Senegal - Small Rural Operations Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2673a-SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF SENEGAL FOR A SMALL RURAL OPERATIONS PROJECT February 20, 1980 11hi decuset hena ret d*rbutim an my be an by reipients ny in te pefnmnce of j their gUlu dutie It contitB my not otherwie be disd withou Wol Dak authortn.  CURRENCY EQUIVALENTS Currency Unit: CFA Franc (CFAF) US$1.00 - CFAF 210 CFAF 1 million - US$4,762 SYSTEM OF WEIGHTS AND MEASURES: METRIC 1 meter (m) - 3.28 square feet (ft.) 1 square meter (m2) = 10.76 square feet (sq. ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (km2) - 0.386 square mile (sq mi) 1 hectare (ha) = 2.47 acres (ac) ABBREVIATIONS AND ACRONYMS BNDS - Banque Nationale de Developpement du Senegal FAC - Fonds d'Aide et de Cooperation FED = Fonds Europeen de Developpement ONCAD - Office National de Cooperation et d'Assistance pour le Developpement SAED - Societe d'Amenagement et d'Exploitation des Terres du Delta du Fleuve Senegal SOMIVAC - Societe de Mise en Valeur de la Casamance FISCAL YEAR July 1 - June 30  FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL SMALL RURAL OPERATIONS PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Senegal Amount: US$11 million equivalent Terms: Standard Project Description: The proposed project focusses on channelling funds and technical services to small groups of rural people who will undertake to provide labor, and some funds, for the development of several types of directly productive activities, namely: development of small perimeters for irrigated cultivation of rice, vege- tables, and bananas; beekeeping; and fishing. The project also includes village water supplies, an allocation for additional directly productive activities to be identified and prepared during implementation, and provision for a management structure. The project's directly productive activities will benefit some 4,200 families, or 42,000 people, nearly all presently having incomes at or below the relative poverty level. In addition, about 100,000 people will benefit from permanent village water supplies. The most important project benefits will be the establish- ment of an institutional framework to encourage and support local initiatives in preparing and executing small rural investments, and the opportunity afforded to render small producer groups creditworthy in the judgment of the local banking system. Experience acquired with other rural develop- ment fund-type projects in West Africa suggests that the main risks would concern quality of construction works, the role of technical service agencies in assuring beneficiary participation and initiative, and the diversity in terms and conditions laid down for such participation. These risks have been assessed during project preparation and appraisal, and appropriate measures--geographic concentration of project activities, decentralization of decision-making, and creation of a special- ized Department to plan and manage small rural projects--have been taken to offset them. This document has a re.ticted 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 - Estimated Project Cost: The cost of the proposed project (net of identifiable taxes and import duties) is estimated at US$14.1 million equivalent, including foreign costs of about US$7.4 million (about 52%). A summary table of cost estimates is shown below: Local Foreign Total (in US$ thousand) Small Rice Perimeters 1,010 1,052 2,062 Small Vegetable Perimeters 448 567 1.015 Small Banana Perimeters 505 500 1,005 Beekeeping 62 52 114 Fishing 57 48 105 Village Water Supplies 714 990 1,704 Project Management 933 948 1,881 Unidentified Activities 2,119 2,295 4,414 Refunding Project Preparation Advance 71 76 147 Base Cost 5,919 6,531 12,450 Contingencies - physical 138 172 310 - prices 643 697 1,340 Total Project Cost 6_700 7,400 14,100 Financing Plan: The project will be financed from the following sources: (i) the proposed IDA Credit of US$11 million; (ii) addi- tional external financing from French technical assist- ance, which will provide a technical specialist over the four-year project period, at an estimated cost of US$0.4 million; and (iii) a Senegalese contribution of US$2.7 million equivalent, of which US$2.4 million from the Government to finance incremental operating costs including local staff and input subsidies, US$0.1 million from the Banque Nationale de Developpement du Senegal (BNDS) for incremental inputs supplied as credit-in-kind, and US$0.2 million as contributions from project bene- ficiaries to finance operating costs of pumps for small- scale irrigation, and incremental cash purchases of inputs. The total external financing of US$11.4 million equivalent will cover 100% of foreign costs and about 60% of local costs, representing approximately 81% of total project costs net of taxes.  - iii - Estimated Disbursements: FY 81 FY 82 FY 83 FY 84 FY 85 Annual 1.6 3.1 3.6 2.4 0.3 Cumulative 1.6 4.7 8.3 10.7 11.0 Rate of Return: The overall economic return for the project is estimated at 14% (on 85% of project costs, see para. 79). Estimated Project Completion Date: June 1984 Staff Appraisal Report: Report No. 2700a-SE dated February 19, 1980 Map: IBRD No. 14615R: Location of Appraised Operations   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELORIENT CREDIT TO THE REPUBLIC OF SENEGAL FOR A SMALL RURAL OPERATIONS PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Senegal for the equivalent of US$11 million to help finance a Small Rural Operations Project. The Credit will be on standard IDA terms. Additional external financing for the proposed project is expected from the French Fonds d'Aide et de Cooperation (FAC), which will provide a technical specialist over the four-year project period at an estimated cost of US$0.4 million. PART I - THE ECONOMY 2. A report entitled "The Economy of Senegal" (212-SE) was distributed to the Executive Directors on September 10, 1973. Since then, a series of preparatory sector missions, a basic economic mission, and most recently a public finance mission and an updating economic mission have visited Senegal to update the macroeconomic data base and to review the country's development strategy. The following paragraphs reflect the findings of these missions, whose conclusions will be included in a basic economic report now being finalized. Updated 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. Senegal's per capita GNP for 1978 was estimated at US$340.  - 2 - 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 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 crop 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 hike 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 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 accompained 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.  -4- 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 from 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, 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, 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 in an amount 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 rehabilitation and stabilization program. This program was informally 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 modestly 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 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 reduce profit taxes; to induce more private investment, levies on non-invested profits will be substantially increased. A very tight credit policy, in particular for non-productive projects, 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, 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. 17. The para-public sector--which represents a serious drain on Gov- ernment finances--will be placed on a sounder footing through the conclusion of medium-term program contracts between the Ministry of Finance and individual para-public enterprises, with the aim to reduce present levels of budget support. More scope will be given to these enterprises to adjust tariffs to more economical levels. 18. The stabilization program limits borrowing of commercial funds 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 reduction in Government's expo- sure to commercial risks. 19. To achieve the objectives of the stabilization plan, administrative reforms have placed all public finance functions under the Minister of Finance. Of particular importance is the centralization of debt management (previously a responsibility split between the Minister of Finance and the Prime Minis- ter), which will have its own tax resources and bank account, and an improved system of financial planning and control.  - 6 - 20. The development of 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; however, they are relatively large and may lead to excessive inflationary pressure. 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. During the next few years, even if economic growth could be raised to a modest 4 percent a year between 1982 and 1985, the long-term trend between 1977 and 1985 would probably not exceed 2.4 percent a year, which is still not above population 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  - 7 - state intervention) often insists upon Government participation or loan guarantees for new ventures, thus reducing the size of its risks. Moreover, 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 Gov- ernment achieve the structural reforms needed, the Bank is planning to expand ongoing technical assistance to the parapublic sector and in particular to the agricultural institutions, provide assistance to the setting up and imple- mentation of the export subsidy scheme, help Government in establishing systems to monitor national savings, assist in improving the development, evaluation and choice of projects, and support the administrative reorganization in the Ministry of Finance to assure speedier execution of ongoing projects. Creditworthiness 24. The ratio of debt service to exports of goods and services increased rapidly from 6 percent in 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 has mainly been due to 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 by the French Government. Moreover, as the experience in 1978 has shown, IMF 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 this regional institution whose existence is a cornerstone for Senegal's creditworthiness. The impact on the balance of payments of the oil price hike and the bad 1979/80 groundnut crop to be sold at low prices could 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  - 8 - 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. The Government has also demonstrated an adequate capacity to respond to the problems which its vulnerable economy is bound to encounter periodically. Senegal's prospects for long-term divefsification 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 fluctua- tions. 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 consider- able part of the local costs of projects. 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 42 operations in Senegal to date. Total outstanding amounts to US$230.8 million, including 22 IDA credits, 14 Bank loans, two blends of Bank and IDA funds, three 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 December 31, 1979, 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 the largest obstacle to really efficient project implementation is the number of institutional bottlenecks which are present in several sectors. 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. In this respect, the ongoing Para- Public Sector Technical Assistance Project will initiate and implement measures necessary to resolve on a sector-wide basis some of the issues regarding the financial management and Government control of public enterprises and mixed companies, particularly those which are channels for Bank Group assistance. In addition, the Government has recently created an Interministerial Committee with representation of foreign aid donors, to expedite preparation of new 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.  - 9- 28. 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. 29. The objectives of Bank Group lending in Senegal fall under five main headings. First, priority continues to be given to rural development, includ- ing development of irrigation in the Senegal River Valley Region, rainfed agriculture in the well-watered southern regions of the country, intensifica- tion of groundnut production and diversification into new crops and new regions, proposed national projects for improvement of agricultural research and for reafforestation, and the proposed operation for Small Rural Projects presented in this report which in many ways represents an innovative approach to development of the rural sector. As in the past, agricultural lending over the next few years is expected to exceed one-third of the total. Secondly, the Bank Group has supported diversification of the economy by lending to the growing industrial sector through the Societe Financiere Senegalaise pour le Developpement 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. irdly, Bank Group projects have supported modernization and expansion (where economically desirable) of the country's infrastructure. A Second Aviation Project was approved by the Executive Directors in early FY79. Also, an engineering project approved later 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. A Fourth Highway Project emphasizing improved road maintenance will be pre- sented for Board consideration later in FY 80. Fourthly, 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, by meeting in particular the needs for trained high- and middle-level techni- cians and managers in the modern sector and in agricultural development activities, and by increasing access to primary level education, particularly in rural areas. Further, the Bank Group remains conscious of the need to support other projects in the social services sector (within the limits of the Government's ability to bear the recurrent costs involved), and has started preparing a production-oriented Integrated Food and Nutrition Project. 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 Para-Public Sector Technical Assis- tance Project. Several Bank Group operations which fit into the overall objectives of the Government's economic strategy, notably in tourism, tele- communications, port infrastructure, loans to SOFISEDIT, and in airport development, have the additional merit of generating revenues for the Senegalese Treasury.  - 10 - PART III - THE RURAL SECTOR A. Background 30. Senegal has a population of about 5.2 million (1977 estimate), of whom nearly 70% live in rural areas and depei1d on agriculture to provide a livelihood. The country covers almost 200,000 km2, of which a relatively high 70% is suitable for rainfed crop production. Basic foodcrops are millet, sorghum, rice, and maize; groundnuts and cotton are the major cash crops. About 60% of the rural population is concentrated within about 150 km of Dakar in the central Groundnut Basin; population density in this area is almost four times as high as the national average, and there is little scope for further expansion of extensive farming. Large areas in the northern and eastern parts of the country are suitable only for livestock production under extensive grazing. The two large river basins (Senegal in the North, Casamance in the South) offer an important water resources potential for agriculture, but have only in recent years begun to be developed. 31. The availability of social services to the rural population is generally inadequate, and the quality of the few services provided is poor. As regards education, the Senegalese system continues to follow the French academic model, and is poorly adapted to the needs of the rural population. Moreover, because the system is costly, Government can afford to educate only about 40% of the total population, mostly in urban areas; the result is that children and illiterate adults in rural areas have very limited access to formal schooling or basic education programs. Government spending in the health sector is also very limited, and almost 80% of the rural population, particularly the vulnerable mother and child group, has almost no access to health care services or basic education in nutrition or sanitation. As a general rule, income disparities and the sharing of services between the urban and rural areas are particularly sharp in Senegal, also with regard to public utilities services to which the rural poor have almost no access, even in cases where they do represent basic needs. Significance of the Rural Sector for the Economy 32. Despite generally poor soils and erratic rainfall, and although its contribution to GDP (about 35%) is much lower than in most countries of West Africa, the rural sector remains a key sector in the Senegalese economy. Agriculture produces about half of export income (with groundnuts accounting for 90% of this), and employs about 70% of the labor force; but per capita income of the rural population averages only about US$150 per year compared with the national GNP per capita average of US$340 (1978 estimates). Almost all output of the rural sector is produced by small-scale units, but there is much diversity in farm size, labor availability, ownership of agricultural equipment, productivity, and income. B. Sector Institutions 33. The Ministry of Rural Development has overall responsibility for development of the sector, but some matters are handled by other Ministries,  - 11 - notably those for Human Affairs, Public Works and Water Supply, and one recently created for Forestry and Inland Fisheries. While these Ministries are responsible for policy, execution of that policy is increasingly entrusted to the six para-public regional development agencies charged with implementing rural development programs in particular areas. At the same time, however, Government departments have retained a large network of field staff, primarily in the Rural Development Centers (RDC) which operate nationwide at the local district level. 