Senegal - Technical Assistance Project For Economic and Financial Planning

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2830-SE REPORT AND RECOMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR A TECHNICAL ASSISTANCE PROiECT FOR ECONOMIC AND FINANCIAL PLANNING August 7, 1980 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = CFA Franc (CFAF) US$1.00 = CFAF 210 CFAF I million = US$4,762 ABBREVIATIONS CNCA - Commission Nationale des Contrats de 1' Administration CRI - Comite de Relance des Investissements DDI - Department of Debt and Investments DPM - Division of Programming and Monitoring of the Department of Planning (MPC) MEF - Ministry of Economy and Finance MPC - Ministry of Plan and Cooperation Primature - Cabinet of the Prime Minister FISCAL YEAR July 1 - June 30  FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC AND FINANCIAL PLANNING CREDIT AND PROJECT SUMMARY Borrower: Republic of Senegal. Amount: SDR 4.1 million (US$5.3 million equivalent) Terms: Standard IDA terms. Project Description: The project would support and strengthen the Government's ability to identify, select and prepare, monitor execution of, and evaluate retrospectively its portfolio of development projects. It would strengthen also the public debt moni- toring, budgeting and forecasting capacity and improve coordination between project needs and public financing. It includes: (a) 11 years of internationally recruited advisors/ trainers (two advisors for 3 years; two for 2 years; one for 1 year); (b) about 68 months of short-term consultants for training and analysis and 6 months of assistance for project monitoring; (c) about 210 months of short-term consultants for project identification, preparation and selection; (d) about 4 months of short-term consultants to parapublic enterprises; and (e) about 18 months of overseas training. The benefits expected from the project include: (a) improved screening of development projects to increase their benefits; (b) the establishment of a system that will improve the pipeline of well prepared and directly productive projects; (c) better utilization of domestic and external resources through improved project implementation; (d) obtaining feedback from ex post evaluation to improve project design; and (e) improved debt reporting, current expenditure control and flow of funds analysis. Although there is some risk in a project of this type, where the benefits will depend largely on Government's dedication to analyze projects and follow through with the recommendations of the planner, this risk is considered acceptable because of the Government's strong commitment to an improvement of its public investment perfor- mance through improved planning, project preparation and supervision capability. 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.  - ii - US$ Thousand Estimated Cost 1/ Local Foreign Total Consultant services 170 1,570 1,750 Internal and overseas 240 490 720 training Local staff costs 350 0 350 Equipment and vehicles 50 250 300 Operating costs 50 140 190 Studies 240 2,160 2,400 Base Cost 1,100 4,610 5,710 Contingencies - physical - 30 30 - prices 130 340 470 Total project cost 1,230 4,980 6,220 Financing Plan: US$ Million Local Foreign Total IDA 0.3 5.0 5.3 Government 0.9 0 0.9 1.2 5.0 6.2 Estimated Disbursements US$ IMillion IDA FY81 FY82 FY83 FY84 Annual 0.6 2.2 1.5 1.0 Cummulative 0.6 2.8 4.3 5.3 Estimated Completion Date: December 1983 Staff Appraisal Report: There is no separate appraisal report 1/ Project costs are shown net of taxes and duties. i1B. Totals miay not add due to rounding.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF SENEGAL FOR A TECHNICAL ASSISTANCE PROJECT FOR ECONOMIC AND FINANCIAL PLANNING 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Senegal for SDR4.1 million (US$5.3 million equivalent) to help finance a Technical Assistance Project for Economic and Financial Planning. The Credit would be on standard IDA terms. PART I - THE ECONOMY 2. A report entitled "The Economic Trends and Prospects of Senegal" (1720a-SE) was distributed to the Executive Directors on March 10, 1980. The following paragraphs reflect the conclusions of this report. Country data appear in Annex I. Economic Structure and Past Developments 3. Senegal, at the western extreme of the African continent, has three-quarters of its territory in the Sahel zone which suffers from low rainfall and periodic droughts. In the traditional sector of the economy, the mainstay is millet cultivation and nomadic cattle-raising for domestic consumption, and groundnut cultivation for exports. Soils are generally poor, and periodically food shortages occur in the months between the sowing and harvesting of the next crop. The large river basins -- some of them fed in the tropical rain zone -- have so far been exploited only marginally. Land distribution is fairly even. In the western part of the country arable land is becoming scarce, but in the extreme southeast some good land is still available. The modern sector of the economy is concentrated in Dakar, the capital, a city of about one million inhabitants, the economic base of which consists of excellent port facilities, an important industrial sector, and a small but fast-growing tourism industry. With a population of 5.2 million, Senegal's per capita GNP for 1978 was estimated at US$340. 4. During the 1960s, the Senegalese economy experienced virtual stag- nation as real output increased at about the same pace as population, at a rate estimated at 2.7 percent per annum. Two factors were responsible for this situation. Firstly, with independence, Senegal lost its privileged position as the center of French West Africa, and subsequently had to adapt to its reduced economic, administrative, and political position. Secondly, in the latter part of the decade, production of groundnuts (its principal export) fell, due to unfavorable weather and declining export prices. 5. In the 1970s, Senegal's narrow-based export sector was hit by sharp fluctuations in volumes and prices, and even with the achievement of higher rates of both private and public investment, average annual growth was not raised above the earlier 10 years' level. Thus, output and incomes were  -2- depressed in 1972 and 1973 by the Sahel's most severe drought in over a century, which brought a decline in real national income. Thereafter, when weather conditions improved and purchasing power of the rural population was substantially restored, both agricultural and industrial production increased markedly. However, in 1977 the country suffered another severe drought, the magnitude of which is reflected in the variations in groundnut crops; from a historical record of 1.45 million tons in 1975/76 (more than double the average for the 1968-73 period), output fell to less than 0.6 million tons in 1977/78; it recovered to about 1.0 million tons in 1978/79, but the most recent crop fell again, to less than 0.7 million tons. Despite these wide fluctuations in agricultural production, industrial output (excluding groundnut processing) did grow at a fairly even rate of about 5 percent a year. Thanks to the recovery from the earlier droughts, real GDP increased at about 5 percent between 1973 and 1977, but in 1978 it is estimated to have declined by 10 percent reflecting the effect of the 1977/78 drought, and, after recovery in 1979, is expected in 1980 to remain about 4 percent below its 1977 level due to the bad crops in 1979/80. 