Senegal - Agricultural Sector Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18093 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF SENEGAL AGRICULTURAL S]ECTOR ADJUSTMENT CfEDIT (CREDIT 2738-SE) June 29, 1998 Rural Development Operations III Country Department 14 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 1994 = 546.72 1995 = 499.64 1996 = 511.27 1997 - 582.96 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AG-SECAL Agricultural Sector Adjustment Credit ASIP Agricultural Sector Investment Program CFAF Currency of the Monetary Union of West African States CFD Caisse.Franqaise de Developpement CNIA Groundnut Sector National Commiittee (CNIA, Coomite National Interprofessionnel de I 'Arachide) CPSP Price Stabilization Agency (Caisse de Perequation et de Stabilisation des Prix) CSS Senegal Sugar Company (Compagnie Sucriere Senegalaise) EU European Union ICR Implementation Completion Report LADP Letter of Agricultural Development Policy PIP Public Investment Program PPSF Producer Price Support Fund SIMRIZ Rice Infornation System SODEFITEX Cotton Development Agency (Societe pour le Developpement des Fibres Textiles) SONACOS National Groundnut Oil Company (Societe Nationale de Commercialisation des Oleagineux) USAID United States Agency for International Development GOVERNMENT FISCAL YEAR January 1 December 31 Vice President Jean-Louis Sarbib Country Director Mahmood A. Ayub Sector Manager Jean-Paul Chausse Task Team Leader Katrine Saito  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF SENEGAL AGRICULTURAL S'ECTOR ADJUSTMENT CREDIT (CREDIT 2738-SE) Table of Contents PREFACE.j EVALUATION SUMMARY.1i PART I: PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE .................................................................I A. INTRoDucTioN.. B. PROGRAM OBJECTIVES. 2 C. ACIHEVEMENT OF PROGRAM OBJECTIVES ......................................2........ D. IMPLEMENTATION RECORD AND MAJOR IssuEs AFFECTING PROGRAM IMPLEMENTATION .........................3 E. SUSTAINABILITY . 11 F. BANK PERFORMANCE ........................................................................... 12 G. BORROWER'S PERFORMANCE ........................................................................... 12 H. PR OGRAM OUTCOME ........................................................................... 12 I. FUTURE OPERATION ........................................................................... 13 J. LESSONS LEARNED ........................................................................... 14 PART II: STATISTICAL ANNEXES ........................................................................... 15 Table 1: Summary of Assessments ............................................................................ 15 Table 2: Related IDA Credits ........................................................................... 17 Table 3: Program Timetable ........................................................................... 18 Table 4: Credit Disbursements: Cumulative Estimated and Actual ............................................................ 18 Table 5: Key Indicators for Adjustment Program Implementation .............................................................. 19 Table 5: Key Indicators for Adjustment Program Implementation (suite) ................................................... 20 Table 6: Key Indicators for Program Operation ........................................................................... 21 Table 7: Studies Included in the Program ........................................................................... 21 Table 8A: Program Costs ........................................................................... 21 Table 8B: Program Financing ........................................................................... 21 Table 9: Economic Costs and Benefits ............................................................................ 21 Table 10: Status of Legal Covenants ........................................................................... 22 Table 11: Compliance with Operational Manual Statements ....................................................................... 24 Table 12: Bank Resources - Staff Inputs ................................................................. 24 Table 13: Bank Resources - Missions ................................................................. 25 APPENDIX ICR Mission's Aide Memoire ................................................................. 26 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.  