Energy Committee. Both DE and DMG suffer from a lack of qualified and experienced personnel, particularly in the areas of economics, finance and specialized fields such as wood and household fuel. Advisors to improve coordination in MDIA on energy policy were appointed under the Power Engineering and Technical Assistance Project (Credit S-26-SE, May 19, 1980). These efforts are continuing with the recent secondment from the Bank Group of an Energy Advisor to the Minister, MDIA. 33. A state controlled company, Petrosen, is responsible for petroleum exploration and production activities and is embarking with Bank assistance (Credit 1323-SE) on a major promotion effort to induce foreign oil companies to explore the Senegalese basin. A private company, "Societe Africaine de Raffinage" (SAR), in which GOS holds a 10 percent interest and foreign oil companies 90 percent, owns and operates a refinery near Dakar with a capacity of 1.2 million tons/year. Because of its financial problems, SAR has in recent years increasingly imported refined products which now account for 65 percent of the total petroleum consumption. Responsibility for the distribution of the petroleum products rests with subsidiaries of foreign oil companies. Energy Policy and Pricing 34. In response to the second oil shock, the Government of Senegal (GOS) formulated an ambitious energy policy aimed at reducing the internal consumption of oil products by 50 percent over the period 1981-1990. GOS strategy is to substitute indigenous energy such as hydro, or less costly imported fuel such as coal, for imported petroleum and to restrain energy consumption by increasing the efficiency of utilization through energy conservation and an appropriate pricing policy. So far, efforts to develop indigenous resources have not been successful and the consumption of petroleum products has increased from 600,000 to 720,000 tons since 1981. The translation of policy into specific operational programs and projects will require the resolution of some important issues related to the development of hydro resources within the regional context, and in the allocation of resources to the power sector. 35. A 1982 study identified substantial potential for savings through energy conservation in the industrial sector. An Office of Energy Conservation has been established within MDIA (DE), with the assistance of two Italian-financed experts. The approach to energy conservation has been defined under the Energy Sector Management Assistance Program (ESMAP) and would consist of energy audits of major industrial users as well as institutional changes. UNDP is financing the first of three years' activity under this program, CIDA (Canada) is considering financing part of the energy audits, and the proposed project includes financing for the second and third years' activities.  - 11 - 36. As a follow-up to the Senegal Consultative Group meeting in December 1984, GOS requested IDA to take the lead in organizing a donors' meeting for the energy sector. For this meeting, GOS prepared, with assistance under ESMAP, an analysis of sector problems and a minimum-needs sector investment program for the period 1986-90. The principal purpose of the donors' meeting, held in Paris in July 1985, was to review sector development policies and investments and to seek the commitment of the donor community to finance the investment program. During negotiations agreement was reached that GOS would consult with IDA, prior to undertaking any investment in the energy sector exceeding US$3 million equivalent. 37. Energy pricing distortions in Senegal were highlighted in the UNDP/World Bank Energy Assessment Report and were a principal topic addressed by GOS in its Declaration on Energy Policy presented at the July 1985 donors' meeting. Fuelwood and charcoal prices do not reflect the cost of reforestation. In the Dakar area, there is a need to find substitutes for household fuel in order to reduce the current strong demand for fuelwood from local forests and a study of this problem is included in the proposed project. Electricity tariffs in recent years have been inadequate in relation to economic and financial requirements. Although the overall level of petroleum product prices exceeds the CIF level, the GOS pricing policy results in significant distortions both between product categories, and between end users of the same product. This necessitates the operation of a complex system of revenue equalization, administered by the distributors' organization to assure that they receive guaranteed revenues. At the July 1985 donors' meeting, GOS announced that it would eliminate in stages all subsidies on petroleum products. Petroleum product price increases ranging from 4 percent for a particular grade of gas oil to 60 percent for LPG cylinders were introduced effective July 1, 1985, and are expected to yield an additional one billion CFAF (US$2 million equivalent) in revenues. At the same time, GOS announced a 10 percent increase in average electricity tariffs as of September 1985 to be followed by two further increases in March 1986 and March 1987. However, in view of the reduction of fuel prices to be applied on July 1, 1986, the tariff increase of September 1985 will be rolled back and the two further increases are made unnecessary. A nearly ten-fold increase in the forestry tax to 20 CFAF/kg of charcoal was also announced, to take effect from January 1987. This increase is a step towards the elimination of distortions in fuelvood pricing. 