6. The large fluctuations in physical production were aggravated by price fluctuations of Senegal's major export and import commodities. In 1974, the terms of trade improved by over 21 percent, because of exceptionally high prices for phosphate rock, Senegal's second export commodity. However, in 1975 export prices for both phosphate rock and groundnuts declined sharply. The recent increase in oil prices brought a further deterioration in terms of trade, causing a loss in income of roughly 5 percent of GDP compared to the favorable year in 1974. These wide international price fluctuations, together with the above fluctuations in output, had serious consequences on domestic prices, public finance and balance of payments. Public Finance 7. The Government has responded with flexibility in adapting its financial policies to changes in the economic environment. In 1974, the retail prices for rice, sugar and groundnut oil were raised by 40 to 90 percent in order to reduce consumer subsidies that had ballooned following the price hikes for these commodities on the world market. Government also brought producer prices for groundnuts closer to world prices which were particularly high at that time. The loss of revenue to the Treasury because of this latter step was expected to be compensated by additional revenues from the phosphate mine, in which Government increased its participation as well as levied an 80 percent tax on excess profits, which accrued from the quadrupling of export prices of phosphates in 1974. In 1974 and 1975, Government did indeed receive high revenues from phosphates amounting to roughly US$45 million a year, or 12 percent of tax receipts. 8. These steps led to a net increase in public savings after debt service from a yearly average of US$25 million during 1971-73, to US$46 million during 1974-76. This high level of public savings was doubtless an important factor in stimulating Government to increase public investment outlays from a yearly average of US$24 million to US$49 million during the same two periods. In addition, however, Government purchases of equity and lending to domestic enterprises increased sharply, mainly because of increased  -3- participation in the phosphate mine and the acquisition of two foreign-owned public utility companies. The combined capital outlays of the Government were thus substantially in excess of public savings, and were financed in large part through medium-term foreign bank loans. As a consequence, foreign debt service carried by the Central Government increased from US$8 million in 1972/73 to US$38 million in 1975/76, representing about 10 percent of Central Government revenues. 9. A sudden fall in world phosphate prices in 1976 eliminated Govern- ment revenues from this source. In the following year, Government increased taxes, limited recurrent expenditures, and undertook some new commercial borrowing for its investment program. When it became clear that the 1977/78 crop would fail, Government endeavored to avoid famine in the countryside by importing more cereals and absolving farmers' debts; however, the added financial burden which these measures entailed was accompanied by reductions in capital expenditures, which were financed through heavy commercial borrowing amounting to US$122 million in 1977 and US$200 million in 1978. As a conse- quence, in 1980/81, when grace periods are over, debt service obligations of the budget will reach about US$150 million (or 18 percent of Government revenues). 10. In August 1978, the National Assembly was called from summer recess to approve a new fiscal package amounting to US$20 million in additional revenues. The 1978/79 budget presented a tax reform that aimed at removal of tariff distortions and administrative deficiencies, but which also increased Government receipts through reductions in exemptions. Further tax measures are in preparation for the 1980/81 budget which will bring the ratio of Government receipts to GDP to 29 percent, as compared to 19 percent in 1970/71 and 23 percent in 1976/77. Balance of Payments 11. The balance of payments came under heavy pressure in 1973 because of low groundnut exports and increasing imports of foodstuffs and equipment goods, and Senegal's net foreign assets fell to minus US$15 million. In the following years, the deficit on current account was reduced, but outflows of private capital related to the acquisition of foreign enterprises continued, and net foreign assets declined further to minus US$48 million at the end of 1975. Since then, the situation has not improved. In 1976, the State Marketing Board purchased a record groundnut crop at the high producer prices established in 1974, injecting massive purchasing power into the economy and adding to the domestic demand resulting fron the Government's monetary and budgetary policies, which in turn put added pressure on imports. However, because both groundnut and phosphate prices were at considerably lower levels in 1976, export revenues stagnated; even though there were price declines of the same order in some of Senegal's food imports, the net effect on the terms of trade was heavily negative. Although the 1976/77 groundnut crop was good, the balance of payments stayed in deficit. The 1977/78 drought caused a loss of US$200 million in groundnut revenues, but the Government's commercial borrowing limited the decline of net foreign assets to US$93  million. In 1979, the groundnut crop was good and Senegal received an alloca- tion from the EEC STABEX Fund of US$64 million as a payment for the shortfall in groundnut exports in 1978, but strong import demand, the terms of trade loss from the hike in oil prices, and the fall in groundnut prices. led to a further decline in net foreign assets of at least US$90 million 1/, reducing the level of these assets to minus US$236 million at the end of the year. These negative reserves were financed by outstanding drawings on the IMF of US$52 million, by a change in Senegal's position in the monetary union, and through short-term foreign borrowing by the commercial banks. 12. Although exogenous factors such as droughts and variations in world market prices explain in part the fall in net foreign assets since 1973, it is also due to more perennial factors such as sluggish growth of export volumes, slow drawings on public aid commitments, increasing debt service related to heavy reliance on commercial funds, and excessively expansionary monetary and budgetary policies. Senegal's basic problem has been the failure of production and exports to respond to higher investment levels and other expansionary policies. Stabilization Program 13. In December 1979, during his annual speech to the National Assembly, the Prime Minister explained the urgency of modifying prevailing tendencies in the economy, and outlined a medium-term stabilization and rehabilitation program. This program was informally but extensively discussed with and broadly supported by the Bank and the Fund. The main objectives are to increase substantially the level of domestic savings, especially in the public sector, over a period of six years, with the first two years focussing mainly on stabilization, and the following four years (which would coincide with the Sixth Four-Year Plan) on the achievement of a still modest higher rate of economic growth of 4 percent a year. 14. According to the stabilization plan, public savings after debt service would increase from 1 percent of GDP in 1978/79 to 3.5 percent of GDP in 1985, mainly through a freeze of recurrent expenditures in real terms. Any shortfalls below this target are to be compensated by new tax measures and increased savings from public entities such as the stabilization fund. This savings target would allow the Treasury to contribute at least 15 percent to financing of the public investment program in the near future, to be improved to 25 percent by 1985. The 15 percent minimum contribution serves a planning function and is likely to be exceeded in favorable years, but may fall short in unfavorable years, such as in 1977/78 when it dropped to a negative level. In such cases, the additional requirements in foreign finance should be on concessionary terms. 