IMPLEMENTATION COMPLETION REPORT REPU]BLIC OF SENEGAL AGRICULTURAL SIECTOR ADJUSTMENT CREDIT (C]REDIT 2738-SE) PREFACE This is the Implementation Completion Report (ICR) for the Agricultural Sector Adjustment Credit, for which credit 27380-SE in the amount of SDR 29.0 million (US$45 million equivalent) was approved on June 6, 1995 and made effective on June 29, 1995. Two supplemental credits in the amounts of SI)R 1.8 million (US$2.8 million equivalent) and SDR 1.3 million (US$1.8 million) were approved on December 12, 1995 and November 14, 1996, respectively, and were both made effective on February 14, 1997. The credit was closed, as planned, on June 30, 1997. The first tranche, released upon effectiveness, was fully disbursed by December 27, 1996; the second tranche was released on December 6, 1996, and the credit was fully disbursed by March 10, 1997. Parallel financing for the project was provided by the United Stated Agency for International Development, the Caisse Fran9aise de Developpement, and the European Union. The ICR was prepared by a team led by Katrine Saito,' AFTR3, of the Africa Region and reviewed by Jean-Paul Chausse, Sector Manager, AFTR3, and Mahmood Ayub, Country Director, AFC 14. The Borrower and other financiers were sent a copy of the report. The Borrower's comments have been incorporated into the ICR. No comments were received from the other financiers by the due date. Preparation of the ICR was begun during the Bank's final supervision/completion mission in October 1997. It is based on material in the project file. The Borrower participated in the preparation of the ICR by contributings views reflected in the mission's aide-memoire. The team members were Katrine Saito, T'ask Team Leader, Ismael Ouedraogo, and Dirk Prevoo (AFTR3). Andrea Vasquez, Task Assistiant (AFTR3), provided support in the processing of the report.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF SENEGAL AGRICULTURAL ISECTOR ADJUSTMENT CREDIT (CREDIT 2738-SE) EVALUATION SUMMARY Introduction I . Deteriorating terms of trade, poor macro-economic policies, and an overvalued exchange rate combined to cause a sharp deterioration of the economy in the late 1980's and early 1990's. The Government adopted internal adjustment measures in 1994, followed by the devaluation of the CFA franc (CFAF) in January 1994. With the goal of deepening reform so as to achieve sustained agricultural growth, the Government and the donors agreed on a medium-term adjustment program, in support of which the Government issued a Letter of Agricultural Development Policy. This program was supported by four donors: the United States Agency for International Development (USAID), the Caisse Frangaise de Developpement (CFD), the European Union (EU), and IDA. Program objectives 2. The overall objective of the program was to promote sustainable growth in Senegal. It included four key elements: (i) liberalizing domestic marketing and pricing of all agricultural products, especially rice at both producer and consumer levels, and privatizing the processing of rice, thereby eliminating subsidies in local rice production; (ii) reforming the agricultural trade regime through the liberalization of external trade in those agricultural products still under Government control by eliminating all prior authorizations for the import and export of these crops (rice, vegetable oils, groundnut oil seeds, sugar, and wheat flour), determining appropriate protective tariffs for these key agricultural commodities2, and (in the case of cotton and groundnuts) linking domestic producer prices to world prices; (iii) privatizing the production, processing and marketing of agricultural products in those sub-sectors still dominated by parastatals, namely groundnuts and rice; and (iv) preparing a three year rolling investment program for the agricultural sector, which respected clear sectoral priorities established in consultation with donors. Implementation Experience and Results 3. The program partially achieved its objectives and its outcome is rated as satisfactory. It exceeded expectations in the rice sub-sector, where reforms have been fully carried out. The 2 Special tariff protection was expected to move over time towards the level in the West African Economic and Monetary Union.  - 111 - liberalization measures related to rice have led to an increased choice and lower prices for consumers, but also to lower local production, as Senegal's comparative advantage in rice production is so weak that the CFAF devaluation was insufficient to reverse the situation. In the cotton sector, measures were implemented that made the sector more efficient and producer prices were increased and a support fund was set up. As a result, production is increasing again, as are yields. Several measures were, however, not implemented by the Government. These related mainly to the repayment of debt by the Government to thefiliere3 and the cession price of cotton fiber to the domestic textile industry, where Government has interfered. In the groundnut sub-sector, the project failed to privatize the National Groundnut Oil Company (SONACOS, Societe Nationale de Commercialisation des Oleagineux). Mechanisms were put in place, however, to more closely align producer prices with world market prices. As most of these measures are still relatively new, it is unclear what the production response will be (see also paras. 21-22 of the main text). It is only in the sugar sector where the reform program failed to achieve its objectives. The liberalization of sugar importation and marketing has failed to lower consumer prices and elicit a production response. It has, however, set the stage for further liberalization, once the contract with the Senegal Sugar Company (CSS, Compagnie Sucriere Senegalaise) expires. The three-year rolling Agricultural Investment Programs have been prepared as planned and increasingly reflect the shift in Government priorities. 