38. The elimination of distortion in petroleum products pricing requires a review of the refining and distribution activities as well as the functioning of the National Energy Fund (INEF). Retail petroleum product prices in Senegal are fixed by GOS so as to cover the ex-refinery price, Value Added Tax, distributors' and retailers' margins, and an element of revenue equalization as indicated above. As the ex-refinery price is not regularly adjusted to reflect fluctuations in the dollar price of crude and refined products, SAR's profits in excess of a guaranteed return are paid into NEF out of which, on the other hand, SAR's losses up to the guaranteed return are made good. Any surplus resulting from revenue equalization is put into NEF. Until mid-1985, SAR operated at a loss and  - 12 - NEF's resources were insufficient to meet SAR's accumulated deficit amounting to CFAF 11 billion. The position has changed dramatically in recent months with the declining cost of oil in the world market and the drop of the dollar rate of exchange. SAR's profits soared because GOS did not pass on the benefit of cheaper oil to the domestic market. By end of 1985, NEF had accumulated more than sufficient funds to pay off SAR's deficit. While these circumstances prevail, NEF will continue to accumulate substantial funds. Consequently, during negotiations, agreement was reached that GOS would implement the principles of its July 1985 Declaration on Energy Policy and, in particular: (a) would furnish to IDA before July 1, 1986, an action plan for the elimination of price distortions among and between various petroleum products; and (b) vould establish a formula for the regular adjustment of consumer prices of petroleum products taking into account price fluctuations on the world market and fluctuations in exchange rates, and regularly consult IDA on the application of this formula. To this end, and to help GOS address this petroleum pricing issue, the proposed project includes: (a) a study of the supply, refining and distribution of petroleum products in Senegal; and (b) a study to recommend improvements in the functioning of the NEF. Finally, during negotiations, GOS agreed to allocate CFAF 6.9 billion from NEF funds to finance the immediate working capital requirements of the power utility, SENELEC, in the form of a loan over 10 years including 4 years grace at 6 percent interest. The actual availability of this loan is a condition of Credit effectiveness. In the meantime, a first tranche of CFAF 5.8 billion has been disbursed to SENELEC, with which SENELEC settled a major part of its arrears to its fuel supplier. Existing Electricity Supply Facilities 39. The "Societe Nationale d'Electricite" (SENELEC), under the supervision of MDIA, is responsible for electricity generation, transmission and distribution throughout the country. SENELEC operates an interconnected power system with a capacity of about 200 NW, and 22 secondary centers totalling less than 10 MW. The main generating facilities are the 60 MW Bel Air steam plant in the port of Dakar, and a 124 MW mixed-thermal plant at Cap des Biches. The Bel Air plant is obsolete and inefficient and should be replaced. Poor operation and maintenance practices at the Cap des Biches plant caused serious outages in 1984 and emergency repairs to the boilers are underway. However, a major rehabilitation of the plant is required and would be undertaken under the proposed project. As a result of these outages, SENELEC was compelled to install 20 NW of gas turbines in October 1984 to reduce load shedding and restore adequate supply, albeit at very high operating cost. Over 50 percent of the diesel units in the secondary centers are in a bad state of repair. The Bel Air and Cap des Biches generating stations supply a 90 kV interconnected network mainly serving the area of Dakar-Thies-TaTba. In 1984, the energy supplied to the system was 756 GWh, with a peak load of 123 MW. Private autoproducers account for about 25 MW of additional installed capacity.  - 13 - 40. The existing transmission and distribution facilities consist of 130 km of 90 kV overhead lines linking five 90 kV substations, about 1,050 km of 30 kV lines and eight 30 kV/6.6 kV substations, and a 6.6 kV primary distribution network in Dakar, Saint-Louis and Ziguinchor. The 90 kV and 30 kV transmission lines in and around Dakar are adversely affected by marine corrosion and insulation problems which result in frequent outages. The transmission network has not been properly maintained. In particular, the 90 kV Bel Air/Hann/Cap des Biches transmission lines are in poor cendition and would be rehabilitated under the proposed project. A second 90 kV line is needed to guarantee security of supply to Talba and Thies. The distribution system in the Dakar and Cap Vert region, representing 80 percent of