Mauritania - Public Enterprise Technical Assistance and Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3979-MAU REPORT AND RECOMNENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 16.9 MILLION TO THE ISLAMIC REPUBLIC OF MAURITANIA FOR A PUBLIC ENTERPRISE TECHNICAL ASSISTANCE AND REHABILIlATION PROJECT March 7, 1935 This docment has a restricted distribution and may be used by recipients only in the perfonnance of their officisl duties. Its cotents may not otherwisc be disdcsed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Ougutya (UM) US$1.00 - UM 80 UM 1.00 = US$ .0125 FISCAL YEAR January 1 to December 31 MEASURES 1 Meter (m) 2 - 3.28 feet (ft) 1 Square meter (m ) - 10.76 square feet (sq. ft) 1 Kilometer (km) - 0.62 mile (mi) 1 Metric ton (mt) - 2,205 pounds (lb) i Liter (1) 3 - 0.26 US gallons 1 Cubic meter (m ) - 264 US gallons 1 kV - 1,000 volts 1 MW - 1 million watts 1 Gwh - I billion watt-hours ABBREVIATIONS AND ACRONYMS CCCE Caisse Centrale de Cooperation Economique CNSS Caisse Nationale de S&urite Sociale CRSP Cellule de Rehabilitation du Secteur Parapublique DTAF Direction de la Tutelle Administrative et Financiare ECU European Currency Unit EDF European Development Fund EIB European Investment Bank EMN Etablissement Maritime de Nouakchott EPAP Entreprise publique a caractere administratif et professionel EPIC Entreprise publique a caractere industriel et commercial FAC Fonds d'Aide et de Cooperation ILO International Labor Organization OCAM Organisation Commune Africaine et Mauricienne OPT Office des Postes et Tel1communications PE Public Enterprises PPF Projet Preparation Facility SEM Societe d'economie mixte SNINI Societe Natioriale Industrielle et Miniere SONELEC Societe Nationale d'Eau et d'Electricite TA Technical Assistance  FOR OMCIAL USE ONLY MAURITANIA PUBLIC ENTERPRISE TECHNICAIL ASSISTANCE AND REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of Islamic Republic of Mauritania Implementing Agencies: Ministry of Planning Sociite Nationale d'Eau et d'Electrtcitt (SONELEC) E:ablissement Maritime de Nouakchott (EMN) Office des Postes et Tel&communications (OPT) Credit Amount: SDR 16.9 million (US$16.4 million) Terms: Standard IDA terms On-lending Terms Proceeds of the Credit other than the funds for the sector reform will be on-lent at about 10 percent, the Bank's prevailing interest rate, with the Government assuming the foreign exchange risk, as follows: (a) SONELEC: 15 years Including 5 years grace (b) EMN: 10 years including 3 years grace (c) OPT: 10 years including 3 years grace. Project Description: The project comprises components aimed at: (a) creating a central agency within the Ministry of Planning to formulate policy, carry out reforms and coordinate programs affecting the public enterprise sector;(b) undertaking a series of special studies in the parastatal sector to propose new policy directions for government (c) initiating diagnostic studies of other public enterprises for the next phase of the rehabilitation strategy; (d) rehabilitating the operation of two key public enterprises (SONELEC and EMN) by upgrading equipment, restoring capacity and providing technical assistance and training; and (e) assisting OPT with expertise and equipment in the area of financial management and further rehabilitation studies. Project Benefits and Risks: The principal benefits of this project would be a start of the reform of the institutional framework for the sector as a whole in support of government's rehabilitation strategy, and the improved operations of several key public enterprises. This document has a restrited distnbution 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.  - it - Although there are no major engineering risks, the project may not be able to achieve its institutional objectives due to the comp'Lexity of the problems facing public enterprises and the pervasive technical, financial and human resource weaknesses prevailing in the sector. To mitigate these risks, the project would be limited to initiating the reform process and to meeting the emergency needs of three selected enterprises. Depending on the success of these efforts, reform could be extended to other enterprises under subsequent operations. Estimated Costs: Local Foreign Total -----US$ Million--- Sector Reform 0.6 2.6 3.2 SONELEC 2.1 12.8 14.9 EMN 0.2 3.3 3.5 OPT 0.2 0.8 1.0 Total Base Cost 3.1 19.5 22.6 Physical Contingencies 0.2 1.4 1.6 Price Contingencies 0.7 4.3 5.0 Total Project cost 4.0 25.2 29.2 == == == Financing Plan: Local Foreign Total - --US$ Million- -- IDA 0.5 15.9 16.4 CCCE - 3.0 3.0 FAC 0.9 0.9 EDF - 1.3 i.3 EIB - 4.0 4.0 Government and Enterprises 3.5 0.2 3.7 Total 4.0 25.2 29.2  -iii - Disbursements: -IDA Fiscal year-------- (US$ Million) 1986 1987 1988 1989 1990 Annual 2.6 4.1 5.1 3.7 0.9 Cummulative 2.6 6.7 11.8 15.5 16.4 Economic Rate of Return: (ERR was calculated only for those components entailing physical investment) SONELEC Component 44 percent EMN Component 68 percent Overall 44 percent Staff Appraisal No: 5193 - MAU Map: IBRD Map No. 1b452R  - 1 - INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE ISLAMIC REPUBLIC OF MAURITANIA FOR A PUBLIC ENTERPRISE TECHNICAL ASSISTANCE AND REHABILITATION PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Islamic Republic of Mauritania for SDR 16.9 million (US$16.4 million equivalent) to help finance a Public Enterprise Tecbnical Assistance and Rebabilitation Project. The Credit would be on standard IDA terms. Additional financing will be provided through a grant from Fonds d'Aide et de Cooperation (US$0.9 million equivalent); a loan from Caisse Centrale de Cooperation Economique (US$3.0 million equivalent); a special credit from European Development Fund (US$1.3 million equivalent); and a loan from the risk capital fund of the European Investment Bank (US$4.0 million equivalent). PART I - THE ECONOMY 2. A report entitled "Islamic Republic of Mauritania - Recent Economic Developments and External Capital Requirements" (2479a-MAU) dated June 4, 1979, has been distributed to the Ex:ecutive Directors. Since then, a number of missions have visited Mauritania to monitor the economic and financial situation and prospects of the economy. Updated country data are given in Annex I. The Land and its People 3. Mauritania bears many of the characteristics of the "Least Developed Countries" in terms of its physical and human resources, despite a level of per capita income (US$460 in 1983) somewhat higher than that of the world's lowest. Three-quarters of the country is desert or semi-desert, the principal economic activity being livestock herding. Crop farming is generally limited to the sub-Saharan zone in the south, where rainfall is nonetbeless sparse and irregular. Pockets of modern economic activity are found in the mining complex of Zouerate, the fishing center of Nouadhibou and the administrative capital of Nouakchott. These centers are geographically separated from the agricultural zones, and there is little economic interaction between them and the rural sector. 