Benin - Second Rural Savings and Loan Cooperative Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11619-BEN STAFF APPRAISAL REPORT REPUBLIC OF BENIN SECOND RURAL SAVINGS AND LOAN COOPERATIVE REHABILITATION PROJECT JUNE 1, 1993 Agriculture Operations Division Occidental and Central Africa Department Africa Region 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) US$11 = CFAF 250 SYSTEM OF WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BCEAO Banque Centrale des Etats d'Afrique de l'Ouest (Central Bank of West African States) CFD Caisse Frangaise de Developpement (French Development Agency, ex CCCE) CCCE Caisse Centrale de Cooperation Economique CLCAM Caisse Locale de Cr6dit Agricole Mutuel (Local Savings and Loan Cooperative) CNCA Caisse Nationale de Credit Agricole (National Agricultural Credit Bank) CPU Central Project Unit CRCAM Caisse Rqgionale de Credit Agricole Mutuel (Regional Savings and Loan Cooperative) EEC European Economic Community FAC Fonds d'Aide et de Cooperation (French Assistance and Cooperation Agency) IDA International Development Association IFAD International Fund for Agricultural Development SDC Swiss Development Cooperation UMOA Union Monetaire des Etats d'Afrique de l'Ouest (Monetary Union of West African States) URCLCAM Union Regionale des Caisses Locales de Credit Agricole Mutuel (Regional Union of CLCAMs) FISCAL YEARS Government: January 1 - December 31 Project Entities: October 1 - September 30  FOR OFFICIAL USE ONLY REPUBLIC OF BENIN SECOND RURAL SAVINGS AND LOAN COOPERATIVE REHABILITATION PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Pe DOCUMENTS CONTAINED IN THE PROJECT FILE . ................................. iii CREDIT AND PROJECT SUMMARY ......................................... v I. INTRODUCTION. 1 II. BACKGROUND. 1 A. Economic Situation and Performance. 1 B. The Agriculture Sector. 2 C. The Banking and Financial Intermediation. 3 Ill. RURAL SAVINGS AND LOAN COOPERATIVES. 4 A. Background. 4 B. First Rural Savings and Loan Rehabilitation Project. 4 C. Present Situation of the Network and Need for further Reforms. 6 D. Rationale for IDA Involvement .11 IV. THE PROJECT .11 A. Project Objective and Summary Description .11 B. Detailed Features .11 C. Project Costs and Financing .13 1. Project Cost Summary .13 2. Financing Plan .14 3. Disbursements .14 4. Procurement .16 5. Accounts, Audits and Reporting Requirements. 18 This report is based on the findings of a joint mission (IDA pre-appraisal and CCCE appraisal) in May 1992 with the participation of Swiss Development Cooperation, FAC, IFAD and IRAM (consultants). The mission consisted of Messrs A. Haji (IDA), L. L'Aot (CCCE), R. Brugger (Swiss Development Cooperation), Y. Yard (FAC), C. Guillemain (IFAD Consultant) and Y. Fournier (IRAM). The IDA appraisal mission led by Mr. A. Haji took place in June/July 1992. Messrs S. Thillairajah and A. Ryba were peer reviewers for this project. Messrs. T. Nkodo and 0. Lafourcade are Agriculture Division Chief and Department Director respectively. 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.  V. PROJECT IMPLEMENTATION ....................... 18 A. Implementation ..................... 18 B. Environmental Impact ....................... 20 C. Benefits and Risks ....................... 20 VI. ASSURANCES AND RECOMMENDATION ............................... 21  ANNEXES Annex 1 CLCAMs' Shareholders and Capital Annex 2 CLCAMs' Deposits Annex 3 CLCAMs' Lending operations - 1989190-1992/93 Annex 4 CLCAMs' Profit and Loss Account for the Year ended 9/30191: la) Atacora; lb) Atlantique; (c) Borgou; (d) Mono; le) Oueme; and (f) Zou. Annex 5 CLCAMs' Balance Sheet as of September 30, 1991: (a) Atacora; lb) Atlantique; lc) Borgou; Id) Mono; (e) Oueme; and If) Zou. Annex 6 Project Costs and Source of Financing. Annex 7 Projections of Network's Financial Viability (1993 - 2011): CLCAMs' annual deposits, operating costs and profits; URCLCAMs' and Technical Secretariat's operating costs, revenues and deficits. Annex 8 Projected Disbursements under the Credit Annex 9 Implementation Schedule and Supervision Plan Annex 10 Terms of Reference for Auditors Annex 11 Cost Reduction Measures and Key Monitorable Indicators Annex 12 Financial Projections Map: IBRD No. 23966   - iii - REPUBLIC OF BENIN SECOND RURAL SAVINGS AND LOAN COOPERATIVE REHABILITATION PROJECT DOCUMENTS CONTAINED IN THE PROJECT FILE Proiect Workina Paners (Available from AF1AG) - Project Preparation Report prepared by IRAM (Consultants) - (Draft) Appraisal Report of CCCE for the (proposed) Second Rehabilitation Project - Statutes of CLCAMs and CRCAMs - Benin Law and Decree (of 1989 and 1990) setting up the First project - FYs 1989, 1990 and 1991 Audited Financial Statements of CLCAMs, CRCAMs and CPU - FY 1991 Budgets of CRCAMs, CLCAMs and CPU - Proposals of CRCAM Presidents for establishment of a National Federation (November 1991) - Consultant Reports (2) on Alternative Institutional Structures of the Network (September 1992) - Proceedings of the Seminar on Alternative Institutional Structures of the Network (November 1992) - Network's Statement of Policies (March 1993)   v REPUBLIC OF BENIN SECOND RURAL SAVINGS AND LOAN COOPERATIVE REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Benin Beneficiaries: The (mutualist) Network of Rural Savings and Loan Cooperatives (CLCAMs/CRCAMs) Amount: SDR 2.8 million (US$ 3.8 million equivalent) Terms: Standard IDA, with 40 years maturity Relendina Terms: Grant Co-financiers: CFD, FAC, The Government of Switzerland, EEC, and IFAD Proiect Descritmion: The project's central objective is to continue the rehabilitation and strengthening of the network of rural savings and loan cooperatives initiated under the First Rural Savings and Loan (S&L) Rehabilitation Project (IDA Credit 2086-Ben). The project would support the development of a privately-owned financial intermediation system in rural areas, organized along mutualist lines. Globally, it is expected that the Network would reach full financial viability and autonomy only in the longer term (10 to 15 years). The specific objectives of the project would be to assist the Network in establishing an efficient institutional structure and making substantial progress toward financial viability. It is expected that, by the end of the project, all primary level cooperatives (CLCAMs) would not only break even financially, but also finance up to 30% of the Network's regional and national levels, in charge of providing policy guidance, assistance and supervision to CLCAMs. The project would support: {i) the establishment of efficient service units at regional level (URCLCAMs) to provide CLCAMs with the necessary technical backstopping (accounting and financial management) and training; (ii) the establishment of a National Federation of S&L Cooperatives to be the Network's policy-making and supervisory body; (iii} technical assistance, equipment, training and annual audits; and (iv) funding for completing the financial restructuring of CLCAMs and providing limited financial assistance to a few CLCAMs operating in the poorest areas of the country and having a potential to reach a deposit base necessary to break-even financially.  - vi - Estimated Proiect Costs Local Foreign Total X of Base ---------- USSmillion --------- Costs Support to CLCAMs Operating Costs (CLCAMs) 2.3 0.2 2.5 17.4 Provision for past losses (to 9/1992) 0.6 - 0.6 4.2 Construction of CLCAM premises 0.3 0.1 0.4 2.7 Office and Accounting Equipment - 0.2 0.2 1.3 3.2 0.5 3.7 25.7 Supoort to URCLCAMs Operating Costs (URCLCAMs) 2.5 0.3 2.8 19.4 Vehicles (replacements) _ 0.2 0.2 1.4 2.5 0.5 3.0 20.8 Support to CPU/Federation Staff & Operating Costs 3.3 0.3 3.6 25.0 Technical Assistance (tong-term) 0.3 1.1 1.4 9.7 VehicLes & Training Equipment - 0.3 0.3 2.1 Computerization - 0.4 0.4 2.8 Consultants, Studies, Research, 0.2 0.8 1.0 6.9 Training, ExternaL Tours 0.1 0.3 0.4 2.8 Annual Audits 0.2 0.4 0.6 4.2 4.1 3.6 7.7 53.5 Total Base Costs 9.8 4.6 14.4 100.0 Contingencies 0.5 0.2 0.7 TOTAL COSTS 10.3 4.8 15.1 Financing Plan CLCAM IDA CFD SDC FAC IFAD EEC TOTAL ----------------(USSmillion)------------------------------ CLCAM Component 2.6 - 1.0 - 0.2 0.1 p.m. 3.9 URCLCAM Component 1.8 0.7 0.1 - - 0.3 0.2 3.1 Federation Component 0.7 3.1 1.7 1.9 0.7 - - 8.1 TOTAL 5.1 3.8 2.8 1.9 0.9 0.4 0.2 15.1 Estimated IDA Disbursements --------------------------------IDA Fiscal Year------------------------- 1994 1995 1996 1997 1998 1999 2000 ----------------------------------USSmillion-------------------------------- Annual 0.9 0.7 0.6 0.5 0.5 0.4 0.2 Cumutative 0.9 1.6 2.2 2.7 3.2 3.6 3.8  - vii - Proiect Benefits: The project would build upon the achievements of the First Project to further develop the S&L Cooperative Network into an efficient financial intermediation system in rural areas, where other formal financial intermediaries are not operating and are not expected to operate in the short to medium term. It would provide safekeeping services and credit for productive and social purposes to its members, and help mobilize rural savings for recycling in the entire economy. The project would therefore have a beneficial impact on incomes and standards of living in rural areas and on the general economic development of the country. Proiect Risks: The risk of external interference in the S&L Network's operations has been reduced by Government's acceptance to limit its role to that of the overall monitoring of the project through the project's Concertation Committee, and the Network's decision to impose strict limits on the channeling by CLCAMs of external lines of credit. The two major risks of the project are (i) a less than satisfactory internal management of the Network, and (ii) a slower than anticipated growth in mobilized savings which would jeopardize its financial viability. The Network's management efficiency would be ensured by the adoption of clear policy and operational guidelines which would be spelt out in a 'Statement of Operational Policies" paper which would be closely and effectively supervised by the Federation's Board and Technical Secretariat. Growth in deposits depends on income growth in rural areas and in populations' confidence in the Network. The financial restructuring successfully carried out under the First Project and the self-imposed financial discipline adopted by CLCAMs have restored the Network's credibility with rural populations. Recent experience shows that the Network has been able to mobilize rapidly increasing deposits, even in a context of very depressed international prices for the country's cash crops. Growth and stability of the Network's deposits would also be improved by efforts at mobilizing deposits from non-farming rural operators.   