the market, has not been adequately expanded nor properly maintained; this results in poor quality of service and high (about 16 percent) losses. A recent distribution study has recommended that future distribution expansion should be at 30 kV. Access to Electricity Service 41. SENELEC supplies electricity to about 150,000 consumers accounting for about 17 percent of the population, or 38 percent of those living in the supply area. Electricity consumption rose at an annual average growth rate of 6 percent in the period 1970-1984, from 285 GWh to 643 GWh. Peak demand on the interconnected system grew at about the same rate from 50 MW to 114 MW. Industrial customers account for 70 percent, residential for 23 percent, and commercial for 7 percent of electricity consumption. The phosphate industry alone "Compagnie Senegalaise des Phosphates de Talba" (CSPT) accounted for 17 percent of total sales in 1984. Power Sector Development and Investment Program 42. As a result of the downturn in the Senegalese economy, earlier demand forecasts have been revised and now assume an annual average growth of 4.5 percent through 1990, rising to 6.5 percent thereafter. A least-cost generation and transmission development program for the period 1985-2005 has been prepared under the Power Engineering and Technical Assistance Project. The study reviewed hydro and alternative thermal (including peat and imported coal) solutions and concluded that the optimal sequence of generation investments would be a 2 x 20 MW low-speed diesel plant by 1988, thereby permitting the retirement of the Bel Air plant, followed by another 20 MW unit in 1990 in the Dakar area and 120 MW of hydro power from the Manantali dam in 1992, with two 220 kV transmission lines to bring it to Dakar. The latter development poses complex institutional problems which can only be addressed in a regional context (para. 46). 43. Following the discovery in 1979 of peat deposits in the Niayes region, GOS considered the development of a peat-fired power plant and requested Bank Group assistance in financing the project. After further study, financed under the Power Engineering and Technical Assistance Project, such a project was found to involve unusually high technical risks  - 14 - and very great financial costs. Conoequently, the Bank Group declined to support the project and GOS will not row proceed with it. 44. The Manantali hydro development would enable the interconnected system to be expanded to all major cities presently supplied by high-cost, inefficient diesel plants. Until that time, schemes to expand the secondary centers should only proceed where economically justified and financially viable. Should GOS require SENELEC to proceed with uneconomic schemes, financial compensation should be provided. Agreement to this effect was reached with the Government. 45. The most urgent transmission requirement is the construction of a 50 km 220 kV line from Dakar to Thies to secure the supply to the phosphate industry. GOS confirmed at the July 1985 donors' meeting that the inclusion of this line in the proposed project would enable GOS to drop the planned investment by CSPT (Talba Phosphate) in a 15 MW captive diesel plant. Such an investment by CSPT would have been inappropriate, as greater benefits would ensue from integrating the plant in the public supply system to take advantage of the future hydro power from Manantali. Urgent subtransmission and distribution measures for Dakar, to be implemented by 1988, have been defined in a recent study. 46. Investment requirements for the power sector were presented to the July 1985 donors' meeting and amount to US$187 million equivalent between 1986-90 at constant 1985 prices (US$230 million equivalent in current prices). The 1986-88 program (US$100 million) consists of ongoing, funded projects (22 percent), the proposed project (65 percent), and a planned start on the third diesel unit and the transmission lines associated with the Manantali hydro development (13 percent). Completion of the two latter projects accounts for about 78 percent of the 1989-90 program. The Manantali hydro power station is not included in SENELEC's program, as its construction would be the responsibility of OMVS. Having regard to the impact of this program on SENELEC's future financial position, agreement was reached that SENELEC will consult with IDA annually on the power sector investment program. Power Sector Issues and Government Policy 47. Exploitation of the hydro power from the Senegal and Gambia Rivers is the responsibility of two regional organizations, OMVS and "Organisation pour la Mise en Valeur du fleuve Gambie" (OMVG), and its development poses complex institutional and technical problems. The Manantali project would be the first step in the least cost sequence of development of hydro resources. OMVS is constructing the dam principally for agriculture, but the design allows for the generation of 600 GWh of firm energy by the addition of a 200 MW power plant. The dam is due for completion in 1988 but electricity could not be supplied before 1992 at the earliest. Detailed studies are needed for the two 900 km 220 kV lines, of which 300 km would be within Mali, to supply electricity to Dakar. Furthermore, given the regional nature of OMVS, any progress will require the resolution of the institutional and intercountry issues associated with  - 15 - the development, ownership and management of power facilities. To this end, a recently approved advance from the Special Project Preparation Facility tSPPF) is assisting the financing of the necessary studies. The engineering for the transmission lines would be financed under a separate operation, once the institutional and intercountry arrangements have been agreed. 