4. The sustainability of the reforms supported by the program varies depending on the sub- sector. Clearly, the impact of the reforms on rice importing and marketing systems has been profound and will be extremely difficult to reverse. These two systems have been completely restructured and the private sector has taken over these activities. The dynamism of the private sector in importing and domestic distribution is particularly striking. Regarding the groundnut sector, as noted above, the reforms are incomplete. The restructuring and privatization of SONACOS remain to be completed. There has been some progress in price liberalization and farmers will be reluctant to relinquish their new role in determining producer prices. However, the principal reforms in the sub-sector remain incomplete and no sustained production response is likely until these are completed. The reforms in the cotton sub-sector, particularly the restructuring of SODEFITEX, are likely to be sustainable. The separating of the rural development functions from other functions of SODEFITEX should result in a more streamlined and efficient marketing system to the benefit of both farmers and the economy. In the sugar sector, the CSS has lost all its monopolies. However, the level of protection for CSS sugar remains at such a level that consumers have yet to gain from the reforms. 5. Considering the depth of the reforms, performance of the Borrower was satisfactory overall, despite some attempts to back track early on during the adjustment process. The Bank's performance was also satisfactory, except for where it concerned its push for privatization of SONACOS, while other donors involved in the groundnut sub-sector had already been pursuing a different approach for some time. 6. Actual costs expressed in US dollars are close to appraisal estimates, with USAID financing US$30 million (same as planned), CFD US$18.3 million (US$20 million planned), EU, US$40.3 million (US$30 million planned) and IDA US$47 million (US$45 million planned). 3 The Govermuent has stated in its letter of June 15, 1998, that debts to SODEFITEX related to the cession price of cotton fiber to local textile manufacturers had been paid on December 31, 1997.  - iv- Summary of Findings, Future Operations, and Key Lessons learned 7. No future agricultural sector adjustment credit is planned. However, reforms in the edible oil sub-sector and the more efficient use of water resources in the Senegal Valley are a high priority in the Government's agricultural development strategy and are also included in the Policy Framework Paper supported by the IMF and the Bank. In addition, important sector investment operations are planned for fiscal years 1999 and 2000 to build on the policy reforms implemented and to elicit a supply response. There are two lessons4 to be learned from the project: (a) Unambiguous consensus among donors and Government is essential in the successful implementation of structural reforms. The greatest success of the program has been in the rice sub-sector largely because donors and the Government have unambiguously agreed on and supported a clearly-stated reform process. The Government eventually went beyond the letter of the agreement in eliminating the rice marketing parastatal. On the other hand, little progress has been achieved in solving the institutional problems of the groundnut sub-sector, largely because a consensus has not developed among donors and Government. Along the process, the Government changed its mind about selling SONACOS's assets in pieces or in a block, and there emerged a divergence in vision among the EU, USAID, and the Bank about the liberalization process of the sub-sector. The Bank might has been wiser to delay privatization until a consensus had been built among donors and Government. (b) Any transition process needs to be well planned with accompanying measures put in place in order to prevent unwanted side effects of reform measures. Continuous monitoring is needed to fine tune the reform process. In the case of his project, the transition from rice imports controlled by Price Stabilization Agency to private sector imports was not well planned, did not go smoothly, and consequently led to unnecessary destabilization of national rice markets. Once needed corrective measures were taken, things went fairly smoothly even under difficult world price conditions. 4 The Government suggested a third lesson: An adjustmnent program needs to be supported by a targeted investment program in order to ensure the sustainability of the expected positive effects of the reforms.  