Senegal - Second Telecommunications Project

Denm of The World Bank FOR OMCIAL USE ONLY C9 />/$tSC Report No. P-4326-SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT OF SDR 19.4 MILLION (?QUIVALENT TO $22.0 MILLION) TO THE REPUBLIC OF SENEGAL FOR A SECOND TELECOMMUNICATIONS PROJECT May 23, 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 = CPA Franc (CFAF) $1.0 CFAF 360 CFAF 1 million = $2,778 FISCAL YEAR Government and SONATEL: July 1 - June 30 SYSTEM OF WEIGHTS AND MEASURES: Metric ABBREVIATIONS AND ACRONYMS AfDB - African Development Bank BOAD - Banque Ouest-Africaine de D-veloppement (West African Development Bank) CCCE - Caisse Centrale de Cooperation Economique CEDEAO - Communautg Economique des Etats de l'Afrique de l'Ouest (Economic Communit-y of West African States) CIDA - Canadian International Development Agency DEL - Direct Exchange Line EIB - European Investment Bank FAC - Fonds d'Aide et de Cooperation (FAC) GPC's - Guaranteed Private Credits ITU - International Telecommunication Union PANAFTEL - Pan-African Telecommunications Network OPCE - Office des Postes et de la Caisse d'Epargne OPTS - Office des Postes et Telecommunications du Seingal SONATEL - Societe Nationale des Thlecommunications du Senegal TELESENEGAL - Societe Nationale des Thlgcommunications Internationales du Senegal UNDP - United Nations Development Programme  SENEGAL SOCIETE NATIONALE DES TELECOMMUNICATIONS (SONATEL) SECOND TELECOMMUNICATIONS PROJECT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Senegal. Beneficiary: Soci6tf Nationale des Telecommunications du Senegal (SONATEL). Amount: US$22.0 million equivalent. Terms: Standard IDA terms. Onlending Terms: The credit would be onlent to SONATEL for 20 years, including 5 years of grace, at the standard Bank interest rate prevailing at the date of the Credit Agreement. SONATEL will bear the foreign exchange risk. Project Description: The proposed project consists of SONATEL's 1986-1993 investment program, excluding ongoing and future works. The program aims at improving operational efficiency and maintenance, and increasing system utilization through rehabilitation of existing equipment and network expansion. The project comprises: (a) installation of about 34,600 lines of switching equipment, with associated cable networks, buildings and subscriber facilities; (b) expansion and rehabilitation of long-distance transmission links; (c) establishment of a national maintenance organization; and (d) technical assistance. Project Benefits and Risks: The improved telecommunications services to be provided by the project will benefit all sectors of Senegal's economy, promote more efficient use of  - ii - capital and energy resources, and facilitate agricultural and commercial/industrial development, and the extension of health, educational, and other services to rural areas. Environmental pollution will be reduced due to more efficient transportation use. Substantial resource mobilization and net transfers to Government will occur. The project faces no unusual risks. The recent sector restructuring appears to have been implemented smoothly. The technical assistance component of the project will assist management in critical areas. There could be delays in physical implementation; however, a number of project components will be executed on a turn-key basis and some are already well underway, so that this risk is considered minimal.  - iii - Estimated Costs: Local Foreign Total Component (US$ million equivalent) Thies Region: switching, networks, transmission, buildings 3.1 3.8 6.9 Ziguinchor-Can Skiring-Boucote: microwave links, local installations 0.3 0.7 1.0 Cap Vert Region: switching, local networks, junctions 21.0 26.4 47.4 Ziguinchor, Kolda, Tambacounda Regions: switching, networks, transmission, buildings 9.5 12.3 21.8 Engineering and training for previous items 0.4 1.7 2.1 National Maintenance Plan 6.5 11.6 18.1 Kaolack, Fatick Regions: switching, networks, transmission, buildings 4.8 6.5 11.3 Various works in all regions 5.0 8.8 13.8 Technical Assistance 0.0 0.5 0.5 Total Base Cost 50.6 72.3 122.9 Physical contingencies 3.8 3.7 7.5 Price contingencies 11.7 14.8 26.5 TOTAL PRuJECT COST: 66.1a/ 90.8 156.9 a/ Local costs incLude CFAF 12.8 billion (US$35.5 million) in customs duties and local taxes.  - iv - Financing Plan: Local Foreign Total z ______ (US$ million equivalent) IDA 0.0 22.0 22.0 14 CCCE 0.0 20.8 20.8 13 BOAD 0.0 4.2 4.2 3 AfDB 0.0 12.6 12.6 8 GPC's 0.0 5.6 5.6 4 SONATEL 66.1 25.6 91.7 58 TOTAL 66.1 90.8 156.9 100 Estimated Disbursements: IDA FY: FY87 FY88 FY89 FY90 FY91 FY92 FY93 - - - - - - - - US$ million - - - - - - - - - Annual 0.4 2.0 3.0 5.3 6.9 3.0 1.4 Cumulative 0.4 2.4 5.4 10.7 17.6 20.6 22.0 Ecinomic Rate of Return: 19% Staff Appraisal Report No: 5977-SEN, dated May 23, 1986. Map: IBRD No. 19284-Senegal. fI  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF SENEGAL FOR A SECOND TELECONMUNICATIONS PROJECT 1. I submit the following report and recommendation on a proposed development credit for the equivalent of SDR 19.4 million (US$22.0 million equivalent) on standard IDA terms to the Republic of Senegal to help finance a proposed Second Telecommunications Project. Additional financing for the project would be provided by France, through a loan from CCCE in the total amount of US$20.8 million equivalent, a loan from AfDB in the total amount of US$12.5 million equivalent, a loan from BOAD of US$4.2 million equivalent, and credit guarantees in the total amount of US$5.6 million equivalent. PART I - THE ECONOMY 1/ 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 importart 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 2.5Z per annum, i.e., below the e-..-imated rate of population growth. 1/ Parts I and II of this report are identical to Parts I and II of Report No.4325-SE, dated May 20, 1986 (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).  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 fluctuations, and despite higher rates of private and public investment, 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% 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%, 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 later 1970s brought a further deterioration in the terms of trade, causing a total loss in national income of roughly 6% 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 objectives were to stabilize the economy during the first two years and then to achieve an economic growth rate of 4% per annum in the following three years. This program was supported by an Extended Fund Facility (EFF) of US$243 million equivalent, approved by the IfF 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 IMF), 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 and Adjustment Efforts 9. The overlay of acute structural and financial problems which Senegal had already suffered for a number of years was compounded in 1983/84 by the return of severe drought conditions. These reduced by  - 3 - almost 40% 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. 