Senegal - Investment Promotion (SOFISEDIT) Project

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1393-SE REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OF THE BANK AND TO THE BOARD OF DIRECTORS OF THE CORPORATION ON A PROPOSED LOAN BY THE BANK TO SOCIETE FINANCIERE SENEGALAISE POUR LE DEVELOPPEMENT INDUSTRIAL ET TOURISTIQUE WITH THE GUARANTEE OF THE REPUBLIC OF SENEGAL AND AN INVESTMENT BY THE CORPORATION IN THIS DEVELOPMENT FINANCE COMPANY May 9, 19 74 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility, for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) EXCHANGE RATES Currencz Unit Official Floating (as of February 1, 1974) US$1 CFAF 230.21 CFAF 25000 CFAF 1,000 us$4.34 uS$4.oo CFAF 1,000,000 US$4,344 US$4,000 The CFA Franc is officially valued at the equivalent of FF 0.02. As the French franc is now floating relative to the US dollar, the US dollar/ CFAF exchange rate is subject to change. The exchange rate on February 1, 1974 of US$1 = CFAF 250 was retained for conversions made in this report. FISCAL YEAR July 1 - June 30  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OF THE BANK AND TO THE BOARD OF DIRECTORS OF THE CORPORATION ON A PROPOSED LOAN BY THE BANK TO SOCIETE FINANCIERE SENEGALAISE POUR LE DEVELOPPEMENT INDUSTRIEL ET TOURISTIQUE WITH THE GUARANTEE OF THE REPUBLIC OF SENEGAL AND AN INVESTMENT BY THE CORPORATION IN THIS DEVELOPMENT FINANCE COMPANY 1. I submit the following report and recommendation on a proposed loan to the Societe Financiere Senegalaise pour le Developpement Industriel et Touristique (SOFISEDIT) with the guarantee of the Republic of Senegal for the equivalent of US$3.0 million and an IFC investment of up to US$200,000 in the share capital of this new company. Amortization of the proposed Bank loan would conform substantially to the aggregate of the amortization schedules applicable to the specific investment projects financed out of the proceeds of the loan. Interest on the loan would be 7-1/4 percent per annum; a com- mitment charge of three-quarters of one percent per annum on the amount of each sub-loan outstanding would accrue as from the various dates of approval of sub-loans by the Bank. SOFISEDIT would relend the proceeds of the loan for up to 20 years for tourism projects and up to 15 years for other projects. PART I: THE ECONOMY 2.. A report entitled "The Economy of Senegal" (212-SE) was distributed to the Executive Directors on September 10, 1973. Country data appear as Annex I. Economic Potential 3. Endowed with few natural resources, Senegal has only limited possi- bilities for economic development. Agricultural conditions are generally poor, particularly in the groundnut basin where the bulk of the population lives. The south and southeast offer better prospects for development of a variety of agricultural products, but groundnuts still account for the cash income of most of the rural population and for nearly half the country's export earnings. 4. Apart from agriculture, the main possibilities for economic develop- ment are fisheries, tourism and manufacturing. Thanks to rich resources off the coast, fish production has been growing rapidly. International tourism to Senegal has started to develop only in recent years, but prospects for  further expansion of this sector are promising. Senegal developed its industry earlier than other West African countries and its industrial labor force is one of the best in Africa. However, although there are certain definite pos- sibilities for development of new crops and new sectors, diversification will take a long time. The economy will continue to be affected by the. vagaries of the weather and by fluctuations in the world market price of groundnuts. Past Development 5. Although during most of the 1960's, Senegal's economy remained stagnant, with minimal growth of GJ)P in real terms (1 percent a year), a number of factors combined to bring about faster growth since 1968, par- ticularly in the modern sector. This was mainly the result of a marked increase in exports of manufactured products averaging 14 percent a year, which reflected Senegal's improving competitive position. In addition, the Government's agricultural diversification effort started to yield benefits in rice, cotton, and vegetable production. 6. Senegal's public finances deteriorated throughout most of the 1960's. By 1968/69, public savings had declined slowly but continuously to virtually zero. Thereafter, a recovery of public savings was made possible because of better tax collection, increased tax rates, and substantial surpluses of the groundnut stabilization fund following the rise in groundnut export prices. In 1970/71, public savings represented 7 percent of current revenues. Yet locally-financed public investment continuec to exceed savings by a wide margin, as it had throughout the 1960's, and this resulted in a steady decline in Treasury deposits. 