34. Financial Institutions. There are two principal financial institu- tions serving the sector. The Banque Nationale de Developpement du Senegal (BNDS) was established in 1964 to assist development projects in agriculture, livestock, fisheries, small industries, housing and handicrafts, and to provide funds for agricultural inputs supplied in kind to cooperatives. BNDS has not actively sought to make loans directly to small rural producers since it considers the guarantees offered too uncertain, and the costs of debt collection too high. BNDS' financial and accounting procedures have been reorganized and improved with assistance provided under Credit 140-SE, and these aspects of its operation are now satisfactory. The proposed project will make use of BNDS' established financial channels. The Office National de Cooperation et d'Assistance au Developpment (ONCAD) was established in 1966 to promote the establishment of cooperatives, to procure and deliver farm inputs on credit provided by BNDS and to recover such credit, and to organize nationally the marketing of groundnuts and cereals, including imported rice. ONCAD's overall performance has been poor: its financial situation has become critical due to poor management and inadequate financial control, and ONCAD has been unable to stimulate the development of cooperatives into financially viable institutions or entities that could mobilize local initiatives and support for development activities. Nonetheless, ONCAD has done a reasonable job of delivering farm inputs and implements, and will have a role in performing this function under the proposed project. For the future, plans call for ONCAD's diversified functions to be gradually assumed by the regional development agencies. 35. Local Government Institutions. In 1972, Government launched an Administrative Reform program to decentralize power over public investments through local allocation of local tax revenues, and to encourage greater popular participation in the political process. The local decision-making bodies were to be elected councils for Rural Communities comprising about 10,000 people. One of the few attempts to reorganize pre-independence structures of local government in West Africa, this reform has now been successfully implemented in six of the eight provinces of the country, with the remainder scheduled to be completed by 1982. Despite the success of the reform, Government still considers it premature to assign certain responsibilities to the Rural Communities, for example, guaranteeing loans to small groups of Community members. The proposed project will nonetheless work to help strengthen the Rural Communities, and one of the project benefits will be this institution-building effort (para. 77). 36. Management of Small Rural Development Schemes. An increasingly large number of small rural projects (for example, well digging, poultry rearing, marketing cooperatives) is being financed by various bilateral and  - 12 - international agencies, and particularly by non-governmental organizations. These operations have to date been carried out or supervised by various Government bodies in different Ministries, with the result that there has been much duplication of effort, and even competition between operations or their sponsors. Government is increasingly concerned about the diversity of approach in planning and execution of the operations, particularly in respect of terms and conditions governing the participation in cash or in kind by the beneficiaries, and the extent of financial and/or technical assistance provided by the sponsors. To help overcome these problems, Government has grouped the responsibilities for planning and management of all small development projects in the rural sector under a single Depart- ment for Small Rural Projects (Fonds National de Developpement Communautaire) established in January 1980 within the Ministry for Human Affairs, and under which the proposed project will be managed (para. 57). C. Sector Strategy and Issues 37. Development strategy for the rural sector necessarily reflects Government's stated desire to achieve the following objectives: socialize rural society; increase home-grown food and make output less dependent on rainfall; diversify exports; increase rural incomes and restrain urban- rural income differences; and generate public savings from the rural sector. Over the years, however, there has been some fluctuation in the priorities assigned to these various objectives, with the result that policies have tended to be inconsistent. Strategies actually adopted by the Government have included: increasing output of irrigated and rainfed cereals; putting increasing emphasis on large-scale irrigation; promoting cotton and confectionary groundnuts, in addition to yield increases of groundnuts for oil; and encouraging migration to the Senegal River Delta and to Eastern Senegal. 38. Although the various elements of the strategy outlined above are all important, the programs and projects undertaken have had limited success, primarily because of several outstanding issues in the sector: First, output from rainfed farming is stagnating since land intensification themes as presently defined are not sufficiently widely adopted. Government now acknowledges the need to define improvements in respect of types of farming systems (an agricultural research project focusing on farming sys- tems was appraised in December 1979) and has commissioned a study on farming incentives that will for the first time examine in depth the problem of urban/rural terms of trade. Second, the performance of ONCAD and the regional development agencies has been disappointing, but Government now recognizes that important changes in their structure and management are required to make them effective, and has started taking some measures to this end. Third, provision for recurrent cost financing is inadequate, and the scope for increasing public revenue is severely limited. Fourth, Government has recently tightened up on agricultural credit, refusing it for the 1979/80 season to cooperatives that had not paid at least 65% of all repayments due; also, the possibility of levying user charges is being seriously examined. Fifth, the cooperative movement as presently constituted has not developed local farmers' organizations capable of organizing joint endeavors. In the current debate on how to encourage grassroots organizations, there is increasing recognition that approaches other than cooperatives should be explored.  - 13 - D. The Bank Group's Role in the Sector 39. Bank Group operations in the agricultural and rural sector have been designed to fit into the general framework of current Government strategy, and to meet the particular investment opportunities of various regions of the country. Overall, they have been directly productive operations aimed at contributing to economic growth generally, and directed as much as possible to the poorer segments of the rural population. Total Bank Group lending for agricultural and rural development amounts to US$74.3 million for 12 operations as follows: three projects for engineering and construction of river polders and large irrigation perimeters in the Senegal River Delta; two projects for development of rice cultivation in the southern Casamance region; two programs for resettlement of farm families in the underpopulated Eastern Senegal region; an agricultural development project for crop improve- ment and diversification in the southern Groundnut Basin; two operations to establish and implement an agricultural credit program; an emergency drought relief program; and a livestock development project. Notes on the progress of execution of these projects are given in Annex II. 40. The Bank Group has in the past collaborated with various inter- national and bilateral agencies active in Senegal in the planning of agricul- tural and rural development projects and the development of sector institu- tions, and several of the larger operations have benefitted from co-financing arrangements, notably with the French Caisse Centrale de Cooperation Econo- mique (CCCE) and the Fonds d' Aide et de Cooperation (FAC), the Arab Bank for Economic Development in Africa (BADEA) and the Kuwait Fund. It is planned to continue this international cooperation in future operations. 