REPUBLIC OF BENIN SECOND SAVINGS AND LOAN COOPERATIVE REHABILITATION PROJECT STAFF APPRAISAL REPORT I. INTRODUCTION 1.01 The rural savings and loan cooperative movement in Benin consists of a network of 50 Caisses Locales de Credit Agricole Mutuel (CLCAMs, Local Savings and Loan Cooperatives) which are affiliated to 6 Caisses R1gionales de Credit Agricole Mutuel ICRCAMs, Regional Savings and Loan Cooperatives) located in the main center of each of the six administrative regions of the country. The CLCAMs/CRCAMs were established in mid-1970s by the now-defunct Caisse Nationale de Credit Agricole (CNCA), a public development bank which controlled the Network's operating policies and procedures. This linkage with CNCA was largely responsible for the deterioration of the Network's management and financial situation. Following the liquidation of CNCA in 1987, and in the context of the restructuring of the country's financial sector, the Government requested IDA's assistance for the rehabilitation of the rural savings and loan cooperatives. The First Rural Savings and Loan Cooperative Rehabilitation Project was identified in late 1988 and appraised in June 1989. An IDA Credit (Credit 2086-Ben) of SDR 2.0 million was approved by the Board in January 1990. The project was co-financed by CCCE, FAC, EEC and the Governments of Switzerland and Germany, who jointly provided an additional US$ 7.1 million equivalent towards the project. 1.02 Performance under the First Project has been excellent. Significant progress has been achieved in restoring the Network's management efficiency and financial situation, and, as a result, the confidence of local populations in the movement. Although the Closing Date of the IDA credit is December 1995, funds are now expected to be fully utilized by the end of 1993. The Government thus approached the project's main co-financiers (CCCE, the Swiss Government and IDA) for a continuation of their support of the rehabilitation process. A feasibility study (financed jointly by CCCE and IDA) was undertaken in March 1992. Ajoint mission IDA (pre-appraisal) and CCCE (appraisal) was carried out in May 1992 with the participation of IFAD, FAC and the Swiss Development Cooperation (SDC). IDA appraisal mission took place in June 1992. II. BACKGROUND A. Economic Situation and Performance 2.01 Benin has an area of 113,000 km2 and a population of 5.4 million increasing at about 3.2% p.a. (1992). About 70% of the total population lives in rural areas. The annual per capita income is about US$400 (1991). The primary sector accounts for about 40% of GDP, more than 70% of export receipts and 75% of employment. The small formal industry sector (19% of GDP) consists essentially of public enterprises often running at a loss, and in the process of being restructured. The tertiary sector essentially includes a large and vigorous informal sector. Benin's geographical location and the deep-water port of Cotonou, together with its relatively good road and rail network, allows the country to provide substantial transit services to the land-locked countries to its North. 2.02 Between 1983 and 1987 Benin's economy grew slowly, partly because of a general decline in international trade and the resulting collapse of the regional transit traffic - but mainly because of the inefficiency and poor management of the productive sectors dominated by the State.  In 1 989, the Government introduced an economic reform program prepared with the assistance of the Bank and the IMF. This program reflected a fundamental change in Benin's economic policy, centered on the reduction of the State's role in the economy and the promotion of private sector activities, a balanced management of public funds, measures to improve the balance of payments situation and greater concern for the country's natural environment. The strategy for the development of the rural sector adopted by the Ministry of Rural Development (MDR) in 1990 is in line with these objectives and supported by IDA. B. The Aariculture Sector 2.03 Production and Farmina Systems. Benin is largely self-sufficient in food and produces cash crops such as cotton and palm oil which are the main providers of foreign exchange. About 72% of the Agricultural GDP comes from crops, 22% from livestock, and 3% each from fishing and forestry products. The average annual rate of growth of agricultural production in the 1980-1988 period was 4.2%. This good performance was however achieved largely through an expansion of the cropped area and extensive cultivation techniques. There is much diversity in farm size, labor availability, ownership of agricultural equipment, productivity and revenues. Despite Government policy of setting up state farms in the latter part of 1970s, most of the rural output (over 95%) has always been produced by individual small farm units. 2.04 Food production is relatively diversified and a large proportion of this production is traded with neighboring countries, especially Nigeria. Maize is predominant in the Southern region and the most widely-planted crop overall (about 450,000 ha), followed by sorghum in the North (130,000 ha), cassava (115,000 ha), yams (90,000 ha), beans (85,000 ha) and peanuts (100,000 ha). Food crops are mostly grown in association, and yields are low. Rice production is marginal. Its consumption is however steadily increasing and demand is being met by imports. 2.05 Cotton cultivation expanded rapidly in recent years and covered about 159,000 ha in 1991-92, for a total production of about 177,000 tons of seed cotton and 73,500 tons of fiber. Yields are satisfactory (1,200 kg of seed cotton/ha) and planted areas are increasing. Cotton constitutes a well-organized subsector, offering a secure outlet for farm production, guaranteeing a floor price to producers as well as a reliable supply of inputs and credit. Palm oil production is declining as a result of the aging of plantations, a water deficit that limits yields, and a lack of competitiveness in an international market dominated by production from Asia. 2.06 Livestock, with about 1 million cattle, 2 million small ruminants and half a million hogs, represents one fifth of agricultural production (8% of GDP). Total meat production is about 30,000 tons per year, along with some 43 million liters of milk, and about 200 million eggs. Animal traction has expanded rapidly, particularly in the cotton production zones where it has contributed to the growth of cultivated areas. The potential for animal production in northern Benin is high in terms of the availability of pastures, but limited by poor management of surface water and archaic production systems. Benin's fishing activities, with a production of about 40,000 tons per year, provide some 50% of the country's animal protein requirements. Lagoon catch accounts for two thirds of production. Production is however declining as a result of problems of lagoon salinity, siltation resulting from the deforestation of watersheds, and over-exploitation. 2.07 Agricultural Institutions. The Ministry of Rural Development (MDR) has the overall responsibility for the development of agriculture, livestock, fisheries and forestry as well as agricultural research. Under the overall supervision of MDR, the implementation of agricultural development policies and programs is the responsibility of the Regional Action and Rural Development Centers (CARDERs) in each of the country's six administrative regions. Over the years, the CARDERs have expanded their activities to a number of commercial operations, which diverted them from their  -3- principal mission of providing support and technical assistance to producers. This expansion has often been supported by foreign donors, including IDA, within the context of externally financed rural development projects. 2.08 The National Agricultural Production Agency (SONAPRA) is responsible for input distribution, cotton processing and export crop marketing. It supplies agricultural inputs (mainly fertilizer, insecticides and spraying equipment) on credit to farmers and farmer groups through the CARDERs. Funds for the purchase of inputs either come from foreign financed projects or have been borrowed from local banks. The recovery of these credits (through CARDERs) has been excellent (about 98%). Over the past three seasons, SONAPRA has built a large enough revolving fund to be able to pay for its inputs without any additional external financing or bank credit. 