IMPLEMENTATION COMPLETION REPORT REPUJBLIC OF SENEGAL AGRICULTURAL SECTOR ADJUSTMENT CREDIT (4CREDIT 2738-SE) PART I: PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE A. INTRODUCTION 1. During the late 1980's and early 1990's the Senegalese economy witnessed a sharp deterioration. The depreciation of the dollar, large devaluations in competing countries, and a continuing deterioration of the terms of trade aggravated the overvaluation of the CFA franc (CFAF) to the point that the Government reversed trade liberalization policies. With the prevailing exchange rate, most sectors lost their competitiveness, and, in the absence of a currency realignment, it became necessary to resort to high tariff rates as a second best instrument. The economy experienced a sharp contraction in key sectors, notably fishing, phosphates, groundnuts and food proces,sing. To halt this deterioration, the Government adopted stringent internal adjustment measures in 1993, followed in January 1994 by a devaluation of the CFAF from 50 CFAF per French Franc (FF) to 100 CFAF per FF. 2. The Government issued a Letter of Agricultural Development Policy (LADP) in August 1994, updated in 1995. The LADP presented a consensus among the Government, the private sector and the donors, and formed the basis for the reform program supported by the Agricultural Sector Adjustment Credit (AG-SECAL, Cr. 2738-SE). The donors involved in the three key sub- sectors of Senegalese agriculture supported the program: the Government of France through the Caisse Fran aise de Developpement (CFD) with regard to cotton; the European Union (EU) with regard to groundnuts; and the Government of the United States (through USALD) with regard to rice. These donors had commenced their support to sectoral reform before IDA5, as negotiations on economic adjustment between IDA and the Government had broken down in the early '90s. After the CFAF devaluation in January 1994, however, it became clear that there was an urgent need for sustaining and deepening reforrns since the realigned exchange rate suddenly and clearly exposed both the costs of structural distortions in the sector, as well as the opportunities for expanded production for export and domestic sales that were now possible. Since the AG- SECAL was signed several years after the agreement with the other donors, it was able to address the key remaining post-devaluation policy issues, as well as reinforcing the ongoing reforms supported by the other donors. 5 The agreement with the Government of France on cotton in 1992, with the European Union on groundnuts in 1992, and with USAID on rice in 1994.  -2 - B. PROGRAM OBJECTIVES 3. The overall objective of the Credit was to promote sustainable agricultural growth in Senegal. To this end, the reform program supported by the credit included the following four key elements: (a) Liberalizing domestic marketing and pricing of all agricultural products, especially rice at both producer and consumer levels, and privatizing the processing of rice, thereby eliminating subsidies in local rice production; (b) Reforming the agricultural trade regime through the liberalization of external trade in those agricultural products still under Government control by eliminating all prior authorizations for the import and export of these crops (rice, vegetable oils, groundnut oil seeds, sugar, and wheat flour), determining appropriate protective tariffs for these key agricultural commodities6, and (in the case of cotton and groundnuts) linking domestic producer prices to world prices; (c) Privatizing the production, processing and marketing of agricultural products in those sub-sectors still dominated by parastatals, namely groundnuts and rice; and (d) Preparing a three-year rolling investment program for the agricultural sector, which respects clear sectoral priorities established in consultation with donors. 4. The adjustment program was supported by other donors, using a mixture of fast- disbursing and investment support. Total program funding was estimated at about US$134 million, of which about US$74 million in budget support and US$60 million in project, technical assistance and institutional development support. Financing was to be provided by USAID (at least US$31 million for budget support and investments), CFD (at least US$20 million), EU (about US$30 million), and IDA (US$45 million). C. ACHIEVEMENT OF PROGRAM OBJECTIVES 5. The program partially achieved its objectives. Reform measures in the rice sector were fully carried out. The liberalization measures have led to an increased choice and lower prices for consumers, but also to lower local production as Senegal's underlying comparative advantage is so weak that the CFAF devaluation was insufficient to reverse the situation. In the cotton sector, measures were implemented that made the sector more efficient. In addition, producer prices were increased from 115 CFAF to 185 CFAF, which is close to the border price for seed cotton, a Producer Price Support Fund (PPSF) was set up, and a profit sharing mechanism was put in place giving farmers 40 percent of the net profits of the Cotton Development Agency (Societt pour le Developpement des Fibres Textiles, SODEFITEX). As a result, production is increasing again, as are yields. It is not known what the impact of the measures was on efficiency and costs. Several measures were, however, not implemented by the Government. These related mainly to the repayment of debt by the Government to thefiliere and the cession 6 Special tariff protection was expected to move over time towards the level in the West African Economic and Monetary Union.  -3 - price of cotton fiber to the domestic textile industry.7 In the groundnut sector, the program failed to privatize the National Groundnut Oil Company (SONACOS, Societe Nationale de Commercialisation des Olkagineux). Mechanisms were put in place, however, to more closely align producer prices with world market prices. As most of these measures are still relatively new, it is unclear what the production response will be (see also paras. 