7. Senegal has benefited from a large inflow of foreign aid, mostly on concessionary terms. Between 1966 and 1970, foreign aid financed about 65 percent of public investment and averaged US$30 million per year. This cor- responds to US$8.8 per capita annually, mainly financed by the European Econo- mic Community (40 percent) and France (30 percent). The World Bank Group and Germany contributed, respectively, 13 and 10 percent of the total. Foreign aid concentrated on infrastructure and on directly productive projects in the rural sector. Also important was technical assistance, mainly in education, which amounted to US$29 million annually, mostly financed by the French Government. In 1972, the Bank Group held 17 percent of Senegal's outstand- ing and disbursed foreign debt, accounting for 4 percent of foreign debt service. Recent Performance and Prospects 8. A severe drought in 1972 seriously affected groundnut production and decimated livestock herds. However GDP fell only slightly, as the modern sector achieved a growth rate of six percent in that year. Nevertheless the drought caused a sharp decline in the standard of living of much of Senegal's rural population, necessitating a large-scale emergency food program and a number of drought relief projects. Although rainfall was somewhat better in 1973, the effects of the drought persisted.  -3 - 9. Ongoing efforts to diversify agriculture and to expand fisheries, tourism and industrial exports should enable the economy to grow faster in the coming years than in the previous decade. However the drought on the one hand, and the accelerating world inflation on the other, have profoundly affected Senegal's balance of payments and public finances. To some extent, increases in the cost of petroleum and other imports will be compensated by expected increases in the price of groundnuts, phosphates and other exports. By 1980, however, the annual trade deficit will reach US$220 million (37 percent of exports), or about US$64 million more than was estimated in early 1973. This would lead to a current account deficit in the balance of pay- ments of US$168 million (21 percent of exports of goods and non-factor services) as compared to US$122 million estimated a year ago. Net factor payments abroad will continue to increase with the growth of foreign invest- ment and the increase in foreign capital requirements. 10. The increased need for external resources is aggravated by a dif- ficult public finance situation in the past decade. Current revenues kept pace with the increase in GDP but current expenditures grew faster than current revenues. This pattern worsened sharply in 1972-1973 as a result of the drought, increases in civil service salaries, subsidization of food imports and increased external borrowing. Even if strong measures are taken to increase Government revenues, control expenditures and keep food subsidies to a minimum, public finances will remain tight for the rest of the decade. 11. Considering the need to diversify the economy, it appears essential that public investment for the Fourth Plan (1973-77) be increased by at least 30 percent in real terms as compared to the Third Plan (1969-73). While such a program is in line with the improved capacity to prepare and implement projects, its financing raises difficult problems. To offset the shortfall in local resources, and the sharply increased investment costs due to infla- tion, a substantially higher level of foreign assistance will be required. Foreign aid is expected to continue to expand rapidly, based on the programs of the European Community, bilateral donors (France, USAID, Germany, Canada and oil producing countries) and the World Bank Group. 12. The terms of external aid to Senegal have been progressively harden- ing over the years. The proportion of grant aid declined from 85 percent in 1964-66 to 55 percent in 1969-71. If Senegal is to finance the required pub- lic investment program, a further hardening of the blend may be unavoidable. From the balance of payments point of view, there is perhaps some scope for increased borrowing on harder terms and even if Senegal's export earnings are subject to serious fluctuations, some further hardening of the blend would probably be manageable. The main constraint, however, on an increase in borrowing on conventional terms is the public finance situation and more particularly the difficulties which the Government will have in increasing savings. Foreign lenders, therefore, should continue to provide a large proportion of their financing on concessionary terms. Moreover, in order to avoid delays in project implementation due to lack of local funds, it is highly desirable that foreign lenders finance an average 85-90 percent of total project cost, including a substantial portion of local currency expenditures in the next few years.  - 4 - PART II: BANK GROUP OPERATIONS IN SENEGAL 13. The Bank Group has had 18 operations in Senegal to date. Total lending <mounts to US$81 million (net of cancellations), including eleven IDA credits, four Bank loans, one blend of Bank and IDA funds and two IFC opera- tions. The Bank Group is now Senegal's third largest aid donor (after France and the European Economic Community) providing about 13 percent of Senegal's external capital assistance. IFC net commitments in Senegal total US$2.22 million in two projects. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1974 and notes on the execu- tion of on-going projects. 