2.09 Significant reforms of the sector's institutional structure are underway under the Agricultural Services Restructuring Project (Credit 2285-BEN) with the assistance of IDA and other donors. The main objective of the reform is to strengthen MDR's capacities for policy making, planning and monitoring, and focus CARDERs' efforts at efficiently providing essential agricultural services that cannot be provided by the private/cooperative sector (extension, adaptive research, rural works, statistics). Specific operations will promote the integration of public and private sector activities, strengthen rural producer organizations and promote the full participation of local communities in the development of their region. C. The Bankina Sector and Financial Intermediation 2.10 Bankinq Sector. Under the Bank and IMF-supported structural adjustment program, considerable progress has been achieved in restructuring the financial sector since the collapse and subsequent liquidation of the three state-owned banks in 1 989. By early 1993 five new commercial banks (including one of international standing) were operational. These banks have been highly successful in mobilizing financial savings, with their deposits increasing from only CFAF 7.8 billion at end-1989 to CFAF 70.5 billion at end-1991. With external assistance, progress has also been made in reimbursing depositors of the liquidated banks, in reducing the Government's obligations to the central bank (BCEAO), in allowing the postal savings and checking system to become fully operational, and in reviving the rural mutual credit network. By contrast the recovery of credits owed to the liquidated banks has been slow due to inefficiencies in the methods employed and deficiencies in the judicial system. Financial sector reforms currently focus on: i) the recovery of the liquidated banks' assets and the strengthening of judicial procedures to protect creditors; ii) the restructuring of the postal checking system and the rural credit network; and iii) the continued regularization of the relationship between the central bank and the Government. 2.11 Despite the establishment of the new commercial banks, the financial system currently does not adequately address the savings and financial requirements of the Beninese economy. The banks have so far chosen to invest their substantial volume of resources on the monetary union money market, with only a small proportion being devoted to (short-term) credit to the domestic economy. This practice is expected to change over time as the recent economic recovery is consolidated and more viable private and para-public borrowers emerge. In the medium term, however, the prospects for their provision of financial intermediation services to rural areas appears quite limited. 2.1 2 Rural Financial Intermediation. Until the late 1980's financial intermediation in rural areas was dominated by the state-owned Caisse Nationale de Credit Agricole (CNCA). As already indicated, the CLCAMs were promoted by CNCA to develop its network of rural financial services. Under the control of CNCA, the CLCAMs had very little autonomy and essentially served as a savings mobilization mechanism. CNCA's financial collapse and Government's decision to liquidate it in 1987 left a serious vacuum for banking services in rural areas. As none of the new commercial banks  - 4 - showed any interest in expanding services outside of Cotonou, the Government decided to make a major effort for rehabilitating the CLCAMs network. The First and proposed Second Rural Savings Cooperative Rehabilitation Projects support this rehabilitation and are an integral part of the Government's strategy for the restructuring of the country's financial sector and for the development of the rural sector. Ill. RURAL SAVINGS AND LOAN COOPERATIVES A. Backaround 3.01 The first CLCAMs and CRCAMs were created in 1977, following the establishment (in 1 975) of the CNCA. As cooperative institutions, they are governed by the general cooperative statutes of 1 966 and fall outside the BCEAO regulatory framework for financial institutions. In line with the mutualist model, it was initially envisaged that the CLCAMs, grouped into regional unions (CRCAMs), would be federated under a national, democratically elected, governing body. However, CNCA assumed the role of the de facto apex institution of the Network and, by mid 1 980s, virtually controlled all its operations. 3.02 This linkage with CNCA was the root cause of much of the movement's problems. CLCAMs/CRCAMs were asked to undertake commercial banking operations, subjected to interest rate ceilings (both on their deposits and lending operations) applicable to banks, and required to align staff salaries and benefits on those of the banking sector. However, the Network did not have access to normal banking facilities such as rediscounting or remunerated deposits with the Central Bank. CNCA control over CLCAMs/CRCAMs management, in addition to diluting the Network's mutualist principles, was therefore detrimental to the movement's financial viability. 3.03 By the time of the appraisal of the First Savings and Loan Rehabilitation Project in 1990 (para 3.04), the movement was nationally represented by 35 permanent and 64 periodic CLCAMs and 6 regional CRCAMs. It had a total membership of 20,800, a total share capital of CFAF 104 million and total deposits of CFAF 2.4 billion (through some 67,000 accounts of various types, including those of non-members). However, this importance of CRCAMs/CLCAMs in the economic and social development of rural areas was not matched by their overall financial strength. Because of lax credit supervision and political interferences, recovery rates were low. By 1988, 43% of total loans outstanding of CFAF 622 million were considered doubtful by the auditors. The profitability of the Network was also affected by high salaries and other operational expenses as well as an insufficient interest margin on its lending operations. The Government's decision in 1 987 to liquidate CNCA, and the consequent loss of the network's deposits (CFAF 565 million) with this institution, pushed the movement into bankruptcy. B. First Rural Savinas and Loan Rehabilitation Proiect 3.04 The liquidation of CRCAMs and CLCAMs was seriously considered by the Government as part of the CNCA liquidation process. However, given the vital importance of the CLCAM/CRCAM Network for rural financial intermediation, the Government finally decided to rehabilitate the Network and transform it into a private, autonomous and financially viable institution. A critical element in donors' decision to assist in the rehabilitation effort was the Government's undertaking to allow CLCAMs full autonomy in setting their policies (including interest rate policy) and operating procedures. The First Rural Savings and Loan Rehabilitation Project was prepared in 1989. Its total cost over a three-year period was estimated at US$ 12.8 million, including the Government and beneficiaries participation of US$ 3.5 million. External financing for the project was shared by CCCE (US$ 3.7  -5 - million), IDA (USS 2.5 million) as well as FAC, EEC and the Governments of Switzerland and Germany (US$ 3.4 million). An IDA Credit (2086-BEN) for SDR 2.0 million was approved by the Board in January 1990 and the Credit became effective in November 1990. 3.05 Total project funds were mainly allocated to the financial rehabilitation of the Network: USS 6.4 million to reimburse CRCAMs/CLCAMs for their deposits lost at CNCA, and US$ 2.0 million to finance operating deficits of CRCAMs/CLCAMs during the start-up/construction period. The balance (US$ 2.4 million) financed (a) the cost of the Project's Central Project Unit (CPU), established to design the Network's key operational policies and supervise their application by CLCAMs/CRCAMs as well as to provide technical backstopping and training to Network staff at all levels; and (b) studies, audits, vehicles and equipment. All funds were passed to the CRCAMs/CLCAMs on a grant basis. Although the IDA credit is scheduled for closing in December 1995, funds are expected to be adequate up until the end of December 1993. 3.06 Project performance has been remarkably good. The Central Project Unit (CPU), headed by two expatriate managers (Director and Deputy/Financial Director), well supported by the Network's "College des Presidents" (comprising of CLCAMs' representatives), provided strong and competent leadership. The project has met its main objectives of re-establishing rural populations' confidence in the CRCAM/CLCAM Network, improving management, training staff and managers and generally re- instituting financial discipline and mutualist principles within the movement. Specific measures taken and main achievements under the project include the following: (a) Statutes. CLCAMs and CRCAMs adopted new Statutes which made their autonomy explicit, provided for annual elections of office bearers and set forth proper procedures for annual general meetings, preparation of annual accounts, etc; (b) Closure of Non-viable Units. Many of the 64 periodic CLCAMs had been established without adequate regard to their long term viability, and their operating losses were a serious drain on the resources of the whole network. Following a detailed financial assessment of each CLCAM undertaken at the beginning of the project, 57 periodic CLCAMs were closed down and 7 converted into permanent CLCAMs; {c) Staff Reduction and Redeployment. The CPU commissioned an audit of the Network's staff and, on the basis of its recommendations, terminated employment of redundant staff and redeployed others to reduce costs and better match available skills with the functions to be performed; (d) Trainina. The project has provided extensive training to the staff and Board members of CLCAMs/CRCAMs. The CPU staff emphasized the vital importance of members' sense of ownership and responsibility for the Network, sound lending policies, financial disciplines and transparency in the Network's operations; and (e) Accounts. Insoections and Audits. The CPU initiated actions to clean-up CRCAMs/CLCAMs accounts and improve internal management information systems and controls. It instituted a rigorous system of inspections and, for the first time ever, CRCAMs and CLCAMs were audited in 1989 by independent external auditors. However, improvements in accounting and internal controls have been slower than expected and, in the latest audit (for the year ended September 1 991) the auditors still reported discrepancies in the accounts of some CLCAMs and CRCAMs. Actions are now underway to correct these shortcomings (para 3.16).  