21-22). It is only in the sugar sector where the reform program failed to achieve its objectives. The liberalization of the sugar importation and marketing has failed to lower consumer prices and to elicit a production response. It has, however, set the stage for further liberalization, once the contract with the Senegal Sugar Company (CSS, Compagnie Sucriere Senegalaise) expires. The three-year rolling Agricultural Investment Programs have been prepared as planned and increasingly reflect the shift in Government priorities. D. IMPLEMENTATION RECORD AND) MAJOR ISSUES AFFECTING PROGRAM IMPLEMENTATION 6. The credit supporting the AG-SECAL was approved on June 6, 1995, and became effective on June 29, 1995. The first tranche was released upon effectiveness, and the second tranche was released on December 6, 1996. 7. Prior to effectiveness of the credit, a significant number of measures had already been implemented that allowed the immediate disbursement of the first tranche, specifically: (a) The setting up of an inter-ministerial committee to monitor program implementation. (b) The liberalization of domestic marketing of rice at both the producer and the consumer level. The Government-owned rice mill had been transferred to the private sector. The recommendations of a study defining the new role and staffing of the Price Stabilization Agency (Caisse de Pere'quation et de Stabilisation des Prix, CPSP) had been accepted by Government, though not yet implemented. Transportation subsidies for broken rice had been terminated. (c) Preparatory studies had been undertaken on the restructuring of the sector; SONACOS, with EU support, had started working on the definition of a mechanism to link producer prices to world market prices. (d) A new agreement had been reached between the Government and the Sugar Company of Senegal (CSS, Compagnie Sucriere Senegalaise). (e) The Government had proposed a mechanism defining the modalities (non- quantitative measures) for protecting the domestic production of potatoes, onions, and bananas. 7 The Govemnnent stated in its letter of Juriel 5, 1998, that debts to SODEFITEX related to the cession price of cotton fiber to local textile manufacturers had been paid on December 31, 1997.  -4 - (f) The Government had established action plans and time tables for the implementation of the major actions, particularly the full liberalization of rice imports and the privatization of the SONACOS. The conditions for second tranche release were: (a) The full liberalization of the import of broken rice and implementation of an import levy on broken rice, which at no time would exceed a cumulative 50 percent of the average Dakar cif price over the preceding two months; (b) The complete elimination of CPSP's role in the importation and distribution of broken rice and the closure of all of CPSP's warehouses and marketing facilities; (c) Bringing SONACOS to the point of sale, namely (i) the issuance of invitations to tender; (ii) the evaluation of the bids; (iii) the selection of a winning bidder(s); (iv) the invitation of the bidder(s) to negotiate; and (v) the commencement of negotiations; (d) The elimination of all prior authorizations (except to the extent required for all health, phytosanitary or environmental protection); (e) Updating the three-year rolling investment program for the agricultural sector to be submitted to donors for review; and (f) satisfactory implementation of the third Lettre de Mission between the Cotton Development Agency (SODEFITEX, Societe pour le Developpement des Fibres Textiles) and Government and the signing of a fourth Lettre de Mission in form and substance satisfactory to IDA. The implementation experience regarding these conditions is reviewed in detail below. (i) The Rice Sub-Sector 8. Reforms in the rice sector were first addressed by the USAID-supported Rice Sector Adjustment Program (RSAP), which became effective in February 1994. The RSAP had three tranches, and many of the reforms, which were conditions of IDA credit's first and second tranches, had been accomplished before the AG-SECAL was signed (price liberalization and privatization of rice mnills). The AG-SECAL helped the Government proceed, however, with the most difficult parts of the reform program, particularly concerning CPSP's operations and the opening up of rice imports to the private sector, as discussed below. The reforms of the rice sub- sector were undertaken during difficult circumstances, when world prices of rice were increasing. Prices for Asian broken rice (at least the Thai Al Special reference price) were substantially above their average levels for almost two years-from late 1994 through mid-1996-just in the middle of the transition phase to free market operations. 9. The Government carried out the rice reform program faster and more completely than foreseen in the AG-SECAL. While the program only foresaw the substantial reduction of the functions played by the CPSP, the Government decided to close the parastatal down because of the high costs it imposed on Government's budget.  -5 - 10. The production of rice, particularly in the Valley, has declined dramatically since the introduction of the reforms. Over the period 1993/94 to 1995/96 production in the Valley declined from 166,000 mt to 102,000 rnt, with area planted declining from 36,000 ha to 25,000 ha, and yields also declining due to decreases in the intensity of input use. Administrative problems in implementing the agreed upon protective tariff system, combined with suspected fraud on the part of importers (overinvoicing of prices to qualify for lower import tariffs) and declining world market prices have resulted in a weakening of producer incentives. Current prices for local producers rose approximately 30 percent through 1996, but the net benefit was lessened by the high increase in the average costs of purchased inputs (40-50 percent). In addition, problems with the credit system have made access to working capital difficult, and costly technical and managerial difficulties in maintaining the irrigated perimeters have increased the cost of production. 11. The most significant positive impact of the reforms was on the rice importing and domestic marketing systems. These two systems have been completely restructured with the departure of the CPSP from the sub-sector. Rice importing has become competitive with no importer having more than a 20 percent market share. Furthermore, the source of origin of rice imports has become much more varied, ranging from Indian to Brazilian to Vietnamese, in addition to the favored Thai ("Siam") rice. The average real consumer price for broken rice is now lower than four years ago prior to the devaluation. There is some evidence that wholesale marketing margins have started to decline over time but with a wide range of rice from different origins and in different quality levels, it is difficult to demonstrate this conclusively.' 12. Another major efficiency gain was the decision by the Government not to hold rice security stocks. Instead it agreed to the creation of a rice information system which would allow it to be informed on market conditions and take any needed action. This unit-the Rice Informnation System (SIMRIZ).-was created in July 1996 with financial support from USAID. It is functioning reasonably well, and provides five different "information products" featuring domestic and international market information to radio, television, newspapers, the Internet, and a list of Government, donors, and private sector agencies/companies. 13. The impact on the rice processing industry has been mixed. Small-scale huller business has expanded, while profitability has been difficult for operators of more costly industrial and semi-industrial scale mills. It is clear that prior to the reforms, there was significant over- investment in processing facilities at the more capital-intensive end of the continuum. (ii) The Groundnut Sub-Sector 14. In 1994, the EU had begun a program to restructure the sector, financed through the Lome Convention. Two important measures were implemented under the Agricultural Sector Adjustment Program, prior to the .start of the AG-SECAL: (i) the removal of import controls (except for health, phytosanitary and environmental considerations) on vegetable oil (September 1994); and (ii) removal of Government controls on consumer prices for vegetable oil (January 1995). 8 Government noted in its comments that margins have increased following liberalization at all levels, especially at retail.  -6 - 15. In principle, these measures have terminated the monopoly position of SONACOS in the domestic market, allowing other enterprises to import and market vegetable oil for domestic consumption. In practice, however, the import protection has been structured to make competition with SONACOS very difficult. Raw oil is assessed a tariff of 26 percent and refined oil a tariff of 48 percent plus a levy of 31.82 CFAF/kg. As a result, SONACOS not only receives a high level of protection on domestically refined oil, but also has a substantial operating margin for processing imported raw oil. Hence these reforms have yet to result in any real competition for SONACOS in the domestic market for vegetable oil. Indeed, available import data for the period 1990-1995 show minimal private sector imports of refined vegetable oil since 1994. Increased competition will only come with a reduction of the import protection levied on refined vegetable oil. 16. Despite this disappointing response to the reforms, competition in the groundnut sector has increased somewhat due to growth in the informal groundnut oil processing sector and the production of confectionery groundnuts. However, they both still account for a small component of the total market for groundnuts and groundnut oil. Confectionery groundnuts accounted for only 9 percent of total groundnut production in 1996/97, and artisanal groundnut oil accounted for 14 percent of domestic vegetable oil consumption in 1993/94. Nevertheless, the expansion of these two activities offers a means to increase the level of competition in the sector, to the advantage of producers. 