48. Efforts to strengthen the laws relating to public enterprises in Senegal have begun under the Second Parapublic Technical Assistance Project. The present legislative framework ("Cahier des Clauses et Conditions Generales") for the power sector has recently evolved from the concession system and is reasonably satisfactory. The annex to this document, which regulates the tariff issues, is being finalized. Strengthening SENELEC's autonomy as a power utility is a longer-term objective which would be further discussed with GOS during implementation of the proposed project. SENELEC - The Implementing Agency 49. Organization, Management and Staffing. SENELEC is responsible for public electricity supply in Senegal and has a monopoly on generation (with some restrictions), transmission and distribution. SENELEC's Board consists mainly of Ministry representatives who determine and monitor SENELEC's broad policy. Policy implementation is the responsibility of a six-man Management Committee which includes the Chairman of the Board and the General Manager, who is responsible for the day-to-day management of SENELEC. At present, in addition to the supervision by MDIA (DE), various other controls are exercised over SENELEC. However, this process is being reviewed in the broader context of public enterprise reform under the ongoing parapublic sector project. 50. SENELEC's headquarters are in Dakar and it has seven regional offices for distribution and remote diesel generation. SENELEC suffers from internal organizational and managerial weaknesses and a precarious financial position. SENELEC has a staff of about 2,100. By regional standards this level is reasonable but extra efforts are needed to train staff, and this would be addressed under the rehabilitation program. Furthermore, the proposed project would continue to finance the training of suitable candidates at the regional training school "Ecole Superieure Interafricaine de l'Electricite" (ESIE) begun under the Power Engineering and Technical Assistance Project. 51. Rehabilitation Program and Performance Contract. A diagnostic study financed under the ongoing Second Parapublic Technical Assistance Project, identified major weaknesses in SENELEC's organization, management and staffing. A rehabilitation program which addresses these weaknesses has now been prepared, and agreement was reached to implement it over the period of the performance contract. Many of the changes will require time to be implemented, in particular those requiring a change of management style and practices. SENELEC has engaged advisory technical assistance personnel in the areas of finance, customer accounting, planning and  - 16 - operation to assist its own staff in the rehabilitation; they are drawn from a power utility under a general "twinning" agreement. 52. Agreement has been reached between GOS and SENELEC on the framework ("Contrat-Plan") to regulate the performance of SENELEC over a four-year period (1986-89) thus covering the rehabilitation program. The finalizing and signing of this performance contract is a condition of Credit effectiveness. 53. Accounting and Audit. The ongoing Power Engineering and Technical Assistance Project provided funds to audit SENELEC's accounts and to review its accounting procedures. The latter have steadily and significantly improved in recent years, and the remaining weaknesses would be addressed in the rehabilitation program of the proposed project. The audits for 1979-84 have been satisfactorily completed; agreement was reached that SENELEC will continue to have its accounts audited by independent auditors satisfactory to IDA, and will submit to IDA its audited accounts, and the auditor's report thereon, within 6 months of its fiscal year end. 54. Past Financial Performance. SENELEC's financial performance has deteriorated in recent years, principally because of its high cost of production, and of GOS's reluctance to grant timely and adequate tariff increases necessary to cover rising costs. Consequently, SENELEC has incurred operating deficits in each of the last four years and as at end 1985, SENELEC's liquidity was inadequate (the current ratio was 0.9). Primarily, as a result of high public sector receivables, SENELEC has had to delay payments for fuel (CFAF 8 billion) and to resort to a bank overdraft (over CFAF 1 billion). Due to the revaluation of fixed assets on January 1, 1983, when SENELEC was established, its debt/equity ratio is satisfactory (30:70). A tariff increase of CFAF 2/kWh (about 3 percent) was introduced from March 1, 1985, but was insufficient to overcome SENELEC's serious financial problems in FY85. Reduction of fuel prices, improved management and maintaining tariffs at adequate levels should help to restore SENELEC's financial viability. 