C. Present Situation of the Network. Lessons Learned and Need for Further Reforms 3.07 Structure of the Network. The present network of CRCAM/CLCAM consists of 50 CLCAMs, 6 CRCAMs and the Central Project Unit (located in Cotonou). Each of the 50 primary level CLCAMs is affiliated to one of the CRCAMs located in the main town of the country's six regions (Atacora, Atlantique, Borgou, Mono, Oueme and Zou). Until recently, the six CRCAMs were performing banking functions (i.e. taking deposits and extending loans) as well as providing services (mainly accounting and liquidity management) to CLCAMs. This resulted in competition between CRCAMs and CLCAMs for deposits and lending, and undermined CRCAMs' ability to provide essential services to the CLCAMs in a timely and efficient manner. To correct this situation, it has now been decided that CRCAMs should stop performing banking functions and concentrate on providing services to CLCAMs. To do so, six new CLCAMs have recently been established in the regional capitals to take over the financial and banking functions presently undertaken by CRCAMs. This transfer of activities is being completed, and CRCAMs being converted into purely service units. Upon completion of this transfer, the CRCAMs will be renamed "Unions R6gionales des Caisses Locales de Credit Agricole Mutuel' (URCLCAMs). 3.08 The CPU is the main body controlling key operational policies and procedures of the entire network and directing the rehabilitation efforts under the First project. It manages the Rehabilitation Fund established under the First Project to receive external project funds (to reimburse the CLCAMs/CRCAMs for the deposits lost at CNCA), as well as the excess liquid funds of CLCAMs and CRCAMs (which have a 60% reserve requirement). The two expatriates and its staff of 19 undertake regular inspections, provide assistance in accounting and organize training at all levels within the Network. The CPU formally reports to the Project's 'Comit6 d'Orientation", set up under the First Project to monitor its implenientation, chaired by the Ministry of Planning and where the project's external financiers are represented. 3.09 Selected presidents of CRCAM/CLCAM are invited to the meetings of the Committee, though on an irregular and ad hoc basis. The presidents of CRCAMs and CLCAMs have however formed a semi-formal "College des Presidents" which meets periodically to discuss important issues related to the Network's operations. CPU systematically consults the College on important issues although it is not bound by its decisions. Under the First Rehabilitation Project, it was envisaged that the CPU would be transformed into the technical secretariat of a federative apex body of the Network, to be established in the third year of the project. However, developments in this regard have been slower than anticipated and the federative body has yet to be created because of a genuine concern that the newly established financial discipline could be undermined if the controls presently exercised by a strong and independent CPU were to weaken too quickly. However, the CRCAM/CLCAM presidents have recently expressed a strong desire to have a greater involvement in the management of the Network and it has been decided that, at the beginning of the proposed Second Project, a formal National Federation of CLCAMs would be established as the policy making and regulatory body of the Network, with the CPU being transformed into the Federation's Technical Secretariat. The detailed institutional structure of the Network is being finalized with external and local assistance.  -7 - 3.10 Deoosits and Lendina. The evolution of CRCAM and CLCAMs' membership and deposits is shown in Annexes 1 and 2. Key data as of June 30, 1992, are summarized in the table below. Network's Situation as of June 30. 1 992 No. of Region/ No of No. of Deposit TotaL CRCAM CLCAMs Menbers Accounts Deposits (CFA MiILLion) Atacora 11 4,826 8,384 397 Attantique 6 2,067 4,836 297 Borgou 13 20,191 33,254 964 Mono 5 2,886 7,602 402 Oueme 6 2,962 8,580 467 Zou 9 6,306 10,275 587 6 50 39,238 72,931 3,114 3.11 Increase in total membership from 20,800 in September 1989 to almost 40,000 in June 1 992 (i.e doubling in less than three years) clearly attests to the return of rural populations' confidence in the movement. Total deposits within the network increased from CFAF 2.4 billion in September 1989 to CFAF 3.1 billion during the same period. Of these total deposits, about CFAF 2.5 billion are savings deposits, remunerated at 3% p.a., the balance being in current accounts earning no interest. A significant portion (about 60%) of Network's total deposits are mobilized from non-members who use the CRCAM/CLCAMs as a banking facility without participating in their share capital. Non- members' deposits increase CLCAMs' resource base for lending and, since part of the deposits can be placed in interest-earning investments, they also contribute to their profitability. Nevertheless, such deposits tend to be more volatile and also dilute the mutualist nature of these institutions. Under the First Rehabilitation Project, CLCAMs and CRCAMs could utilize up to 40% of their deposits, for lending operations. Including non-members' deposits, this practice allowed CLCAMs to increase their lending base and therefore their earning potential. However, given the high proportion of non-member deposits in total deposits, it may also allow CLCAMs to lend to members more than the total amount of their deposits, which is not desirable. Under the proposed project, the need to continue offering safekeeping services to non-members and the positive contribution of the latter's deposits to CLCAMs profitability would be acknowledged. However, to preserve the mutualistic nature of the movement and provide adequate safeguards, CLCAMs would be allowed to lend up to 50% of total savings deposits (para 6.02 (a)). This policy was included into the Statement of Operating Policies (SOP) of the Network (para 5.03).  - 8 - 3.12 Details of lending operations and recovery performance since September 1989 are provided in Annex 3. Loans are provided to members only. Except for medium-term loans under the IFAD line of credit administered by Borgou CRCAM (para 3.15), most of the loans are short term. Although loans to individuals are permitted, most loans are made to farmer groups who provide group- guarantees. These group guarantees have been important for achieving 100% recovery of loans. However, an even more critical factor has been the strict application of the rule under which a CLCAM is not authorized to make fresh loans unless all loans fallen due have been fully recovered. This rule, though very useful has limited the ability of the CLCAMs to diversify the type and timing of their loans. The Network is therefore proposing to slightly relax the 100% repayment rule within each CLCAM to allow for loans to individual borrowers or groups of borrowers of a particular CLCAM who have no outstanding debts even if the repayment within the CLCAM is less than 100%. However, if the total reimbursement rate for the CLCAM as a whole was less than 90%, no member of the CLCAM, regardless of his credit standing, would receive credit. Assurances to this effect were obtained at Neaotiations (para 6.02 (b)). 3.13 CLCAMs and CRCAMs charge an interest of 24% p.a. on their loans. This provides them with a net margin of about 21 % (taking into account the 3% they pay on saving deposits). This relatively high margin is necessary for financial viability in view of the yet small volume of lending operations. As the deposit and lending base increases over time, CLCAMs operations should result in increased profitability. Future profits would be used to (a) contribute to the cost of services provided by the regional and national levels of the Network; (b) constitute reserves; and (c) decrease lending rates, increase deposit rates and/or distribute dividends to members. Measures would be adopted under the project to ensure CLCAMs provide an increasing contribution to the financing of the entire Network while preserving their incentives to increase profits (para 3.18). CLCAMs would be free to decide on the allocation of their profits, after contribution to Network financing and reserves. 3.14 Pooling of Excess Liauidity. Liquid funds not utilized by CLCAMs for lending operations are managed by the CPU. Funds are placed with commercial banks which currently pay a net interest of 8.5% p.a.. CPU retains a margin of 1.5% and passes-on 2% to CRCAM and 5% to CLCAMs. Under current regulations, interest on deposits earned by cooperative institutions are tax-exempt. However, CRCAMs' and CLCAMs' funds are being managed by the CPU through the Rehabilitation Fund set up under the First Project and the Ministry of Finance has so far declined to recognize the cooperative nature of the Rehabilitation Fund and to give it a tax-exempt status. The Government has however indicated that once the National Federation of the CLCAMs has been established in replacement of the CPU (para 3.09), interest earned on CLCAMs pooled resources would be tax- exempt. Assurances to this effect were obtained at neaotiations (para 6.02 (c)). 