Senegal - Railway Project

RESTRICTED Report No.P-510 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVElLOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT FOR A RAILWAY PROJECT TO THE REPUBLIC OF SENEGAL September 15, 1966  INTERNATIONAL DEVELOP4ENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE MECUTIVE DIRECTORS ON A PROPOSED DEVELOFMENT CREDIT FOR A RAILWAY PROJECT TO THE REFUELIC OF SENEGAL 1. I submit herewith the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to $9.0 million to the Republic of Senegal to finance part of the cost of a program for the rehabilitation and modernization of its Railways. PART I - HISTORICAL 2. The proposed project is the outcome of a series of consultations during the past 2-1/2 years between the Government, the Regie des Chemins de Fer du S6negal (R6gie) and the Association on a railway rehabilitation and modernization program suitable for financing by the Association. Because of the complementary nature of the project with a railway rehabil- itation and modernization project in the Republic of Mali, which the Association had also been requested to finance, discussions were held with the Mali Government and its Regie du Chemin de Fer during the same period. Both projects were reviewed by consultants on behalf of the Association in the summer and fall of 1964, followed by an appraisal mission to Senegal and Mali in November 1964. In June 1965 a pre-negotiation mission to both countries resulted in modifications in both projects which were appraised in their final form in the spring of 1966. 3. Formal negotiations took place in Washington in June/July 1966. During the same period, the Mali project wasnegotiated and the interde- pendence of the two projects called for joint negotiations on particular matters with Senegal and Mali. The Senegal Delegation was led by His Excellency Habib Thiam, Minister for Planning and Development and Mr. Faly Ba, Director of the R6gie. 4. The Bank and the Association have not yet financed any projects in Senegal. The Senegal Railways, however, benefited from the 1954 Bank loan of $7.5 million equivalent for the dieselization of the former French West African Railways, of which the Senegal Railways at that time were a part. This project was successfully completed and the loan has been repaid. 5. The Bank has under active consideration a request from the Govern- ment to finance a project for the port of Dakar which would materially improve the ability of the port to cope with present and expected new traffic carried by the railway system. The Government has also requested financial assistance from the Bank or the Association to establish an agricultural credit fund designed to increase yields and expand the acreage of groundnuts.  - 2 - PART II - DESCRIPTION OF THE PROPOSED CREDIT 6. Borrower: Republic of Senegal. Beneficiary: Regie des Chemins de Fer du S6n6gal. Amount: $9.0 million equivalent. Purpose: To meet part of the cost of rehabil- itating and modernizing the Senegal Railways. Amortization: 50 years, by semi-annual payments begin- ning February 1, 1977 and ending August 1, 2016. Payments to and including the installment payable August 1, 1986 to be 1/2 of 1% of principal amount and each installment thereafter to be 1-1/2%a of the principal amount. Service Charge: 3/4 of 1% of the principal amount of the credit disbursed and outstanding. Relending terms: The Borrower will relend the proceeds of the credit to the R6gie at 6% interest, to be repaid in 30 years, including three years of grace. PART III - THE PROJBCT 7. A report "Appraisal of the Senegal Railways Project, Republic of Senegal" (TO-542a) is attached. 8. The project consists of the high-priority items in the Railways' Four-Year Investment Plan 1965/66-1968/69. It includes the relaying of certain lines and completion of the doubling of the Dakar-Thies line, the purchase of locomotives, rolling stock, spare parts and equipment and the provision of consulting services. 9. The estimated total cost of the project, including consultant fees and allowances for contingencies, is $13.9 million. The foreign exchange component is $8.5 million. Of this amount, $0.5 million have been covered by a grant from the French Fonds d'Aide et de Cooperation (FAC); $1.2 million represent the cost of three newly designed heavy-duty locomotives whose performance remains to be proven and which for this reason have been ex- cluded from financing by the Association. The proposed credit would cover the remaining $6.8 million of foreign exchange requirements, together with $2.2 million (40%) of the local currency component and would thus finance 65% of the total project cost. The remainder would be met by the R6gie out  - 3 - of its own resources. Given the fact that the Association has had the proj- ect under active consideration since 1964, it is proposed that the R6gie should be reimbursed from the proceeds of the proposed credit for eligible project expenditures incurred after January 1, 1965, amounting to about $0.7 million equivalent. 10. The major categories included in the project are: relaying and doubling of track $6.5 million (47%); locomotives and rolling stock $5.3 million (38%); spare parts and equipnent $1.2 million (9%); consulting services $0.2 million (1%) and contingencies $0.7 million (5%). 11. The imported items to be financed out of the proceeds of the credit will in general be procured after international competitive bidding. An exception is, however, proposed for four locomotives, six trailers, one breakdown crane and certain spare parts, with a total cost of $1.4 million, where the overriding need for standardization argues in favor of negotiated contracts. Contracts for domestically procured materials will be awarded after local competitive bidding, except for cement for which the prices of- fered today by the only local supplier are competitive with those for imported cement, before customs duties. The works included in the project will be carried out by the Railways' own forces. 12. Almost all of the imported items proposed to be exempted from the Association's normal procurement procedure have already been ordered and partly delivered. Lack of funds obliged the Regie to have recourse to sup- pliers' credits. At the recommendation of the Association, the R6gie is negotiating with the suppliers to make cash payment of the amounts outstanding and thereby avoid certain charges. The R6gie would be reimbursed out of the proposed credit for payments already made under these credits and for the balance to be paid off in cash. 13. The project also provides for services by a) consultants to carry out a detailed traffic cost study, and b) technicians to assist in the Railways' track improvement and maintenance program. An important part of the consultants' and technicians' task will be assistance in training local staff. 