4. The three centers of modern economic activity account for a major share of the country's overall output, while livestock and crop farming, which support as much as 70 percent of the population, account on average for about 25 percent of total output. The mass of the population (total 1.6 million) suffers from an extremely low standard of living, as reflected in key social indicators: life expectancy at birth  - 2 - is estimated at 45 vears, infant mortality is 132 per 1,000, only one in every three children of school-age attends primary school, and less than 20 percent of the population is literate in either of the two official languages, Arabic and French. Past Economic Performance 5. Led by increases in iron ore production, Mauritania's GDP sustained an average annual growth rate of 8 percent during the 1960's. The economy experienced a sharp deceleration in growth in the mid-1970's, however, and a period of marked financial instability in the latter part of the decade. Principal factors were reduced world demand for iron ore, on which the country had been dependent for 70-80 percent of its export earnings, and the effects of severe and repeated drought on output in the rural sector. These factors were compounded by prolonged military conflict in the Western Sahara and a poorly conceived investment policy. The investment program was stepped up in the mid-1970's to rates approaching 40 percent of GDP with the support of heavy inflows of foreign assistance, particularly from OPEC sources and commercial lenders. These resources were used principally to finance the nationalization of the mining sector, ambitious projects in transport infrastructure and a few large industrial ventures which were to prove unviable. 6. The effects of depressed iron ore earnings, drought and a generally weak record of economic management in the mid-1970's brought the country to financial crisis by 1977. The Government's current expenditure requirements that year reached a level nearly double its receipts, producing a Treasury deficit equivalent to 16 percent of GDP. On the balance of payments the country suffered a severe drain on its reserves despite massive inflows of foreign grants and loans. The Government which took power in 1978 immediately adopted a stabilization program which called for rescheduling more than S200 million in debt service obligations, tight controls on the Government wage bill and a reinforced tax collection effort. The growth of the Government's current budgetary expenditure was curbed, and the earlier drain on the country's foreign reserves was arrested. Modest boosts in iron ore and fisheries production and the stimulus of a new investment effort temporarily enabled the economy to pull away from the stagnation which had characterized it since 1975 and to enjoy a brief three-year period of growtb averaging 4 percent per annum during the period 1979-81. 7. The improved performance of the economy could not be sustained, however, in the face of a fallback in mining production and the recurrence of drought. Iron ore production fell by more than 20 percent in 1982-83 to a level only 65 percent of that registered 10 years earlier. With rainfall only about 20 percent of normal levels in the 1983/84 season, the livestock herd suffered major losses, and cereals production met less than 10 percent of total dcmand. Aggregate output of the economy fell by 2.2 percent in 1982, rose by 6.6 percent in 1983 (due to distress sales and offtake in the livestock sector and  - 3 - other exceptional factors) and stagnated in 1984. In the absence of sustained growth, per capita incomes today are essentially unchanged in real terms from those of a decade ago. 8. The failure of the mining sector to underpin growth of the economy in the 1980's marks a major reversal of expectations at the outset of the current Five-Year Development Plan period, 1981-85. On the assumption of gradual recovery in the world steel industry and a consequent near-doubling of Mauritania's ore production, mining was expected to resume it's role as the economy's motor of growth through at least the first half of the decade and to ensure the domestic resources to effect the development strategy adopted for the 1980's: to eventually shift the base of the economy from its exhaustible mineral resources to alternative, renewable sources of growth - irrigated agriculture, livestock and fisberies. The need to ensure future mining capacity and at the same time to diversify the economy has resulted in Mauritania's maintaining its record for some of the highest rates of investment registered among developing countries. Gross capital formation averaged $240 million annually through a peak period, 1981-83, or 35 percent of GDP. Continuing high levels of investment have reflected the completion of large projects in the transport sector begun in the late 1970's and, simultaneously, the execution of the $500 million Guelbs mining project, Gorgol Irrigation and other major projects undertaken in the framework of the 1981-85 public investment program. Additionally, a spurt of private sector investment in fisheries was made in the early 1980s in response to Government initiatives to promote national exploitation of these formerly foreign-controlled resources. 9. Given the performance of the mining sector and drought-induced shortfalls in rural production, Mauritania's inability to maintain satisfactory rates of growth have sharply aggravated its exceptional dependence on foreign resources to meet consumption as well as investment requirements. Whereas the external current account deficit had been held in check at an average 22 percent of GDP in the 1979-81 period and the overall balance of payments maintained in approximate equilibrium, Mauritania's external position has substantially weakened since 1982. Despite a strong rise in earnings from fish exports (estimated at $135 million in 1984 closely rivalling earnings from iron ore of $150 million), the current account deficit expanded to an average 33 percent of GDP in 1982-83. Though in part the result of exceptionally heavy foreign-financed mining investment, the expansion of the deficit was unmatched by a corresponding increase in capital inflows, forcing a massive drawdown of Central Bank reserves (cumulative $77 million in 1982-83). In 1984 the payments crisis was modestly eased by a decline in cereals imports, replaced by exceptional receipts of food aid, and a reduction in other general imports induced by a downward adjustment of the ouguiva exchange rate of 19 percent in relation to the US dollar. Further losses in official reserves were nonetheless incurred (US$33 million), and by end-1984 payments arrears on external medium and long-term debt had mounted to an estimated $95 million.  