15. Increased savings in the private sector would be encouraged by higher interest rates on deposits and savings certificates, and through the 1/ The most recent estimate records a decline in foreign reserves of US$120 million in 1979 due to an acceleration of imports in the last quarter of the year.  -5- allocation of cheap housing loans based on earlier savings performance. In rural areas, the savings of farmers will be mobilized. However, the bulk of private savings will have to come from private enterprises. To achieve this goal, the Government proposes to ease price policies and to impose higher levies on non-invested profits. A very tight credit policy, in particular for non-productive Drojects, will evidently increase the need for own funds in the private sector. 16. Recognizing that the savings drive will weaken domestic demand and that production costs in Senegal are too high to meet foreign competition, the Government is taking steps to provide more protection to the domestic producers by raising import duties while achieving greater uniformity in their application, and by subsidizing export industries with excess capacity. This policy allows for the fact that parity of the local currency is fixed in the framework of the monetary union to which Senegal belongs and that the CFA franc has de facto appreciated over time relative to most non-franc curren- cies, especially the dollar. 17. The parapublic sector (public enterprises and mixed companies) represents a serious drain on Government finances and will be placed on a sounder footing through the conclusion of medium-term program contracts ("contrats-plan") between the Ministry of Economy and Finance (MEF) and individual parapublic enterprises, with the aim to reduce present levels of budget support. The proposed project would finance assistance for preparation of these contracts. More scope will be given to these enterprises to adjust tariffs to more economical levels. 18. The stabilization program imposes ceilings on commercial borrowing abroad and restricts its use to projects that generate a sufficient cash flow to service such debt, and abolishes Government guarantees on loans to private and mixed enterprises unless such guarantees are required by the statutes of the lending institution. These measures will bring a highly desirable reduc- tion in Government's exposure to commercial risks. 19. To achieve the objectives of the stabilization plan, a recent administrative reform has placed all public finance functions under MEF. Of particular importance is the centralization of debt management in MEF (previously a responsibility split between the Minister of Finance and the Prime Minister), which will have its own tax resources and bank account, and an improved system of financial planning and control. 20. The trend in wages in the modern sector remains a matter of some concern. After sizable wage increases in 1979, Government decided as of January 1, 1980, to raise the minimum wage by 25 percent; and Government salaries were increased from 34.4 percent for the lowest paid workers to 3.6 percent for the highest paid, to be followed by another increase of 7 percent as of July 1. These increases are meant to compensate for past inflation and to cushion the effect on real incomes of the stabilization measures.  -6- Prospects 21. The Government's long-range development strategy continues to be based on the promotion and diversification of agriculture and export-oriented activities. The agricultural program calls for development of areas less afflicted by drought (Casamance and Eastern Senegal), where cash crops other than groundnuts can be grown. Irrigated cereal production is being developed in the arid northern part of the country along the Senegal River. 'This policy will make the country less dependent on the uncertainties of its climate and world market prices, and reduce the heavy burden of food imports. To stimulate agricultural production in the Groundnut Basin, which has not substantially increased since independence, Government proposes to overhaul the state- cooperative system, trimming the heavy bureaucracy and transferring economic initiative back to the farmers. Agricultural research will be oriented more on farm systems than on individual crops, with the objective of lowering the costs of the agricultural techniques propagated, and better adaptation to farmers' needs. The Government also aims at a modest expansion of phosphate mining, and development of light export industries and tourism; moreover, contracts have been signed for construction of a ship-repair yard, and plans for a phosphoric acid plant are in an advanced stage. However, with limited prospects for export growth in the groundnut sector, and because of the modest scale of the export subsidy scheme, no spectacular improvements in the balance of payments can be expected. Government counts heavily on the implementation of a number of large investments, either in irrigation to diminish the heavy dependence on rice imports, or in export-oriented manu- facturing industries. However, these investments have long gestation periods and involve the Government in substantial risks, and a cautious view of the long-term outlook is therefore warranted. Even if economic growth could be raised to a modest 4 percent a year between 1982 and 1985, the annual growth rate between 1977 and 1985, because of the decline in GDP in 1978 and 1980, would probably not exceed 2.4 percent a year, which is still not above popula- tion growth. 22. Government intends to rely more on the private sector for investment in industry, tourism and other productive activities; however, it will take some time before this new emphasis will be reflected in the composition of investments. The private sector has a low propensity to invest because of Senegal's relatively high production costs, and (after a period of active state intervention) often insists upon Government participation or loan guarantees for new ventures, thus reducing the size of its risks. Mloreover, - some public investments are needed in view of the country's critical depen- dence on state-financed irrigation. 