3.15 External Lines of Credit. To reinforce its fundamental mutualist principles and protect the Network from the lax repayment performance usually associated with the use of external funds, neither the first nor the proposed project include external funds for lending operations. However, prior to the beginning of the First Project, the International Fund for Agricultural Development (IFAD) had already put in place two lines of credit: one channelled through CLCAM Borgou (CFAF 800 million, US$3.0 million) for farm mechanization and loans to women groups, and the second through the CRCAM Atacora (CFAF 400 million, US$1.5 million) for the same purposes. Actual experience to date indicates that these lines of credit are serving a critical role in providing much needed long term resources (in particular to meet the heavy demand by cotton farmers for loans for ox-drawn equipment) for which credit from other sources is unavailable. Repayment performance on these loans has so far been excellent. There is also evidence that many women groups who had no prior access to credit  -9- facilities are benefitting significantly from the IFAD credit lines. It is proposed therefore to let CLCAMs of Borgou and Atacora manage the two existing IFAD lines of credit, grovided however that (a) the usual 100% repayment rule is applied to IFAD-financed loans and (b) total outstanding borrowing by any CLCAM under the IFAD lines does not exceed at any time 30% of its total deposits. Assurances to this effect were obtained at Neaotiations. Assurances were also obtained that the CRCAM/CLCAM Network would not borrow any further funds from external sources without prior agreement of the 'Comite de Concertation" (para 5.05 and para 6.02 (d)). 3.1 6 Present and Proiected Profitability of the Network. Audited Profit and Loss accounts and Balance Sheets of the 50 CLCAMs and 6 CRCAMs as of September 30, 1 991 are shown at Annexes 4 and 5. In auditing these annual accounts, the auditors noted discrepancies between the accounting records at the CLCAMs level and those 'centralized' at the CRCAMs level. The present accounting difficulties are largely due to cumbersome accounting procedures (which involve duplicate accounting at CLCAM and CRCAM levels) and to manual book-keeping methods. The auditors, jointly with the financial staff of the CPU, have undertaken to establish an accurate opening Balance Sheet for each CLCAM as of October 1, 1992. Also, a simple computerized accounting system would be designed and introduced under the proposed project. 3.17 CLCAMs have made vigorous efforts since 1989 to achieve financial viability. The latest assessment indicates that over half of the 50 CLCAMs should break even (or show operating profits) for the fiscal year ending September 30, 1992. Projections of CLCAMs profitability beyond 1 992 (Annex 7) indicate that nearly all CLCAMs would become profitable by the end of the proposed project period (11998). These projections are based on conservative assumptions: (a) increase in deposits of 10-15% p.a. depending on area potential; (b) increase in operating cost of 7% p.a.; (c) lending operations limited to 35% of total savings deposits mobilized in FY 1994 gradually increasing to 45% by the end of the project; (d) interest earnings of 5% per year on excess liquid funds; (e) interest payment of 3% p.a. on savings deposits, and (f) provisions for losses equal to 4% of annual lending. They are therefore robust. On this basis, it is projected that the total operating losses of primary level CLCAMs during the entire project period would not exceed CFAF 30 million (US$ 1 20,000). These temporary operating losses would only be incurred by a few CLCAMs located in areas where there is no cash crop (such as cotton) and deposit potential is lower. In order to underline the importance of CLCAMs rapidly achieving financial viability and to ensure that unprofitable CLCAMs do not continue to operate indefinitely, assurances were obtained at Neaotiations that CLCAMs which are unable to cover their operating costs through internally generated revenues for three consecutive years would be closed down by decision of the Federation's general meeting (para 6.02 (e)). A Central Support Fund would be created at the central level to support loss-making CLCAMs for a period not to exceed two consecutive years. The fund would be established and replenished with annual contributions from CLCAMs of 10% of their interests on credits. (para 6.02 (f)).  - 10 - 3.18 The projections of CLCAMs' operating incomes and of the Network's financial viability are presented in Annex 7 and summarized below. Proiected Financial Situation of the Network (CFAF million) 1993 1994 1995 1996 1997 1998 1994-98 2001 2007 CLCAMS Totat deposits 3,533 4,063 4,672 5,373 6,179 7,106 10,808 21,738 Annual profits j/ 57 84 118 140 167 198 332 969 Annual (deficits) 2/ (8) (7) (6) (6) (6) (5) (30) - - URCLCAMS Annual Costs 120 125 132 138 145 153 694 177 237 Revenues - margins on CLCAMs Liquidity 34 35 37 43 48 56 219 85 196 - contribution from CLCAMs profits 17 25 35 42 50 59 211 98 290 Operating (deficits)/profits (69) (65) (60) (53) (47) (38) (264) - - Technicat Secretariat Annual Cost 156 164 172 181 190 199 905 230 309 Revenues * margin on CLCAMs liquidity 25 26 27 32 36 42 163 64 147 - contribution from CLCAMs profits - - - - - - - 6 249 Operating (deficits)/profits (131) (138) (145) (149) (154) (157) (742) (160) 9 Total Deficit of Network (209) (210) (211) (209) (206) (200) (1,036) (160) 87 1/ of profit making CLCAMs 2'/ of deficit making CLCAMs Most of the CLCAMs would break even or make a profit before the end of the project period. The network is in the process of studying the most effective way of financing the URCLCAMs and the Federation including annual contributions by CLCAMs, revenue obtained from managing the network's excess liquidity, or payments by CLCAMs for the real costs of services provided by the URCLCAMs and the Federation. Meanwhile the financial projections show that a contribution of 30% of profits by profitable CLCAMs together with the expected donor contributions should be enough to finance the URCLCAMs and the Federation and it is projected that at the end of the project, CLCAMs' contributions would cover 75% of the URCLCAMs' operating costs and 20% of the Technical Secretariat's. Assurances were obtained at Negotiations that starting in FY94 and pending the adoption by the network of a new system for financing the URCLCAMs and the Federation acceptable to IDA, CLCAMs' generating a profit would contribute about 30% of these profits towards URCLCAMs and the national Technical Secretariat, in that order of priority (para 6.02 (g)). On that basis, for the five-year period (1994-98), CLCAMs' contribution to URCLCAMs' total operating costs of CFAF 694 million would amount to CFAF 430 million (62%). Their contribution to the cost of the Technical Secretariat (CFAF 905 million) would be CFAF 163 million (18%). The balance of operating costs at URCLCAM and Technical Secretariat levels would need to be externally financed. The projections also indicate that CLCAMs would be able to fully cover the cost of URCLCAMs operations by 2001 and the  cost of the entire network by 2007. Faster growth in deposit mobilized and cost containment at regional and national levels would speed up financial viability. D. Rationale for IDA Involvement 3.1 9 As for the First Project, the proposed project is consistent with the Government's strategy of improving the performance of financial intermediaries in the rural sector, removing direct Government interference in rural savings and loan functions and encouraging greater responsibility of rural communities in the management of local institutions. The successful experience under the First Project, and in particular the enthusiasm with which rural populations have participated in the rehabilitation of CLCAMs, has further reinforced this strategy. The proposed project also clearly falls within the Bank's strategy to support the development of financial intermediation in the rural areas through private local initiatives based on mutualist principles. Several countries within the Region are attempting to establish such institutions, and successful establishment of the CLCAM Network in Benin will have wide implications for possible replication in other countries. The Government welcomed IDA's association with the First Project and, during the course of supervision missions, emphasized its desire for IDA's continued involvement in the second phase project. IV. THE PROJECT A. Proiect Obiectives and Summary Description 4.01 Obiectives. The proposed project would support the Government's long-term strategy to strengthen rural financial intermediation institutions. It would build upon the achievements and lessons of the First Savings and Loan Cooperative Rehabilitation Project to continue the rehabilitation of the Network, with the ultimate objective of creating a private system that would be financially viable and sustainable without external subsidies. 4.02 Summary Description. The project would be implemented over a five-year period (1994-98). It would support the establishment of an efficient institutional structure for the Network through: (a) the creation of a representative apex policy-making and advisory body with a strong Technical Secretariat ensuring the proper policy guidance for, and overall control over, the Network's operations; (b) the conversion of CRCAMs into efficient service units (URCLCAMs) providing technical backstopping to CLCAMs; and (c) the training of staff at all levels. The project would finance investments (office equipment, vehicles, buildings), technical assistance, as well as part of the cost of development services provided to CLCAMs by the Technical Secretariat and the URCLCAMs, to the extent that these costs would not be covered through contributions from CLCAMs. B. Detailed Features 4.03 CLCAMs Component (26% of total costs). Project support to primary level CLCAMs would include the following: (a) Investment Costs. Office equipment for the new computerized accounting system (about US$0.2 million) and construction of premises for fifteen CLCAMs (about US$0.4 million); and (b) Ooeratino Costs. It is expected that most of the CLCAMs would become profitable early during the project period. External financing would support: (a) a small provision (US$0.6 million) included in the project to cover losses incurred by CLCAMs until  - 12 - September 30, 1992 which were not fully identified because of difficulties in their accounting system (para 3.16) and therefore not covered under the First Project; and (b) a provision of (US$0.1 million) to cover part of operating expenses of a few CLCAMs operating in the marginal, non-cash crop areas of the country which are taking longer to establish their viability and a contribution to operating costs of four new CLCAMs to be established during the project period. 