14. Due to the interdependence of the Senegal and Mali Railway systems, close cooperation between the two R6gies is essential. A suitable framework for such cooperation has been established in a Railway Convention, signed between the Senegal and Mali Regies in 1963. In addition, the Government of Senegal and the R6gie have re-confirmed to the Association that they will take all reasonable steps to facilitate railway operations between the two countries. The Association has obtained an identical undertaking from the Government of Mali and the R6gie du Chemin de Fer du Mali in connection with a proposed railway credit for Mali. The Senegal and Mali Governments have also agreed to modify the provisions in the Convention which require the same ton/km rates and equal passenger/km fares for international traffic in both countries. The amendment allows either railway to introduce a different tariff from the other in case changes in costs were to warrant it.  15. The R6gie has been in deficit for a number of years. However, the Government and the R6gie have accepted the Association's recommendations re- garding increases in certain tariffs and the gradual reduction of staff. Together with the works to be undertaken under the project and the expected growth in traffic, the Railways should start making a profit in the near future. The rates of return on the R6gie's investments are expected to reach 4% in 1968/69, 5% in 1970/71 and not less than 6% thereafter. The project, expected to be completed by mid-1969, would make a substantial contribution to the country's economic development through a technically improved and financially sound railway system. PART IV - LEGAL INSTRUMIENTS AND AUTHORITY 16. A draft Development Credit Agreement between the Republic of Senegal and the Association, a draft Project Agreement between the Asso- ciation and the R6gie des Chemins de Fer du S6negal, a Supplementary Letter on tariffs applicable to international traffic and the Report of the Com- mittee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors sepa- rately. 17. In view of the complementary nature of the Senegal and Mali railway systems and of the interdependence of the proposed Senegal and Mali projects, special provisions have been inserted in the credit documents. In this con- nection, particular attention is drawn to paragraphs (b) and (c) of Section 5.02 of the draft Development Credit Agreement, which enable the Association to suspend disbursements and, under certain circumstances, to premature the credit, if (i) certain agreements concluded between Senegal and Mali which provide the basis for the operation of the two railway systems have been modified or terminated so as to affect adversely the ability of the Borrower or the Regie to carry out their obligations (paragraph (b)), or (ii) inter- national traffic has been substantially interrupted for other than technical reasons, unless these reasons are manifestly beyond the control of the Republic of Senegal (paragraph (c)). Section 5.02 (d) also entitles the Association to suspend disbursements if disbursements have been suspended under the Mali Credit and if as a result thereof, it will be improbable that the purpose of the project will be achieved. It is also contemplated that the Senegal and Mali Credit Agreements will become effective concurrently (Section 6.01 (a)). 18. The draft Development Credit Agreement provides that the proceeds of the credit will be relent by the Borrower to the R6gie, and to simplify the administrative procedures, withdrawals from the Credit Account will be made directly by the Regie (Section 7.04). The conclusion of arrangements satisfactory to the Association with respect to the employment of the consultants and technicians referred to in paragraph 13 above has been made an additional condition of effectiveness of the Development Credit Agreement (Section 6.01 (b)).  PART V - THIE ECONOMY 19. A report on "The Economy of Senegal" (AF-h4a) was circulated to the Executive Directors on May 26, 1966. 20. Since independence in 1960, Senegal, which used to be the ad- ministrative, commercial and industrial center of French West Africa, a vast area inhabited by some 20 million people, has by and large successfully ad- justed to the situation of a country with 3.4 million people. Per capita income for the population as a whole is about $190 per year, but very un- evenly distributed between the Dakar area and the rest of the country. 21. The adjustment was achieved in spite of a narrow resource base - groundnuts are the main commercial resource - owing largely to a smooth transition after independence, substantial assistance from France and con- tinued sound internal and external financial managenent. Current expenditures have been maintained below revenues, in spite of the increased burden of sov- ereignty; the investment effort has been reasonable in size, and is generally well directed and soundly financed. Private investment has been encouraged and external indebtedness has been kept low. Government services have not yet been fully scaled down to Senegal's present needs but have performed ade- quately in rather difficult circumstances. 22. Medium-term prospects, however, are obscured by the relative scarcity of rapidly productive investment opportunities, combined with the emergence or continuation of a number of deflationary factors due, in part, to the planned and gradual withdrawal of French troops and other services. French expendi- tures in Senegal are accordingly declining while the cost of operating some of the formerly joint installations is now borne increasingly by Senegal. The system by which France guaranteed a price and market for Senegal's ground- nuts is being eliminated in accordance with EBC policy and Senegal will soon have to sell its groundnuts at fluctuating and generally lower prices than in the past. Finally, Senegal has lost, and cannot expect to regain, most if not all, of the former French W4est African market. 23. W4hile Senegal retains some margin of creditworthiness, it will have to continue to rely heavily on external assistance for its development. In view of its poverty, of its good economic and financial management, and of its limited prospects for long-term growth and expanding export earnings, it is both desirable and justified for external assistance to Senegal to be ex- tended as much as possible on soft terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association.  - 6 - PART VII - REC0OMINDATION 25. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of a Development Credit to the Republic of Senegal in an amount equivalent to U.S. $9,000,000 RESOLVED: THAT the Association shall grant a development credit to the Republic of Senegal in an amount in various currencies equivalent to nine million United States dollars (U.S. $9,000,000), to mature on and prior to August 1, 2016, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1%) per annum, and to be upon such other terms and con- ditions as shall be substantially in accordance with the terms and condi- tions set forth in the form of the Development Credit Agreement (Railway Project) between the Republic of Senegal and the Association and the form of the Project Agreement (Railway Project) between the Association and the R6gie des Chemins de Fer du S6n6gal, which have been presented to this meeting. Attachment George D. W4oods President September 15, 1966