10. While there are some encouraging jigns 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 persistent 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% 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, limiting the growth of GDP in that year to only about 2 percent. With an estimated one million ton cereal crop and an improved prcduction 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, with which credit outstanding a; end-June 1985 was equivalent to 260% 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% of GDP, was successfully completed. A new standby arrangement covering an 18-month period to June 1986 was approved by the IMF Board in Januarv 1985, and performance is judged by the IMF 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 objec.ives 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  - 4 - 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. 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 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 maintai.xing 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 producer were raised by about 1OZ for the 1984/85 season and by around a further 20% 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 the 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 reestablish 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 atten- tion 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  - 5 - year under the SAL. The objective is to put in place a system of three year rolling investment programs starting with fiscal year 1987. 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 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 2000 staff have been laid off. For others, a redefinition of tasks 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 very much depend on the success of its medium-term adjustment program. This program seeks tce create an improved base for development both by correcting the unsustainable imbalances on 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 lebs 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 in proceeding on the two large dams planned for the Senegal River by the Organisation pour la Mise en Valeur de la Vallee du Senegal (OMVS), and the first (Diama) should be  completed in 1986 and the second (Manantali) in 1988. The Government's new agriculture policy aims to eliminate 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 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 groundnuts, 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 public 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 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 fir ess of the Government's commitment to tackle these problems. PART II - BANK GROUP OPERATIONS IN SENEGAL 2/ 20. As of March 31, 1986, the Bank Group had approved 61 operations in Senegal for a total of US$646.0 million, consisting of 36 IDA credits, 11 Bank loans, five blends of Bank and IDA funds, six IFC operations, two blends of Bank and IFC funds, and one blend if 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 of 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 2/ See footnote on page 1.  - 7 - 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 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 rehabilitatian 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 Val3ey. 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 maintenance; the Dakar Container  -8- 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, and a follow-up project to support tariff policy reforms and expansion of operating capacity has been submitted to the Executive Directors for their consideration in this fiscal year. 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 ii. 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; and 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 improved 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 meetiags are planned during  9 1986 for agriculture, industry the 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%, of which roughly two-thirds was IDA-financed. The Bank Group's share in outstanding medium/long-term (MLT) debt was 19% at end-1984 and is projected at around 24% by 1990. The Bank Group's share in MLT external debt service payments (excluding IMF) rose from 3.7% in 1980 to 16% in 1984, but is projected to decline to around 8% in 1990, under an assumption of no new debt renegotiations between 1986 a.d 1990. PART III - THE TELECOMMUNICATIONS SECTOR Telecommunications and the Economy 30. Compared with alternative means of communication, telecommunications are more efficient in terms of capital, energy consumption and user time. With adequate telecommunications facilities, the level and variety of productive activities can be increased considerably in areas where this would otherwise not be feasible. In terms of the specific constraints on Senegal's economic and social development, telecommunications can play a significant role in: (a) increasing the efficiency of transport, resulting in energy savings and greater afficiency of productive interactions; (b) improving the working of the market mechanism by expediting and extending access to information; (c) providing essential domestic and international communications for tourism, an important source of foreign exchange; (d) facilitating communication between Dakar and provincial centers, as required for effective coordination and management of development activities; (e) facilitating the extension of social services, public works and Government administration to rural areas; and (f) increasing domestic savings by transferring part of the incremental net income from telecommunications operations to government. Access to Service 31. As of January 1, 1985, the average telephone density in Senegal was only about 0.32 telephone lines (DELs) per 100 inhabitants, which is only about 65% of the average for Africa (excluding the Republic of South Africa). For example, the average telephone density in the Republic of Cote d'Ivoire, already low in