17. A groundnut producer price support system was adopted based on a proposal by the EU and the CFD. This approach departs from that originally envisaged by the AG-SECAL in that it is based on support for a pre-announced producer price administratively set close to export parity, rather than a relatively low floor price. The adopted system thus requires active recourse to the price support fund, which is either drawn down or replenished on an annual basis according to the difference between the pre-announced producer price and the actual end-of-season producer price. Responsibility for implementing this price mechanism has been conferred on the Groundnut Sector National Committee (CNIA, Comite National Interprofessionnel de l 'Arachide), a new institutional structure which comprises representatives of all groups within the sector including: producers, traders, input suppliers, transporters and SONACOS. Government thus retains influence on the process only indirectly through the latter. Another feature of the system is that operating margins for SONACOS are periodically negotiated, which is not conducive to sustained productivity improvements. 18. First used to set producer prices for the 1995/96 season, although at that time without the benefit of the price support fund, the system became fully operational by the end of 1997. The immediate impact has been positive in that real producer prices have been increased and aligned more closely with export parity prices (Table 1), thus satisfying the immediate objective of the reforms espoused in the reform program. It has also given producers a much greater share of the benefits of the CFAF devaluation; a result of cost reductions and improved efficiency at SONACOS in response to the EU program of institutional support, and a more equitable apportionment of export returns between producers and SONACOS.  -7 - Table 1: Trends in Producer Prices and Protection Unit 91/92 92/93 93/94 94/95 95/96 96/97 Nominal Protection 3.56 3.03 0.72 0.89 0.99 0.92 Coefficient Real Producer Price FCFA/kg 99 114 108 120 122 127 (1995=100) _________ 19. While these changes are positive and encouraging, they are only a beginning. There is still a considerable margin for efficiency improvements in domestic marketing and processing activities, that could be shared by producers and consumers. It is too soon to tell whether the increased real producer prices will elicit a sustained production response (see Table 2). Table 2: Groundnut Production: 1991-1997 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 Oil =- ___ ___ _ Production (000 mt) 679 727 552 602 678 791 588 Area ('000 ha) 886 842 926 739 893 841 856 Yield (kg/ha) 766 829 596 820 759 940 687 Confectionery . Production (000 mt) 24 27 27 26 40 37 58 Area ('000 ha) 28 29 31 25 36 40 64 Yield (kg/ha) 866 964 870 1011 1114 913 914 Total Production (000 mt) 703 754 579 628 718 828 646 Area ('000 ha) 914 871 957 764 929 881 920 Yield (kg/ha) 769 866 605 822 773 940 702 20. The removal of Government controls on consumer prices and the termination of import licensing requirements for vegetable oils has not led to any marked change in the level of consumer prices (Table 3), which are still very high because of the protective tariff levied on imported refined oil, or introduced an unacceptable level of price variability. Further rationalization of trade policy, as noted above, offers the best means to reduce consumer prices, and so to avail consumers of the full benefits of market liberalization. Table 3: Consumer Prices for Groundnut Unit 1992 1993 1 1994 1995 1996 1997 Nominal FCFA/kg 330 332 _ 465 566 583 588 Real ('95=100) 468 1 474 503 566 567 570  - 8 - 21. The second tranche release condition related to the groundnut sub-sector was for SONACOS to be brought to the point of sale. Together with USAID, IDA placed privatization of SONACOS high on the AG-SECAL agenda for policy reform, viewing it as the key to reducing Government intervention in the sector, and making it more competitive and market oriented. The Bank and the EU differed, however, on the approach to be taken to SONACOS's privatization. The EU supported a phased approach to privatization starting in 1994 with a program to improve the financial structure of SONACOS accompanied by measures to improve management, increase efficiency, and rationalize staffing levels. The next stage, programmed for 1995-96, was to have involved separation and privatization of SONAGRAINES, a fully owned subsidiary of SONACOS responsible for the primary marketing of groundnuts for delivery to SONACOS; the termination of all seed related activities; and either a strengthening of the seasonal credit program or its transfer to an appropriate financial institution. With this separation and rationalization complete, the final step envisaged was privatization of the core activities of SONACOS. The Bank's approach called for the immediate privatization of SONACOS in its existing form (with all ancillary activities and agencies). However, other than provision for eventual privatization of SONAGRAINES, the AG-SECAL made no analysis or proposal on whether further disaggregation or rationalization of SONACOS's activities was necessary, and, if so, how it should take place. Block privatization was implicitly viewed as the basis for subsequent rationalization and improvements in transparency, accountability and efficiency. The lack of coordination between the donors coupled with Government's decision to privatize SONACOS in its existing form had the unfortunate result of halting EU financial and technical support for rationalization of the institutional structure, and USAID's support to the privatization initiative. 