The Recovery Program and the Current Outlook 10. Mauritania's balance of payments and budgetary situation thus remains extremely weak, requiring continuing adjustment measures over the medium term and heavv support from abroad in the form of financial and technical assistance and food aid. The gradual depreciation of the ouguiya during 1984 was one of a series of recovery measures in the areas of exchange rate and price policy, fiscal administration, the public enterprise sector, the banking system and the public investment program towards reducing external and domestic imbalances to sustainable levels and maximizing the modest prospects for the economy in the medium term. Such measures are being pursued in the context of the Government's Economic and Financial Recovery Program. In January 1985 the Government reached agreement with the IME on a proposed Stand-By arrangement for SDR 12 million. In accordance witb that agreement, it undertook in February 1985 a further 19 percent effective devaluation of the ouguiya in domestic currency terms and increases in cereals prices at both producer and consumer levels ranging from 12-50 percent. The Government also agreed to raise interest rates to levels which are positive in real terms and to restrict credit expansion. The IMF Stand-By would be put in place following successful negotiations with Arab and Western bilateral creditors to fill the projected 1985 financing gap of about $200 million. 11. Successful implementation of the Government's Economic and Financial Recovery Program, supported by the international communitv, is critical to the medium-term outlook for the economy. With disciplined economic management and well-conceived measures to exploit Mauritania's limited resources, modest but sustained growth in output is possible. Rural sector production should recover moderately from drought-induced lows of 1984. Although international iron ore markets are not expected to recover significantly through the 1980's, it is possible for SNIM to continue to improve the cost effectiveness of its operations. In the livestock sector, some time will be needed to reconstruct the herd following the heavy mortality and accelerated offtake over the past two years. In the period abead, irrigation development will increas;ingly contribute to food supplies, even though cereals production will remain highly vulnerable to the effects of drought. In the fisheries sector, now a major source of foreign exchange and budgetary revenue, growth could remain strong for another 3-4 years, but would then level out if resources are not to be over-exploited. Under favorable assumptions, overall growth of the economy through the remainder of the 1980's could average 3.5 percent annually, or 1.0 percent ahead of the projected rate of population growtb. 12. Mauritania's longer term development strategy must take into account the country's very limited natural resource base and prospects for its supporting rising standards of living. Compounding the implications of overall population growth is the fundamental economic and social change taking place throughout Mauritania as a result of a decade of severe drcught and attendant rural emigration. The growth of Mauritania's urban centers, at some of the most rapid rates registered  in West Africa, is clear evidence of the need to give high priority to those sectors such as light industry which offer maximum scope for expanded income and employment opportunities. In this context, it is vital to ensure that basic services provided by the parastatal sector are efficiently managed. Thus, the reform and strengthening of the parastatal sector, which is the objective of the present project, is a key component of the Government's Economic and Financial Recovery Program. PART II - BiNK GROUP OPERATIONS IN MAURITANIA 13. As of FY84 the Bank Group has had 19 operations in Mauritania for a total of US$212.6 million. Of these, cwo are Bank loans for mining operations (US$66 million for MIFERMA in 1960, and US$60 million to SNIM in 1979 for the Guelbs Iron Ore Project). The other 17 are IDA credits totalling US$86.9 million. Of the IDA operations, five have been in the transport sector, six in the rural sector, two for education, two have been technical assistance projects for economic planning and there have been separate projects for urban and rural development and petroleum exploration. IFC has no operations in Mauritania. The Bank Group's presence in Mauritania was fairly substantial in the early 1970's, and in 1970-72 it was the third largest donor providing about 18 percent of Mauritania's external capital assistance. Since then, external financial assistance to Mauritania from other sources has increased rapidly and at present, the Bank Group's share in Mauritania's external capital assistance amounts to about 8.0 percent. 14. Until the mid-seventies Bank Group strategy for Mauritania focussed on financing traditional projects mainly in agriculture, transport and education. Since the mid-seventies this assistance has been broadened increasingly to address the institutional weaknesses of country economic management, investment planning and project implementation which had manifested themselves during the last decade. In 1978, the Association assisted the Government in designing a financial and economic rehabilitation program for which the first Technical Assistance Project (FY77) provided the expertise. Assistance for the formulation of macro-economic policy, a medium and long-term development strategy, and investment programs is being continued under a Second Technical Assistance Project (FY82), which is also helping to develop a pipeline of feasible investment projects other than mining (iron ore) on which the country can no longer solely count for sustained economic growth. The objective of this assistance is to institute a much more thorough evaluation of investments than occurred in the past especially to avoid large, capital intensive projects with low productivity and unsatisfactory rates of return. Priority will now be given to projects aiming at the rehabilitation and maintenance of existing infrastructure, and encouraging only those new investments that demonstratively promise a high rate of return.  