23. The stabilization plan will help Senegal to overcome the effects of the recent drought, the higher oil prices, and the high debt service built up over the past five years. Its strict implementation is therefore crucial for Senegal's prospects for economic growth and creditworthiness. To help Government achieve the structural reforms needed, the proposed project would expand ongoing technical assistance to the parapublic sector, help Government in establishing systems to monitor national savings, assist in strengthening the Ministry of Plan and Cooperation to improve the development,  - 7 - evaluation and choice of projects, and support the administrative reorganiza- tion and strengthening in the Ministry of Finance. Creditworthiness 24. The ratio of debt service to exports of goods and services increased rapidly from less than 7 percent until 1976 to 13 percent in 1979, and an estimated 16 percent in 1980, a level which should not be exceeded in Senegal's current economic circumstances. This steep increase is mainly the result of a rise in the share of commercial borrowing from about 25 percent of total borrowing during 1973-76 to an average of 56 percent during 1977 and 1980. Thanks to considerable restraint by the Government on commercial borrowing in 1979 (US$9 million), and the termination of repayments on earlier commercial credits, debt service will level off in the early 1980's. In the medium-term, expected improvement in export performance related to better crops, a few large export-oriented projects, and implementation of the export incentive scheme is expected to allow Government to keep the debt service ratio around 15 percent of export earnings. 25. The weak balance of payments' position is dominated by the need to strengthen Senegal's foreign reserve position. In the short term, Senegal can afford low reserve levels through its membership in the West African Monetary Union which provides for pooling of foreign reserves, and whose currency is guaranteed unlimited convertibility by the French Treasury. Moreover, as the experience in 1978 has shown, JMF and STABEX facilities provide a buffer for the periodic drops in export revenues linked with droughts and fluctuations in world market prices. However, if Senegal maintains negative balances for an extended period, it could weaken the monetary union whose existence is a cornerstone for Senegal's creditworthiness. The impact on the balance of payments of the oil price increase and the bad 1979/80 groundnut crop to be sold at low prices would widen the overall balance of payments' deficit to some US$250 million in 1980 and about US$100 million in 1981. Since Senegal's debt service burden is already extremely heavy, full Eurodollar financing of these deficits should not be envisaged. Foreign donors should therefore be prepared to raise the percentage of foreign finance in their projects, and consider program aid in the first instance to help cushion the impact of these developments on net foreign assets, as well as to support the structural reforms being undertaken as part of the stabilization plan. 26. With implementation of the Government's economic stabilization plan, Senegal would remain creditworthy for some lending on IBRD terms. The Government has demonstrated its commitment to development by expanding its public investment effort substantially between 1970/71 and 1977/78, and has shown adequate capacity to respond to the problems which its vulnerable economy is bound to encounter periodically. Senegal's prospects for long-term diversification and growth are modest, but essential to provide a reasonable basis for social and economic development. Its access to short-term financing facilities and membership in the West African Monetary Union also reduce the risks associated with economic fluctuations. However, lenders (including the Bank Group) should provide a large part of their assistance on concessionary terms in order to avoid a further rapid buildup of debt service, and should be prepared to finance a considerable part of the local costs of projects.  -8- Moreover, in the coming two years, financial assistance of a program nature and close monitoring of the economy will most likely be required to support the Government in its structural adjustment policies. PART II - WORLD BANK OPERATIONS IN SENEGAL 27. The Bank Group has had 45 operations in Senegal to date. Total outstanding amounts to US$279.8 million, including 24 IDA credits, 14 Bank loans, three blends of Bank and IDA funds, four IFC operations, and one blend of Bank and IFC funds. Annex II contains a summary statement of Bank loans, IDA credits, and IFC investments as of June 30, 1980, and notes on the implementation of ongoing projects. Physical execution of these projects is progressing reasonably well, although some operations are affected by the shortage of counterpart funds due to the Government's continuing difficult public finance situation, as well as by lack of qualified local staff for key positions. But institutional bottlenecks in several sectors constitute the largest obstacle to efficient project implementation. The Government is well aware of the need to reduce delays caused by these problems, and particularly of the importance of assuring good management supervision of projects in all sectors. 28. In this respect, the ongoing Parapublic Sector Technical Assis- tance Project initiates and implements measures necessary to resolve on a sectorwide basis some of the issues regarding the financial management and Government control of public enterprises and mixed companies, particularly those that are channels for Bank Group assistance. The project comprised a three-year program to assist Government in improving the efficiency of Government organizations responsible for strategic analysis, operational supervision and formal financial control over the parapublic sector and to upgrade the auditing, financial management and accounting procedures for the sector as a whole and for a member of the most important public enterprises and mixed companies. The project provided for expatriate experts and an increase in local staff for Government control organizations; for auditing, consulting services and training for four public enterprises and auditing of three mixed companies; and training for staff in Government control organiza- tions, for Government representatives acting as directors of parapublic sector companies and for accountants. The project, at its halfway stage, is now progressing reasonably well after a difficult start due to problems in recruiting consultants and later problems concerning adequacy of project management, subsequent to which the project director and deputy were replaced. In the proposed project, more direct Bank involvement in recruitment would help reduce these difficulties and steps have already been taken for early identification and recruitment. The substantive components of the project are progressing quite well, although it is too early to assess their impact. The project is in compliance with Credit conditions. The proposed project would assist public enterprises in preparation of their medium-term program contracts (para. 17) which will specify in greater detail government-enter- prise commitments and expectations. 29. In addition, the Government has created in late 1978 an Inter- ministerial Committee (Comite de Relance des Investissements - CRI) which works closely with foreign aid donors, to expedite preparation of new  - 9 - investment projects, and to identify bottlenecks in project execution and take remedial action. The work of this committee has already begun-to produce some positive results and would be strengthened in the proposed project through reinforcement of its secretariat. 30. The Bank Group's share in total external aid disbursements to Senegal over 1977-81 will stay at around 12 percent, of which roughly 54 percent in IDA financing. The Bank Group's share in outstanding disbursed * debt was 18 percent in 1979, and will (after falling slightly in 1980-83) slowly start to surpass that level, reaching about 20 percent in 1985. The Bank Group's share in public debt service is expected to increase from 3.8 percent in 1979 to about 4.9 percent in 1985, a rise which is mainly due to the increase in Bank loans from 32 percent of the Bank Group's total outstand- ing and disbursed funds to Senegal to about 42 percent by 1985. 