comparison with other countries with similar GNP per capita, was 0.56 per 100 inhabitants in 1985. The low average density in Senegal is the result of very low investment amounting only to about 0.2% of GNP on average, in the domestic network during the past decade. The number of telephone subscribers has only been growing at about  - 10 - 4.2% per annum in recent years, compared to the African average of 8.7% per annum. Access to service is unevenly distributed, with 71% of the total number of telephone lines in the Cap Vert (Greater Dakar) region, 17% in five other major cities, and 12% for the rest of the country. There are about 150 public telephones in the country. Telex service is available to about 780 subscribers, of which 690 are in Dakar. Usage of Service 32. Of the telephone subscribers, 16% are in the public and 84% in the private sector. About 26% of telephone operating revenues are from domestic calls, 67% from international calls (due to the large number of Senegalese living abroad and substantial transit traffic revenues), and 7% from rentals and other services . The average revenue of US$1,750 per DEL in 1985 is high by international standards, reflecting the relatively high call charges and the multiple and intensive use of many telephone lines. Quality of Service and Existing Facilities 33. The quality of service is generally poor. About 15% of the aational network is out of service at any given time due partly to unsuit- able or obsolete cable networks and lack of coordinated and systematic maintenance. An acceptable figure would be 2%. Delays in reestablishing service are usually more than a week, often more than a month (50% should be reestablished in one day). Inadequate maintenance on domestic long distance connections has resulted in poor service and congestion as measured by the number of faults (5) per line per year (1 per year), the duration of such faults (50% last more than seven days, versus an acceptable figure of 50% lasting less than one day), and the average call completion rate during peak hours (generally less than 50%). International facilities (one type A satellite earth station and four submarine cables with terminal switching equipment) are well maintained and have low fault rates, but full utilization is inhibited by the poor local network. 34. As of January 1, 1985, total telephone switching capacity was 31,599 lines and telex exchange capacity 807 lines. About 94% of telephone subscribers and all telex subscribers are connected to automatic exchanges. About 96% of international telephone calls and 99% of telex communications are direct-dialled. However, the capacity of much installed equipment is exhausted in some areas, underutilized in others, or is obsolete. Three of the ten regional capitals and 14 of the 30 departmental capitals have only manual service. Local distribution networks are generally poor and have inadequate capacity. Demand for Service 35. As of January 1, 1985, connected telephone lines met about 70% of expressed demaad (working lines plus registered applicants). However, there is significant suppressed demand which is not accounted for since potential subscribers are discouraged from registering by long waiting times. Expressed demand over 1980-85 grew at about 7.0% per annum, while connected DELs increased at only 4.3% per annum. Expressed demand is  - 11 - expected to grow by at least 8.1X per annum over 1985-1993. Present planning aims to meet about 78% of expressed demand by mid-1993, compared to 70X at present. Only about 63% of demand for telex service is satisfied due to saturation of the available switching equipment. Additional capacity will be available by the end of 1987. Sector Organization 36. Until recently, domestic telecommunications services were the responsibility of the Office des Postes et Telecommunications du Senegal (OPTS), and international telecommunications were the responsibility of the Societe Nationale des Telecommuniations Internationales du Senegal (TELESENEGAL). This arrangement was unsatisfactory. Poor planning and execution of investments, combined with inadequate maintenance and operating inefficiencies, led to increased customer dissatisfaction, and aggravated the discrepancy between domestic and international services. A 1983/84 consultants' study, financed under the Second Parapublic Technical Assistance Project (Credit 1398-SE) made specific sector reorganization proposals. The following recommendations were adopted by Government in July 1985: (a) OPTS' postal/financial services would be reorganized into the Office des Postes et de la Caisse d'Epargne (OPCE); and (b) the telecommunications branch of OPTS would be merged with TELESENEGAL, forming SONATEL. The reorganization became effective on October 1, 1985. The new entity is functioning satisfactorily . 37. SONATEL is a Societe Nationale (State Corporation) with Govern- ment as the sole shareholder. The status of Societe Nationale gives SONATEL's management wide ranging operating autonomy, subject to policy review and approval by its Board of Directors. SONATEL's organizational structure is satisfactory. Its senior staff consists of the most able managers of the two merged entities. They are qualified to implement the proposed project. Under the project, technical assistance will be provided to assist management in selected areas. Sector Constraints 38. The recent sector reorganization should help overcome some major past problems. First, the previous sector organization was not suited to the highly commercial nature of telecommunications activities. OPTS was directly supervised by Government and was burdened with problems relating to the postal/financial services. TELESENEGAL had adequate autonomy, but was hampered by dependence on OPTS for subscriber connections, maintenance of the domestic network, and bill collection. Second, job descriptions for most OPTS staff were rarely applied and there was inadequate delegation of authority and responsibility. Recruitment policy frequently did not match needs with qualifications. Third, most investment planning for the domestic network was done by consultants or by equipment suppliers. Overall programing was merely a listing of separate investments. This led to significant network imbalances, creating congestion in some areas and underutilization in others. Fourth, maintenance of the domestic network was not adequately organized. This led to neglect of equipment, increased maintenance costs, and reduced the useful life of existing equipment.  - 12 - Finally, OPTS' management was unable to provide the necessary leadership for system development, both vis-a-vis Government as well as its own staff. This resulted in stagnation of investments, even when financing was available, inability to connect subscribers, and a lack of operating efficiency stemming from the absence of financial management and of adequate recruitment policies. With the creation of SONATEL and its stronger, more purposeful management team, this constraint has been substantially alleviated. Similarly, the absence in the past of an agreed operating policy framework is a constraint that will be eliminated upon signature of SONATEL's Performance Contract (para 39). Sector Goals 39. Senegal's Seventh Development Plan (FY86-FY89) contains the following general objectives affecting the sector: (a) state enterprises should improve their management and generate funds sufficient to finance an adequate share of investments; (b) government subsidies to state enterprises should be reduced or eliminated to save public funds and to encourage increased efficiency; (c) the regions should be given increased participation in the national economy; and (d) as a matter of high priority, the telecommunications sector should be rehabilitated and expanded. The emphasis is on self-sufficiency, efficiency, and agreed operating policy frameworks in the form of Performance Contracts. Such a Performance Contract, establishing the mutual obligations of Government and state corporations, has been prepared for SONATEL and lays down its medium-term strategy. A final draft of the Performance Contract, acceptable to SONATEL, Government and IDA, was agreed upon during negotiations. Signature of this Performance Contract is a condition of effectiveness of the proposed credit. In accordance with the Plan's overall objectives, SONATEL's objectives are to: (a) rehabilitate existing installations, conduct systematic maintenance, and make additional investments to bring system utilization to a satisfactory level; (b) expand sector facilities to meet expressed demand; (c) increase operational efficiency and quality of service through improved management, staff training and maintenance; (d) generate a strong cash flow to finance a major share of investments, primarily through improved efficiency; and (e) make substantial net transfers to Government, dir^ectly through income taxes, and indirectly through custom duties on imported equipment. Role of the Bank Group 40. The Bank became involved in the sector through the First Telecommunications Project (Loan 866-SE) of US$6.25 million, approved in November 1972. The project, completed in December 1980, comprised: (a) rehabilitatioa, modernization and expansion of local telephone facilities in Dakar and in other cities and towns in the northern provinces; and (b) construction of long distance radio links from Dakar to the north and from there eastwards along the Senegal river, to support agricultural development. Technical assistance was provided to improve staff training and financial management. However, OPTS' management did not take full advantage of the training provided, neglected financial management and maintenance, and was unable to introduce systematic overall planning and  - 13 - programming. This caused delays, cost overrins, inadequately balanced investments and a lack of operating efficiency. Under the First Parapublic Sector Technical Assistance Project (Credit 764-SE) approved in 1979, IDA provided further support to OPTS in accounting and financial management; some improvement occurred. However, realizing the magnitude of the restrictions imposed on sector development by the fragmentation of the sector, Government decided to reorganize the sector (para 36). 41. IDA's role through this project is to address the principal constraints facing the sector. The primary emphasis is on institutional development. Through prior sector restructuring, significant obstacles to improved sector management have already been lifted; the technical assistance component of this project aims to provide added impetus to this process and provide management with valuable support in critical areas. IDA has been instrumental in bringing the size of the investment program down to levels that are feasible in terms of both physical implementation and availability of external financing at concessionary terms. Finally, IDA focuses through this project on rehabilitation, increased capacity utilization and improved maintenance as the primary means of optimizing the contribution of the sector to the economy. IDA played a major role in bringing about a consensus on the above objectives by convening a donor's meeting on Senegal's telecommunications sector in Paris (December 1984). During this donor's meeting, broad agreement was reached on sector restructuring, the investment program and the financing plan. PART IV - THE PROGRAM AND THE PROJECT The Program 42. SONATEL's investment program of CFAF 78.8 billion (US$ 218.9 million equivalent) covers July 1, 1986 - June 30, 1993. The program comprises ongoing works (15%), the proposed project (69%), and future investments (16%). Ongoing works are tofinanced by CCCE, BOAD, CEDEAO, and by SONATEL. They consist predominantly of equipment rehabilitation, and will increase utilization of existing equipment in the Cap Vert region. IDA played a key role in the formulation of the proposed investment program by focusing the objectives on: (i) rehabilitation and maintenance; (ii) achieving a balanced network; and (iii) network expansion if of high priority and economically justified. Future investments consist mostly of investments for the international network commencing around FY89. 