41. Primarily because of the constraints discussed in para. 38 above, Project implementation has been achieving mixed results; in spite of large provisions for technical assistance and training, management effective- ness has recently been deteriorating, and project benefits are not always fully realized. Project Performance Audit Reports have been issued for the first Agricultural Credit Project (Loan 584-SE and Credit 140-SE), the first Casamance Rice Project (Credit 252-SE), the Terres Neuves I Resettlement Project (Credit 254-SE), the Drought Relief Project (Credit 446-SE), and the River Polders Project (Credit 350-SE). The main shortcomings mentioned in these reports concern: (i) the quality of engineering design and supervision of construction of project works; (ii) marketing, unremunerative prices, and input distribution; and (iii) the need to investigate more thoroughly the social aspects involved in project planning and execution. While these lessons are not generally relevant to the small, discrete operations that constitute the project proposed in the present report, experience acquired with rural development fund-type projects in West Africa, including the six-country Drought Relief Project, is of relevance. For this latter opera- tion, works in Senegal were found to be more successfully executed than similar projects in the other five Sahelian countries. The quality of super- vision of well construction was, however, inadequate; the village water supply component in the proposed project takes into account the need to overcome this failing. More generally, particular attention was paid during project appraisal to measures to ensure sound engineering preparation and supervision of small rural works, to arrangements for financing recurrent costs of small  - 14 - rural projects, and to delivery of effective technical assistance to bene- ficiaries during and after construction. PART IV - THE PROJECT A. Background 42. In September 1976, Governmeat informed the Association of its interest in a follow-up project to the Drought Relief Fund which had financed three small operations in rural water supplies, firebreak construction, and a one-year livestock vaccination campaign. Government and the Association agreed that a follow-up operation should emphasize more directly-productive activities rather than infrastructure, and thus more direct participation by the project beneficiaries. Detailed preparation studies were carried out by the Senegalese para-public consulting firm SONED (Societe Nationale d'Etudes pour le Developpement), with financing provided by an advance of US$142,000 equivalent from the Project Preparation Facility, and technical assistance from staff of the Ministry of Rural Development and the Bank's Regional Mission for West Africa. 43. The project preparation phase was unusually long because of dif- ferences among the several Government agencies concerned on the appropriate institutional framework within which the project would operate, and on effec- tive means of providing guarantees for credit to be extended to the beneficiaries. Preparation was finally completed in agreement with the Association in early June 1979, and an appraisal mission visited Senegal in June/July 1979. Credit negotiations were held in Washington in January 1980 with a Senegalese delegation led by Mr. Louis Alexandrenne, Minister for Planning and Cooperation. The Staff Appraisal Report No. 2700a-SE dated February 19, 1980 is being circulated separately to the Executive Directors. B. Project Objectives and Description 44. The project now proposed focusses on channelling funds and technical services to small groups of rural people who would undertake to provide labor, and some funds, for the development of several types of directly-productive activities. The broad objectives of the project are to encourage local initiatives thereby increasing popular participation in decision-making on investments in the rural sector, and to undertake only those operations that are manifestly in the interest of beneficiaries. The main specific objectives are to render small groups of producers creditworthy in the judgment of the local banking system, and to develop the existing local capacity for identification and preparation of directly- productive small rural projects. 45. The proposed project, to be implemented over four years, includes the following items: (a) construction, equipment, and technical services for 30 perimeters of 20 ha each for irrigated cultivation of rice in the Galenka Valley in the Fleuve Region;  - 15 - (b) construction, equipment, and technical services for 18 perimeters of 2 ha each for irrigated cultivation of vegetables in the Thies and northern Sine Saloum Regions; (c) construction, equipment, and technical services for 15 perimeters of 4 ha each for irrigated cultivation of bananas at Sedhiou in the Casamance Region; (d) construction, equipment, and technical services for beekeeping and processing of wax and honey at Bignona in the Casamance Region; (e) provision of 20 small fishing boats with outboard motors and ancillary equipment in the Louga Region; (f) equipment for an open well brigade, construction of 50 new wells, and deepening of 50 other wells in the Sine Saloum Region; (g) provision for unidentified activities; and (h) provision of a project management structure. 46. Selection Criteria and Initiatives. The criteria used for selec- tion of the appraised operations were that they be: directly productive; financially and economically profitable, with a net income per labor-day at full development of at least CFAF 275 (about 25% more than the nationwide average rural income), and an internal economic return of at least 10%; and requested by, and manifestly in the interest of a group or groups of producers (paras. 71 and 72). The criteria of operations being directly productive or financially viable do not apply to village water supplies. The above criteria will be retained for preparation and appraisal of currently unidentified activities during project implementation. (Sections 3.04 and 3.05 of draft Development Credit Agreement). Detailed Features of Proposed Operations (See Map) 47. Small Rice Perimeters. In an area along the Galenka, a tribu- tary of the Senegal River, there are about 12,000 people presently cultivating millet on the sand dunes in the rainy season, and sorghum and other crops in the valley bottoms as the floods recede in the dry season. Production and income vary with the rains and the floods, and there is much emigration from the area. The proposed project will provide assistance to each of 30 groups of producers to construct and operate irrigated perimeters of 20 ha each with full water control. An operation similar to that proposed for the Galenka was started in 1975 at Matam, about 200 km upstream on the Senegal River, where 36 perimeters are now being cultivated by about 700 farmers; the success achieved there prompted demand both from the people and the regional development agency, SAED, for the Galenka perimeters.  - 16 - 48. SAED will be responsible for preliminary surveys (an additional PPF advance of $20,000 approved in January 1980 will finance this effort), and construction supervision, and will provide technical assistance and training during initial farming operations, deliver inputs on behalf of ONCAD, and purchase paddy and tomatoes on behalf of the processing plants located down- stream. Producer groups will be responsible for providing all unskilled labor for perimeter construction, performing all farming operations, paying for operation and maintenance of their pump, and providing in cash and in kind for maintenance of the water distribution system. Land allocation within the perimeters will be decided by the groups of producers; if the Matam experience is followed as expected, each group would have about 40 members each receiving 0.5 ha. 49. Small Vegetable Perimeters. In the area bounded by Thias, Joal, and Fatick, about 80 km from Dakar, there is already much vegetable develop- ment using various irrigation techniques applicable to small-scale cultivation. There is now much demand from groups of small producers for an improved method of water extraction for irrigating vegetables. The proposed project will provide assistance to each of 18 groups of producers to construct and operate small irrigated vegetable perimeters of 2 ha each, with water to be supplied by manually powered pumps erected on open wells. 