55. Billing and Collection. Accounts receivable as of end 1984 were over CFAF 13 billion (US$31 million equivalent), representing about four months' billings. This high level was due primarily to the poor payment record of the public sector, whose accounts were more than one year in arrears (about CFAF 4 billion) and, to a lesser extent, to private consumers outside Dakar. SENELEC recently started a major recovery and disconnection campaign, particularly directed at private clients. For the public sector, SENELEC has reached agreement with the various agencies on the amounts outstanding, and on a plan to set off the arrears against amounts due by SENELEC in respect of debt service. As of end 1985, receivables had dropped to about CFAF 10 billion (US$24 million equivalent). The rehabilitation program proposes comprehensive measures to strengthen SENELEC's control of collections. In order to complement these actions, agreement was reached that: (a) the annual budgets of all Gover ent departments and local authorities would include sufficient  - 17 - provision to cover the cost of their annual consumption of electricity; and (b) SENELEC would ensure that the level of consumer receivables would not exceed the equivalent of 3 months' billings. 56. Tariffs. Tariffs for each class of consumers are uniform throughout Senegal. This results in a substantial subsidy to consumers in the secondary centers, where the costs of supply from isolated diesel plants are high. Tariffs are at the level based on the medium-term least-cost development program, which is about CFAF 60/kWh (USd15/kWh). However, they need to be related more closely in future to the costs of supply. Agreement has been reached following a recent tariff study on an acceptable tariff structure and levels, which are to be implemented as a condition of effectiveness. 57. Internal Cash Generation. In order for SENELEC to contribute to the financing of its investment program as needed to ensure its envisaged implementation, SENELEC's financial position needs to be substantially improved. The reduction in the price of its fuel as of July 1986 would go a long way towards the achievement of this objective. Tariff increases are, therefore, unlikely to be required during the program period, as long as fuel prices to SENELEC (US$23/barrel) remain at about their present level. However, in order to ensure SENELEC's ability to meet that ob4 ective, agreement was reached that the Government and SENELEC would undertake whatever measures would be required, including tariff increases, so that SENELEC achieves a contribution to its investments from internally generated funds of not less than 30 percent annually as of 1987. At this stage of SENELEC's development, it was deemed simpler to establish a satisfactory level of internal cash generation, taking into account debt service and working capital requirements, than a rate of return requiring a regular fixed asset revaluation. 58. Financing Plan. SENELEC's financial requirements in current prices for the period 1986-90, based on its investment program (para. 45), amount to about US$230 million, of which the proposed project accounts for about US$82 million, excluding US$2 million for the energy conservation component to be implemented by MDIA. SENELEC has already secured about US$20 million to finance ongoing projects from AfDB, BADEA, CCCE and CIDA. For the proposed project GOS would be the borrower of the IDA Credit of US$20 million, of which US$18 million would be passed on to SENELEC. The remaining US$41 million foreign exchange cost of the proposed project would be financed by other donors. Further borrowings of about US$85 million would be needed to finance major new investment from 1988 onward, most of which is attributable to the further 20 NW diesel plant and transmission links to the Manantali hydrostation. At this stage, however, the investment program and financing plan after 1988 must remain tentative. 59. Future Finances. With progressive implementation of the rehabilitation program, SENELEC's financial position would improve; in particular, SENELEC would be able to repay the balance of its arrears to its fuel supplier and its overdraft (para. 54) within one or two years, and thereafter maintain adequate levels of working capital and liquidity. Debt  - 18 - service coverage and current ratios would be satisfactory through 1990. However, to help ensure SENELEC's future financial viability, agreement was reached during negotiations that SENELEC would not incur new debt without IDA's concurrence unless its expected future internal cash generation is at least 1.5 times future debt service, including the proposed borrowing. Bank Group Role in the Energy Sector 60. Strategy and Rationale for Involvement. Bank Group strategy aims at assisting the authorities to achieve an optimal use of energy resources, to reduce the cost of electricity supply, meet economic demand and ensure satisfactory service to consumers while, at