14. Bank Group operations in Senegal began in 1966 and for the first five years were limited to the transport and groundnut sectors, with projects for the railway (Credit 96-SE), the port (Loan 493-SE), highways (Credit 198-SE), an agricultural credit project for small holders in the groundnut basin (Credit 140-SE) and an IFC loan and equity investment for the establish- ment of a fertilizer plant near Dakar (114-SE). In the following three years, Bank Group financing expanded and diversified. In addition to follow-up operations for railways (Credit 314-SE and Loan 835-SE), highways (Credit 366-SE) and groundnuts (Credit 404-SE), there were several small holder pro- jects aimed at developing new crops and opening up new agricultural regions - Casamance Rice Project in the South (Credit 252-SE), Terres Neuves Project in the East (Credit 254-SE) and the River Polders Project in the North (Credit 350-SE), as well as a promotional investment by IFC to develop near Dakar large scale irrigated vegetable production for exports (210-SE and 265-SE) and a project by IBRD to relieve the effects of the drought (Credit 446-SE). Other Bank Group activities comprised an Airport Project (Loan 867-SE) to facilitate tourism development, a Credit for technical and agricultural education (Credit 253-SE), a Telecommunications Project (Loan 866-SE), an engineering loan for a ship repair project, and the Bank Group's first Site and Services Project (Credit 336-SE). 15. Execution of these projects, apart from the Railway Project and the Site and Services Project, is moving forward without exceptional delays. The Railway is in serious financial difficulties due to the failure of revenues to increase as projected, low utilization of locomotives and rolling stock, poor staff performance, and frequent changes at the post of General Manager. These factors have in turn affected the implementation of the track renewal program, which is now one year behind schedule. However the first shipment of rails has been delivered and technical assistance financed under the Project is helping the Railway's management to reverse the deteriorating trend. The Site and Services Project is about one year behind schedule. The main causes for the delay were the unexpected need to pass a law, rather than a decree, to reorganize the executing agency (OHLM), the.delay in recruitment of technical assistance and the difficulty experienced by OHLM in getting prompt cooperation from other ministries and government agencies involved in project execution. A recent request by the Government to modify the site plan for the project may cause further delay. Tendering for the first tranche of 100 hectares  -5- has now been completed and land occupation is scheduled to take plice by mid-1975. Some of the agricultural projects, such as the Terres Ni!uves Project and the Casamance Rice Project, were hampered by delays in receiving the Government's counterpart contribution; however, owing to efforts of the project authorities, physical implementation of these projects is proceeding generally according to schedule. 16. Future Bank lending is expected to take three main directions. First, we plan to continue lending for transport and education. A second education project would aim at upgrading secondary education as well as assisting voca- tional training for tourism, industry and fisheries. It will also include an experimental program for informal rural training. Secondly, it is proposed to follow up on a number of small-holder agriculture projects. One of these (the Sine Saloum Project) will assist farmers in the southern groundnut basin. Others such as the proposed second Casamance Rice Project and the proposed second Terres Neuves Project will continue support for the experimental pro- grams to open up new areas of the country with new crops, following the pro- mising results of the initial projects. Finally, we are continuing to explore other avenues for diversification such as the tourism and industry sectors. In addition to the present SOFISEDIT project, lending may include assistance to SONEPI for small scale industry, a tourism infrastructure project on the Petite Cote and a ship repair project, based on the studies financed under Loan S-3SE. PART III: INDUSTRY, TOURISMI ANID BANKING IN SENEGAL Industry 17. Economic growth in Senegal has been largely attributable to the role of the industrial sector, which had an annual rate of growth of 6-7 percent. Although not outstanding by international standards, growth in the sector represents an achievement for the Senegalese economy. In 1972, the sector accounted for about 15 percent of GDP, as compared to 8 percent in 1960. Industry employed about 20,000 persons, or 14 percent of the country's labor force. Manufacturing accounts for about three quarters of value added by the industrial sector, whiie public utilities and mining represent 16 and 7 percent of the total respectively. Growth in the manufacturing sector is largely due to the textile/leather and mechanical/electrical subsectors. Whereas industrial production was mainly oriented to import substitution in the first part of the 1960's, growth of exports largely contributed to the increase in industrial output in the latter part of the 1960's. These new markets were found for the most part within former French West Africa, al- though some firms (textiles) have proved to be competitive in the markets of developed countries. Gross investment in the manufacturing sector, ex- cluding a large sugar complex, is estimated to have amounted to about CFAF 4 billion (US$16 million) per annum in 1969/71 against an average CFAF 2.5 bil- lion (US$10 million) in 1964/66.  