50. The main crops to be grown will be potatoes, onions, tomatoes, cabbage and beans. Inputs will be purchased by farmers from private suppliers who are well represented in the area; production will be sold to the well-established network of private buyers. Local branches of the Rural Development Centers will be responsible for supervising construction and providing technical assistance and extension advice during initial farming operations. Producer groups will be responsible for providing all unskilled labor for construction, performing all farming operations, and paying for maintenance of their pump and water distribution facilities. Land allocation within the perimeters will be decided by the groups of producers; each group would have about 20 members each receiving 0.1 ha. 51. Small Banana Perimeters. Although the climate in the Southern Casamance Region is marginal for banana cultivation, the crop has developed over the last 10 years through private investment in small perimeters, and through assistance from the FED for larger perimeters of about 20 ha each. There is now much demand from groups of producers for further investments, but in smaller-scale perimeters. The proposed project would provide assistance to 15 groups of producers in the Sedhiou District to construct and operate irrigated banana perimeters of 4 ha each, with water provided by mechanical pumping. 52. The regional development agency SOMIVAC would be responsible for perimeter construction and initial planting of bananas, provide extension service and technical assistance (in collaboration with FED experts) during initial operations, and deliver inputs on behalf of ONCAD. Producer groups  - 17 - would be responsible for providing all unskilled labor for construction, performing all farming operations, paying for operation and maintenance of their pump, and providing in cash and in kind for maintenance of the water distribution system and the banana sorting and treatment center. Land alloca- tion within the perimeters will be decided by the groups of producers; each group would have about 40 members each receiving about 0.1 ha. 53. Beekeeping. In the Bignona District of the Casamance Region, collection of wild honey and wax is a traditional occupation, and in the past decade some modern hives have been installed, as well as an extraction center with quality control and packaging facilities. There is now great demand for more of the modern, locally-designed and constructed hives, and from groups of producers for more honey and wax extraction facilities. The project will provide for: installation of four honey and wax extraction centers for four groups of 25 beekeepers each; installation of five hives per beekeeper, and provision of necessary equipment, including mesh frames, fumigators, and protective clothing; and rehabilitation of the existing extraction center which would serve as a regional quality control and packaging center. The Livestock Department of the Ministry of Rural Development will be responsible for installing the facilities, and has adequate technical assistance available for both production and marketing. Producer groups will be responsible for performing all beekpeeing and processing operations, and paying for maintenance of their extraction facilities. 54. Fishing. There is a strong fishing tradition in the area of Lompoul and Tare on the coast of Louga Region, and a recently created Provincial Fisheries Department has been actively organizing activities in the sector. In early 1979, the Government financed four motorized canoes to groups of young fishermen at Tare, and since then the demand to participate has been overwhelming. The proposed project will provide, to each of 20 groups of five young fishermen, a canoe equipped with a 20HP outboard motor, and a complete set of nets. The project will also provide drying stands, salt tanks, and other processing equipment at both Tare and Lompoul. The Provincial Fisheries Department will be responsible for installing facilities, and will provide technical assistance for processing and marketing. Producer groups will be responsible for all fishing and processing operations, and paying for maintenance of their boats, nets, and processing equipment. 55. Village Water Supplies. In contrast to the Drought Relief Project which financed well construction in five Regions, works under the proposed project will be concentrated in a single Region, Sine Saloum, and undertaken in only one district per year. This will permit improved quality control of work, as well as increased pace of operations since plant and equipment could be more readily maintained. The proposed project provides for strengthening the existing open well brigade at Kaolack, for construction by the brigade of 50 new open wells, deepening of about 50 existing unfinished open wells, and  - 18 - increasingly over the project period, for supervision and subsequent deepening of wells constructed by small contractors with financing from Rural Communities. The Water Supply Department, through its Kaolack base, will be responsible for execution; and the project will finance the services of a Works Manager, internationally recruited in agreement with IDA, responsible for sound tech- nical execution of the proposed operations, and to ensure effective planning and organization of well maintenance and repair works. Draft terms of reference have been discussed and agreed with the Government. (Section 3.02 of draft Development Credit Agreement). Over time, the proposed operation would serve as a model for developing an increased role for other open well brigades by strengthening their capacity to supervise rural works executed by private contractors, and to execute works that are difficult to contract out such as major repairs, deepening of existing wells, maintenance, and even construction of new wells in isolated cases where contract lots are unattractive for competitive bidding. 56. Unidentified Activities. During project preparation, many promising proposals for small rural projects were considered and rejected, often because of incomplete preparation. The proposed Credit therefore includes an alloca- tion of about US$3.0 million equivalent (representing about 30% of total project costs) to finance additional directly productive operations to be identified, prepared, and appraised during project implementation, following specified criteria and procedures (paras. 46 and 71). The allocation will be used for new project ideas (and in some cases extensions of appraised opera- tions) in which producers will be expected to take the key initiatives once the Project Management Unit has effectively diffused to interested producer groups all relevant information regarding availability of funds and procedures for gaining access to them. 57. Management Structure. A Project Unit will be created in the Depart- ment of Small Rural Projects of the Ministry of Human Affairs. The Unit will be headed by a Senegalese Project Manager who has been appointed, is acceptable to IDA, and who was a member of the Government's delegation to Credit negotiations. Detailed Terms of Reference for the Project Manager have been discussed and agreed with the Government (Schedule 4 of draft Development Credit Agreement). Other personnel in the Unit will include four technical specialists (of whom two will be expatriate expert staff), an accountant, and support staff. The project will provide office accommodation, vehicles, equipment and furniture, as well as accounting and audit services, consultants and materials for training, office operating facilities, and local staff travel. C. Project Cost and Financing 58. The total cost of the proposed project (net of identifiable taxes, and import duties from which the project would be exempt) is estimated at US$14.1 million equivalent, including foreign exchange costs of US$7.4 million (about 52%). Base cost estimates reflect prices at July 1980. Physical contingencies have been applied at 10% on civil works and equipment. Expected  - 19 - price increases have been estimated at 9% in 1980, 8% in 1981, and 7% per year thereafter, and total 17% of base project costs, not including the provi- sion for unidentified activities. The project provides for 12 man-years of technical assistance at an estimated unit cost of US$80,000, of which about 60% in salaries. 