Senegal - Industrial Sector Restructuring Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6947-SE STAFF APPRAISAL REPORT SENEGAL INDUSTRIAL SECTOR RESTRUCTURING PROJECT November 25, 1987 Africa Region, Sahelian Department Industry and Eneroy Operations Division 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 Franc (CFAF) 1/ US$1.0 - CFAF 314 CFAF 1 million US$3,185 SDR 1 = US$1.32109 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) 0.62 miles (mi) 1 kilowatt (kW) 1,000 watts (W) 1 square kilometer (kmn2) = 0.39 square mile (sq mi) 1 hectare (ha) = 2.47 acres (a) 1 metric ton (t) = 2,205 pounds (lb) 1 kilogram (kg) 2.2 pounds (lb) FISCAL YEAR July 1 - June 30 1/ The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of FF I to CFAF 50. The French Franc is currently floating.  FOR 0OFFCIAL US ONLY ABBREVTATIONS AND ACRONYMS AFINACE - Agence financiere nationale de cr6dit a lexpo tation (Export Credit Agency) ASACE - Agence s6n6galaise d'assurance crAdit a l'exportation (Export Credit Insurance Agency) BCEAO - Banque centrale des Etats de l'Afrique de l'Ouest (Central Bank of West African Countries) BCG - Boston Consulting Group BCS - Banque commerciale du Sfntgal (Commercial Bank) BNDS - Banque nationale de developpement du S6n6gal (Development Bark) CCCE - Caisse centrale de cooperation fconomique CEAO - Coi1munaut6 6conomique des Etats de l'Afrique de l'Ouest (Economic Community of 'est African States) CICES - Centre international du commerce ext4rleur du Sfn6gal (Senegalese Center for External Trade) css - Compagnie sucriare s6nfgalaise (Sugar Manufacturing Enterprise) EDP - Entrepreneurship Development Program ICS - Industries chiniques du SOntgal (fertilizer productlon) KfW - Kreditanstalt fUr Wiederaufbau MDIA - Ministare de l'industrie et de l'artisanat (Ministry of Industry and Handicrafts) ONFP - Office national de formation professionnelle PPP - Project Preparation Facility SAR - Socigtg africaine de raffinage (refinery) SME - Small and Medium-Scale Enterprise SOFIDAK - Soci4t6 de la foire international. de Dakar (Dakar International Fair) SOFISEDIT - SociWte financiare son6galaise pour le d6veloppement de l'industrie et du tourisme (Development Bank for Industry and Tourism) SONEPI - Socifti nationale d'6tudes et de promotion lndustrielle (National Agency for Industrial Promotion) SME - Small and Medium-scale Enterprise SSE - Small-Scale Enteiprise TEN - Taux d'escompte normal (Normal Rediscounting Rate) TEP - Taux d'escompte prEffrentiel (Preferential Rediscounting Rate) TPS - Taxe sur lee prestations de services (tax on services) UMOA - Union mon6taire ouest-africaine (West African Monetary Union) USB - Union sAn6galaise de banques (Commercial Bank) This document has a restricted distribution and may be used by recipients only In the pefformac of their offica duties. Its contents may not otherwise be disclosed without World Dak authoation.  - i - SENEGAL INDUSTRIAL SECTOR RESTR-ITURING PROJECT TABLE OF CONTENTS Pae DOCUMENTS CONTAINED IN PROJECT FILE ................................. iii CREDIT AND PROJECT SUMMARY ......................... v I. INTRODUCTION .................. ... ... ,, , I II. THE INDUSTRIAL SECTOR ............. . ......... 2 A. Sector Background .............. 2.............. 2 B. Constraints on Sector Development .......................... 5 C. Industrial Policies ...................... 5 D. The SAL Programs of Industrial Reforms ... .................. 7 E. Sector Institutions .................a...................... 8 F. Impact of the Industrial Sector Reforms .................... 9 III. THE FINANCIAL SECTOR ........................... .....*......* 11 A. Policy Framework ........................ , 11 B. Financial Institutions . ............... 14 C. Banking Credit ........................ 16 D. Sector Issues ..... . .......... 16 E. The SAL III Program of Finaneial Sector Reforms ........... 17 F. Bank's Role in Industrial Finance ........................... 