43. The proposed second telecommunications project is a balanced and integrated package of high priority works. The basic objectives are to improve: (a) service quality; (b) access to service; (c) organization and management; and (d) operational efficiency and resource mobilization. The project aims to meet about 78% of expressed demand by 1993; exchange capacity will increase from 31,600 to 55,000 lines, and the number of connected subscribers from 21,200 to 42,800. The project was appraised in June 1985. Negotiations were 'neld in Washington from April 14 to 18, 1986. The Senegalese delegation was led by H.E. Djibo Ka, Minister of  - 14 - Communications. Supplementary data on the proposed project are presented in Annex III. Project Description 44. The project will be implemented during FY87-93. It comprises priority components of the overall investment program, namely: (a) 24,000 lines of mainly electronic switching equipment, cable networks and Intra-regional transmission for the Cap-Vert region; (b) 3,400 lines of electronic switching equipment for the Ziguinchor, Kolda and Tambacounda regions serving eight cities, plus associated cable networks, buildings and interurban transmission equipment; (c) 7,200 lines of electronic switching equipment for ten stations in the Thies, Kaolack and Fatick regions, plus associated cable networks, buildings and interurban transmission equipment; (d) facilities for linking Cap Skiring and Boucote to the national telecommunications network; (e) rehabilitation of various existing installations and cable networks and establishment of a national maintenance organization; (f) various works in all regions (feeder links, multiplex equipment, conventional and solar power installations, etc.); and (h) staff training, engineering and other technical assistance; Project Costs 45. Total project costs are estimated at CFAF 56.5 billion (US$156.9 million), including foreign costs of CFAF 32.7 billion (US$90.8 million) and local costs of CFAF 23.8 billion (US$66.1 million). Local costs include CFAF 12.8 billion (US$35.5 million) in customs duties and taxes. Project base cost estimates are based on mid-1984 prices experienced in Western Africa, and adjusted to mid-1986 level. 46. Physical contingencies have been calculated at 5% for imported equipment and 10% for services and local cost items. Price contingencies for local costs have been computed at 7% annually. The standard rates have been used for price contingencies for foreign costs, i.e., 7.0% (1986); 7.0% (1987); 7.5% (1988); 7.7% (1989); 7.6% (1990); and 4.5% per annum thereafter. Project Financing 47. The project's foreign costs of US$ 90.8 million will be financed by a number of cofinanciers and SONATEL. CCCE will provide US$20.8 million  - 15 - in foreign cost financing for switching and intraregional transmission in the Cap Vert, region together with guaranteed private credits (US$5.6 million ). AfDB would provide US$12.6 million to finance investments under the national maintenance plan. BOAD intends to provide US$4.2 million to finance switching and transmission in the Ziguinchor, Kolda and Tambacounda regions. IDA would provide US$ 22.0 million to finance the remaining project components. These financing arrangements were confirmed during negotiations. Fulifillment of the conditions of effectiveness of the CCCE and AfDB loans is a condition of effectiveness of the proposed credit. Appraisal of the BOAD-financed project component is expected to take place in the beginning of FY87. SONATEL will finance all local costs (US$66.1 million) and the foreign exchange gap of US$25.6 million from net internal cash generation. Efforts are continuing to find additional cofinancing for the foreign cost portion of the project. Assurances were obtained from SONATEL that it will seek prior agreement with IDA on any proposed changes in the investment program that would increase its cost by more than 10% in any one year or that would substantially alter network balance. Procurement 48. Procurement arrangements are summarized below: PROn Wr ARANGt (pS$ '000)a/ Limited Iter- tk:c_lated natioial local ICB Contract Biddig Bidding Other Total SW-;ching 16,011 (7,672) 1,362 (800) 26,415 43,788 (8,472) local retwiks 8,825 (2,598) 1,006 (220) 26,542 36,373 (2,818) TransmLssion 14,432 (7,684) 2,592 (660) 14,006 31,030 (8,3f14) Pmaer equipt. 3,395 (866) 705 (130) 2,507 6,607 (996) I.stnmunts 3,434 (314) 1,214 (284) 2,830 (272) 9,432 16,910 (870) Civil wiors 14,805 14,805 ( 0) Tectmical assisLanee 3,550 (500)b/ 3,831 7,381 (500) TaL 46,097 (19,134) 6,879 (2,094) 6,380 (772) 82,733 156,894 (22,000) Note: Figires in parentheses represent anmots financed by the proposed IDA credit. a/ nclluding contingncies. b/ Bank gidelines for the use of consultants. Equipment for US$19.1 million to be financed by IDA will be procured through ICB in accordance with the Bank's guidelines. Some spares and equipment to be financed by IDA (US$2.1 million), required to remove  - 16 - physical bottlenecks, would be procured on the basis of negotiated contracts with existing suppliers. IDA's approval will be required for the negotiated contracts to ensure that the prices are comparable to those likely under ICB. Limited international bidding (LIB) would be used to procure US$0.3 million of test instruments, tools and specialized vehicles, for which there is a limited number of suppliers. Consulting services for US$0.5 million will be procured according to Bank guidelines for the use of consultants. IDA financed contracts of over US$100,000 each will be subject to prior review covering about 70% of all contracts for equipment. Other IDA financed contracts will be subject to post-award review. Procurement under cofinancing will be in accordance with the guidelines of the respective institutions. Project preparation is well underway. Specifications for major project items have been prepared or are nearing completion. To minimize implementation delays, the issuance of invitations to bid for goods and services to be financed by IDA, for an amount equivalent to 50% of the credit amount, is a condition of effectiveness of the proposed credit. Disbursements 49. The proposed IDA credit of US$22.0 billion would be disbursed against full standard documentation for: (a) 100% of foreign expenditures for goods, including the foreign exchange component of equipment installa- tion; and (b) 100% of total expenditures for technical assistance. A Special Account of US$1.5 million, to be maintained in US dollars in a bank acceptable to IDA, will be established to facilitate IDA disbursements. Applications for replenishment will be submitted on a bimonthly basis. Disbursements for amounts of less than US$50,000 would be made against Statements of Expenditure. The estimated disbursement schedule is in line with standard Bank disbursement profiles for the country. The Credit closing date is expected to be June 30, 1993. Project Implementation 50. Project implementation will be coordinated by the technical department of SONATEL. Installation of equipment will be done by suppliers under SONATEL supervision. Local coatractors would be hired for civil works aad other suitable tasks. The transfer of knowledge to SONATEL staff would be achieved through staff participation in installation and testing work, training provided by suppliers and institutions abroad, as well as in local training centers (para 53). The project is expected to be substantially completed by June 30, 1992. Final acceptance testing and guarantee payments are expected to be completed by June 30, 1993. 