Senegal - Port of Dakar Project

RESTR I CTED FILE COPY Report No. P-533 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 The report may not be published nor may it be quoted as representing their views.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 BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PORT AUTONOME DE DAKAR April 10, 1967  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPCRT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE PORT AUTONOME DE DAKAR 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$ 4,000,000 to the Port Autonome de Dakar, to be guaranteed by the Republic of Senegal, to assist in financing improvements to the Port of Dakar, Republic of Senegal. PART I - HISTORICAL 2. The proposed project is the outcome of a series of consultations during the past three years between the Government, the Port Autonome de Dakar (the Port) and the Bank on a port rehabilitation and modernization program suitable for financing by the Bank. 3. The proposed loan would be the first Bank loan to the Republic of Senegal. An IDA credit (96-SE) of US$ 9.0 million equivalent was made for the modernization of the Senegal Railways in September 1966. This credit became effective on January 25, 1967 but no disbursement has yet been made. Prior to this, in 1954L, the Senegal Railways benefited from a Bank loan (100-FR) of US$ 7.5 million equivalent, to the Office Central des Chemins de Fer de la France d'Outre-Mer for the dieselization of the then French West-African Railways. This project was successfully completed and the loan has been fully repaid. 4. IFC has an equity investment of US$ 1.0 million in, and has made a long-term loan of US$ 2.45 million to, a Senegalese Company (Societ6 Industrielle des Engrais du S6n6gal) established to build and operate a fertilizer plant near Dakar. The principal amount disbursed to date for these investments is US$ 0.8 million equivalent. 5. Bank staff appraised the project in April/May 1966, after a number of contacts and visits in 1964 and 1965. Formal negotiations were completed in Washington in December 166 but the presentation of the proposed loan to the Executive Directors has been delayed until the Government and the Port Authority had taken steps agreed upon during negotiations involving amendments to the Port Statutes and the appointment of a qualified accountant. The Senegalese Delegation was led by H.E. Habib Thiam, Minister for Planning and Development and Mr. Sidi Mohamed Dioury, Managing Director of the Port.  - 2 - PART II - DESCRIPTION OF THE PROPOSED LOAN 6. BorrowVer: Port Autonome de Dakar. Guarantor: The Republic of Senegal Amount: Equivalent, in various currencies, to U.S. $b.0 million. Purpose: To meet part of the cost of improvements to the Port of Dakar (extension of a mole, reconstruction of twro quays and a dredging program). Amortization: 15 years including 3.1/2 years of grace. 25 semi-annual payments beginning October 15, 1970 and ending April 15, 1982. Interest rate: 6% per annum. Commitment Charge: 3/8 of 1% per annum. PART III - THE PROJECT 7. An Appraisal Report (Appraisal of the rakar Port Project, Republic of Senegal - TO-569-a) is attached. The project consists of the high-priority items in that part of Senegal's Four-Year Development Plan (1965/66-1968/69) applicable to the Port. It includes (a) the extension of the existing Mole 3, to increase the handling capacity for Mali traffic, and the reconstruction of the quay wall in the adjacent East Basin, with dredging alongside to 10 m depth; (b) reconstruction of the quay wall of the Middle Basin, with dredging alongside to 10 m. depth; (c) dredging to provide improved access for cargo vessels to the southern sector of the Port and to permit deeper draft vessels for phosphate exports. 8. The financing of this project would complement to a certain extent IDA's credits for the rehabilitation of the Senegal and Mali Railways (95-MLI and 96-SE), since the majority of the international traffic on the railways, including the greater part of the maritime trade of Mali,  - 3 - passes through the Port of Dakar. The success of the project therefore depends on continued cooperation between Senegal and Mali in this sector. Traffic between Senegal and Mali is regulated by an International Traffic Agreement, a Railway Convention, a Customs Agreement providing for transit in bond through Senegal for Mali goods, and a free-zone agreement providing transit facilities for Mali goods through the ports of Dakar and Kaolack. The assurances obtained for the continued cooperation of Senegal with Mali within the framework of these agreements are reflected in the Loan documents, as they were in the agreements for the railways credits. 9. The estimated total cost of the project, including consultants' services and allowances for ccntingencies, is US.$6.9 million. The foreign-exchange component is estimated at US$ 4.0 million. The amount of the proposed loan is calculated to cover the estimated foreign exchange requirements and would finance about 58% of the total project cost. The remainder would be met by the Port out of its own resources. 10. Since the CFA franc is the common currency of seven African countries and is freely convertible into French francs, tender documents in Senegal do not provide for a breakdown of the bids between foreign exchange and local currency and, therefore, disbursements from the loan account cannot be related to the actual foreign exchange cost. For this reason, disburse- ment would be made on the basis of the estimated overall percentage of foreign exchange to the total cost of the project, that is 58%. The loan would be disbursed over the period during which expenditures are made on the project. If there were a substantial increase in the estimated total cost of the project, a lower percentage would be established to ensure that withdrawals would be made as nearly as practicable in relation to the physical progress of the project. If a reduction were to occur in the total cost of the project, the Bank would be entitled to maintain its 58% participation and cancel the resulting savings in the loan account. 11. In view of the urgent need for the extension of Mole 3 owing to increased traffic and the reconstruction of the East Basin quay wall which has collapsed, a contract for these works amounting to $2.12 million equivalent was let in July 1966, following discussions with the Bank. This was done in accordance with international bidding procedures satisfac- tory to the Bank and on the basis of specifications which incorporated the Bank's recommendations. It is therefore recommended that the Bank reimburse from the proceeds of the proposed loan 58% of the payments made by the Port for these works since November 15, 1966, that is, an amount of about US$ 200,000. Contracts for the remainder of the project will be let in accordance with the Bank's Guidelines regarding procurement. 12. There are two major financial conditions to the proposed loan. The first is that an adequate return on the net fixed assets in use should be earned by the Port and, to achieve this, increases in the Port's charges and dues are necessary. The Senegalese Government and the Port have agreed that charges should be increased in stages, and the first of these increases was made effective in December 1966. Secondly, the fixed assets  of the Port are to be revalued in accordance with sound accounting practices acceptable to the Bank, and the agreed rates of return w7ill be calculated on the revised value. 13. The Government and the Port have accepted a wide range of measures recommended by the Bank, including: (a) a gradual increase of revenue; (b) a reduction in Port staff: (c) strengthening of the Port Managing Director's Authority over its staff; (d) a modification of the Board's and Permanent Committee's quorum requirements and voting procedures, to reflect more closely the representation of members of the full Board; and (e) exemptions from import and custom duties for capital equipment to be imported under the project. The various measures suggested should enable the Port to achieve a rate of return rising from 0.L% in 196L/65 to about 3% in 1968/69 and about 6% in 1970/71, and to a figure in excess of 6% in subsequent years. 1L. The project would be completed by the end of 1969. It will increase the efficiency of port operations, allow a reduction in freight charges, enable the Port to meet the expected increases in traffic and bring about an improvement of the Port Authority's finances- In view of its direct and indirect benefits, the project is economically justified. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. A dreft Loan Agreement between the Bank and the Port Autonome de Dakar, a draft Guarantee Agreement between the Republic of Senegal and the Bank and the Report of the committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. 16. The draft Loan Agreement conforms generally with agreements for loans for ports and includes provisions limiting capital expenditures outside the Project (Section 5.13) and requiring actions to ensure an adeouate return on fixed assets (Section 5.l1). In view of the importance to the Borrower of traffic to and from the Republic of Mali, discussed in paragraph 8 above, provisions similar to those included in the Association's Development Credit Agreement wiith Senegal (96-SE) have been included here, e.g., Sections 5-15 and 6.02 (c) and (d). The employment of consultants w7ould be a condition of effectiveness of the agreement (Section 7.01). 17. The Guarantee Agreement follows the general pattern of guarantee agreements for similar loans.  PART V - THE ECONOMY 18. A report on "The Economy of Senegal" No.AF-Lla, dated May 26, 1966 was circulated to the 3xecutive Directors on June 1, 1966. 19. Over the last six years, real national income has probably no more than kept pace rTith the population growth rate estimated at about 2.5% per annum. Thus average income per head has shown little change. Howyever, largely as a result of the special position that the country occupied before 1960 when it was the administrative, commercial and industrial center of the Federation of French West Africa, a vast area of some 20 million inhabitants, it still is among the highest per capita in West Africa. Having kept income at that level is in itself a remarkable achievement since the adjustment of Senegal to its present position of an independent country with 3 .5 million people has involved a significant reduction of income from services, a loss of actual and potential markets in Africa, and consequently, a marked slow-down in private investment. There has also been a progressive reduction of French Government civil and military expenditure, other than direct public aid. Some offset to these depressing factors has been provided by an increase, although ,'ith great irregularities from one year to another, in the production of groundnuts and groundnut products, which account for 60% of total exports and 30% of GDP. Prices for groundnuts have been maintained at a steady level for the past ten years as a result of guaranteed price on the French Market. However, rising import prices have led to a slow deterioration in the terms of trade contributing to the relatively slow growth rate in total real income. 20. In spite of these difficulties, the Government has kept the financial and monetary situation well in hand. Current public expenditure has been practically stabilized since 1963-64, while high government resources (24% of GDP) permitted maintenance of a current budget surplus averaging CFAF 3)4 billion over the last four years, and CFAF 2.7 billion in 1965/66. Total investment has been running at around 10% of GDP, about half of it, public. Some 50% of public sector capital expenditures has been financed by external aid, mainly grants from France and EEC, as well as soft term loans. In total, these have amounted to around CFAF )45 to 5.5 billion per year. The Government has also relied to some extent on local borrowings from resources generated by private savings. In fact, private domestic savings have been greater than government savings in most recent years, although they have apparently been decreasing mainly because of a decline in agricultural real per capita income. In total, domestic savings have financed about half of investment, which is a comparatively high proportion for a country with per capita income as low as Senegal's. Institutional financial and monetary links Twith the external world manifest themselves, in the first instance, in the firm attachment of the country to the Franc Area System within the West African Financial Community and in its association with the Ehropean Economic Community. After a period of estrangement, relations with Mali were restored in July 1963 and have continually improved since.  -6- 21. Growth prospects appear to depend mainly on the success of agricultural policy and on the inflow of external capital. As a result of the convention signed in 1964 between EEC and the Overseas Associated Countries, Senegal will have to abandon, in the near future, the system wihereby it enjoyed its guaranteed outlet and a stable guaranteed price, above the world market level, for its groundnuts exported to France. In order to compensate for the adverse effects to be expected from this move internally and externally, the Government has embarked upon policies aimed at reducing marketing and transportation costs for groundnuts, at increasing productivity in its production and, more generally, at diversifying agricultural production, including livestock, with financial aid from EEC. An obvious objective for its efforts is to fill the food gap which results from the general low productivity in agriculture and from the overwhelming emphasis which has been put on groundnuts production for many years, and thus try to reduce the major item of expenditure in the import bill. At the same time, new export crops such as cotton are being encouraged and also scme improvement in exports may be expected from increased production of calcium and aluminum phosphates. However, the results of these policies -wll not bear fruit for several years and the benefits of the increased physical production oriented towards 3xportation are likely to be offset in varying degrees by the adjustment of groundnut export prices to world market levels and by the general downward trend of world market prices for primary commodities. On the other hand, the industrial sector which was established before independence on a wider base than is required for present needs suffers from some excess capacity. As a result of this, and the narrowness of the local market, Senegal is unlikely to provide the same opportunities for foreign and domestic capital investment as in the past. 22. If investment is to rise at the rate which seems necessary to achieve an increased growth rate in per capita output, imports wrill probably have to rise at a faster rate than in the past, at least for the next few years. Given the present outlook for relatively slow growth in exports and domestic savings, a net capital inflow will probably be required on a substantial scale for some years to come. If the bulk of this were obtained on conventional borrowing terms, this could lead to a sizeable debt service burden by the mid-1970's. Thus it would be desirable for Senegal to continue to receive the major part of its external capital on concessionary terms. However, given the present lo level of external debt service - around 3 percent of exports - and the sound management of economic affairs which has been characteristic of the Senegalese administration, Senegal should be able to contract a moderate amount of loans on conventional terms. Since an IDA credit (No. 96-SE) of $9 million for the Senegal Railweys was approved by the Board in September 1966, a Bank loan for the present project would appear to be consistent with the present capacity of Senegal to service external debt.  - 7 - PART VI - COMPLIANCE IITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 2b. I recommend th't the Executive Directors adopt the following resolution. RESOLUTION NO Approval of Loan to Port Autonome de Dakar in an amount equivalent to U.S. $L4,000,000 to be guaranteed by the Republic of Senegal RESOLVED: THAT the Bank shall grant a loan to the Port Autonome de Dakar, to be guaranteed by the Republic of Senegal, in an amount in various currencies equivalent to four million United States dollars, (U.S. $U,000,000), to mature on and prior to April 15, 1982, to bear interest at the rate of six percent (6%) per annum and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan A ree.-: rt (Port of Dakar Project) between the Bcnk and the Port Aubonome de Dakar and in the form of Guarantee Agreement (Port of Dakar Project) between the Republic of Senegal and the Bank which have been presented to this meeting. George D. Woods Preside nt Attachment Washir.gton, D.C. April . );l167