15. To back-up the Government's efforts to address Mauritania's severe balance of payment problems, tight fiscal situation and its inability to service its public debt, our country and economic sector work has been intensified and will include sector papers on fisheries, education, energy and urban development. Provided that the IMF Standby arrangement is approved and satisfactory progress is made in the implementation of economic recovery measures, a Consultative Group meeting will be organized to obtain donor support for the Recovery Program. 16. Professional training of Government officials remains an essential ingredient of IDA assistance to overcome the acute shortages of trained local staff at all levels, which constitute a major difficulty in project implementation. Through project aid and technical assistance, efforts have been made to strengthen vocational training for the modern industrial sector and farmers' training, in parallel with broadening access to primary education. Nonetheless, shortages of pupils completing secondary and vocational schools with satisfactory results remain critical and explain the low productivity of employees in the modern sector. As a consequence technical assistance should continue to be an important part of project financing. 17. Assistance to the education sector is being provided under the Second Education Project (FY82) which aims at expanding access to primary educaticn, improving vocational training in the modern industrial and commercial sectors, and training of lower secondary school teachers to replace a substantial number of foreign technical assistants on expensive contract basis. Future IDA assistance should continue to focus on the need to reduce technical assistance personnel. The Government recently requested the Association to assist the Government Education Reform Committee in the review of key sectoral issues, a clear definition of overall long term objectives, the formulation of policies, the preparation of an investment program to increase efficiency of education and training, and the reduction in recurrent costs to lower the large share of education (30 percent) in the national budget. Additional sector work is being initiated for this purpose. 18. Assistance to agriculture, especially irrigation and livestock, will be continued since this sector is still considered Mauritania's principal source of growth over the longer term, despite its weak base and extreme vulnerability to drought, and the high cost of investments caused by difficult physical conditions, limited transport infrastructure, and the high level of technical assistance needed. Through the Second Technical Assistance to the Rural Sector project (FY83), rural institutions will be strengthened and efficient incentives developed by addressing such fundamental issues as input and product pricing, subsidies and land tenure. A Small Scale Irrigation project (FY85) will continue IDA assistance to the on-going irrigation program and finance the establishment of 75 command areas of 20-25 ha each, emphasizing the participation of beneficiaries in construction,  - 7 - maintenance and operation to keep investment costs down. A Second Livestock project (FY86), would improve livestock production, strengthen services and - based on encouraging experience in Niger and Mali - establish pastoral cooperatives on an experimental basis with grazing rights allocated to identifiable land areas. This would enhance renewable resource management through greater involvement by the pastoralists themselves. In the fisheries sector, which could be an important source of future growth, a sector study has been prepared to assist the Government in the elaboration of a sector strategy. The objective is to enable Mauritania to capture a larger share of the benefits currently reaped by foreign trawlers operating along the coast. Once this strategy is in place, a fisheries project could be considered. 19. In the energy sector, our assistance consists of supporting the Government's search for hydrocarbons through the Petroleum Exploration Promotion Project (FY82) and carrying out an energy assessment to recommend strategies and policies aimed at improving energy demand management, develop indigenous energy resources, strengthen institutions, and identify specific areas for follow-up technical assistance, based on which a future operation could be developed. The Association is also helping Mauritania to evolve an overall strategy for the urban sector. Urbanization has grown dramatically in recent years while appropriate measures to adjust to bhis development have not been taken. Sector work is being carried out to gather detailed knowledge of the urban requirements and to examine tha wider urban policy issues in the context of Mauritania's overall development aspects. This sector work may lead to the design of an urban project later in this decade. To assist in Mauritania's efforts to diversify employment and sources of income, financing was provided to encourage private enterprise through the Mauritanian Development Bank (Credit 888-MAU) and to promote artisanal carpet-weaving activities. A follow-up project (FY85) will further pursue these objectives and through studies develop appropriate policies for improving subsector performance and possibilities of further expansion of the manufacturing sector. PART III - THE PUBLIC ENTERPRISE SECTOR 20. The public enterprise sector produces over one-fifth of GDP, generates one-eighth of government revenues, and accounts for one-fourth of formal sector employment, with debt accounting for one-fourth of Mauritania's total external public debt and received subsidies totalling around one-tenth of the Government's public enterprise annual operating budget. The Government is thus keenly aware that a successful overall economic rehabilitation program has to include major improvements in the performance of the public enterprise sector.  - 8- Economic Impact and Importance 21. Throughout the 1970s, the Government rapidly expanded the size of the public enterprise sector. At the end of 1982 the cumulative investment in public enterprises had reached UH 12.5 billion (US$217 million). The high priority attached to Mauritanian control of productive resources and to economic independence was the justification. The Government acquired ownership in existing enterprises and created a large number of new ones in mining, agriculture, manufacturing, transportation, distribution, construction, insurance and banking. By the end of the 1970s the parapublic sector included: 25 industrial and commercial enterprises (EPIC), 27 joint ventures with the private sector (SEM), and 56 decentralized services in administration, research and education (EPAP). By far the largest public enterprise is SNM) ("Societe Nationale Industrielle et Miniare") which operates the iron ore mines and accounts for 95 percent of the country's industrial value added and over 60 percent of exports. SNIK received a US$60 million Bank loan (Loan 1747-MAU) in 1979. The next largest public enterprises include the electricity and water company (SONELEC), the post and telecommunications company (OPT), the port authority at Nouakchott (EHN), an airline (Air Mauritania), a rural development company (SONADER), and an import-export company (SONIMEX). The first three enterprises (SONELEC, OPT and EMN), which are proposed for rehabilitation under the proposed project, represent 30 percent of value-added by public enterprises if SNIM is excluded. Financial Status 22. Altbough the data base for public enterprises is weak, analysis of the available data highlights some major preblems. Many enterprises are suffering large financial losses and have inadequate financial structures with excessive debt-equity ratios. SNIM was the only enterprise witl-, substantial profits (UM 500 million or US$ 8.7 million in 1981), bat starting in 1983 has also recorded losses. Especially since 1978, a part of these losses has been financed by rapidly growing debts with the public sector. The Government stopped paying for goods and services purchased from public enterprises while public enterprises stopped servicing debts with state-owned banks and other public enterprises, and stopped paying taxes owed to the Government. By 1983, the Government owed about UM 600 million (US$10.4 million) to public enterprises, most of it to OPT, Air Mauritania and SONELEC. Government arrears accumulated because it systematically underbudgeted its consumption of water, electricity, post and telecommunications services and was slow at making payments. In turn, enterprises owed the Government about UM 500 million (US$8.2 million), mainly in back taxes and penalties for late payment.  -9- Sector Constraints 23. In addition to financial problems, Mauritania's public enterprises sector has been hampered by organizational and human repource constraints. A major problem is the lack of sector planning, po.Licy direction and management. Enterprises operate with conflicting objectives, are not subjc.ct to evaluation according to sound economic criteria, and often make decisions without consideration of sectoral objectives or the implications for public finances. Appropriate means to monitor and evaluate the sector's aggregote impact do not exist. The Government's dealings with its enterprises are complex, including controls over the use of foreign exchange, procurement, and pricing policy, as well as approval of personnel appointments, salaries, organization structures, and financial transactions. There are, moreover, ambiguities in the respective responsibilities of different control agencies and the various laws regulating the sector are often inconsistent. Finally, there is no established commercial discipline governing relations between the Government and its enterprises, in paying accounts due and in the settlement of arrears. Government Efforts to Rehabilitate Public Enterprises 24. Increasingly aware of the sector's deterioration, the Government began attempts at reform in 1977. With financing from IDA's First Technical Assistance Project (see para 43), a public enterprise sector report was prepared in 1978 and rehabilitation programs for various enterprises were drafted in 1979. They recommended action on pricing policies, personnel reductions, management and maintenance. Some measures on prices and management were taken but their limited scope and the deepening degree of the problems led to little significant improvement. However, the 1978-82 period of study and review substantially strengthened Government's perception of the actions needed. 25. In December 1982, as part of an overall macroeconomic rehabilitation program, the Government established a high-level Interministerial Committee for the Rehabilitation of Public Enterprises with a technical secretariat in the Ministry of Planning to prepare a comprehensive medium-term rehabilitation program for the public enterprise sector. This Committee received substantial support from IDA's Second Technical Assistance Project (Cr. 1292-MAU) and, in September 1983, submitted its report. The report stressed that as preconditions for improving performance, the Government would have to make a profound change in policies and streamline its dealings with public enterprises. A clear definition of the enterprise role was essential, payment for goods and services within the public sector had to be enforced and the relative responsibilities and duties of the enterprise and the Government had to be clearly spelled out. The report found that on the Government side there was: interference in the day-to-day management of the enterprises; lack of exercise of responsibility of government appointees on the boards of parapublic  - 10 - enterprises; lack of monitoring of government objectives; lack of financial controls and audits; delays in payments of government bills; and late and poorly planned increases in tariffs. On the enterprise side the report found that there were weaknesses in management and personnel; lack of motivation; lack of internal controls stemming from the absence of qualified finance staff and accountants and consequent delays in accounting, inadequate billing and collection procedures; lack of maintenance and deterioration of equipment; and an overall lack of training policies and programs. Objectives of the Sector Reform Program 26. Based on the Interministerial Committee's report, the Government approved a reform program in November 1983, with the following features (see Annex VII for full list of measures). According to this program, no new public enterprises will be established, except if economically justified and of national strategic importance, and the portfolio of existing public enterprises will be rationalized through liquidations, privatizations and rehabilitation. Prices are to reflect costs and subsidies will be phased-out. Intra-public sector debts will be settled, and the Government and enterprises are to make prompt payment for goods and services. Hiring of unskilled staff will be frozen, excess staff will be trimmed, and a new salary structure is to be established. The quality of accounting, auditing and budgeting will be improved in all public enterprises. All investments will require prior feasibility studies and, if over UM 20 million, will require Cabinet approval. A reform management structure has been created in the Ministry of Planning, operating in liaison with all relevant government institutions. The proposed project supports these fundamental improvements, which are described in more detail below. Reform Strategy and Progress During 1984 27. Ultimately, the Government intends to reform the entire