51. Improvement of SONATEL's management systems will be monitored through selected performance indicators on service quality, financial performance, operating efficiency and program implementation. This will enable SONATEL to take the required corrective actions in a timely manner. While the targets for later years are indicative, those for fiscal years 1987 and 1988 were agreed upon with SONATEL during negotiations, as representing desirable and feasible levels of attainment. Assurances were obtained from SONATEL that: (i) the targets for each of the subsequent  - 17 - fiscal years will be agreed to with IDA by March 31 of the preceeding fiscal year; and (ii) SONATEL will furnish semiannually, for IDA review, a report on its performance against these indicators. The Implementing Agency 52. SONATEL's ability to succes6fully manage and develop both the domestic and the international network remains to be tested. However, the current management team consists of the most able managers of ex-OPTS and TELESENEGAL, and is highly motivated. In addition, in order to provide management with support in critical areas during the transition period following sector restructuring and during the remainder of the project implementation period, technical assistance will be provided under the project. SONATEL currently receives technical assistance from a variety of sources: (i) engineering and rehabilitation of installations (FAC); (ii) computerized billing system (FAC); (iii) introduction of data processing in accounting and administration (CIDA); (iv) management and operation of power supply and transmission equipment (CIDA); (v) preparation of a Master Plan (UWDP/ITU); and (vi) personnel management (IDA-Second Parapublic Technical Assistance Project, Credit 1398-SE). Total assistance from these sources during the project implementation period is about 270 manmonths. In addition SONATEL has engaged, under its own financing, experts in the operation of highly specialized telecommunications installations and a general management expert for a total of about 36 manmonths. During project appraisal (June, 1985) IDA identified the following broad areas where expert support is considered necessary: planning, data processing, management information, and supply logistics. SONATEL expects to be able to obtain grant financing from sources other than IDA for experts in these areas, with terms of reference and qualifications acceptable to the Association. Appointment of these consultants is a condition of effectiveness of the proposed credit. Due to the phasing of the tariff study (para 66), a tariff expert will not need to be recruited until the beginning of 1987. During project implementation other areas may be identified where expc-t assistance is required. An amount of US$0.5 million (36 manmonths) has been allocated within the credit to meet additional teclnical assistance requirements as necessary. Terms of reference for these additional experts would be agreed to during project supervision. Staff and Training 53. SONATEL took over existing telecommunications staff from OPTS and TELESENEGAL. This initial staffing of 2,030 results in a ratio of 93 staff per 1,000 DELs in service, which is high. Under the terms of its Performance Contract (para 39), SONATEL will control recruitment and improve the personnel structure primarily through attrition, highly selective recruitment, and staff training. In addition, strict adherence to job descriptions and staff participation in management committees to improve productivity, as practiced by TELESENEGAL prior to sector restructuring, will be continued by SONATEL. These measures, and the expected increase in the number of connected lines, will result in a decrease of the staff ratio from 93 in 1986 to 50 in 1993. The staff ratio  - 18 - is one of the principal performance indicators to be monitored during project implementation. 54. Two specialized technical telecommunications schools exist in Senegal, one in Rufisque (lower level technical staff) and one in Dakar (higher level staff). They were established with assistance from the International Telecommunications Union tITU). During the project period, the two multinational schools will be merged and located in Dakar, and SONATEL will take over the Rufisque facilities. ITU is expected to provide technical assistance to implement this plan. The schools will provide most of the technical staff training needed by SONATEL. Highly specialized and university level training will continue to take place abroad. Training needs will be established through evaluations against job descriptions and on the basis of recommendations by ITU experts. In addition, training to update technical stdff will be provided by equipment suppliers and by SONATEL. SONATEL will continue the in-house training programs for administrative staff previously provided by TLLESENEGAL, and has committed itself under its Performance Contract to spend the equivalent of 5% of its salary budget on staff training. These arrangements are satisfactory. Billing and Collection 55. Prior to sector restructuring, OPTS was responsible for billing and collection of domestic and international charges. Bills were prepared on a bi-monthly basis through the Government's data processing department, but were frequently delayed by two to three months. To minimize delays, SONATEL will in the future process bills on its own computer system. An expert provided by FAC is assisting in this. SONATEL's Performance Contract specifies that billing delays should be reduced from the current average of 50 days to 20 days by the end of FY89; progress will be checked through the performance monitoring system. 