the same time, reducing the burden of financial demands imposed by the sector on Government resources. These aims are being pursued by a strategy of: (a) continued institution building in the power sector, by way of strengthening SENELEC; (b) assistance to GOS and SENELEC in making optimal decisions on rehabilitation and expansion of power facilities, including the promotion of regional hydro resources; and (c) conservation measures, including economic pricing of electricity. The Bank Group role is essentially catalytic. For example, at GOS request, the Bank Group acted as coordinating agency for the July 1985 Energy Sector donors' meeting which provided a forum for major sector policy reforms and for mobilizing the substantial cofinancing needed for the proposed project. Without our involvement, it is unlikely that the above aims would be achieved in a satisfactory and coordinated way, as other sector aid is predominantly of a bilateral nature. 61. Past Involvement in the Sector. In FY80, the Bank Group approved the Power Engineering and Technical Assistance Project to assist GOS to develop an overall energy plan and to reorganize the sector. Several studies (generation/transmission master plan, tariffs, audits) have been completed satisfactorily, and provide the basis for the institutional, technical and financial improvements envisaged under the proposed project. Technical assistance was also provided to MDIA in energy and power sector planning, and an overseas training program was established for Senegalese officials responsible for energy planning. Identification of energy sector reforms was further supported in FY83 through the Second Parapublic Technical Assistance Project, which provided funds to finance, inter alia, a diagnostic study and rehabilitation program for SENELEC. Implementation of both projects has been satisfactory. PART lV - THE PROJECT 62. The project was prepared by SENELEC following studies under the ongoing Power Engineering and Second Parapublic Projects and was appraised in May/June 1985. Negotiations were held in Washington in January 1986; the Senegalese delegation was headed by Mr. Demba Diop, Director of Programming, Financing and Investments Monitoring in the Ministry of  - 19 - Planning and Cooperation. Supplementary data on the proposed project is presented in Annex III. Project Obiectives 63. The proposed project would assist Senegal to: (a) optimize its use of energy resources through the elimination - of price distortions and through the implementation of energy conservation measures; (b) reduce the cost of electricity generation through improved efficiency and availability of existing plant and through the construction of more fuel-efficieut facilities; (c) strengthen and expand the existing transmission and distribution system to improve reliability, reduce losses and generate sales, mainly in the Dakar area; and (d) strengthen SENELEC's management and restore its financial viability through a comprehensive rehabilitation program. Project Description 64. The proposed project consists of the following components: (a) Generation: Mi) the installation of 2 x 20 NW of low- (or medium-) speed diesel units at Cap des Biches; and (ii) completion of the ongoing rehabilitation of the existing steam units at Cap des Biches. (b) Transmission: Mi) rehabilitation of the existing 90 kV transmission line and substations, Bel Air/Hann and Bel Air/Cap des Biches; (ii) construction of a new 50 km, 220 kV line, Cap des Biches/Thies (operated at 90 kV initially) and a 90 kV substation at Tobene; and (iii) construction of a new 18 km, 90 kV line, Hann/Cap des Biches. (c) Distribution: (i) rehabilitation and strengthening of the Dakar network (75 km of 6.6 kV line and 34 substations);  - 20 - (ii) rehabilitation of about 100 km of 30 kV line outside Dakar and construction of 45 km of 30 kV line to connect 2 secondary centers to the main grid. (d) Engineering: Consultant services for the generation, transmission and distribution components (135 man-months); (e) Energy Conservation: Consultant services, training and equipment for the industrial sector energy conservation program (1986-88); (f) Studies of: (i) petroleum product supply, refining and distribution arrangements, (ii) organization and operation of the "Fonds National de l'Energie", and (iii) household energy consumption; (g) Technical Assistance: (125 man-months) to SENELEC, as defined in the rehabilitation program; and (h) Training: Continuation of the program of scholarships to ESIE of 7 students annually for the three-year period 1987-89 and provision for about 40 man-months training for SENELEC staff in those areas identified in the rehabilitation program. Project Cost 65. Based on exchange rates prevailing at the time of negotiations, the estimated cost of the project, including provision for physical and price contingencies, but excluding interest during construction, is US$81 million equivalent (including US$2 million of energy conservation), and is set out in the Credit and Project Summary at the beginning of this report. The foreign exchange cost of US$61 million equivalent represents about 75 percent of the project