4.04 URCLCAM Component (21 % of total costs). The project would support the cost of development services provided by URCLCAMs to CLCAMs (assistance for accounting/financial management, training of staff and promotion of the movement to increase membership) to the extent that these development costs are not totally financed by CLCAMs' contributions. Over the project period, it is estimated that CLCAMs would contribute about USS 1.8 million towards URCLCAMs' development costs. The external financing needed would therefore amount to about US$1.1 million. The project would also finance the renewal of vehicles for the six URCLCAMs (US$0.2 million). 4.05 National Federation Component (53% of total Costs). The establishment of the National Federation and its Technical Secretariat would constitute the main component of the project. It would consist of the following: (a) Investments. The project would finance the design and installation of the computerized accounting system (US$0.4 million) as well as other office equipment and vehicles for the Technical Secretariat (US$0.4 million); (b) Technical Assistance/Training and Audits. The project would finance about 78 man- months of external technical assistance to cover the cost of the Project's Deputy Executive Secretary and Financial Controller (US$1.5 million); as well as short-term consultancies, external training and study tours, and the annual external audits of the accounts and operations of the Network's different units including the 50 CLCAMs (US$2.1 million); and (c) Development Costs. The total cost of the Federation/Technical Secretariat's support to CLCAM and URCLCAMs would amount to about US$3.8 million over the project period. It is expected that, in addition to their contribution towards the cost of URCLCAMs' services, CLCAM would contribute about US$0.7 million towards the cost of services provided by the Federation's Technical Secretariat through the (1.5%) commission retained on pooled liquidity earnings (para 3.16). The balance (US$3.1 million) would be financed from external sources under the project.  - 13 - C. Proiect Costs and Financina 1. Proiect Costs Summary 4.06 A detailed break-down of project costs is shown in Annex 6. The following table presents the Project Cost Summary. Summary of Project Cost Local Foreign Total Local Foreign Total X of -----CFAF million ------- -------USS million------- Base cost Support to CLCAMs Operating Costs (CLCAMs) 567 64 631 2.3 0.2 2.5 17.4 Provision for past losses (to 9/1992) 150 - 150 0.6 - 0.6 4.2 Constructions 60 30 90 0.3 0.1 0.4 2.8 Office and Accounting Equipment 10 40 50 - 0.2 0.2 1.3 787 134 921 3.2 0.5 3.7 25.7 Support to URCLCAMs Operating Costs (URCLCAMs ) 625 70 695 2.5 0.3 2.8 19.4 Vehicles - 39 39 - 0.2 0.2 1.4 625 109 734 2.5 0.5 3.0 20.8 Support to CPU/Federation Staff & Operating costs 815 90 905 3.3 0.3 3.6 25.0 Technical Assistance (long-term) 58 300 358 0.3 1.1 1.4 9.7 Vehicles, & Training Equipment 10 74 84 - 0.3 0.3 2.1 Computerization 10 90 100 - 0.4 0.4 2.8 Consultants Special Studies, Research, 50 200 250 0.2 0.8 1.0 6.9 Training, External Tours 30 70 100 0.1 0.3 0.4 2.8 Annual Audits 50 100 150 0.2 0.4 0.6 4.2 1, 023 924 1!947 4.1 3.6 7.7 53.5 Total Base Costs 2,435 1,167 3,602 9.8 4.6 14.4 100 Contingencies 122 58 180 0.5 0.2 0.7 TOTAL COSTS 2,557 1,225 3,782 10.3 4.8 15.1 4.07 Total project cost would be US$1 5.1 million over the five year implementation period, including US$4.8 million in foreign exchange, or 32% of total costs. Project costs are based on prices as of June 1 992 adjusted to the negotiations date of March 1993 and includes appropriate price and physical contingencies.  - 14 - 2. Financina Plan 4.08 The project's detailed financing plan (Annex 6) has been agreed upon with the project's main co-financiers (CFD and the Swiss Development Cooperation). It is summarized in the table below. Proiect Financing PLan CLCAM IDA CFD SDC FAC IFAD EEC TOTAL --------------------------(USSmiltlion)------------------------------ CLCAM Component 2.6 1.0 0.2 0.1 p.m. 3.9 URCLCAM Coriponent 1.8 0.7 0.1 0.3 0.2 3.1 Federation Component 0.7 3.1 1.7 1.9 0.7 - - 8.1 Total 5.1 3.8 2.8 1.9 0.9 0.4 0.2 15.1 4.09 The proceeds of the IDA credit would not finance past losses or operating cost deficits of CLCAMs. They would finance part of the cost of development services provided by URCLCAMs (other than those of Atacora and Mono that would be financed by IFAD and EEC respectively under on-going operations) and those of the Federation's Technical Secretariat that would not be financed by CLCAMs themselves out of their annual profits (para 3.18). The Swiss Development Cooperation (SDC) has indicated that it would finance, out of the balance of the grant funds under the Bank- administrated Assistance to Public Enterprises Project, the project's training component, part of the technical assistance component and the cost of annual external audits. CFD and FAC funds would finance CLCAMs' past losses and operating deficits, buildings, computerization of accounting systems, equipment and part of the technical assistance. IFAD and EEC would finance part of the services of URCLCAM and the temporary operating deficits of CLCAMs in the Atacora and Mono region through their on-going Atacora and Mono Rural Development Projects. 4.10 IDA funds would be made available to the Government on standard IDA terms on 40 years including a ten-year grace period. All external financing, including IDA funds, would be passed on by the Government to the movement as grant. The signing of a Subsidiary Agreement acceptable to IDA between the Government and the Federation would be a Condition of Effectiveness of the IDA _re (para 6.03 (i>). The Technical Secretariat of the Federation would manage the Special Account (SA) which will be opened with a bank acceptable to IDA, into which IDA would deposit CFAF 100 million (US$400,000) as an initial advance for project implementation. 3. Disbursements 4.11 Disbursements would be fully documented except for expenditures below US$20,000 equivalent where statement of expenditures would be used. Related documentation would be kept by the Technical Secretariat of the Federation and made available for scrutiny to Bank supervision missions and auditors. The disbursement profile for agricultural projects in Benin show that project funds would be disbursed over a period of seven and a half years as indicated in Annex 8. IDA funds would finance part of the development services provided by the URCLCAMs and the Federation's Technical Secretariat to CLCAMs. Annex 7 presents the projected share of the cost of URCLCAMs' and Federation's development services that would be financed by the CLCAMs, and the share that would be covered by IDA. It is summarized below:  - 15 - Financing of URCLCAMs' and Federation's Services 1994 1995 1996 1997 1998 Total 1994-98 -(C---------------------tCFAF million)---------------------- URCLCAMs Total Cost of Services 125.0 132.0 138.0 145.0 152.0 692.0 CLCAMs' Contributions 60.0 72.0 85.0 98.0 115.0 430.0 Deficit - CFAF 65.0 60.0 53.0 47.0 38.0 263.0 - x of Total Cost 52 45 38 32 25 38 Federation Total Cost of Services 164.0 172.0 181.0 190.0 199.0 906.0 CLCAMs' contributions 26.0 27.0 32.0 36.0 42.0 163.0 Deficit - CFAF 138.0 145.0 149.0 154.0 157.0 743.0 - x of Total Cost 84 84 82 81 79 82 4.12 It is projected that CLCAMs would be able to finance about 60% of the total cost of URCLCAMs' development services during the project period, with their contribution increasing from about 45% in project year 1 to about 75% in project year 5. CLCAMs would also contribute about 20% to the cost of services provided by the Federation's Technical Secretariat over the project period. Accordingly, IDA disbursements would be as follows: Disbursements of IDA Credit Categories IDA Allocation x of Expenditure to be financed USs million 1994 1995 1996 1997 1998 (1) URCLCAMs' DeveLopment Cost 0.7 60 50 40 35 30 (2) Technical Secretariat's DeveLopment Costs 2.9 85 85 85 85 85 (3) Unallocated 0.2 Total 3.8 4.13 CLCAMs actual profitability will depend on the amount of deposit mobilized, the quality of their loan portfolio and their operating expenses. Should CLCAMs become profitable sooner than expected, their contribution to the cost of URCLCAMs and Technical Secretariat's development services would be higher than projected. IDA disbursements would then exceed URCLCAMs' and Technical Secretariat's financing needs. Assurances were obtained at Neaotiations that IDA disbursement percentage would be reviewed as part of the mid-term review, when the profitability of the Network could be better assessed, to correct for possible excess IDA disbursement (para 6.02 (h)). 4.14 It is also possible that CLCAMs profitability during a given year, and therefore their contribution to URCLCAMs' and Technical Secretariat's development costs, be less than projected. Any shortfall would be covered through appropriate internal cost containment measures. Assurances were obtained at Neaotiations in that respect (para 6.02 {i)). CLCAMs that will incur losses for three consecutive years would be closed down (para 3.17). During negotiations cost reduction measures and key monitorable indicators (Annex 11) were developed and agreed upon with the Network. It is expected that these measures, together with (a) the incentives provided by the CLCAMs retaining 70% of their annual profits and (b) the respect by CLCAMs of the Network's Statement of Operating Policies (para 5.03), would be effective in promoting productivity and cost effectiveness at all levels of the Network.  - 16 - 4. Procurement 4.1 5 Goods and services financed under the project would be procured in accordance with procedures acceptable to each co-financier. IDA would not finance the project's technical assistance. However, the qualifications and terms of contract of the Technical Secretariat's managerial staff (Executive Secretary and Financial Controller/Deputy Executive Secretary) would be subject to IDA's review and approval. Procurement arrangements are summarized in para 4.17 below. Amounts in parenthesis indicate IDA financing. Development costs, including salaries of contractual staff, staff travel allowances, vehicles operations and maintenance, equipment and office costs, given their individual nature and the small unit amounts involved, would not be subject to competitive bidding. However, to the extent practicable, contracts for materials and office equipment would be grouped in bid packages of the equivalent of US$100,000 or more and be subject to International Competitive Bidding (ICB). Materials and office equipment estimated to cost less than the equivalent of US$100,000 but more than the equivalent of US$30,000 would be procured through Local Competitive Bidding (LCB) acceptable to IDA. Materials and office equipment estimated to cost less than the equivalent of US$30,000 per contract, up to an aggregate amount not to exceed the equivalent of US$ 1 million may be procured under contracts awarded on the basis of comparison of price quotations solicited from a list of at least three suppliers eligible under the Bank's Guidelines. 4.16. The proposals for advertising, draft bidding documents, bid evaluation, and award proposals for all contracts of US$30,000 or more would be subject to review by IDA prior to their execution. The review process would cover at least 80% of the total value of contracts to be financed by IDA. An IDA selective post-review of awarded contracts below the thresholds would be done for about 1 in 4 contracts. 4.1 7 Procurement actions have overall been performed satisfactorily under the First Project and experience and knowledge of IDA procurement procedures already exists at the project central level. The Federation's Technical Secretariat (TS) would be in charge of carrying out project procurement. Procurement information would be collected and recorded as follows: (a) prompt reporting of contract award information by the TS; and (b) comprehensive quarterly and annual reports to IDA by the TS, indicating: (a) revised cost estimates for individual contracts and the total project; (b) revised timing of procurement actions including advertising, bidding, contract award, and completion time for individual contracts; and (c) compliance with aggregate limits on specified methods of procurement.  -17 - Procurement Arrangements (USS Million) Total Expenditure Categories ICB LC3 Other N.I.F. Costs Civil Works (CLCAM premises) 0.4 0.4 Computers & Equipment 0.7 0.7 VehicLes 0.5 0.5 Operating Costs of CLCAM 3.3 3.3 Development Costs: - URCLCAMs 2.9 2.9 (0.7) (0.7) - Federation Secretariat a/ 0.2 0.2 3.4 3.8 (0.2) (0.2) (2.7) (3.1) Technical Assistance 2.6 2.6 External Audits 0.6 0.6 External training & study-tours 0.3 0.3 Total Project Costs 0.2 0.2 6.3 8.4 15.1 (0.2) (0.2) (3.4) - (3.8) =. .. . . .a . Note: Figures in parentheses are the amounts financed by IDA credit. N.I.F.: Not IDA-financed. a/ Procurement under ICB and LCB is for office equipment and material  - 18 - 5. Accounts, Audits and Reportina Reauirements 4.18 CLCAMs, URCLCAMs and the Federation Technical Secretariat would be required to maintain records of their operations and of use of funds under the project, in accordance with generally accepted accounting principles. CLCAMs, URCLCAMs and Federation Technical Secretariat would have their annual accounts audited by independent auditors acceptable to IDA, and submit to IDA the reports of these annual audits not later than six months after the end of each financial year (para 6.02 (k)). The auditors would also be required to provide certification that (a) the SOE disbursements under the IDA credit were adequately documented and concerned costs incurred for the purpose of the project; and (b) the Special Account was used exclusively for the project. The scope of audits would also be extended to the verification of compliance with the Network's Statement of Operating Policies and Statutes. The auditors' terms of reference are presented in Annex 10. The Technical Secretariat would have simplified versions of annual accounts prepared and distributed to CLCAM members each year. The Federation's Technical Secretariat would also prepare annual work programs (AWP) and budgets as well as semi-annual progress reports to be submitted to project's cofinanciers. In addition, by June 30 of each year, the Technical Secretariat would furnish to IDA for approval, a draft AWP for the subsequent year and the budget for such a program. The AWP would include details of the training program, key monitorable indicators for the project, commitments and expected disbursements and discussion of major issues regarding project implementation. By September 30 of each year the Federation's Technical Secretariat would submit a final AWP and a budget acceptable to IDA. Finally, within six months of the Credit closing date, the Technical Secretariat would prepare a Project Completion Report (PCR) for submission to IDA. Assurances were obtained at Neaotiations concerning these reporting requirements (para 6.02 (j)). V. PROJECT IMPLEMENTATION A. Implementation 5.01 The project would be implemented by the various levels/units of the S&L Cooperative Network under the monitoring of the "Comite de Concertation". The Committee would meet at least twice a year to review project implementation, provide guidance and monitor Network's activities and financial situation. 5.02 Establishment of the National Federation. It had been agreed that, by the end of the First Project, the Network would review options with regard to the institutional structure of the movement (from a loosely coordinated club of fully autonomous primary level units to a centralized system where an apex institution would have considerable policy making and regulatory powers). After a series of external consultancies, the 'College of CLCAM Presidents' held a seminar in October 1 992 to review alternative institutional arrangements. It decided to establish a three-tiered federative structure with (a) CLCAMs undertaking all banking activities and retaining considerable operational and managerial autonomy; (b) six regional service units (URCLCAMs) providing CLCAMs with training and technical backstopping; and (c) a National Federation operating as a policy making and supervisory body, composed of elected CLCAM representatives and assisted by a Technical Secretariat responsible for supervising the Regional Units, controlling the financial practices of CLCAMs and managing their excess liquidity. The "College des Presidents' met again in February/March 1993 to adopt the organizational structure and draft Statutes of the Federation. The draft organizational structure and Statutes have been submitted to IDA and found acceptable. The actual establishment of the Federation would however require that its Board be formally elected. Assurances were obtained at Neaotiations that the Federation would be effectively established, with a democratically elected Board, before December 31, 1993 (para 6.02 (I)).  -19 - 5.03 Statement of Operational Policies. The basic operational policies underlying the present operations of the Network have evolved through the implementation of the First Project. Fundamental principles such as the freedom of CLCAMs to fix interest rates, have been clearly spelt out from the outset in CLCAMs statutes. Others such as the 100% recovery rule have been proposed by the CPU and adopted by the 'College des Presidents' to respond to specific needs or problems. The Network's policies have now been consolidated into a comprehensive "Statement of Operational Policies' (SOP) clearly spelling out the Network's policies in the area of deposit mobilization, provision of credit, prudential ratios, internal management controls, mechanisms to finance the regional and apex structures (including adequate cost containment measures), the opening of new CLCAMs or the closing of unprofitable ones, etc. Through a series of seminars organized by consultants, representatives of the network, staff of the CRCAMs and CPU have met about three times to discuss various aspects of the SOP and a draft has been prepared at their last meeting in February/March 1993. This was discussed at negotiations before formal adoption by the 'College des Presidents". 5.04 Manaaement of the Federation's Technical Secretariat. The 'College des Pr6sidents' has recruited a Beninese national to be Executive Secretary of the Federation's Technical Secretariat, under terms and conditions satisfactory to IDA. In addition, the Network has recruited an expatriate Financial Controller to design and set up the proposed computerized accounting system and internal control procedures for the entire network. The Financial Controller would work closely with his (existing) Beninese counterpart. Assurances were obtained at neaotiations that the performance of the Financial Controller and the national Executive Secretary would be reviewed by the Board of the Federation at the end of the first year of project implementation (September 30, 1994), which would then decide whether to renew their appointment. The recommendations on the appointments acceptable to IDA would be implemented within three months (para 6.02 (m)). If the Financial Controller's performance is satisfactory and he has completed setting up the accounting system, he would assume the function of Deputy Executive Secretary in charge of finance and his counterpart would take over as Financial Controller. 