59. The project will be financed from the following sources: (i) the proposed IDA Credit of US$11 million; (ii) additional external financing from French technical assistance, which will provide an agricultural economist for the Project Unit over the four-year project period, at an estimated cost of US$0.4 million; and (iii) a Senegalese contribution of US$2.7 million equiva- lent, of which US$2.4 million from the Government to finance incremental operating costs including local staff and input subsidies, US$0.1 million from BNDS for incremental inputs supplied as credit-in-kind, and US$0.2 million as contributions from project beneficiaries to finance operating costs of pumps for small-scale irrigation, and incremental cash purchases of inputs. The total external financing of US$11.4 million will cover 100% of foreign costs and approximately 60% of local costs, representing about 81% of total project costs net of taxes. 60. On the basis of the above arrangements, the proposed financing plan is as follows: (in US $ Millions) Total IDA FAC Govt. BNDS Beneficiaries Small Rice Perimeters 2.1 1.3 - 0.6 0.1 0.1 Small Vegetable Perimeters 1.0 0.8 - 0.2 - - Small Banana Perimeters 1.0 0.8 - 0.1 - O.i Beekeeping 0.1 0.1 - - Fishing 0.1 0.1 - - - Village Water Supplies 1.7 1.6 - 0.1 - - Project Management 1.9 1.2 0.3 0.4 - - Unidentified Activities 4.4 3.7 - 0.7 - - Refunding PPF 0.2 0.2 - - - Contingencies 1.6 1.2 0.1 0.3 - - Total 14.1 11.0 0.4 2.4 0.1 0.2 Percentage 100 78 3 16 1 2  - 20 - D. Project Execution 61. Project execution is scheduled to start in mid-1980 and to last about four years. Responsibility for carrying out the appraised operations and preparing currently unidentified operations will rest with the Project Unit; each operation will be confined to a limited area, with field execution undertaken by a single technical service agency and a still undetermined number of producer groups (paras. 47-57). Over the project period, there would likely be a total of at least ten different operations and about 150 groups of producers, averaging about 30 participants per group. 62. Financial transactions of the project will be handled through two separate accounts to be opened, one for Government funds, and the other for proceeds of the IDA Credit; the latter will be designated a "Special Account" into which payments could be made without passing through the Government's Treasury Department. For both accounts, Government's Chief Financial Controller will exercise a posteriori control of expenditures rather than a priori control which is normally the case. The pre-financing of project expenditures will require an initial deposit of CFAF 160 million (US$760,000 equivalent), representing estimated quarterly project expenditures. Contributions to this fund will be paid by Government and IDA into their respective accounts in approximately the proportion of Senegal's and external financiers' share of total project costs; IDA participation in financing of this fund is justified on the basis of Senegal's continuing difficult public finance and budgetary circumstances. Opening of the project accounts, and Government's payment of its initial deposit of CFAF 24 million (US$110,000) will be a condition of Credit effectiveness. (Section 5.01(b) of draft Development Credit Agreement). The project's Government account will be replenished at least quarterly by Government on the basis of supporting documentation for expenses incurred, and cash forecasts made by the Project Unit in order to have sufficient funds to meet project expenditures for the following three months. The project's IDA account will be replenished from Credit proceeds upon receipt of satisfactory evidence of disbursements from the fund for eligible expenditures. Should, however, any disbursement from the IDA account be found ineligible for financing from Credit proceeds, Government will be responsible for replenishing the account in the corres- ponding amount (Section 2.02(f) of draft Development Credit Agreement). Procurement 63. Experience acquired with procurement of civil works for rural projects in Senegal shows that foreign firms are not likely to bid unless a contract is worth over US$1 million. Since contract lots under the proposed project will be much smaller, procurement of civil works (estimated cost US$4.0 million) will be by competitive bidding through local procedures acceptable to IDA. Procurement of vehicles and equipment (estimated cost US$3.9 million) will be through international competitive bidding in accord- ance with Bank Group guidelines in the case of contracts over US$100,000 (approximately US$2.1 million); competitive bidding following local  - 21 - procedures will be used for contracts for equipment and materials between US$25,000 and US$100,000 (approximately US$1.6 million); for contracts less than US$25,000 (approximately US$0.2 million), competitive shopping will be employed; domestically-manufactured goods will be allowed a 15% preference or the applicable import duty, whichever is lower. Other small investments (for example surveys, initial upkeep of banana perimeters, and tree planting (US$0.4 million) will be undertaken by force account by the responsible technical service agencies as specified in their contracts with project management (para. 67). Well deepening and construction (US$1.1 million) will also be undertaken by force account, with materials and supplies procured by competitive bidding through local procedures. Services of the interna- tionally-recruited agricultural economist, Works Manager for village water supplies, and locally-recruited consultants for specialized services (US$0.9 million) will be obtained following procedures acceptable to IDA. The remaining items to be procured with IDA funds include office accommodation, overheads and staff travel for the Project Unit team, and training materials (US$0.7 million), and will not be suitable for competitive bidding. The above arrangements have been discussed and agreed with the Government (Schedule 3 of draft Development Credit Agreement). Disbursement 64. Proceeds from the proposed IDA Credit will be disbursed as follows: (a) for civil works and surveys, vehicles, and equipment, 95% of total expenditures: for appraised operations (US$4.7 million); for unidentified operations (US$3.0 million); (b) for Project Unit, 95% of total expenditures on vehicles and equipment, local training, accounting and audit services, locally recruited consultants, office accommodation and overheads, and staff travel (uS$900,000); (c) for expatriate staff: 100% of expenditures (US$600,000); (d) initial deposit into the Special Account to pre-finance items under specific categories (US$650,000); (e) refunding of the Project Preparation Advance (US$162,000); and (f) unallocated (US$988,000). 65. The Project Unit will establish accounts to record all project expenditures; these accounts will be verified quarterly and audited annually by independent auditors in agreement with the Association (Section 4.01 of draft Development Credit Agreement). All IDA disbursements will be fully documented, except for force account works, training, office accommodation and overheads, and local staff travel which will be made against certified statements of expenditure; documentation for these will be held by the Project Unit and made available for quarterly verification by the independent auditors, as well as review by IDA supervision missions.  - 22 - E. Organization and Management of the Proposed Project 66. As discussed in paras. 57 and 61 above, overall responsibility for project execution will rest with the Project Unit established within the new Department of Small Rural Projects. The Government also intends to create an Interministerial Management Committee with broad responsibility for efficient operation of the new Department, and particularl-y for implementation of the proposed project; the Chairman of this Committee will be the Minister for Human Affairs. The draft decree for creation of the Committee has been reviewed by the Association and found satisfactory. Official publication of the decree would be a condition of effectiveness of the proposed Credit (Section 5.01(a) of draft Development Credit Agreement). 67. Role of Technical Service Agencies. Regional agencies will provide technical and accounting support to the various producer groups as required. The agencies will report quarterly to the Project Manager on all aspects of sub-project implementation. Remuneration to the agencies will take account of the complexity of services provided, and activities of the respective producer groups. Agency contracts acceptable to IDA will be entered into with the Project Unit, and will specify that such remuneration would cover only the additional direct costs incurred, with no contribution to overheads (Section 3.03 of draft Development Credit Agreement). 68. Status and Role of Groups of Producers. The responsibility of groups of producers for each operation will vary according to the respective responsibilities of the technical service agencies. Generally, though, responsibility for the proposed operations will be vested in these groups of producers which will comprise between ten and forty families, depending on the type of asset to be operated and managed. Producer groups will not neces- sarily have to be a de lure entity, and will require only a de facto identity with an appropriate operational structure, (including the capacity to enter into contracts with the technical service agencies providing assistance under the project), and at least one bank account, the Capital Replacement Account (paras. 69-70). Selection of the appropriate status for a particular producer group will be determined under the guidance of the Project Unit and in cooperation with the responsible technical service agency, which will continue to provide all necessary supervision of the group's operations (Sections 3.03 and 3.04(a) of draft Development Credit Agreement). 69. Capital Replacement Accounts. A particular feature of the proposed project will be the provision of medium-term assets to groups of producers through capital replacement accounts instead of conventional medium-term credit. The proposed approach, which has the full support of the Government, is considered justified in the case of these small operations primarily because medium-term credit has a poor record in Senegal, and because the intended beneficiaries would not be deemed creditworthy by the local banking system. Each producer group will, for each medium-term asset to be provided, open a capital replacement account at the nearest branch of BNDS; power of withdrawal from such accounts will be vested in nominated repre- sentatives of the group. As a condition for provision of the asset, the group will pay into its capital replacement account an amount of at least 5% of the delivered cost, of the asset; such payments will be verified by the Project  - 23 - Unit (Section 3.04(a) of draft Development Credit Agreement). The first time an asset were provided to a group, it would remain the property of the Project Unit until the group had put sufficient funds into the account to replace the asset. The first and all subsequent replacements would be financed by the group's savings in its capital replacement account. Savings would accumulate through annual payment of an annuity calculated to generate sufficient savings (including expected price increases) to replace the asset at the end of its life. The contract between the technical service agency and the producer group will specify the amount of the annuity and the date payable (Section 3.04 of draft Development Credit Agreement). 70. Prospects for obtaining payment for assets under the proposed scheme are expected to be good because beneficiaries will be making payments into an account in their own name and identified specifically to replace the asset. Nevertheless, to ensure successful operation of the scheme, instances of overdue accounts will be reported by technical service agencies in their quarterly reports to the Project Unit, which will in turn report at least semi-annually to the Interministerial Management Committee. At the same time, producer groups will be notified that appropriate action will be taken unless arrears were paid off by the next meeting of the Committee; the Committee will issue the necessary instructions to take action in the case of accounts which still remained delinquent (Section 3.01(b) of draft Development Credit Agreement). In addition, IDA supervision missions will carry out a systematic review of the capital replacement accounts to report on their status, and make periodic judgments on whether or not medium-term assets should continue to be provided under the proposed system. 71. The Small Rural Projects Cycle for Unidentified Operations. The cycle of project initiation, preparation, appraisal, and approval will comprise the following phases. First, initiation of project ideas and pro- posals will stem increasingly from groups of producers in response to the diffusion of information by the Project Unit on their eligibility for funds. Second, preparation will be undertaken by groups of producers who would enlist the help of a local technical service agency to write up an outline project proposal. This proposal will be distributed for comments simultaneously to the Rural Community Council, district and provincial officials, and the Project Unit, which will provide appropriate guidance in refining the proposal and submitting an official request for financing. Third, appraisal of the request will be undertaken at three levels, namely the Rural Community, the Provincial Development Committee chaired by the Governor, and the Project Manager. Fourth, power of approval will be vested in the Interministerial Management Committee subject to IDA approval of all new operations, and all extensions of appraised operations, which exceed specified levels in costs per group of producers or per participating family. (Section 3.05 and Schedule 1, para. 3(b) of draft Development Credit Agreement). As soon as a proposal is approved, the Project Unit will draft contracts between itself and the technical service agency, and between the latter and the producer group, and ensure that they are discussed and agreed in detail, and explained to the producer groups as appropriate.  - 24 - 72. The proposed cycle is well adapted to Senegalese administrative procedures which require that many agencies and levels of authority have the right of consultation in proposed development activities. Nevertheless, to avoid any uncertainty about the efficacy of what could prove a lengthy process, IDA and the Government will undertake a joint review of the procedures midway through the proposed project, i.e. by June 30, 1982 (Section 3.09 of draft Development Credit Agreement). 73. Training. As part of its task of diffusing information on eligi- bility for funding, the Project Unit will conduct training courses on selection criteria, the small rural projects cycle, and the rights and obligations of the various participants. These courses will be held initially for staff at the provincial level, and then for members of Rural Community Councils and technical staff at the district level. Courses will be given by staff of the Project Unit and locally recruited consultants. As experience is acquired with project implementation, course content will be amended to highlight lessons to be applied to further project preparation and execution. The proposed project does not provide for technical training to staff either of the Project Unit or the technical service agencies, since they are already technically qualified to provide the services expected of them. F. Financial and Economic Analysis of the Project Market Prospects 74. Output from the appraised operations will be either import sub- stitutes (paddy, maize, tomatoes for paste, bananas), or additional supplies to the domestic market (vegetables, honey and wax, fish). Much of the output is likely to be consumed by the producers themselves, or close to the produc- tion sites in small towns that presently are poorly supplied. Apart from local demand, nationwide urban demand is strong and fast-growing for project outputs. 75. Producers will be free to sell all project output to private buyers. For some outputs, producers will have the additional option of selling to parastatal agencies (SAED for paddy and tomatoes, SERAS for honey and wax) which participate in a competitive commercial structure that functions quite efficiently. Official producer prices are declared for paddy and maize, and the respective parastatal agencies set their own prices for honey, wax, and tomatoes for paste; since the marketing structures are reasonably competitive, however, actual prices may differ, and producers will not thereby suffer from unduly low prices. As a further option, some groups of producers (notably for bananas and vegetables) may elect to con- stitute marketing cooperatives, and in such cases the project would provide appropriate technical assistance.  - 25 - Financial Implications for Project Beneficiaries 76. Yield forecasts have been estimated for appraised operations based on acquired experience with similar small-scale operations in or near project areas. These forecasts are considered reasonable and sustainable, and would be exceeded by the more efficient groups of producers. The buildup to full development yields is expected to be gradual over a few years (except for fishing), and full development output will therefore not be reached until the sixth year of the project. Beneficiaries' incremental incomes at full project development (net of cash inputs and payments into their capital replacement accounts) show much diversity among the different operations, reflecting investment opportunities in different areas, capitalization per beneficiary, and different labor inputs. Incremental incomes are estimated to vary from the equivalent of US$260 per participating family in small rice perimeters to US$650 in fishing, with a weighted average of approximately US$360 equivalent. These figures can be compared with nationwide average rural incomes estimated in 1979 at the equivalent of US$1,430 per ten-member family, but with con- siderable variation between localities, reflecting rainfall patterns and proximity to the capital area. Pre-project incomes of beneficiary families would vary from about US$910 equivalent in the Senegal River Valley for small rice perimeters, to about US$1,670 equivalent in the vicinity of small vege- table perimeters near Dakar. Project-generated incomes for these operations would be about 28% and 35% respectively of pre-project incomes. Project Benefits and Risks 77. One of the most important project benefits will be its institutional role in providing a framework to encourage and support local initiatives in rural investments; in helping to render small groups of producers credit- worthy in the judgment of the local banking system; in enabling Government to sort out the present diversity in terms and conditions of financing of small rural projects; in improving the capacity for identification and preparation of such projects at both provincial and local levels; and in strengthening the Rural Communities. These institution-building benefits are considered so significant that they justify the high project costs per beneficiary family (about $2,260 equivalent in 1979 prices, including project management costs) which are about double those incurred in typical agricultural development projects on improving rainfed farming in West Africa, but less than one- quarter of costs incurred in large-scale irrigation projects. 78. Distribution of Benefits. Assuming that the cost per beneficiary for the unidentified operations will be similar to estimates for the appraised operations, the project is expected to benefit about 4,200 families, or 42,000 people. In addition, about 100,000 people will benefit from provision of permanent village water supplies. With the possible exception of small banana perimeters, nearly all of the likely beneficiaries now have incomes at or below the relative poverty level (US$120 equivalent in rural areas).  - 26 - 79. Economic Analysis. Economic costs and benefits have been analyzed on the basis of assumptions regarding estimated project life (20 years), shadow price of foreign exchange, and opportunity cost of all labor. Accord- ing to these assumptions, the appraised operations are estimated to yield economic rates of return as follows: small rice perimeters, 18%; small vegetable perimeters, 12%; small banana perimeters, 19%; beekeeping, 12%; fishing, 60%. The economic return for all the above operations (including 50% of project management costs and representing in total 47% of project costs) is estimated at 15%. The estimated economic return for currently unidentified operations (for which rates of return will likely fall in a similar range to those calculated for the appraised operations), including 50% of project management costs and representing 38% of total project costs, is about 13%. The remaining 15% of project costs is made up of: village water supplies for which no economic return can be calculated, and refunding of the Project Preparation Advance. The overall economic return for the project is estimated at 14%. No attempt has been made to measure the institution-building benefits outlined in para. 77 above. 80. In carrying out the above analysis, the risk of underestimation of costs or overestimation of benefits is considered minimal, both because of the unusually sound data base available for estimating the costs, and because production estimates could be based on acquired experience. Sensitivity tests show that a 10% increase in costs would entail a relative decline in base rates of appraised operations by 19-25%, and a 10% reduction in benefits a decline of 21-28%. 81. Bank Group experience acquired with execution of other rural development fund-type projects in West Africa suggests that there will be three main risks. First, small rural works have often been poorly constructed due, mainly, to the difficulty of supervising work at many dispersed sites. To offset this risk, while the six appraised operations are geographically dispersed, sub-projects within a given operation will be concentrated in a limited area. Second, technical service agencies have often assumed full responsibility for project execution as well as preparation, and have tended to pay little or no attention to beneficiary participation and initiative. Assessment of this risk was one of the key issues at project appraisal, and the Association is satisfied that the Government is fully committed to the primacy of the objective of encouraging local initiatives in small rural investments. Third, such stipulations as had been made governing beneficiary participation were not always respected, primarily because of the wide diver- sity in terms and conditions of assistance offered by the large number of Government and external agencies involved in small rural operations, and by a tendency among Governments to avoid enforcing rigorous financial discipline. The new Department of Small Rural Projects created under the proposed project will allow Government to exercise its stated desire to take a clear position on specifying and enforcing such terms and conditions, and to show the desired leadership in this respect.  - 27 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 82. The draft Development Credit Agreement between the Republic of Senegal and the Association, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Associa- tion, are being distributed to the Executive Directors separately. 83. Features of the Development Credit Agreement of special interest are referred to in Section III of Annex III. Special conditions of effectiveness of the proposed Development Credit are: (i) establishment of the Intermini- sterial Management Committee through issuance and publication of the relevant decree; and (ii) opening of the project accounts and paying in by Government of its initial deposit of CFAF 24 million (Section 5.01 of draft Development Credit Agreement). 84. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 85. I recommend that the Executive Directors approve the proposed Development Credit. Robert S. McNamara President Attachments Washington, D.C. February 20, 1980  - 28 - St0CCAL - SOCIAL INDICATORS DATA SUIT UUIWECI GROUPS (USTED A2 RAGE5 LANrD ARA (TllOUSAD sa. t.) nfc^L - NOST RICENT S St ) RhT TOTAL 196.2 SAME SANz UXE UIGHEXL ANICILTUR&L 81.0 MM RECEN 910GRA.PWIC 0INCoR IN0CM 1960 & 1970 A ESTIMATE A UGION a GROUP j GOUP CNP PER CAPITA (US$) 180.0 240.0 340.0 306.1 467.5 1097.7 O5aGY C TUSUWtION PF CAPITA (XTL.OGS o0 COAL RGUIVALIT) UIl.O 139.0 156.0 80.6 262.1 730.7 POPULATIOV AND VITAL STATISTICS POPULATION. MID-TEAl (MILLIONS) 3.4 4.4 5.2 URA" POPULATION (PCP T OF TOTAL) 22.6 23.7 24.2 17.1 24.6 49.0 POPULATION PRJCTIONS PForATION TX YEAR 2000 rM.LION8) 9.0 STATIOART POPMATION (MILLIOS) 24.0 EAR STATIONARY POPMlATIOt US UCMZD 2155 POPULATION DINS Tm PnR SQ. At. 17.0 22.0 27.0 18.4 45.3 44.6 PER SQ. KK. AGICULTURA.L LAND 43.0 55.0 64.0 50.8 149.0 140.7 POPULATION AGE STRUCTURE (PSICNT) 0-14 IRS. 42.5 U2.9 44.2 44.1 45.2 41.3 13-64 TIS. 56.0 54.2 52.7 52.9 51.9 55.3 65 TVR. AND u.3o0n 1.5 2.9 3.1 2.8 2.8 3.5 POPULATION GROCM RATZ (PrMCET) TOTAL 2.2 2.4 2.6 2.7 2.7 2.4 U9R .3.5 2.9 2.9 5.7 4.3 4.5 CRW3 W IC RLATE (P n ThOUSAND) 47.9 46.6 48.5 46.3 394 31. I CQD3 DEAT5 ILATE (PIL TrUoSAND) 26.7 23.7 22.3 17.2 11.7 9.2 GROSS