31. The objectives of Bank Group lending in Senegal concur with the Government's strategy and fall under five main headings. First, priority continues to be given to rural development, including development of irriga- tion in the Senegal River Valley Region, rainfed agriculture in the well- watered southern regions of the country, intensification of groundnut production and diversification into new crops and new regions, national projects for improvement of agricultural research and for reforestation, and a Small Rural Operations Project which was approved by the Executive Direc- tors earlier this year. As in the past, agricultural lending over the next few years is expected to exceed one-third of the total. Second, the Bank Group has supported diversification of the economy by lending to the growing industrial sector through the Societe Financiere Senegalaise pour le Develop- pement de l'Industrie et du Tourisme (SOFISEDIT), a development finance company established with Bank Group assistance in 1974, and through an ongoing project for development of tourism infrastructure. Third, Bank Group projects have supported modernization and expansion (where economically desirable) of the country's infrastructure. In the recent past, a Second Aviation Project was approved in FY79 and a Fourth Highway Project was approved earlier this year. Also, an engineering project approved in FY79 finances studies and technical assistance for water supply and sanitation development in eleven secondary centers, and is expected to pave the way for future Bank Group involvement in that sector. Fourth, assistance is being provided under the Third Education Project approved in FY79 to help the Government re-orient and expand the country's education system at all levels. Bank strategy in these three projects has focussed on: (a) meeting the need for trained high- and middle-level technicians and managers in the modern sector and in agricultural development activities, by supporting technical training in secondary schools and specialized institutions for technician training; and (b) supporting institutions responsible for the development of primary education. Finally, continuing assistance is being provided to help Government increase its absorptive capacity for planning, executing, and managing development projects through institutional support within individual Bank Group projects, and through broader efforts such as the Parapublic Sector Technical Assistance Project. The proposed project is intended to reinforce the development and use of these ongoing efforts within the technical ministries through strengthening the role of central ministries and making better use of improved analysis in the technical  - 10 - ministries. Several Bank Group operations, notably in tourism, telecommuni- cations, port infrastructure, loans to SOFISEDIT, and in airport development, have the additional merit of generating revenues for the Senegalese Treasury. PART III - THE NEED FOR TECHNICAL ASSISTANCE 32. In spite of the external resources available to its development effort, and although per capita official development aid has been about $40 in most years, Senegal has not achieved real increases in per capita income. This can be attributed partially to its poor resource base, severe climatic conditions to which its predominantly agricultural economy is subjected, deteriorating terms of trade, and the continuing difficult public savings and public finance situation. However, other important reasons for the country-s poor economic performance stem directly from weaknesses in the system for the identification, selection, preparation, execution and ex post evaluation of development projects. 33. Senegal's economic development is guided by four-year national plans which are prepared by the Ministry of Plan and Cooperation (MPC) following a lengthy process of consultation with technical ministries, parapublic sector companies, and regional and local administrations. With the help of technical assistance provided since 1972 by the UNDP, the plans have proved to be useful guides in identifying sectors which should receive priority in the allocation of domestic and external resources. But the plans have so far served only as general guidelines, since they are not prepared on the basis of sound sectoral analysis which could effectively identify the types of investments which could contribute most fully to development. Nor are the plans based on adequate economic evaluation of proposed projects. The Government's central planning mechanism has not been effective in evaluating the merits of individual projects. There has, therefore, tended to be an over-dependence on infrastructure operations which are relatively easy to prepare, but which are often not entirely productive. A pilot unit within the Division of Programming and Monitoring (DPM) of the Planning Departmemt in MPC has, over the last several years, initiated formal economic screening techniques and project monitoring s3stems. At present it has neither the staffing nor the powers to require, or to assist in, data preparation by the appropriate ministries. Its focus on better analysis and monitoring has, however, been generally well received by the other ministries and the formalization and expansion of the pilot unit under the proposed project is expected to receive adequate cooperation from other ministries. 34. This situation is similar for the completion phase of the project cycle where the lack of an institutional capacity to assess the impact of completed projects has meant that the planning process does not benefit from lessons to be learned from previous projects. 35. The current Four-Year Plan (1977-81) reflects Government's increas- ing commitment to finance development in the directly productive sectors, especially in rural areas, and to focus planned investments on benefitting  - 11 - the lower income groups and the poorer regions of the country. To help achieve these objectives, Senegal has been able to attract substantial external aid from a large number of donors, most recently from lending agencies of the OPEC countries. However, some of these funds have not been effectively utilized, particularly in the case of donors which depend exclu- sively on national Governments to offer well prepared projects ready for financing. 36. A further constraint in the development process is that committed funds from external donors as well as from the Government itself do not disburse as rapidly and as efficiently as expected. This situation is due in large part to a Government administration which has an overwhelming variety of procedures for contract approval and overall financial management. One result of this heavy bureaucracy is that project execution often suffers severe delays (with concomitant increased costs), and new funds are conse- quently slow to be committed. While some control against the possible misuse of Government funds is fully justified, Government has recognized that certain procedures should be reviewed to increase their efficiency. 