parapublic sector--restructuring the sector through privatization and rehabilitation, and liquidations instituting appropriate policies, and developing the institutions needed to plan, coordinate and monitor sector developments.As a first stage, however, its approach is limited by the scarcity of funds and the weakness of existing institutions to manage a larger reform effort. The first phase of the Government's program will concentrate therefore on: (1) establishing the general policy context for public enterprises; (2) developing institutional mechanisms to manage the reform process; (3) carrying out legal, institutional, and structural reforms; and (4) rehabilitating enterprises selected on the basis of priority as and wben funds become available. With the assistance of the proposed project, the first phase concentrates on essential public services--water, electricity, port, post and telecommunications. In parallel with financing from other sources (including other Bank and IDA financed projects), rehabilitation actions are also underway or planned in the agricultural sector (SONADER), iron ore (SNIM), and rug making (OTn). Efforts under the  - 11 - second phase are expected to concentrate on those companies facing financial difficulties (SOCOGIM, SMAR, Air Mauritania, SOMECOB, SMCPP, etc.) as well as enterprises in key sectors of the economy (fishing for example). 28. The Government has already made considerable progress in implementing the first phase of its reform program. It has given particular priority to key measures in sector restructuring, investment review, settlement of interlocking debts and appropriate budgetary allocations. Annex VIII summarizes government action to date and the calendar for the reform. During negotiations the Government has confirmed its agreement on the scope and extent of this first phase of the reform program (Section 3.04 of the draft Development Credit Agreement). Implementation has proceeded well so far, largely owing to the efforts by the Ministry of Planning, responsible for instituting parapublic reforms. Legal Framework Reform 29. Improvement of the legal basis for public enterprises is well advanced. A new public enterprise law was approved in early 1984 introducing the requirement for program contracts ("contrat programme"). These are contracts between the Government and its enterprises to establish clearly the objectives of the enterprises, their required support from the Government, plus their targets and operational plans as mutually agreed with the Government. Patterned after the French system of "contrat-plan" adopted in many countries in Africa (Senegal, Congo, Ivory Coast, etc.), program contracts will be introduced for the first time in Mauritania, starting with SONELEC and EMN. During negotiations agreement was reached that the Goverzment and the two enterprises will enter into program contracts, acceptable to the Association, by December 31, 1985 (Section 3.06 of the draft Development Credit Agreement). Project support, with initial financing under the Project Preparation Facility (PPF) (para 44), is available to assist the enterprises and the Government to prepare these contracts. Other assistance will be provided under the project to help the Government implement additional legal reforms, especially for SONELEC, EMN and OPT, as part of their action plans and to continue refinement of the sector's legal framework. Sector Restructuring 30. Annex IX summarizes the progress made to date and the calendar for future action on sector restructuring. The first phase of the classification exercise covering 30 industrial enterprises is almost complete: three enterprises are to be liquidated, four privatized, four converted to government services, five have their scope of activity reduced, ten will be rehabilitated or retained as they are and ten require further study to be done as part of the proposed project. Decisions on public enterprises in fishing (13 enterprises), banking  - 12 - (eight enterprises), and EPAPs (56 institutions) will be made once sector studies to be done as part of the project are completed. Settlement of Interlocking Debts and Financial Discipline 31. The difficult task of settling the web of interlocking debts is progressing well. Coordinated by the Ministry of Planning, interlocking debts of 15 of the most important public enterprises were settled by October 1984 through compensation, cancellation and refinancing. After intensive work and negotiations, the Government has reached agreement with OPT, EMN and SONELEC, satisfactory to IDA, for the settlement of their interlocking debts. To avoid recurrence of this problem, a start also has been made by the Government to establish realistic budget allocations for the goods and services it consumes. In the 1984 budget, adequate allocations for SONELEC were made. For 1985, the Government has agreed to include in its 1985 budget (through addendum to the budget if necessary) adequate provision for payment by all public sector consumers (schools, hospitals, army, national guard, etc.) of services provided by SONELEC and OPT, as well as pay up any arrears, as a condition of effectiveness (Section 6.01(f) of the draft Development Credit Agreement). Tariff AdJustments 32. Under the new pricing policy, enterprises may increase prices to reflect costs and other operational conditions and, if the increase is not approved for socio-political reasons, enterprises are to receive compensatory subsidies. Attention so far has focussed on EMN and SONELEC. Projections, prepared by the appraisal mission, indicate that increases in average tariffs in 1985 to compensate for inflation and the effects of devaluation (estimated at about 16 percent), combined with improvements in SONELEC's operating efficiency, will be sufficient to put SONELEC into a better liquidity position in 1985 so that it can cover operating costs and service debts. Subsequent increases, to be reviewed and approved by IDA, will be required for SONELEC to operate as a financially viable enterprise. Increase of average tariffs to adjust to inflation and change in exchange rate, satisfactory to IDA. is a condition of credit effectiveness (Section 6.02 (h) of the DCA). As for EMN, its average tariffs were recently (February 1985 raised by 25 percent across-the-board. Various other port charges were also raised at the same time and new charges added. It was agreed during negotiations that EMN would increase tariffs as necessary in order to achieve an operating ratio of 65 percent starting in 1986. The prices for other enterprises are also under review: prices for PHARMARIN (pharmaceutical products) have already been increased, while SMCPP's (gasoline) and STPN's (urban transport) prices are being studied. Increases for other enterprises are to be determined as part of the rehabilitation of individual enterprises as necessary.  - 13 - Investment Progras 33. With assistance from the Bank and the IMF (para. 15), the Government is now undertaking a thorough review of its expenditures to establish investment priorities that, within its resource constraints, have the greatest economic impact. In this context, the proposed project, focusing on emergency expenditures for restoring basic services and rehabilitating presently inadequately used assets, has been given the highest priority by the Government. More generally, Mauritania's investment program as reviewed by IDA and IMF provides the general framework and global limit for investments in 1985. The Government bas furthermore agreed to consult with IDA on investments in future years as part of Mauritania's economic recovery program. In addition, during negotiations it was agreed that IDA prior approval will be sought before any investment by SONELEC, EMN and OPT above specified limits (Sections 4.04, 4.05 and 4.04 respectively of the draft Project Agreements for these enterprises). A moratorium on the creation of enterprises with the exception of extraordinary cases is also in effect. The only major public enterprise created in the last five years is a fish export marketing company which the Government considers critical to increasing Mauritania's revenues from fishing activities. However, the Government intends to review closely its progress and liquidate it if it is not generating satisfactory financial and economic results. Managing the Reform Process 34. Tackling the problems of Mauritania's parapublic sector involves a wide range of government ministries, enterprises, banks and outside agencies, with the Ministry of Plan playing the lead role as policy formulator, catalyst and coordinator. A special group within the Ministry entitled the "Cellule pour la Rehabilitation du Secteur Parapublic" (CRSP) has been set up to manage the overall reform process. It coordinates the Government's reform measures, monitors progress and develops, in collaboration with other ministries, policy proposals and action plans to be approved by the Council of Ministers. In a staff capacity, CRSP can cross sectoral lines, approach the sector's problems with a multi-disciplinary outlook and arbitrate among established interests. So far, key CRSP staff have been instrumental in both developing and implementing the Government's reform program. Under the project, CRSP will be fully equipped and staffed and provided with necessary training and logistical support. The Enterprises 35. In its request to IDA, the Government identified SONELEC, EMN and OPT as first priorities for rehabilitation since they provide essential public services and, in the case of EMN and SONELEC, are in serious danger of collapse if no action is taken. A summary of these enterprises follows.  - 14 - SONELEC 36. Created in 197S, SONELEC provides water and electricity services to Nouakchott, . Ladhibou and a few small urban centers. It is supervised by the Ministry of Hydraulics, Energy and Mines, with management vested in its Director-General. SONELEC's facilities are badly in need of repair, upgrading and replacement. Available capacity is far below installed capacity and technical losses are very high. SONELEC's financial performance has consequently been unsatisfactory. Collection is poor, and as a result SONELEC has not been able to service debts and pay taxes. SONELEC's accounts, furthermore, have never been subject to external audit. Although SONELEC's current tariffs are relatively high compared to other West African countries, they are not sufficient for SONELEC to cover operating costs, service debt and contribute to new investment. Despite improvements to SONELEC's operating efficiency, already evident as the rehabilitated generating facilities come on stream, increases in average electricity and water tariffs and measures to reduce operating costs which will improve its financial position considerably, are still required to adjust to inflation and the change in the exchange rate. Implementation of these tariff increases is a condition of credit effectiveness. In addition, agreement has been reached during negotiations to implement by December 31, 1987 the results of a tariff study which is to be completed by June 30, 1987 (Section 2.08 of the draft SONELEC Project Agreement). 37. Annex X summarizes SONELEC's action plan to rehabilitate its operations, organization and finances. SONELEC's management, helped by technical assistance financed by the PPF, has already started to advance the action plan. Improvements to collection of client accounts and billing system are proceeding. Physical inspections of the water system in Nouakchott has already started, to plan detailed rehabilitation efforts and to prepare tender documents for the repair and replacement of water pipes and connections. Physical works on the rehabilitation of SONELEC's existing electricity generation facilities are well underway with CCCE financing (para 57). Meanwhile, other institutional improvements await the arrival of the remaining technical experts who have already been selected. A new organizational structure for SONELEC would be approved by Government as a condition of credit effectiveness (Section 6.01(g) of the draft DCA) and revisions to its legal base should be implemented as part of SONELEC's action plan. During negotiations agreement was reached with the Government and SONELEC to implement the action plan (Section 3.04 of the draft SONELEC Project Agreement). EMN 38. EMN manages the principal commercial port, serving Nouakchott and much of the interior, which accounts for about 80 percent of general cargo traffic. Created in 1975, EMN is supervised by the Ministry of Equipment. Having reached a peak of 325,000 tonnes in 1982, traffic fell to about 300,000 in 1983 but is expected to recover gradually. The  - 15 - present harbor has only one unprotected berth that can handle only small ships. Larger ships must be lightered in open roadstead using barges which results in double handling. Much of EMN's equipment is not in working order and the berth is near collapse. However, it must continue to serve Naoukchott for at least 3 more years until a new deepwater port is complete. This port is being built by the People's Republic of China with financing on concessional terms (50 years repayment, including 10 years grace and commission of 1 percent p.a.). During negotiations, Government has agreed, by no later than December 31, 1987 (about six months after the estimated completion date), to transfer it to EMN, on terms and conditions satisfactory to IDA (Section 4.02 of the draft Development Credit Agreement). 