22. The Government, however, did bring SONACOS to the point of sale. Bids were received by December 1996, as required, but were validly rejected as being unrealistically low. The Bank agreed with Government that the latter had legally fulfilled the condition for second tranche release of bringing SONACOS to the point of sale, even though negotiations with bidders were unsuccessful. The process was restarted in 1997, in order to obtain a more acceptable offer. (iii) The Cotton Sub-Sector 23. As a result of substantial deficits incurred by SODEFITEX, performance contracts (Lettres de Mission) were signed between the company and Government. The third such contract, signed in March 1992, served as the basis for the AG-SECAL reforms. The contract focused on management reform-aiming to put the company on a commercial basis and to set clear technical objectives-and stipulated the responsibilities of the Government vis-a-vis SODEFITEX. 24. Management reform objectives for SODEFITEX included a substantial personnel reduction, the restructuring of the company to separate the cotton production activities from the rural development activities, the establishment of an analytical accounting system with separate accounts for the two main subdivisions of the company (cotton and rural development), and moving company headquarters to Tambacounda from Dakar. All have been or are in the process of being accomplished, with the exception of moving the headquarters to Tambacounda. The ICR mission could not obtain the necessary data to assess the impact of the reforms on production costs.  -9 - 25. Technical objectives were related to an increase in production, improved field level performance and the institution of a flexible mechanism for the distribution of cotton rents and producer price stabilization. Improved field-level performance was also expected, through improved management of farmer markel:ing groups, the use of village-level "farmer auxiliaries" in extension and input and product marlceting processes, and a clearer definition of contracting arrangements with rural development paitners, research, rural roads, livestock, etc. Most of these measures have been implemented. 26. The flexible mechanism for distribution of the cotton rent and producer price stabilization was at the heart of the risk management system. It has been set-up consistent with AG-SECAL conditions, i.e., there is no direct Government involvement and the producer floor price is linked to the world market price. The Producer Price Support Fund (PPSF) was to contain 20 percent of the amount of the next year's forecasted crop multiplied by the floor price of the preceding year. Initial funding for this fund was to come from CFD. However, the agreement for setting up this fund was not signed until June 1997 and the initial funds had not yet been provided by the end of 1997. Concerning distribution of the cotton rent, the Lettre de Mission stipulates that net profit margins are to be divided as follows: 40 percent to producers ( in terms of ristournes), 40 percent to SODIFITEX, and 20 percent to the Government.9 In addition, in the case there are no positive gross margins for two successive years, the management committee can re-examine the floor price and the cost structure, and if it cannot make suitable changes in the floor price, it can make other arrangements for deficit financing. 27. Production and yields have responded positively to the increase in producer price from 115 CFAF in 1993/94 to 185 CFAF in 1996/97. Cotton production increased from 31,000 tons in 1995 to 50,000 tons in 1997, albeit less than planned. Table 4: Cotton Production 1991 1992 1993 1994 1995 1996 1997 Area ('000 ha) 44 45 44 34 35 50 52 Yield (kg/ha) 1,117 1,067 887 844 896 731 962 Production ('000 tons) 52 48 39 29 31 38 50 Producer Price (CFAF/kg) 100 100 115 150 170 170 185 28. Obligations of the Government under the Lettres de mission related to the repayment of its debt to SODEFITEX, tax treatment, cost of electricity, transfer to the company of the property it uses in the port of Dakar, employee personnel rights, removing the SODIFITEX obligation to market non-cotton agricultural crops, and assistance to the company in its contracting arrangements and operation of the PPSF and its Management Committee. These obligations, however, have not been fully respected. The Government attempted to post representatives of the The agreement says that 60 percent was to be divided equally between the company and the Government, but the Government's share was later lowered to 20 percent.  - 10 - domestic textile industry on the PPSF Management Committee, which was not part of the original agreement. This attempt, together with non-adherence to the agreement that cession price to the textile industry be based on the world price, and to the agreement to repay debts to the company'