37. Government has become increasingly concerned about its poor performance in managing the project cycle and aware of the need for improving project identification, selection, preparation, execution and evaluation. Over the past two years a number of measures principally to improve project execution has been taken (often in consultation with, or with the informal assistance of the Bank Group) including, in addition to the DPM pilot unit: (i) establishment of small groups responsible for project preparation and analysis in technical ministries and project agencies; (ii) allocation of highest priority in the investment budget to providing counterpart funds for projects financed by external sources, a measure intended to accelerate the utilization of donor commitments; (iii) creation of the Comite de Relance des Investissements (CRI) within the Prime Minister's Office to help improve project execution by unblocking specific administrative bottlenecks which are brought to its attention with DPM as its secretariat; and (iv) organizing a series of training sessions for local staff working in project agencies to familiarize them with Govern- ment and donor procedures, and thereby attempt to accelerate the various steps in the project cycle. 38- The above measures have had some success, indicated best by dis- bursements for Bank Group projects which, as a percentage of appraisal estimates, have increased steadily from about 30 percent at mid-1978 to about 55 percent at end-1979. It is recognized that this figure cannot in itself be used as a measure of speedier execution, but it does give some  - 12 - indication that performance is improving. Other donors have also ex- perienced some improvement in their disbursement rates. Across sectors, however, performance varies widely, with disbursements ranging from 66% for education and technical assistance to 31% for industry and tourism. The proposed project will have industrial, other productive and export-oriented sectors as primary targets for assistance. 39. The above must, however, still be considered only the beginning of what will undoubtedly be a long process. The immediate need is to consoli- date the measures already taken and planned into a coherent system, and to extend its coverage in the Government. 40. Government has recognized the improvements brought about by its actions thus far to improve project implementation and by the benefits from, for example, planning cells in technical ministries financed by the Bank and other donors. Government, therefore, wishes to expand the more rigorous technical and economic analysis already initiated in DPM and some ministries to all projects of significant size during project identification, preparation and selection. MPC has hitherto been unable to play a strong control role in project selection and preparation principally because of insufficient analytical capacity due to lack of staff and resources. The strengthening of MPC would be the primary focus of the proposed project. 41. In the framework of the medium-term stabilization and rehabilita-- tion program the Government has set itself a number of macroeconomic targets that will have to be reached during the coming five years in order to reduce the balance of payments' deficits and to bring the economy to a trend of 4 percent annual growth. In view of the relatively high debt service on foreign loans, Government intends to put strict limits on further commercial borrowing and base the financing of its investment program, to a larger extent than in the past, on concessionary capital flows and increased domestic savings. The implementation of this policy will rest to a large extent on the Ministry of Economy and Finance (MEF) which needs additional specialized staff to fulfil this task. Since no Senegalese economists with this type of experience are available, Government has asked the Bank for assistance in financing expatriate consultants who would train Senegalese officials and develop the analytical ability required. Partially as a result of the Parapublic Sector Project, the Government intends to establish medium-term contracts ("contrats-plans") between parapublic enterprises and Government, along the lines of those developed in Europe, setting out the responsibilities, commitments and expectations of both parties, particularly those relating to management's objectives and results and Government finan- cial obligations. A model "contrat-plan" appropriate to Senegal has been developed and, in the context of the proposed project, Government has requested continued Bank assistance for finalizing "contrats-plans" for about ten key enterprises in the para-public sector, which have been selected in agreement with the Association.  - 13 - PART IV - THE PROJECT 42. The proposed project was identified in November 1979 following a request by Government. Subsequent preparation was undertaken by Govern- ment with th^- assistance of the Bank's resident mission in Senegal, and the project was appraised in March 1980 by a mission composed of Messrs. J. Brown, I. Harvey and S. Amar. Negotiations were held in Dakar on June 2-4, 1980, with a Senegalese delegation led by Mr. Abdou Malick Sow, Director of Planning. A Credit and Project Summary is at the front of this report. There is no separate appraisal report but further details on the proposed technical assistance project are in Annex IV. Project Objectives 43. The project would support a three-year program aimed at: (a) strengthening and improving Government's ability to identify, select, prepare, monitor the execution of, and evaluate retrospectively its port- folio of development projects; (b) strengthening Government's public debt monitoring, budgeting and forecasting; and (c) specifying in greater detail the relationships of parapublic enterprises with Government. The project would assist principally the Ministry of Plan and Cooperation (MPC), the Ministry of Economy and Finance (MEF), the Office of the Secretary General of the Presidency and the Primature. The overall project objectives would be: (a) to increase the benefits of development projects by improving project preparation, selecting better and more directly productive projects and improving project implementation; and (b) to improve the process of Government financial control. Primary emphasis would be to improve projects in the directly productive and export-oriented sectors. 44. Specifically this project would help: (i) improve the effectiveness of MPC to: (a) evaluate the economic benefits of development projects; (b) improve the quality of project identification and to reinforce MPC's role in planning and project selection and preparation; (c) monitor project execution and expedite solving implementation problems; and (d) begin a pilot program of ex post evaluation of completed projects; (ii) improve control and monitoring of macroeconomic performance; * train local staff in project preparation, execution and evaluation; (iii) speed up project implementation by, inter alia, upgrading the Commission Nationale des Contrats de l'Administration (CNCA), within the Office of the Secretary General of the Presidency, which is responsible for contract review and processing for approval; (iv) assist the Ministry of Economy and Finance (IMEF): (a) to sup- port the operations of the reorganized Department of Debt and  - 14 - Investments in order to provide timely historical and pro- jected information on debt statistics and Senegalese funds provided for projects financed by Government or external sources; and (b) to strengthen the Departments of Budgeting and of Forecasting; and (v) assist the Primature in the preparation of "contrats-plans" for the parapublic sector. Project Description 45. The project would comprise: (a) about eleven man-years of advisory/training support of which: (i) eight man-years (a senior economist/group leader, a senior industrial economist and a senior social services economist) would strengthen the Division of Programming and Monitoring (DPM) in MPC; (ii) one man-year (a senior public finance economist) to strengthen the Debt Division of the Department of Debt and Investments (DDI) in MEF; and (iii) two man-years (an advisor on "contrats-plans") in the Prima- ture for preparation and implementation of medium-term "contrats-plans" for about ten key parapublic enterprises; (b) about 68 man-months of short-term consultancy services would provide analytical, management and training support to DPM (38 months), to DDI (16 months), to the Department of Budget (6 months), and to the Department of Forecasting (8 months); a further 6 months of short-term consultants would help DPM monitor and supervise the proposed project; (c) about 210 man-months of consultancy services to assist DPM and other relevant ministries and agencies in the identifica- tion, selection, and preparation of new projects and evalua- tion of completed projects in the sectors at which the project is aimed; (d) about 4 man-months of short-term consultancy services to assist the Primature in specific matters relating to "contrats- plans"; and (e) about 18 months of overseas training for DPM technical staff and Primature and MEF senior staff and provision for additional local staff and for equipment, materials, vehicles and operating costs required to support the project. 46. The project is expected to be implemented over three years within the period 1980/81 to 1983/84. Ministry of Plan and Cooperation (MPC) 47. Although the technical ministries are, and would continue to be, responsible for project preparation, the responsibility for selection of  - 15 - projects and the preparation of development plans rests with MPC. Within MPC, the project would strengthen DPM, a division of the Planning Depart- ment. As noted earlier, DPM has hitherto been unable to play a strong role in project selection and preparation of development plans, principally because of insufficient analytical capacity due to lack of staff and resources. The role envisaged for DPM, addressed in the project, would: (a) reinforce and extend the use by technical ministries of more rigorous project prepara- tion and selection procedures, with assistance for those technical ministries which do not yet have functioning planning units; (b) improve data collection, * processing and analysis for improved monitoring of project execution; (c) initiate ex post evaluation of projects with feed-back into the planning cycle; and (d) assist MPC and MEF in developing sound criteria for sectoral allocation of the development budget. The pilot unit in DPM (para 33) has already prepared detailed guidelines which specify the financial, economic and summary technical data required for their analysis. 48. DPM would be strengthened by extensive internal training and assistance to be provided by the advisors and short-term consultants. Initially there would be a substantial backlog of work required to undertake more rigorous analysis of the existing portfolio of proposed projects. This economic and financial analysis would relate to project ranking and selection for development planning; it is expected, however, that DPM will need to provide substantial assistance and guidance to some technical ministries for preparation of basic data. Beyond this, DPM would implement an extensive program of external training and seminars in methods of project identification, preparation, evaluation and monitoring. This would be aimed at assisting the MPC and existing planning cells in other ministries as well as for assistance to such ministries in setting up new planning cells, for training of regional staff and project directors involved in project prepara- tion and implementation and for coordinating data collection needs and information dissemination between DPM and other ministries (para 57). DPM's strengthened role is expected to reinforce the planning and preparation carried out by planning cells in technical ministries. DPM would, as a principal element of its output, provide the Comite de Relance des Investisse- ments (CRI), for which it is the secretariat, with project monitoring data and general recommendations for improving implementation. DPM would implement actions requested by CRI to improve specific project execution. 49. Based on the successful organization of the pilot unit (para 33), DPM would have four sector functional units dealing broadly with: (a) industry; (b) social services; (c) infrastructure; and (d) agriculture. Of the three advisors/trainers to be financed for DPM under the project, the senior economist/group leader (who is already in post) would advise and assist the DPM chief and staff on the infrastructure sector and would provide overall guidance to the advisory group, the senior industrial economist would advise and assist on the productive sectors and the senior social sector services economist would be similarly responsible for the social sector and would coordinate all DPM internal and external training activities (proposed terms of reference for the two new positions are in Annex IV, Appendix 1). Assurances have been obtained that Government would retain the advisors/trainers by November 1, 1980 (para l(a) of Schedule 4 to the Credit Agreement). French technical assistance is currently providing  - 16 - one expatriate advisor for the agricultural sector. Assurances have been obtained that Government would maintain employment of the senior economist! group leader and the agricultural sector advisor during the project (para l(a) of Schedule 4 to the Credit Agreement). A service section would provide documtentatilon, statistical and data collection and processing backup to DPM. Short-term consultants would be employed to provide technical advice for project analysis and for designing and implementing internal and external training programs. The project would also finance overseas training in specialized subjects (see para 57). The project would include equipment, materials and vehicles for DPM. 50. The project would finance about 210 months of consultants princi- pally for the identification, selection, preparation and analysis of proj- ects not yet identified as well as some assistance for ex post evaluation. Although the use of these funds would be at the discretion of the DPM, primary responsibility for project identification, preparation and feasibi- lity studies would remain with the technical ministries. At least half of the consultancy funds would be utilized for studies aimed at improving the pipeline of projects in the directly productive and export-oriented sectors. Criteria for use of these funds have been agreed (Annex IV, Appendix 3) (Schedule 5 to the Credit Agreement). 51. To assist in ex post evaluation, Government would begin a pilot program of associating DPM and technical ministry staff with World Bank (and other donor) project completion and Operations Evaluation Deparment missions in Senegal. 