18 IV. THE PROJECT ...... ,, 18 A. Project Origin and Objectives ............. 18 B. Project Description ...................... 19 C. Line of Credlt ..................... , 19 D. Retraining and SSE Lending Programs......................... 21 E. Technical Assistance Component ..... ........................ 24 F. Project Cost and Financing ......... .. .... . . . .400#* 26 G. Disbursements ................. ................... 27 H. Procurement Arrangeients ............... ............ 28 I. Project Implementation, Reporting and Auditing ............. 28 This report is based on the findings of an appraisal mission whiclh visited Senegal in June 1987. The mission comprised Messrs Wormser (Mission Leader), Van Eeghen (Economist), Amar (Operations Officer), Queyrane and Ms. Oman (Consultants). Mr. C. Azi (Operations Officer) and Mmes Chassard-Ilanibog (Financial Analyst) and Sorsa (Economist) also contributed to the report. Secretarial work was done by Mmes. D. Lavoie, M. Chung-Kong, B. L. Ettangondop and F. Betre.  - ii - V. BENEFITS AND RISKS ............... 29 VI. AGREEMENTS AND RECOMMENDATIONS .........so*...... 29 ANNEXES 2.01 Exports of Goods, 1980-1985 31 2.02 State Investments in the Manufacturing Sector 32 2.03 Selected Industrial Indices of Production (1979-1986) .... 33 2.04 Selected Indicators of Manufacturing Activity in Senegal (1985) o... . ........., 34 2.05 Structure of Customs Tariff and Duties on Imports prior to SAL II Reforms 35 2.06 Provisions of the 1981 Investment Code 36 2.07 Industrial Policy Reforms under SALs II and III .........o. 37 2.08 Structure of Customs Tariff and Duties on Imports after the 1986 Reform 42 2.09 Provisions of the New Investment Code ......43 2.10 Organization Chart of the Ministry of Industry and Handicrafts ............. 44 2.11 Restructuring of the Manufacturing Sector Under the New Incentive System .............. 45 3.01 Central Bank Refinancing Criteria 51 3.02 Evolution of UMOA Lending Rates (1975-1986) ............... 53 3.03 Evolution of UMOA Deposit Rates (1975-1986) .... o........... 54 3.04 Summary Balance Sheet of Banks as of September 30, 1985 ... 56 3.05 Evolution of Aggregated Balance Sheet of the Banking System (1980-1985) ......o...................... 57 3.06 Evolution of Outstanding Credit to the Economy (1980 - 1986) ........58 3.07 Analysis of Outstanding Credit to the Economy by Subsector. 59 3.08 Analysis of Credit to the Manufacturing Sector ............ 60 4.01 Central Bank Credit Authorizations (1985-1986) o .........o 62 4.02 Technical Assistance Component Cost Estimates ............. 63 4.03 Restructuring Strategy for the Senegalese Export Credit Insurance Agency (ASACE) ............ 64 4.04 Restructuring Program for the Senegalese Center for External Trade (CICES).................. ... ................ 69 4.05 Projected Quarterly Disbursements of the IDA Credit . i.... 73 IBRD 20620  - iii - SENEGAL INDUSTRIAL SECTOR RESTRUCTURING PROJECT DOCUMENTS CONTAINED IN THE PROJECT FILE A. Industrial Sector 1. Study of the Impact of Industrial Policy Reforms on the Sector, Boston Consulting Group, January 1987. 2. Preliminary Report on Special Enterprise Conventions in Senegal, DFC, February 1987. 3. Report on the Structure of Industriail Incentives in Senegal, Ministry of Economy and Finance, May 1987. 4. Study on Industrial Policies in Senegal, Dar Al- Handasah Consultants, May 1985. 5. Statement of Industrial Policy for an Inter- ministerial Council, Ministry of Industry, February 1986. 6. Subsector Analyses, Ministry of Industry, June 1986. 7. Performance Audit for SONEPI, SODI Consultants, July 1982. 8. Proposal for the Restructuring of SONEPI, UNIDO, April 1986. 9. Feasibility Study for an Entrepreneurship Development Program in Senegal, ILO, June 1987. B. Banking Sector 1. Study on the Senegalese Banking System, CIFPB, April 1987. 2. Restructuring program for BNDS, USB, BCS; 1987. 3. Report on SOFISEDIT and Proposed Restructuring Program, Gondicas, September 1983.  - iv - C. Export Promotion 1. Demand for Export Insurance in Senegal, JPG Consultants, February 1987. 2. Export Promotion in Senegal, P. Queyrane, November 1986. 3. Towards Development of Exports in Senegal, J. de la Vallee, May 1986. D. Selected Working Papers 1. The Public Financial Sector in Senegal, WA2DB, October 1986. 2. Industrial Policy Review, INDSP, April 1986. AFSIE November 1987  - V - SENEGAL INDUSTRIAL SECTOR RESTRUCTURING PROJECT CREIT AN) PROJECT SUMMARY Borrower: Republic of Senegal Financial Intermediaries: - Comercial and specialized banks customarily involved in industrial lending (restructuring and new investments) - SOFISEDIT (small-scale enterprises) Beneficiaries: - Manufacturing enterprises - Displaced employees of the industrial sector - Various agencies supporting the industrial sector Credit Amount: SDR 25.0 million (US$33 million equivalent) Terms: Standard, with 40 years maturity Project DescritioE: The project would facilitate the adjustment of the manufacturing sector to the reformed incentive policies through: (i) an apex-type line of credit (US$25 million) for restructuring and new industrial investments; (ii) a retraining and SSE lending program (US$5 million) to assist displaced workers of the industrial sector; and (iii) a technical assistance comionent (US$3 million) to strengthen the Ministry of Industry and other institutions supporting the reform process. Onlending Terms: - The apex line of credit would be made available by the Central Bank to participating banks at 5.0% p.a. for onlending to beneficiary enterprises at 9.5% p.a., with maturities of 3-13 years and grace periods of 1-2 years. - Funds for the establlshment of small-scale enterprises by displaced workers would be onlent to SOFISEDIT at 3.5% p.a., and to final beneficiaries at 8.5% p.a., with maturities of 3-6 years including up to one year of grace. As with the above line of credit, the foreign exchange risk would be borne by the Government.  - vi - Project Benefits: The project would facilitate the adjustment of industries to the new incentive system. Provision of financing under the line of credit will sustain modernization efforts of existing enterprises, helping them regain or maintain competitiveness on both domestic and export markets; it would also foster the emergence of new poles of industrial growth that are better able to positively contribute to the national economy. The reorganization of the export promotion and insurance agencies would enable the development of new markets abroad. The provision of technical assistance to the Ministry of Industry would enhance its capacity, enabling it to effectively implement the policy reforms. Finally, assistance to displaced employees for retraining and setting up of SSEs would alleviate the social cost of the reforms, thus enhancing their sustainability. Project Risks: A major risk, which could result in slow disbursement of the line of credit, is that the banking system may be reluctant to increase its financial exposure to the industrial sector perceived as more risky than traditional sectors such as commerce. To minimize this risk, terms and conditions under the line of credit (including lending spread) have been structured in such a way as to be attractive to the banks. Another risk is that restructuring as well as new investments in the industrial sector may be slow to materialize on account of the initial uncertainty caused by the reformed incentive framework and lower effective protection. It is indeed expected that the line of credit will initially be used to finance mostly the restructuring and modernization of existing capacities. After the initial adjustment, the revised incentive system should, however, provide a sustainable basis for the development of new industrial investment opportunities.  - vii - Estimated Costs % of Local Foreign Total Total Cost ----