18. Recent industrial growth is due to the combination of a number of favorable factors: first, Senegal has a long tradition of industrial pro- duction, and labor productivity is comparable to Europe in the case of mechanized or repetitive industrial operations requiring relatively little control; secondly, investments in manufacturing increased considerably in the 1960s, reflecting the confidence of foreign entrepreneurs (mostly French) who control 85-90 percent of the modern industrial sector; thirdly, the com- petitive position of Senegal was helped by a rather slow increase in wages of about 3 percent per annum; finally, the 1966 Agreement among the countries of the West Africa Customs Union benefitted Senegal. 19. Industrial production is expected to continue to grow on the basis of a further increase in exports to developed countries and by greater local consumption commensurate with an expanding economy. Despite the increase in the cost of energy and the difficult transport conditions, the value added in the industrial sector could continue to grow by more than 6 percent annually between 1971 and 1980. To complement the foreign private investment that is likely to continue to be attracted to Senegal's industrial sector, the Govern- ment's Fourth Development Plan for 1973-77 projects investments in manufac- turing totalling CFAF 17.6 billion (US$70.4 million), or CFAF 4.4 billion (US$17.6 million) per year. Tourism 20. Senegal is well endowed for international tourism development. Its long sandy beaches, pleasant climate during European and American winters and good accessibility through the international airport at Dakar offer much attrac- tion for foreign tourists as well as for stop-over traffic destined for other African or South American countries. After a long period of very slow growth, tourism increased by about 10 percent a year between 1968-71, and has taken even a more sharp upturn in 1972 and 1973. Nevertheless, total tourists are relatively small in number. Senegal received 60,000 foreign visitors in 1972 compared to almost a million that were attracted to the Canary Islands. 21. The growth in bednights by over 70 percent in 1972 and in the first half of 1973, and the high occupancy ratio of hotels in Senegal (averaging about 80 percent in the first half of 1973) indicate that the main bottleneck for tourism expansion has been the insufficiency of hotel accomodation. As tour operators begin to organize regular charter flights and package tours, hotel capacity will continue to pose a problem. At the end of June 1973, the total hotel capacity in Senegal suitable for international tourism was 1,771 rooms, over two-thirds of which were concentrated in Dakar. Of the 800 rooms now under construction, about half are in the Dakar area. This disequili- brium in tourist facilities between Dakar and the rest of the country hampers the expansion of excursions into the country side. Nevertheless, consider- able expansion potential exists in outlying regions, particularly the Petite Cote, a long stretch of beaches 60 miles south of Dakar. The Government has ordered a study of the physical planning of a project in this region and lhas requested World Bank financing for infrastructure construction.  - 7 - 22. Recent tourism demand studies undertaken for Senegal show that if attractive, moderately priced accomodations were available, tourism bednights could increase annually by over 30 percent over the next ten years. Senegal's Fourth Development Plan (1973-77) forecasts the construction of 11,270 hotel beds at a total investment cost of CFAF 27.2 billion (US$109 million). Al- though this target appears unrealistic due to constraints in infrastructure and trained personnel, plans based on advanced proposals indicate that at least 4,000 hotel beds will be built in the next four years, resulting Sn annual investments on the order of CFAF 2-3 billion (US$8-12 mill:'.on). In addition, it has been ascertained that complementary investments i'or infrastruc- ture, conservation of natural and historic resources, and promotion, should further increase annual investments by about CFAF 650 million (US$2.6 million). 23. Assuming that daily expenditures per tourist average about $25 until the early 1980's and rise to about $30 by 1990, by 1982 gross revenues from tourism would increase to CFAF 16 billion per year (US$64 million) and to CFAF 44 billion (US$176 million) by 1990. This would substantially in- crease the importance of tourism vis-a-vis merchandise exports from under four percent in 1972 to nearly 16 percent by 1982 and over 26 percent in 1990. Banking 24. Senegal is a member of the Western African Monetary Union established in 1962 and composed of six countries with a common central bank, the Banque Centrale des Etats de l'Afrique de l'Ouest (BCEAO) which has an agency in Dakar. Other financial institutions in Senegal include four commercial banks and a development bank. Established in 1964, Banque Nationale de Developpement du Senegal (BNDS) has specialized since 1970 in short and medium-term loans to the agriculture and agro-business sectors. The Union Senegalaise de Banques (USB), a commercial bank, is now 51 percent owned and controlled by the Government: it was recently granted loans from KfW and AfDB to provide long-term finance to industry, and particularly Senegalese enterprises. How- ever, the AfDB loan may be cancelled; the commitment of this loan was difficult because of the rigorous documentation required by AfDB. The KfW loan is expected to be fully committed by the end of 1974. The three other commer- cial banks, which are foreign-controlled, are presently extending only medium- term finance (up to seven years) to industry and tourism. 