5.05 Overall Guidance and Supervision. The cooperative movement will need to rely on external financial assistance beyond the end of the proposed project. The Government has therefore a legitimate interest in closely following the Network's management and development. Implementation of the First Project was supervised by a 'Comit6 d'Orientation' chaired by the Coordinator of the IDA- financed Project for Assistance to Public Enterprises in the Ministry of Planning. These arrangements have worked well. Under the proposed project, a "Comite de Concertation" including representatives of the Federation, the Government and donors would be established no later than December 31, 1993 and maintained to monitor project implementation. Assurances to this effect were obtained at Neaotiations (para 6.02 (n)). 5.06 For the moment, there is a regulatory vacuum in the countries of the Union Monetaire de l'Afrique de l'Ouest (UMOA) with regard to the supervision of grass-root financial cooperatives , as these institutions do not fall under the purview of the BCEAO. Under the First Project, control over the Network's operations have been carried-out by the CPU and through annual external audits. These arrangement have worked well and would be continued by the Federation's Technical Secretariat, with financial policies and prudential ratios clearly spelt out in the Network's Statement of Operational Policies and strengthened internal controls. However, the Technical Secretariat's controls remain a form of internal control and external supervision will eventually be necessary. BCEAO has recently launched a study to establish a regional regulatory framework for financial cooperatives in the UMOA. Once adopted, this framework would be applied to the Network's operations.  - 20 - 5.07 Proiect Mid-Term Review. A detailed mid-term review of the project would be undertaken before September 30, 1996. This mid-term review would assess the Network's progress towards achieving financial viability, the adequacy of its operational policies and the suitability of its institutional structure and management. Assurances to this effect were obtained at Negotiations (para 6.02 (o)). B. Environmental Imoact 5.08 The project would not entail any potential environmental risk. By improving financial services in rural areas, a considerable contribution to the overall performance of the rural sector is expected, hence setting the basis for sustainable growth and poverty alleviation in rural areas, which admittedly contribute to a better environment. The environmental category of this project is C. C. Benefits and Risks 5.09 The main benefit of the project would be the establishment of a private, decentralized and cost-effective financial intermediation system in the rural areas of Benin. In turn, this effective financial intermediation will foster wide-based economic and social development in rural areas. Restoration of financial health into the rural financial sector and recovering farmers' confidence has a great potential to disseminate the savings spirit in the rural areas and thus mobilize large amounts of rural savings. A broad spectrum of rural and smallholder families would benefit from the cooperative savings and loan system to meet their seasonal credit needs especially during the lean season. Moreover, a viable and sustainable institutional framework can also better serve the needs of private entrepreneurs in the rural areas, given the very limited development of the commercial banking system outside from Cotonou. 5.10 The risks that could threaten the viability of the Network are (a) external interferences leading to bad lending practices and poor repayment disciplines; (b) poor internal management with heavy overheads; and (c) lower than anticipated deposit mobilization and earning capacity. The risk of external pressures has been greatly reduced under the First Project by the Government's commitment not to interfere with the operations of what is officially acknowledged as a purely private institution. Measures have also been taken under the proposed Project to limit risks linked to the use by CLCAMs of external lines of credit. The soundness of CLCAMs' management and the cost effectiveness of their operations would be ensured by clear guidelines and safeguards spelt out in the Network's Statement of Operational Policies and continued strong monitoring by the Federation's Board and Technical Secretariat. 5.11 The main risk, however, is that the mobilization of the deposits by the Network be slower than anticipated and therefore that it take longer for the entire institutional structure to become financially self-sustaining. Deposit potential in rural areas critically depends on production and income. In this respect, cotton production and prices will have a determining impact on populations' income and savings capacity. Recent experience indicates however that, in spite of a decline in cotton producer prices, CLCAMs have on average been able to increase deposits at more than 15% a year. This trend is expected to continue. In addition, it is expected that CLCAMs will be able to maintain a large spread between deposits and lending rates. Finally, the very decentralized nature of the Network and the large operational and financial autonomy of the CLCAMs would ensure the overall robustness and financial viability of the global system through risk diversification.  - 21 - VI. ASSURANCES AND RECOMMENDATION 6.01 The following assurances and measures were obtained from the Government and/or the Network: 6.02 Assurances obtained at Neaotiations (a) CLCAMs would be allowed to lend up to 50% of their total savings deposits (para 3.1 1); (b) A CLCAM would be permitted to make new loans only to members who have completely reimbursed previous loans that are due but will not lend to any member if its overall recovery rate is less than 90% (para 3.1 2); (c) Interest revenues earned on CLCAMs pooled liquidity resources would be tax-exempt (para 3.14); (d) Total outstanding borrowing by any CLCAM under existing external line of credit would not exceed at any time 30% of its total deposits and no additional line of credit would be accepted by the Network without agreement with the 'Comitd de Concertation' (para 3.15 and para 5.05); (e) CLCAMs unable to cover their costs through internally generated revenues for three consecutive years would be closed down by decision of the Federation's general meeting (para 3.17); (f) A Central Support Fund would be created at the central level to support loss-making CLCAMs for a period not to exceed two consecutive years. The fund would be established and replenished with annual contributions from CLCAMs of 1 0% of their interests on credits (para 3.17); (g) Beginning in FY94, and pending the adoption by the Network of a new system for financing the URCLCAMs and the Federation acceptable to IDA, CLCAMs' generating a profit would contribute about 30% of these profits towards URCLCAMs and the national Technical Secretariat (para 3.1 8); (h) IDA disbursement percentages would be reviewed as part of the mid-term review to compensate for possible excess disbursements deriving from a higher than projected profitability of CLCAMs (para 4.13); (i) Any shortfall between the cost of URCLCAM/Technical Secretariat services and funding coming from CLCAMs agreed upon contributions and IDA disbursements would be covered through appropriate internal costs containment measures (para 4.14); (j) By June 30 of each year, the Technical Secretariat would furnish to IDA for approval, a draft annual work program (AWP) for the subsequent year and the budget for such a program. The AWP would include details of the training program, monitoring targets for the project, commitments and expected disbursements and discussion of major issues regarding project implementation. By September 30 of each year, the Federation's Technical Secretariat would submit a final AWP and a budget acceptable to IDA (para 4.18);  - 22 - (k) The annual financial statements of CLCAMs, URCLCAMs and Technical Secretariat would be audited by independent auditors acceptable to IDA and the audit reports submitted to IDA not later than six months after the end of the financial year (para 4.1 8); (l) The National Federation would be established before December 31, 1993 (para 5.02); (m) The performance and employment prospects of the Technical Secretariat's Executive Secretary and the Financial Controller would be reviewed by September 30, 1994 by the Board of the Federation and its recommendations acceptable to IDA would be implemented within 3 months (para 5.04); (n) A 'Comit6 de Concertation" including representatives of the Federation, of the Government and donors would be established and maintained throughout the project execution, to monitor project implementation (para 5.05); and (o) A Project's mid-term review would be undertaken before September 30, 1996 (para 5.07). 6.03 Condition of Effectiveness (a) The signing between the Federation and the Government of a Subsidiary Agreement acceptable to IDA (para 4.10). 6.04 Recommendation. With the above assurances, the project would be eligible for an IDA Credit of SDR 2.8 million (US$3.8 million equivalent) on standard IDA terms.  - 23 - Annex 1 Paae 1 of 2 UDENt - SECOND RURAL SAMANGS AND LOAN REAiuTAnlON PRo0ECT SHAREHOLDERS AND CAPITTAL - SUMMARY 11 I - -o3~8--------------0/Q9 - I--O 39--I ----_--oaes----- -------