56. As of March 25, 1986, telecommunications accounts receivable were CFAF 14.3 billion, equivalent to about nine months of billing. Of this, Government owes an estimated CFAF 5.3 billion (equivalent to 24 months of billing to Government); the exact amount of Government arrears will be confirmed by May 31, 1986. The private sector owes CFAF 9.0 billion (equivalent to seven months of billing). Actual arrears are less, in view of existing billing delays and a two-month period during which subscribers may pay their bills. Given improved application of disconnection procedures, as per SONATEL's Performance Contract, private sector arrears should be manageable. Clearance of Government arrears has long been a problem. However, under the terms of SONATEL's draft Performance Contract, Government commits itself to repay CFAF 2.4 billion in FY86 and FY87 each, and the remaining CFAF 0.5 billion in FY88. The CFAF 4.4 billion in cross-debt from SONATEL, mostly due to previous debt rescheduling, would offset most of this. Assurances were obtained from Government that it will: (a) settle its arrears in accordance with the schedule stipulated in the Performance Contract; (b) ensure that adequate annual budget provisions are made for payment of arrears and consumption; and (c) settle future telecommunications bills within 90 days of the billing date starting immediately, and within 45 days by June 30, 1988. As a condition of  - 19 - effectiveness of the proposed credit, SONATEL will present an accounts receivable aging schedule to IDA. Assurances were obtained that SONATEL will write off, by December 31, 1986, receivables that are uncollectable. Accounting and Auditing 57. SONATEL will keep accounts on an accrual basis and in accordance with the Senegalese accounting plan. With the simplification of accounts resulting from the separation of postal/financial services, SONATEL's unaudited accounts are expected to be ready within four months after the end of each fiscal year. Assurances were obtained that SONATEL will: (a) have its accounts audited annually by external auditors acceptable to IDA; 'b) present its unaudited financial statements to IDA within four months after the end of each fiscal year; and (c) present the external auditor's report to IDA within six months after the end of each fiscal year. Financial Aspects 58. OPTS' and TELESENEGAL's financial performance over the period FY81-85 was satisfactory. The consolidated rate of return on the book value of average net fixed telecommunications assets in service was about 33% on average and net internal cash generation was equivalent to 172% of investment expenditures. However, telecommunications investments during that period were at undesirably low levels, with investments in the domestic network averaging only 0.2% of GNP. Total sector investments during the period FY86-93 will be equivalent to about 0.9% of GNP on average. Accounts receivable for the sector were at very high levels, equivalent to about eleven months of billing as of the end of FY85 (para 56). 59. SONATEL's opening balance sheet as of October 1, 1985 has not yet been finalized. Auditing firms working on different aspects of the balance sheet are expected to complete their work by June 30, 1986. Establishment of the opening balance sheet implies basic agreement on the modalities of the split-up of OPTS between SONATEL and OPCE, will determine its initial working capital and is necessary to enable SONATEL to produce complete financial statements at year-end. Agreement between Government and SONATEL on the definitive opening balance sheet is a condition of effectiveness of the proposed credit. 60. Despite substantial investments during the project period, the financial indicators would remain satisfactory. The operating ratio would remain strong, ranging from about 59 in FY86 to about 74 in FY93. Debt service coverage would remain adequate at over 2.5 times, and the debt level would remain low around 30% of debt plus equity, despite the increase in borrowings. The current ratio would be adequate at above 1.5. Net internal cash generation would finance on average 62% of construction requirements. Assurances were obtained that SONATEL will finance from net internal cash generation not less than 50% of investment expenditures, on a moving three year average basis, in any one year during the project implementation period.  - 20 - 61. The IDA credit will be onlent by Government to SONATEL at the standard Bank interest rate prevailing at the date of the Credit Agreement, with repayment over fifteen years following five years of grace. SONATEL will bear the foreign exchange risk. As a condition of effectiveness of the proposed credit, a subsidiary loan agreement acceptable to IDA would be concluded between the Government and SONATEL. 62. In the past, the telecommunications sector subsidized the postal/financial services through OPTS. Government would have preferred continuation of such a direct financial link between SONATEL and OPCE. However, this would not enhance the autonomy and efficiency of OPCE. Under the terms of its Performance Contract (para 39), SONATEL will transfer to Government gradually decreasing amounts, starting at CFAF 1.7 billion in FY86. Government, in turn, wil transfer these funds to OPCE. Assurances were obtained from Government that: (a) any services rendered by SONATEL to OPCE will be paid in full by the latter; and (b) the level of the annual subsidy from SONATEL to OPCE will decline each year and end by June 30, 1989. Benefits 63. Telecommunications services benefit all sectors of Senegal's economy and promote more efficient use of capital and energy resources. They are likely to play a particularly significant role ia Senegal in: Ca) promoting industrial and commercial development in the Cap-Vert region and in the regions around Diourbel, Thies, Tambacounda, Kaolack, Ziguinchor and Kolda; (b) developing tourism; (c) stimulating agricultural development through better access to market information and more efficient management; (d) improving the services offered by regional development agencies; (e) facilitating the improvement and extension of health, education, government administration and other services to rural areas; (f) substituting for transport and facilitating vehicle coordination; and (g) mobilizing domestic savings by transferring part of SONATEL's net income to Government (para 65). Least Cost Solution 63. The investment program is the least cost solution for providing the planned service levels, within the constraints imposed by the configuration and technology of the existing telecommunications network. The timing and dimensioning of various elements in the system are based on accepted engineering practice with regard to selection of techniques and equipment. Fiscal Impact 65. During the project implementatioa period SONATEL'S 33% income tax is expected to generate CFAF 17.7 billion in revenues for Government. Amounts transferred to Government to subsdize OPCE are estimated at CFAF 5.8 billion. In addition, SONATEL would pay customs duties and taxes on imported equipment equivalent to about CFAF 12.8 billion during the project implementation pcriod, plus an additional CFAF 2.5 billioa