25. BCEAO exercises a qualitative and quantitative control of credit through a system of global and individual rediscount ceilings. The interest rate structure is built around the rediscount rate of BCEAO which was raised from 3.5 percent per annum to 5.5 percent per annum early in 1973. The in- terest rates charged to industrial firms for medium-term loans are between 9 and 11 percent per annum. 26. Except for USB recently, there has been no internal source of long- term financing. Long-term credit to industry has been extended only by Caisse Centrale (France), directly or through BNDS (until 1970) at low interest rates (3-1/2 percent per annum to 6-1/2 percent per annum ); the outstanding amount of long-term loans so channelled to Senegalese industry was CFAF 4.3 billion by end-1973.  - 8 - 27. To fill the gap for such long-term financing, the Government decided to establish a new financial institution, SOFISEDIT. To preserve competition in the commercial banking sector, the Government decided that SOFISEDIT should be an independent entity, not aligned with one of the existing financial institutions. In order to provide SOFISEDIT with an opportunity to establish itself in Senegal's financial structure, it would have the first option on applications for long-term financing for industry and tourism under the terms of its convention, the signature of which would be a condition of effective- ness of the loan (Section 8.01(b), draft Loan Agreement). SOFISEDIT will, however, seek close cooperation with existing financial institutions in the many cases where co-financing will be required. SOFISEDIT will also cooperate closely with SONEPI, a Senegalese promotional institution which undertakes feasibility studies of selected industrial proposals, seeks Senegalese in- vestors to sponsor approved projects and assists such sponsors with project development, organization and management. To encourage a continuous communica- tion and a transfer of knowledge between these organizations, each will be represented on the other's Board as an observer. In addition, the Government has undertaken to guarantee a long-term loan by SOFISEDIT to SONEPI of about CFAF 20 million (US$80,000) in order to reinforce ties with SONEPI and con- tribute to the promotion of Senegalese enterprise (Section 3.04, draft Guarantee Agreement). The loan to SONEPI would be viewed as a one-time interim arrangement possibly to be complemented by future Bank Group assist- ance directly to SONEPI. 28. Senegal has endeavoured to promote investment by granting financial incentives under an Investment Code. Applications for benefits under the Code are reviewed by a Technical Commission, headed by the Ministry of Plan- ning, on the basis of an appraisal prepared by SONEPI, and then submitted to an inter-ministerial Committee which meets in principle once a month. SOFISEDIT will be invited to attend all meetings of the Technical Commission, so that it will receive the project studies submitted by SONEPI and have the opportunity to discuss them at an early stage and to express an opinion on the merits of projects. PART IV: THE PROJECT Background 29. In 1970 a Bank mission visited Senegal at the request of the Govern- ment to examine the feasibility of creating a new development bank to spe- cialize in long-term financing for industrial projects. The mission concluded that immediate investment prospects were insufficient at that time to warrant the establishment of a new institution. By mid-1972, however, when the need for fixed investment in industry and tourism had substantially increased, the Government proposed the establishment of the Societe Financiere Senegalaise nour le Developpement Industriel et Touristique (SOFISEDIT) and requested Bank Group assistance to establish this new financial institution and to assist  -9- in financing it. A Working Group, including representatives of SOFISEDIT's prospective shareholders and of the Societe Nationale d'Etudes et de Promotion Industrielle (SONEPI), was formed in June 1973 in order to prepare SOFISEDIT's formation, operating policy, management and staffing requirements and appraisal procedures. Working closely with the Working Group, a Bank and IFC mission appraised the project in November 1973. Negotiations were held in Washington on April 29, 1974, with H.E. Ousmane Seck, Minister of Planning, heading the Senegalese delegation. A report entitled "Appraisal of Societe Financiere Senegalaise pour le Developpement Industriel et Touristique" dated May 9, 1974 is being circulated separately. A loan and project summary appears as Annex III. Capital Structure and Resources 30. SOFISEDIT was incorporated in March 1974 as a societe anonyme under the Senegal Commercial Code and as a financing institution subject to the banking legislation of BCEAO. Its initial share capital totals CFAF 650 million (US$2.6 million), with the following participations: