Senegal - Sefics Railway Project in support of the ICS Fertilizer Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-3038a-SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SOCIETE D'EXPLOITATION FERROVIAIRE DES INDUSTRIES CHIMIQUES DU SENEGAL WITH THE GUARANTEE OF THE REPUBLIC OF SENEGAL FOR THE SEFICS RAIL TRANSPORT PROJECT IN SUPPORT OF THE ICS FERTILIZER PROJECT June 1, 1981 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 EQUIVALENT Currency Unit = CFA Franc (CFAF) US$1 = CFAF 220 CFAF 1 million = US$4,545 The CFA Franc is pegged to the French Franc at the fixed rate of CFAF 1 = FF 0.02 and floats vis-a-vis the US dollar. FISCAL YEAR Government = July 1 - June 30 ICS and SEFICS = January 1 - December 31 ABBREVIATIONS ADB African Development Bank BADEA Arab Bank for Economic Development in Africa CCCE Caisse Centrale de Cooperation Economique EIB European Investment Bank EMC Entreprise Miniere et Chimique FED European Development Fund GOS Government of Senegal iCS Industries Chimiques du Senegal OPEC Organization of Petroleum Exporting Countries RCFS Regie des Chemins de Fer du Senegal SEFICS Societe d'Exploitation Ferroviaire des Industries Chimiques du Senegal SIES Societe Industrielle d'Engrais au Senegal SONEES Societe Nationale d'Exploitation des Eaux du Senegal  FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL SEFICS RAIL TRANSPORT PROJECT LOAN AND PROJECT SUMMARY Borrower: Societe d'Exploitation Ferroviaire des Industries Chimiques du Senegal (SEFICS) Guarantor: Republic of Senegal Amount: US$19.3 million equivalent Terms: 18 years including 5 years of grace with interest at 9.6 percent p.a ..* Project Description: The major objective of the ICS fertilizer project, which consists of an Industrial Complex and of a Water Supply System, proposed to be financed by IFC and other major financial insti- tutions, is to upgrade Senegal's phosphate rock to produce phosphoric acid and fertilizers, predominantly for export, thereby assisting Senegal's efforts to promote productive investments, notably in export-oriented industries. The proposed Bank-financed SEFICS rail transport project in support of the ICS project would ensure a safe and reliable service for the transport of ICS raw materials, supplies and products. In addition, it would be a first step towards a reorganization of RCFS with a view to concentrating its limited managerial and technical staff resources on improving traffic operations on the international line between Senegal and Mali. The SEFICS rail transport project would consist of: (i) the upgrading and renewal of a main siding track; (ii) the construction of terminal tracks at ICS plants and at the Port of Dakar; (iii) the provision, operation and maintenance of mainline and shunting locomotives and of wagons; and (iv) the construction and equipping of a workshop to maintain the locomotives and wagons. Benefits and Risks: The project would provide the most economical transport solu- tion consistent with required safety and reliability standards for the transport of highly corrosive chemicals in urban areas. There are no unusual technical risks associated with the proposed transport project. The main financial risks are those that could result from difficulties encountered in the implementation and operation of the ICS fertilizer project. These risks, and arrangements proposed to minimize them, are described in the IFC President's Report IFC/P-444. * In addition SEFICS would pay to the Republic of Senegal a guarantee fee of 1.0 percent p.a. on all proceeds of the Bank loan with the exception of those to finance improvements in RCFS' facilities. 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 - Estimated Cost: Local Foreign Total ----US$ million- --- Fixed Assets Upgrading and Renewal of Main Siding Track 1.09 1.57 2.66 Construction of Terminal Tracks 0.69 3.19 3.88 Equipment (locomotives, wagons) - 8.26 8.26 Maintenance Workshop 0.21 1.82 2.03 Contingencies Physical 0.11 1.00 1.11 Price 0.26 1.87 2.13 Total Fixed Assets* 2.36 17.71 20.07 Other Costs Studies, Supervision, Start-up 0.12 0.50 0.62 Initial Working Capital 0.12 0.23 0.35 Total Other Costs 0.24 0.73 0.97 Interest and Guarantee Fees during Construction 0.22 2.12 2.34 Total Financing Requirement: 2.82 20.56 23.38 * The Government of Senegal has exempted the project from all taxes and duties. Financing Plan: Local Foreign Total ----US$ million- - --- Bank Loan - 19.3 19.3 ICS - equity in SEFICS 1.8 1.3 3.1 RCFS - equity in SEFICS 0.3 - 0.3 GOS - capital grant to RCFS 0.5 - 0.5 GOS - capitalized guarantee fees 0.2 _ 0.2 Total 2.8 20.6 23.4 Estimated Disbursements: FY82 FY83 FY84 -----US$ million---- Annual 3.5 8.1 7.7 Cumulative 3.5 11.6 19.3 Rate of Return: Overall economic rate of return of 13.5 percent for the ICS fertilizer project together with the SEFICS rail transport project. IFC/Bank Staff Appraisal Report: Report No: IFC/T-369 Map: IBRD No. 15748  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SOCIETE D'EXPLOITATION FERROVIAIRE DES INDUSTRIES CHIMIQUES DU SENEGAL WITH THE GUARANTEE OF THE REPUBLIC OF SENEGAL FOR ThiE SEFICS RAIL TRANSPORT PROJECT 1. I submit the following report and recommendation on a proposed loan to Societe d'Exploitation Ferroviaire des Industries Chimiques du Senegal (SEFICS) with the guarantee of the Republic of Senegal for the equivalent of US$19.3 million. The loan would have a term of 18 years including 5 years of grace, with interest at 9.6 percent p.a. 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, followed by a President's Report for a structural adjustment loan/credit (P-2869a-SE) dated November 26, 1980, containing an expanded section on the economic situation. The following paragraphs reflect the conclusions of these reports. Country data appear in Annex I. Economic Structure and Past Developments 3. Three-quarters of Senegal's territory lies in the Sahel zone, which suffers from low rainfall and periodic droughts. The mainstay of the tradi- tional economy 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 5.5 million, Senegal's per capita GNP for 1979 was estimated at US$430. 4. During the 1960s, the Senegalese economy experienced virtual stagnation as real output increased at a rate estimated at 2.7 percent per annum, hardly more than the population. 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.  -2- 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. 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 condi- tions improved, the purchasing power of the rural population was substantially restored and both agricultural and industrial production increased markedly. However, the late 1970s saw another series of bad crops, which adversely affected the economy in 1978 and 1980 and will in 1981 also. The magnitude of these downswings is reflected in the variations in groundnut crops; from a historical record of 1.45 million tons in 1975/76, output fell to less than 0.6 million tons in 1977/78; it recovered to about 1.0 million tons in 1978/79, but fell again, to less than 0.8 million tons in 1979/80 and to a new low of about 0.5 million tons in 1980/81. Industrial output (excluding groundnut processing) did grow at a fairly even rate of about 5 percent a year. After 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 9 percent reflecting the effect of the 1977/78 drought; similarly, due to the mediocre crops in 1979/80, it remained below its 1977 level in 1980. 6. The large fluctuations in physical production were aggravated by the price movements 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, but in 1975 export prices for groundnuts declined sharply, followed in 1976 by a fall in the export prices for phosphate rock; the recent increase in oil prices brought a further deterioration in the terms of trade, causing a total loss in income since 1974 of roughly 5 percent of GDP. These swings in international prices, together with the fluctuations in output, had serious consequences for domestic prices, public finance and balance of payments. Public Finance 7. The Government has shown some 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 aligned 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, such as an 80 percent excess profits tax and dividends from increased ownership. In 1974, the phosphate price quadrupled, and 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. Public savings after debt service rose from a yearly average of US$25 million during 1971-73, to US$46 million during 1974-76. This higher  - 3 - 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 the increased participation in the phosphate mine and the acquisition of two foreign-owned public utility companies. The total capital outlays of the Government were thus substan- tially in excess of public savings, and were financed in large part through medium-term foreign bank loans. As a consequence, foreign debt service borne by the Government increased from US$8 million in 1972/73 to US$38 million in 1975/76, representing about 10 percent of its revenues. 9. A sudden fall in world phosphate prices in 1976 eliminated Govern- ment revenues from this source. In the following year, Government raised tax rates, 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 and maintain rural incomes by importing more cereals and absolving farmers debts; however, the added financial burden which these measures entailed was not 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 consequence, in 1980, when grace periods were over, debt service obligations of the budget reached about US$145 million (or 19.5 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 aimed at removing tariff distortions and administrative deficiencies, which also increased Government receipts through reductions in exemptions. Further tax measures in 1980/81 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. Since 1973 the balance of payments has been under heavy pressure, resulting in a very large negative balance in the net foreign assets by the end of 1980. Underlying the deterioration in the external accounts is the sluggish growth of exports combined with fast growing imports, leading to increasing current account deficits that could not be covered anymore by the normal flow of concessionary aid and an acceptable level of commercial borrowing. Between 1974 and 1976 exceptionally high phosphate revenues slowed the deterioration in the current account, but Government-s purchases of large participations in existing enterprises, created considerable outflows of private foreign capital, and foreign reserves were not replenished. Tb deterioration in the external accounts accelerated in 1978, fueled by losses in groundnut revenues, strong import demand and the oil price hike, and could not be arrested by EEC STABEX fund receipts and commercial borrowings. At the end of 1979, net foreign assets stood at minus US$319 million, including drawings on the IMF of US$61 million. The balance of payments picture in 1980  - 4 - was characterized by a loss in groundnut revenues of almost US$200 million, partly due to the small harvest and partly to exceptionally low world market prices. Moreover the net effect of the 1979 increase in petroleum prices was close to US$90 million. The resulting deficit on the current account was partly absorbed by the first tranche of an exceptional international aid package amounting to almost US$200 million, of which US$56 million by the IMF in the form of drawings on the Extended Fund Facility, taking some pressure off the monetary union and the commercial banks. At the end of 1980, net foreign assets stood at minus US$407 million. 12. Although exogenous factors such as droughts and variations in world market prices explain part of 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 policies. Senegal's basic problem has been the failure of production and exports to respond to higher investment levels and other expansionary policies. Covernment's Economic and Financial Rehabilitation 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 the Bank and the Fund and provided the basis for an agreement with the IMF for the purchase of US$243 million equivalent in currency under the Extended Fund Facility, an agreement which was approved by the IMF Board in August 1980, and a US$60 million structural adjustment loan/credit approved by the Board on December 18, 1980. The letter of intent from the Government to the IMF and the statement of economic policy sent to the Bank emphasized various aspects of the Government-s program. The global objectives of the Government's program are to stabilize the economy during the first two of the five years and to achieve a modestly higher rate of economic growth of 4 percent a year in the following three years. 14. Under the program, public savings after debt service would in- crease from about 1 percent of GDP in 1978/79 to over 3 percent of GDP in 1985, mainly through a freeze of recurrent expenditures in real terms. This savings target would allow the Treasury to finance at least 15 percent of the public investment program in the near future, to be improved to 25 percent by 1985. The 15 percent minimum contribution serves as a planning basis and is likely to be exceeded in favorable years, but may fall short in years of bad crops such as in 1981. Consequently, financing of local costs by foreign donors for specific projects is likely to be essential. 15. Increased private savings will be encouraged by the 2.5 percentage points increase in interest rates on deposits and savings certificates (an increase that was introduced in May 1980 together with a similar increase in the rediscount rate of the Central Bank), and through the allocation of preferential housing loans to borrowers with good savings performance. In  - 5 - 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 has eased price policies and tightened credit policies, in particular for non-productive projects. 16. Recognizing that the recent bad crops and the ongoing savings drive will dampen domestic demand and that production costs in Senegal are high compared with foreign competition, the Government is taking steps to provide more protection to 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 therefore cannot be changed except by agreement of the West African Monetary Union as a whole. 17. The level of investments is being reduced somewhat to facilitate economic stabilization but is planned to increase moderately over the five-year period of the Rehabilitation Plan. The emphasis of Government's program is on a shift of total investments toward more productive projects. A minimum rate-of-return requirement will weed out the less viable projects in the public sector, and an improvement in the incentives for private investors is expected to encourage private undertakings. The propensity to invest in Senegal is still low because of limited domestic markets and high production costs, and following the period of active state intervention, private entrepreneurs have tended to seek Government participation or loan guarantees for new ventures, to reduce their risks. 18. 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-plans") between the Government and individual parapublic enter- prises, that aim at setting sector objectives and reducing present levels of budgetary support. More scope will be given to these enterprises to adjust tariffs to more economic levels. Government's program imposes ceil- ings on commercial borrowing abroad and restricts its use to enterprises and projects that generate a sufficient cash flow to service such debt. The program introduced a fee for Government guarantees on debts of mixed enter- prises. Treasury advances and loans to mixed enterprises in financial diffi- culties have been drastically reduced and made conditional on the conclusion of a program contract. 19. In the agricultural sector, the liabilities resulting from the uncovered recurrent expenditures of parapublic enterprises had accumulated to the extent that the Treasury and, indirectly, the money and credit system were threatened. Moreover, because of weak management, some public institu- tions had become an obstacle to project implementation. In August 1980, Government dissolved the central cooperative organization (ONCAD) which controlled individual cooperatives, as well as the delivery of agricultural inputs, the extension of agricultural credits and the marketing of crops, restoring some of its functions to the private sector. The cooperatives will be reorganized to assume responsibilities for agricultural credit and  - 6 - seedstocks, and to allow greater farmer participation. Technical assistance to cooperatives would in future be provided by the regional rural development agencies that are in charge of extension services to the farmers. The remain- ing parapublic agencies in the agricultural sector will also be reorganized with a view to restore their financial soundness and increase their opera- tional efficiency. Subsidies on agricultural inputs were removed with the exception of those for fertilizer for which substantial reductions are now being considered. The agricultural reform will also lead to a substantial reduction in the number of staff, reduce the annual deficits that have been supported by the budget, and may eventually allow higher net revenues to farmers. 20. The structural adjustment program agreed with the Bank on the basis of the above Rehabilitation Program had a slow start as a result of: (a) a change in Government in early 1981; (b) a record low 1980/81 crop; and (c) steep increases in the price of imported rice. The new Government restated the general objectives of the program but focussed, during the first four months in office, on the economic and financial crisis caused by the bad crop. Short-term targets and policy measures had to be adapted to the new situation; details on establishment of these measures were discussed with the International Monetary Fund in the framework of agreements under the Extended Fund Facility, drawings on which were temporarily blocked in the absence of agreed credit ceilings for 1981. Some additional issues existed concerning the Government's price policies: after levying a "solidarity tax" on urban wages to finance emergency food supplies for the rural population, the Govern- ment thought it could not increase basic food prices by implementing the scheduled 15 percent import duty on rice intended to protect local cereal producers, and even accepted some temporary food subsidies to cushion the impact of rising world prices on the cost of living. Within the agricultural reform program, the tests to build autonomous village sections within the agricultural cooperatives were delayed as well as the introduction of a new credit system based on these units, mainly because the new administration had to prepare emergency measures before undertaking new programs. On the other hand, progress was made in the field of investment planning and establishment of program contracts with parastatal enterprises. The system of export premia for five test products was set up, but with retroactive payments of the premia later in the fiscal year. In view of the delays in execution of the structural adjustment program, the Bank postponed release of the second tranche of the Loan/Credit; a paper was circulated to the Executive Directors on May 4, 1981, explaining this delay. Long-term 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 the 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 approach will make the country less dependent on the uncertainties of its climate, and reduce the heavy burden of food imports. The overhaul of insti-  - 7 - tutions in the groundnut sector is expected to restore production to previous levels within a few years, and even to increase production by 1.8 percent a year if, in the medium term, the groundnut prices paid to the farmer can be raised as expected. Agricultural research will be oriented more to farm systems than to individual crops, with the objective of lowering the costs of the agricultural techniques propagated, and better adaptation to farmers' needs. 22. The Government also aims at a modest expansion of phosphate mining, and development of light export industries and tourism; moreover, construction of a ship-repair yard is almost completed, and implementation of the ICS ferti- lizer project is due to start in July 1981. 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 export performance can be expected. Government counts heavily on the implementation of a number of large investments in irrigation to diminish the heavy dependence on rice imports. However, since such investments have long gestation periods and are difficult to implement, a cautious view of the long-term outlook is 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 below population growth. 23. The economic and financial rehabilitation plan, and the exceptional foreign aid based on it will help Senegal to overcome the effects of the recent bad crops, the higher oil prices, and the high debt service built up over the past five years. Strict implementation of this plan is therefore crucial for Senegal's prospects for economic growth and creditworthiness. PART II - BANK GROUP OPERATIONS IN SENEGAL 24. The Bank Group has had 50 operations in Senegal to date. Total outstanding funds amount to US$364.1 million, including 26 IDA credits, 14 Bank loans, four blends of Bank and IDA funds, four IFC operations, one blend of Bank and IFC funds, and one blend of Bank, IDA and IFC funds. Annex II contains a summary statement of Bank loans, IDA credits, and IFC investments as of March 31, 1981, 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 ldck of qualified local staff for key positions. But institutional bottlenecks in several sectors constitute the largest obstacle to efficient project implementation. 25. The Government is well aware of the need to increase absorptive capacity 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 initiates and implements measures necessary to resolve on a sectorwide basis some of the issues regarding  - 8 - financial management and Government control of public enterprises and mixed companies, particularly those that are channels for Bank Group assistance. The Government created in late 1978 an Inter-ministerial Committee (Comite de Relance des Investissements) which works closely with 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, and will be strengthened under the Technical Assistance Project for Economic and Financial Planning approved in August 1980, through reinforcement of its secretariat. 26. The Bank Group's share in total external aid disbursements to Senegal over 1979-85 will stay at around 12 percent, of which roughly 52 per- cent in IDA financing. The Bank Group's share in outstanding disbursed debt was 18 percent in 1979, and will remain at around that level until 1985. The Bank Group's share in public debt service is expected to increase from 3.8 percent in 1980 to about 7 percent in 1985, a rise which is mainly due to the increase in Bank loans from 32 percent of the Bank Group's total outstanding and disbursed funds to about 41 percent by 1985. 27. The Bank Group's project financing and economic and sector work, which is designed to support the Government's development strategy, has six main objectives. First, priority continues to be given to rural development, including development of irrigation in the Senegal River Valley Region, rainfed agriculture in the well-watered southern regions of the country, and intensification of groundnut production and diversification into new crops and new regions. This effort of diversification has led the Bank Group to finance a Small Rural Operations Project in FY80, a reforestation project earlier this year and a project designed to improve agricultural research will be submitted to the Board in the near future. Agricultural lending over the next few years is expected to account for about 20 percent of the total. Second, the Bank Group has supported diversification of the economy by lending to the growing industrial sector through SOFISEDIT for which a third line of credit was re- cently approved, and through the proposed SEFICS rail transport project in support of the ICS Fertilizer Project, a major phosphoric acid/fertilizer complex. Diversification of the economy is also pursued through an ongoing project for the development of tourism infrastructure. Third, Bank Group projects have supported modernization and expansion (where economically desirable) of the country's infrastructure through lending to the four modes of transport. An engineering project approved in FY79 finances studies and technical assistance for water supply and sanitation development in eleven secondary centers and is paving the way for Bank Group involvement in that sector. Similarly a Power Engineering Project should identify possibilities for Bank financing in this sector. Fourth, assistance in the field of social services 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 the education sector has focused on meeting the need for trained high- and middle-level managers and technicians in the modern sector and in agriculture and improving access to primary education, particu- larly in rural areas. The Bank remains conscious of the need to support the social services (within the limits of the Government-s ability to bear the recurrent costs involved) by preparing carefully identified projects; to that  - 9 - end, a proposed Primary Health Care Project is under preparation. Fifth, the energy sector is being supported through the use of funds under the Project Preparation Facility for the preparation of an offshore oil exploration project. Finally, continuing assistance is being provided to help Government increase its absorptive capacity for planning, executing, and managing devel- opment projects through institutional support within individual Bank Group projects. Several Bank Group operations, notably in tourism, telecommunica- tions, port infrastructure, loans to SOFISEDIT, and in airport development, have the additional merit of generating revenues for the Senegalese Treasury. 28. While project aid is vital, Senegal's long-observed economic stagnation and the deep-seated proLlems that have culminated in the present crisis call for additional, special remedies. One is economic advice. In 1979, for instance, the Bank helped Government devise a policy package aimed at improving the balance of payments while maintaining whatever growth momentum was left in the economy, through waste reductions, cutting consumer subsidies, and higher taxes on urban dwellers, rather than through cuts in groundnut producer prices or curtailing productive investments. Second, and far more importantly, Government's needs for financial and technical assistance during the period of structural adjustment are being addressed under the ongoing Loan/Credit operation (paras. 13-20). PART III - THE TRANSPORT SECTOR AND THE INDUSTRIAL SECTOR Transport 29. Senegal has a fairly well-developed transport system concentrated in the Cap Vert Peninsula and the Groundnut Basin farther to the east, which are the areas with the largest population and economic activity. Roads, the principal mode of domestic transport, carry about 75 percent of commercial inter-urban passenger and freight traffic, excluding phosphates. The railway system consists of a main line from Dakar to the Mali border, and several branch lines. Traffic at the Port of Dakar, mainly phosphates, petroleum, general merchandise, and international traffic for Mali and to a limited extent Mauritania, has doubled over the last ten years, and now totals about six million tons annually. The Dakar airport is a major international transit point for Europe-Africa-South America traffic. Three secondary seaports and 18 regional airports and airfields are located outside the Cap Vert region. Traffic volumes on the three navigable rivers are modest and gradually being lost to road transport. 30. Government-s transport strategy focuses on: (i) developing local transport infrastructure in support of overall economic growth, particularly in the agriculture sector; (ii) promoting regional integration; and (iii) maintaining the already extensive assets in the sector. Transport planning and coordination are shared by three ministries: the Ministry of Planning and Cooperation assumes overall responsibility for preparation of development plans; the Ministry of Finance and Economic Affairs authorizes commitments,  - 10 - determines the structure and level of taxes levied on transport services and maintains financial supervision of state-owned transport enterprises; the Ministry of Equipment proposes and executes the Government's transport policy. With Bank Group assistance, the Government has started preparing a National Transport Plan as a first step in strengthening the transport planning institutions. 31. Bank Group operations in the sector have helped to establish the basic transport infrastructure, and to organize its maintenance. Total lending equivalent to US$104.3 million has helped finance five projects for highway construction and maintenance, three directed toward improving the railway infrastructure and increasing locomotive hauling capacity, two in aviation for major improvements to the Dakar Airport and for modernization of two important domestic airports, and two for construction and extension works at the Port of Dakar. Projects in the highway, aviation and port subsectors have been executed satisfactorily in general and, to a large extent, the Bank has been able through these operations to assist the Government in reaching sectoral objectives. Little success has been achieved however in the railway subsector, as described below. Details on execution of these projects are given in Annex II. The Railway Subsector 32. The railway comprises about 660 km of mainline between Dakar and the Mali border and 374 km of branch lines. It is operated by the Regie des Chemins de Fer du Senegal (RCFS), a public enterprise. In FY80 the Regie carried about 1.7 million tons of freight, the bulk of which is phosphates from the Taiba and Thies mines to Dakar port and transit traffic to Mali. The railway has traditionally been the dominant carrier of domestic freight, but due to deteriorating service and efficiency, it has recently lost its position to the road transport, particularly for shorter hauls. The Bank Group has financed three railroad projects (Credit 96-SE, 1966; Credit 314/ Loan 835-SE, 1972; and Loan 1518-SE, 1978). An audit report on the First Senegal Railway Project was issued by the Operations Evaluation Department on January 10, 1977. An audit of the Second Senegal Railway Project is also under prepara- tion. The first two projects concentrated on improvements in physical infra- structure, while the third project, now under execution, lays emphasis on improving the Regie's organizational and financial management and on technical assistance and training programs. 33. The overall results however, have been disappointing. The central issues, confirmed as well by the earlier audits, continue to be limited man- agerial and technical staff resources, low productivity, inefficiency, poor staff morale, and lack of discipline. As a consequence, the railway is plagued with major operational problems, poor locomotive and wagon turn- around, and an inability to handle available traffic, particularly interna- tional traffic to and from Mali. 34. The railway continues to be the most economic regional transit route for most of Mali's international traffic. Yet, mainly due to its present inefficiencies, poor service, and lack of coordination with the Mali railways, which suffer from similar operational problems, as much as 50  - 11 - percent of Malian traffic has recently been using the more expensive, longer- haul, road-rail transit route via Abidjan. The other major function of the Senegal railway is haulage of the bulk phosphate traffic from Taiba and Thies to Dakar, for which the road alternative would worsen congestion in the Dakar-Thies corridor and increase road maintenance costs due to heavy loading of phosphate trucks. The railways general cargo and short-haul passenger traffic have declined substantially during the past decade, in face of severe competition from the rapidly expanding privately-run road transport services. 35. In light of the above considerations, an organizational structure study under the ongoing project threw open several possible options for restructuring RCFS operations. The proposals ranged from total reintegration of Senegal and Mali railways, to the creation of a number of autonomous opera- tional units specialized in the main traffic categories, viz., phosphates, international freight and passenger traffic, and other traffic, linked with a central entity to maintain the rail infrastructure. While the latter alter- native appears to be politically unacceptable and operationally difficult to achieve in its entirety, particularly for the international traffic, the for- mer gained some political backing, but it is equally fraught with operational and organizational difficulties of implementation. The Government has chosen to follow a more prudent middle course in order to permit RCFS to streamline its current operations and establish interim working-level arrangements for international traffic operations with the Mali railway. 36. It is with these basic objectives that the Government decided to treat the exacting transport requirements of the ICS project as an enclave operation and as a first step in the restructuring of railway operations. In view of the higher costs, high risks and inconvenience of transporting corro- sive acid and other bulk chemicals by road, and the railway-s limited manage- rial and technical staff resources to satisfactorily handle the delicate ICS traffic, the Government decided on creation of the new entity, SEFICS, for this purpose. The Government also intends to have SEFICS eventually take over transport of the short-haul phosphate traffic from RCFS, thereby fulfilling one of its objectives in the reorganization of RCFS, i.e. a streamlining railway operation. 37. As far as its other and principal objective, the Government has examined with Bank assistance, the case for setting up a formal working-level arrangement with the Mali railway. Discussions have also been held with the Malian authorities, as a result of which the two railways are now taking steps to create a Cooperative Management Service (Service de gestion cooperative) with the sole objective of running all international services on a joint basis using the total available locomotive and wagon pool. As the international freight traffic provides over 50 percent of the Senegal railways revenues, these arrangements for running the international service would be partirilarly beneficial. At the same time, the creation of SEFICS to handle the transport of ICS products and eventually of all short-haul bulk phosphate traffic, would help pave the way for a better structuring of RCFS operations and ensure safety and reliability for the ICS traffic.  - 12 - The Industrial Sector 38. Senegal has a somewhat larger industrial base than many African countries, with the secondary sector contributing about 24 percent of GDP in 1980. Average growth of the industrial sector since 1960 has, however, been modest. Industrial development has been based on the processing of primary products (phosphate, cement, groundnut oil), and the substitution of manu- factured imports. 39. The Government's intervention in the industrial sector since the 1960s has focused on: (a) developing a few small Senegalese enterprises in the traditional sector with the objective of graduating them into the modern sector; (b) requiring foreign enterprises to make an effort to replace expa- triate staff with Senegalese personnel; and (c) imposing general wage and employment policies in response to pressures from labor unions. The latter measure resulted in rapid production cost increases, thereby limiting the ability of the industrial sector to compete outside the domestic market. 40. In the early 1970s, the Government tried to play a more active role in promotion of the industrial sector. Efforts were made, in collaboration with private enterprises, to encourage the development of export industries. However, while Senegal has been able to develop what has become a very success- ful hotel and tourism industry, most of the other initiatives have remained rather sporadic, with not very encouraging results. In fact, the promotion of private enterprises and export industries will never yield substantial results unless prospective investors are offered a comprehensive package of incentives to compensate them for the high production costs of Senegalese industry, including labor costs. 41. Having failed to stimulate private investment, the Government turned to a policy of direct public investment in industry and other sectors. This was made possible by the sharp rise in phosphate prices (from US$12 per ton in 1972 to US$67 per ton in 1975), which allowed for a considerable increase in export revenues and public savings, and enabled Government to borrow heavily on the Eurodollar market. A substantial part of these new resources was used by Government to acquire majority ownership in several foreign-owned private enterprises, including the Taiba Phosphate Mining Company, two public utility companies, and a wide variety of smaller firms. It created a new public agency (SONACOS) with the monopoly for the export of groundnut products (oil and cakes), and new contracts with the private crushing mills were concluded that provided for the gradual transfer of their assets to Government. 42. The results of these policies were not impressive, both because the industry's cost structure remained an obstacle to the industrial exploitation of local resources, and inefficiencies developed in the state-controlled enterprises. Moreover, the Ministry of Industrial Development and Artisans, which is responsible for designing and executing Government's industrial policy has had difficulties in articulating a coherent sector strategy.  - 13 - 43. From 1979, as part of its efforts to combat economic stagnation (see paras. 13-23), Government decided to: (aJ promote manufacturing activi- ties based on more intensive use of local resources, through protection and incentives; (b) increase the proportion of directly productive investments in its Plan; and (c) welcome private and foreign capital. 44. Although the industrial sector suffers from Senegal