on  - 21 - imported operating equipment items and services. Thus, total transfers from SONATEL to Government would be CFAF 38.8 billion (US$107.8 million). Tariffs 66. Senegal's telecommunications tariff level and structure are comparable to those of neighbouring West-African countries; tariff levels are relatively high by internal standards. Current tariff levels are expected to be adequate through FY88, with a 10% average revenue increase required in FY89. However, the tariff structure should be reviewed to ensure economic efficiency in the use of existing plant and new investments. For example, the connection charge and monthly rental in Dakar are relatively modest but the base call charge is relatively high. This could encourage a high demand for new connections from customers with low prospective usage, resulting in underutilized aetworks. There is no peak/off peak pricing, and local calls are not metered. Under the proposed project the tariff study would be carried out by SONATEL, with the assistance of an IDA-financed expert (para 52). Assurances were obtained from SONATEL that it will carry out, and furnish to IDA, the tariff study by January 1, 1988, and implement its recommendations, as appropriate, by July 1, 1988. Return on Investment 67. The internal financial rate of return on the investment program is estimated at about 13%. The quantifiable economic rate of return is 19%. This estimate understates total program benefits, since it does not take into account the total consumer surpius or the secondary benefits derived from telecommunications, such as more efficient use of transportation, responsiveness to market forces, more effective health services, etc. Risks 68. The program faces no unusual risks. The merger of TELESENEGAL and OPTS into SONATEL appears to have proceeded smoothly. The project's technical assistance component will provide management with expert assistance, should problems develop in specific areas. The principal risks are that the new entity will not be able to implement the investment program as rapidly as scheduled; and that it will not be able to achieve prompt recovery of arrears and future billings. Protection against the first risk is provided by the fact that implementation of the first phase of network rehabilitation is well underway and that many contracts will be on a turn-key basis, and by the technical assistance provided by IDA and other donors. Protection agairnst the risk of low recovery of receivables is provided by Government's assurances concerning arrears settlement and payment of future bills, as well as the improved billing and collection procedures to be implemented under the project. A sensitivity test on the rate of return indicates that a combination of a 20% increase in capital expenditures and operating costs combined with a 20% reduction in revenues, which is extremely unlikely, would reduce the estimated economic rate of  - 22 - return from 19Z to about 10X. A two-year delay in all benefits without postponement of costs would reduce the economic rate of return to about 13Z. Environmental and Health Aspects 69. The project is expected to have no adverse environmental or health impacts. On the contrary, increased use of telecommunications services produces more efficient use of the transportation system, reduces environmental pollution, and promotes energy conservation. In addition, improved telecommunications services improve the delivery system for routine and emergency health services. PART V - RECOMMENDATION 70. 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 DC May 23, 1986  - 23 -ANNEX I T A LS 93A rPage 1 of 6 SUINEAL - BOCIAL KIDICATR DATA NUT SUINEAL J17UPlRE CE COR05 (VCIOITID AVEARME) l HOST (MMOT mEanT MSTIMATE) /b m MDOLE IlUCME MIDDLE rINCm 19@ 1970iL ESTIATELk AFRICA S. OF PAURA N. AFRICA A MID EAT au ('i *e-. o4 TOTAL 196.2 l61.2 194.1 2 AGRICULTURAL 99. 104.5 10 3 Go P CAPIA .. .. 440.0 1063.6 1134.9 -v -onnn s cama CKILOORA OP OIL EQUIVALENT) 331.0 360.0 20.0 5831.5 623.9 POLATES S VITUL STATEITC POPULATION.MID-TEAR (THOUSAS) 3493.0 415.0 6211.0 URBAN POPULATION C RF TOTAL) 23.0 30.0 34.4 32.0 49.0 POPULATION PROJECTIONS PoPwuATION IN YEAR 2000 (MILL) 10.1 STATIONARY POULATION (MILL) 30.0 POPULATION I 1.9 POULATION DNSITY PER 110. RH. 17.J 22.5 31.7 65.1 37.6 PE SQ. . RI. LAD 35.1 42.2 55.2 124.6 470.1 POPULATION AGC STRUCTU..E CR) 0-14 IRS 42.7 43.9 44.4 45.4 43.S 15-64 IRS 54.2 53.1 52.6 51.5 53.0 65 AND ABOVE 3.0 2.6 2.6 2.7 3.3 POPULAATI CROItH RATV () TOTAL 2.3 2.3 2.6 2.9 2.8 URBA 3.4 5.0 3.7 5.1 4.4 CRUDE BUITH RATE (PU T3s0) 47.5 46.7 46.1 47.0 40.0 CRUDE DATH RATE (PER TlOUS) 24.4 21.9 16.5 15.0 11.5 GROSS REZRODUCTON JATE 3.1 3.1 3.2 3.2 2.8 FAMILY PLANISC AccEPTOS. ANNUAL (Tnous) USERS CE OF HARRD ON) .. .. 4.o c 6.4 21l. INDEI OF FOOD PItOD. PER CAPITA (1969-71-100) 125.0 83.0 64.0 62.9 95.1 PEr CAPITA SUPPLY OF CALORS (Z or RRQUIETS) 99.0 93.0 99.0 98.5 113.2 PROTEINS (CRAMS PER DAY) 67.0 62.0 70.0 55.4 77.8 orF WIH1 ANIMAL hND PULSE 20.0 19.0 19.0 Id 16.5 17.8 CHiLD (AGES 1-4) ODEAT RATE 45.9 38.1 28.0 16.6 12.8 LIFE EXPECT. AT BIRTH (TARS) 39.4 42.4 45.5 52.0 57.8 INFANT MO. RATE (PU TDOUS) 173.5 164.0 140.0 106.6 96.8 ACCESS TO SAFE WATER CRPiP) TOTAL .. .. 42.0 Ia 42.4 67.2 URBMA .. .. 77.0 We 67.5 93.4 RURAL .. .. 25.0 7; 35.8 45.8 ACCESS TO EXCErTA DISPOSAL (Z OF POPULATION) TOTAL .. .. 33.0 /a 28.9 45.9 URBAN .. .. 100.0 7 57.7 63.0 RURAL .. .. z.o 7; 20.7 28.6 POPULATION PER PHYSICIAN 24990.0 16790.0 13760.0 Ic 11791.7 4331.0 POP. PER NURSIN PERSON 3150.0 IC 1950.0 1390.0 7 2459.8 1645.0 POP. PER HOSPITAL -D TOTAL 840.0 820.0 900.0 Id 981.1 621.8 URBAN 460.0 A 450.0 560.0 7 36S.6 545.0 RULAL 1990.0 7j 1250.0 120.0 7; 4371.9 2511.3 ADMISSIONS PER HOSPITAL 0.. 22.2 29.2 Id 27.2 25.7 SOSINC AVERAGE SUEt OF HOUSEHOLD TOTAL .. ... URA .. 7.Ih . RURAL .. 6.0 7r AVRACE NO. OF PERSOCSIROM TUTAL 1.5 11 .. URBAN .. .. RURAL .. .. PCRCENTACE OF WEUlIDS WI ELCT. TOTAL .. .. URBAN .. .. RURAL .. ..  - 24 - ANNEX I TAULF. lA Page 2 of 6 SEINGAL - SOCIAL INDICATORS DATA SHEET SENEGAL RSFERENCE GROUPS (WEGHED AVERAGES) /a HOST (OMST RECET ESTIMATE) /b RECENT MIDDLE INCUS MIDDLE INCOME i96db 1970.1b STIKA4..!b AFRICA S. OF SANARA N. AFRICA & MID EAST ADJUSTED ENROLLMENT RATIOS PRlIARY: TOTAL 27.0 38.0 *6.0 95.7 89.8 K1AL 36.0 47.0 58.0 100.0 103.7 FINALE 17.0 30.0 38.0 83.2 75.2 SECONDARY: TOTAL 3.0 9.0 12.0 17.3 42.9 HALE *.0 13.0 16.0 25.0 50.9 FEMALE 2.0 5.0 8.0 14.8 34.6 VOCATIONAL (X OF SECONAY) 23.1 9.2 10.4 5.9 10.0 PUPIL-TEACHER RATIO PRIKARY 63.0 tg 45.0 43.0