52. To emphasize the importance of DPM and to give authority to their strengthened role, assurances have been obtained that Government would ensure, through an executive order (Circulaire Primatorale): (a) that all development projects costing more than CFAF 100 million (US$500,000) would be submitted to DPM for economic and financial review, to ensure consistency with criteria laid down by DPM; and (b) that ministries undertaking prepara- tion studies for such projects would be required to prepare the economic and financial data requested by DPM (Section 4.03 of the Credit Agreement). The executive order would also provide that projects smaller than US$5 million would be handled on a no-objection basis with DPM allowed two weeks for comments. Issuance of the executive order is a condition of effectiveness (Section 5.01 (b) of the Credit Agreement). Ministry of Economy and Finance (MEF) 53. Department of Debt and Investments. Government has decided to merge the Department of Investments (which participates in donor negotia- tions and prepares disbursement requests) with the Debt Division to form the Department of Debt and Investments (DDI). The Debt Division has previously lacked the resources to carry out its functions of monitoring Government debt and guarantees and of making projections. The result has been a significant and largely uncoordinated increase in Government debt obligations. The DDI will help to ensure that Government commitments to borrow money in future would correspond more closely to project needs and would remain within prudent limits. The project includes expatriate technical assistance  - 17 - for one year to assist in improving debt reporting operations in DDI and short-term consultants for the project to provide technical and training assistance plus advice on organization and staffing of the new department. The proposed terms of reference for the advisor are in Annex IV, Appendix 1. The project also would include incremental Senegalese staff for the DDI and equipment, vThicles and materials. 54. Budget Department. Since the savings behavior of private agents will show, at most, only gradual improvement, Government has put the empha- sis of the economic adjustment policies on a substantial increase in budge- tary savings. Also, since tax pressure is already relatively high, Govern- ment has decided to increase budgetary savings by putting a ceiling of 10 percent on the annual increase of its recurrent expenditures, an increase just about equal to annual inflation. However, such a freeze on recurrent expenditures in real terms will place considerable strain on the budget preparation process. Government's public investment program will create a continuing need for new recurrent expenditures for maintenance or operating personnel for the new assets; freezing the level of overall recurrent expenditures would, therefore, imply substantial cuts in existing expendi- tures. Present emphasis of the budgetary process in Senegal is on screening new expenditures. For some years now, percentage cuts on existing expendi- tures have been practised, but may not provide an optimum distribution of limited public funds. The Minister of Finance has, therefore, asked the Director of the Budget to prepare objective criteria by which to judge the level of the existing recurrent expenditure in different fields, inter alia, through international comparisons. To help execute these studies and train Senegalese officials, the project would finance about six months' consulting time of an already selected public finance expert in the Budget Department. 55. Forecasting Department. Although improved budget control will contribute most to public sector savings, Government has taken a number of policy measures, and is considering others, to improve the savings perfor- mance of other sectors in the economy. At present Government has limited analytical tools to monitor the impact of these policies. The national accounts are produced with a delay of three years and the financial studies are limited to the capital flows that pass through the treasury. The Minister of Finance has asked the Director of the Forecasting Department to set up a flow of funds analysis that would cover the entire economy, a statistical analysis that would enable him to forecast the savings perfor- mance of the different sectors in the economy. In order to set up this analytical ability, the project would finance about 8 months of consultancy over three years. A consultant has already been selected. Secretary General of the Presidency and Other Ministries 56. Senegal has established a lengthy procedure for contract award and approval which helps to ensure that domestic and foreign resources spent by the Government are properly and efficiently utilized. Although these pro- cedures should be maintained, they have caused in some cases delays in contract approval. The project would include strengthening of the National Commission for Contract Approval (CNCA) in the Office of the Secretary General of the Presidency to speed the review of bidding documents at an early  - 18 - stage to determine their adherence to the appropriate procedures and to speed the approval of contracts. The project would provide for an additional local staff position and minor equipment and materials to improve the efficiency of the CNCA. A training program would be implemented to increase the familiarity of Government services and project agencies with Government procedures. Several ministr4es now have full time staff to process contract documents, and this has already speeded CNCA review. Assurances have been obtained that Government would issue an executive order (Circulaire Primatorale) pursuant to which civil servant would be nominated in all ministries and project agencies responsible for monitoring the progress of contracts and ensuring that Government procedures are followed from the beginning of the contract approval cycle (Section 4.04 of the Credit Agreement). Issuance of the executive order is a condition of effectiveness (Section 5.01 (c) of the Credit Agreement). Training 57. In addition to the advisors in DPM and DDI, who would also be responsible for training, the proposed project would include funds for short-term consultants, equipment, vehicles and materials necessary to prepare in-country seminars dealing with project identification and prepara- tion, execution and ex post evaluation, and contract approval procedures of Government and donors. About 24 seminars occupying 75 seminar-days have been planned by DPM for the first year of the project and would reach about 600 people. These seminars would be intended for: regional planners (9 seminars, 180 people); planning cells in technical ministries (5 seminars, 100 people); project managers (2 seminars, 80 people); and "information-users" for those using DPM analytical output (8 seminars, 230 people). Similar follow-up seminars would be planned for the second and third years of the project. The advisors in DPM would conduct the seminars and would be responsible for preparing the training packages of which the seminars would be one part. The advisors would be expected to have finalized details for first year training within six months of arrival. They would utilize for training, as required, the short-term consultants noted above. The project would finance about 14 months and 4 months of short duration overseas training for DPM technical staff and for senior level civil servants respon- ble For the implementation of the "contrats-plans", respectively, in pecialized subjects where training is not available in Senegal. The p-oposed project would finance periodic short trips, as agreed by the Association for the consultants and Department Directors of Budget and of Forecasting for macroeconomic discussions with the World Bank Group and the nternatlUnal Monetary Fund, in order to increase exposure of Senegalese -Staff to a larger group of financial interlocutors. larapublic Sector 58.