cost. Project cost estimates are based on recent studies and are at end-1985 prices. Foreign costs of engineering services and technical assistance personnel are based on currently prevailing rates. The cost figures do not include taxes and duties on the proposed project. The cost of the 40 MW diesel component is based on low-speed units, although bids will be invited for both low- and medium-speed units in mid-1986. The project cost includes 10 percent physical contingencies for all equipment, which is reasonable. Price escalation for both foreign and local costs have been included at rates of 7 percent in 1986 and 7.5 percent thereafter. Project Financing 66. An IDA Credit of US$20 million equivalent to GOS is proposed which would finance about 25 percent of the project cost. IDA would finance a part of the civil works of the new diesel plant, the foreign cost of the Dakar distribution rehabilitation component, consultant services for engineering, energy conservation, energy studies and technical assistance, and training. Most of the proposed Credit (US$15.5 million equivalent) would be relent by GOS to SENELEC for 20 years, including 5 years of grace,  - 21 - at the IBRD prevailing rate. About US$2.5 million equivalent would be relent to SENELEC for 20 years including 10 years of grace, at the IBRD prevailing rate to finance technical assistance and training. SENELEC would bear the foreign exchange risk on its share of the Credit. The execution of a satisfactory subsidiary financing agreement between GOS and SENELEC is a condition of Credit effectiveness. The remaining US$2 million equivalent of the IDA Credit would be retained by GOS to finance the energy conservation and energy studies components of the project. The local cost of the project (about US$23 million equivalent) would be covered by SENELEC from internally generated funds. GOS and SENELEC would assume responsibility for any cost overruns. 67. About US$41 million equivalent cofinancing is needed for the proposed project. At GOS request, the Bank Group has taken the lead in coordinating arrangements for this cofinancing and a meeting was held in Dakar in October 1985, during which the financing plan was finalized. CCCE would contribute US$28 million equivalent for design, electromechanical components and construction of the diesel plant. However, formal commitment of CCCE is awaiting a satisfactory agreement between SENELEC and CSPT, its largest industrial customer, on further reduction of the tariff level to be applied to CSPT. We do not anticipate any problems in this respect since all concerned agree on the basic principles being applied in determining this level. AfDB would contribute US$8 million equivalent and BOAD US$5 million equivalent to the financing of the transmission component and distribution component outside Dakar; BOAD would also finance part of the rehabilitation of the Cap des Biches steam plant. The effectiveness of all cofinancing is a condition of Credit effectiveness. Since these cofinancing amounts are denominated in currencies orher than US dollars, fluctuations of the US dollar exchange rate will have no real effect on the financing plan. With respect to the IDA share, which is pegged in SDR's to the dollar value in effect at negotiations, when the exchange rate of the US dollar was CFAF 412, used in this project, such fluctuations would have no significant effect, and would, at any rate, be absorbed by the built-in contingencies. Project Implementation 68. Status of Preparation and Execution. Project preparation has been satisfactorily advanced under the power engineering and second parapublic projects, and through the distribution expansion study which have defined optimal programs for power sector rehabilitation and expansion. Project completion is expected by end-1990. 69. SENELEC would implement all aspects of the proposed project, except for the energy conservation com-onent and energy studies for which IDIA (DE) would be the executing agency. Existing SENELEC staff would be responsible for project management, with overall co-ordination by the General Manager. However, in view of SENELEC's limited experience and capabilities, assistance from engineering consultants and technical assistance personnel would be needed. SENELEC lacks experience in engineering the diesel component and has appointed Electricite de France  - 22 - (EdF) for design, bid evaluation and supervision under terms of reference agreed with IDA. EdF has also been appointed, with ongoing CCCE financing, to engineer the transmission component. Consultants have been appointed to assist SENELEC in programming and monitoring the transmission and distribution components of the proposed project under terms of reference agreed with IDA. SENELEC has also appointed satisfactory technical assistance personnel, drawn from a power utility, to assist in implementing major aspects of the rehabilitation program. An advance of US$400,000 was made from the Project Preparation Facility to accelerate the engineering and technical assistance components of the proposed project. 70. Procurement. Apart from the civil works, the CCCE-financed diesel plant package which includes the detailed design, electromechanical component and erection vould be procured following French procurement procedures. In order to maximize competition, bids for both low- and medium-speed diesel options will be sought. Civil works would be procured in accordance with the Bank Group's ICB requirements; bids would be restricted to prequalified contractors. Transmission line and substation contracts would be awarded on a supply and erect basis, following BOAD and AfDB procurement procedures. The distribution component outside Dakar would also be procured under BOAD and AfDB procedures. IDA-financed distribution materials would be procured under Bank Group guidelines. Most of the installation work on the distribution component would be financed by SENELEC and would be carried out by competent local contractors, follo-;ing LCB procedures which are satisfactory. IDA-financed components for amounts over US$0.25 million equivalent would be subject to prior review. Consultants and technical assistance personnel to be financed by IDA have been appointed in accordance with Bank Group guidelines. Procurement arrangements are summarized in the following table:  - 23 - Procurement Arrangements / (US$ Million) ICB LCB Other Total Cost Project Component Generation 9.3 31.9 41.2 (4.4) (4.4) Transmission 11.2 1.4 12.6 Distribution 12.0 8.1 20.1 (9.5) (9.5) Engineering 2.0 2.0 b (1.6) (1.6) - Technical Assistance 1.7 1.7 (1.5) (1.5) Training 0.9 0.9 (0.9) (0.9) Energy Conservation 2.3 2.3 (2.1) (2.1) Total Project Cost 32.5 9.5 38.8 80.8 (13.9) (6.1) (20.0) a/ Figures in brackets represent proposed IDA financing. b;/ Includes PPF advance. 71. Disbursements. The proposed Credit would be disbursed against 100 percent of foreign expenditures on: (a) the civil works for the new diesel plant; (b) materials and equipment for rehabilitation of the Dakar distribution system; (c) engineering services; (d) technical assistance; (e) training; and (f) energy conservation. The proposed Credit is expected to be fully disbursed by mid-1991. This corresponds to the Western Africa Region Power Sector Profile. 72. Monitoring and Reporting. SENELEC has established a Project Unit satisfactory to IDA, under the General Manager, to monitor project execution. Detailed monitoring and reporting requirements were discussed with SENELEC during appraisal and were finalized at negotiations. These would include quarterly reports on SENELEC's activities (project, investment program and financial position). 73. Environmental Aspects. The proposed project would not have any major adverse environmental effects. The diesel plant would be located at the existing Cap des Biches power plant, which is some distance away from Dakar, and measures would be incorporated in the design to minimize noise and pollution.  - 24 - Project Justification, Benefits and Risks 74. No technical alternative exists for the rehabilitation components of the proposed project. These are urgently needed to improve the efficiency and availability of existing generation plant and to improve reliability and reduce losses in the transmission and distribution system. New investments in generation and transmission have been selected on the basis of the least cost sequence of system expansion to meet load growth to the end of the decade. 75. The composition of the proposed project makes it appropriate to consider the return on SENELEC's five-year investment program through 1990 as a reasonable proxy for the return on the proposed project. The Internal Rate of Return (IRR) on SENELEC's investment program (excluding investments related to the Manantali project) is 17 percent, based on measurable costs and benefits. The latter understate the total benefits, particularly those arising from rehabilitation which have not been quantified (improved reliability and maintenance of the present level of sales). A 10 percent increase in total benefits would raise the IRR to 20 percent. A 10 percent reduction in costs would have the same effect. On the other hand, the IRR is not particularly sensitive to different assumptions on the trend of real oil prices after 1995. The effect of a 10 percent variation in the exchange rate of the US dollar would have no significant effect on the IRR. 76. The project presents no unusual technical or environmental risks. The risk of cost overruns is small, as the cost of the largest component of the project (new diesel plant comprising about 50 percent of the project cost) may prove to be lower than estimated. The main area of uncertainty is the pace of implementation of SENELEC's recovery program as, despite the proposed use of technical assistance personnel, considerable political and managerial will is needed to resolve present problems. PART V - RECOMMENDATION 77. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. A.W. Clausen President Attachments Washington D.C. May 20, 1986  -25- ANNEX I Page 1 of 7 T A * L Z 3ft SL3061. - SOCIAL INDICATORS DATA Ni SENEGAL SUFR3300r8s (NIGfdE AVEAOSU) pm OT (MMT lUi:T iSTIUNA) lb 196unL 197mot ZOIcnTk AFCi S. oF SMMA W. A 6 MID SU . C_ mug. m10 iotL 196.2 191.2 196.2 MUCILIAL n9.4 1o0.5 109.3 m'm cars CUES) .. .. 440.0