39. EMN's internal controls, systems, financial records and information processing are weak. Accounting is particularly poor and EMN's accounts have never been externally audited. EMN has shown a profit only once in the past five years, its liquidity position is poor and it has not serviced its debts since 1979. EMN now owes Government about UM 46 million (US$0.9 million) in taxes and penalties which it will have great difficulty paying. However, the Government has agreed to waive the penalties which reduces the amount due to UM 4 million to be paid in 1985. (para. 31). 40. The steps necessary to rehabilitate EMN's operations have been incorporated in an action plan, summarized in Annex XI. This plan covers productivity improvements, development of management information and financial systems, reorganization and staffing changes, designed to strengthen EMN's institutional capabilities and prepare EMN for the operation of the new deep water port. Physical improvements and equipment provided to EMN under the project are therefore kept to the minimum essential for EMN's continued operation. An important achievement to date has been the reduction of staff from 400 to 300 persons. EMN is committed to further staff reduction, from 300 to 250 persons by end December 1985. During negotiations, agreement has been reached with Government and EMN to implement the action plan (Section 3.04 of the draft EMN Project Agreement). OPT 41. OPT is responsible for international and domestic postal and telecommunication services and for the provision of postal financial services. Postal services are available in major centers, while telecommunication services are concentrated in Nouakchott and Nouadhibou. Service utilization is low, postal service unreliable, and telecommunication services poor. Recently, OPT has taken steps to upgrade long-distance and international service using satellite facilities. However, these investments (one standard A earth station and two standard B earth stations) are likely to strain OPT's financial position and the most important, a Standard A earth station, is difficult to justify in technical and economic terms. This type A station, at an estimated cost of US$ 18.7 million, was financed on a  - 16 - blend of commercial and concessionary terms from French sources (CCCE for US$7.8 million equivalent at 4.5 percent over 20 years; commercial bank financing of US$6.2 million at 10.6 percent over 5 years and grants of US$4.7 million equivalent from FAC). With these new investments, OPT should not require major investment in international telecommunication facilities until the mid 1990s, but will still need to undertake rehabilitation of its domestic local and long-distance services. 42. Created in 1961, OPT reports to the Ministry of Information, Posts and Telecommunications. OPT's present organizational structure centralizes authority in Nouakchott and does not provide a clear separation between postal and telecommunication services. As a starting point, greater separation between these two areas should be achieved by developing financial and management reporting systems that make the appropriate distinctions. Sound accounting policies, financial controls and systems for client billings and collections are especially needed to properly analyze OPT's financial situation, assess future investments and maximize cash generation. During negotiations, agreement has been reached to carry out an action plan incorporating measures to overcome these deficiencies as summarized in Annex XII (Section 3.04 of the draft OPT Project Agreement). The Association's Role 43. Support from IDA under two Technical Assistance projects laid the basis for the Government's parapublic reform program. The first project (Cr. 665-MAU), approved in 1976, financed a review of the sector in 1978 and carried out diagnostic studies audits of some 20 enterprises in 1979. This work led to some reforms, but more importantly increased the Government's awareness of the nature and magnitude of the sector's problems. Advisors continued to provide advice on parastatal policy as the Government undertook a comprehensive review of the sector in 1982 which culminated in the adoption of the Government's emergency measures in late 1983. The Second TA project (Cr. 1292-MAU) approved in 1982 continued these efforts by financing the diagnostic studies of SONELEC, OPT and EMN that are the basis of the action plans to be implemented as part of the project. 44. A PPF advance of US$1 million, approved in May 1984, supported the reform process (Annex XIII). It is financing final plans for the physical and institutional rehabilitation of SONELEC and EMN and the start-up of project activities. Maintaining the momentum achieved by the Government's reform program, financing is being provided to prepare terms of reference for sector and enterprise studies, engage technical advisors, and equip CRSP. The Second TA Project may also be used for bridge financing of urgent studies required by the Ministry of Planning on sector issues. 45. IDA proposes to support the Government's two-phase sector reform program. This first project will initiate the reform process, prepare the details of the sector strategy and meet the emergency needs  - 17 - of three selected enterprises. Depending on the success of this first phase, a project constituting the second phase could extend reforms to other enterprises. A key part of IDA's role will be to assist the Government in mobilizing and coordinating other donor support for its reform program. PART IV - THE PROJECT 46. In 1981, the Mauritanian Government confirmed its request to the Association for assistance in its public enterprise reform program. The appraisal mission took place in October 1983, based on preparation financed under the Second TA Project (para 39). Negotiations were held from February 19 to 22, 1985 in Washington, D.C. with a Government delegation led by Mr. Mohamedou Ould Michel, Economic Advisor to the Minister of Planning, and including the Directors of the three enterprises selected. Supplementary data on the project are provided in Annex III. A staff appraisal report, numbered 5193-MAU, is being circulated separately to the Executive Directors. Rationale for Bank Group Support 47. The rationale for the Association's involvement in the reform of the public enterprise sector is based on three key considerations. Through the Association's past technical assistance efforts, confidence has been built-up within the Government on the Association's ability to be of help on the subject. Second, without the Association's lead other donors are reluctant to support the Government's rehabilitation program in light of its complexity and far-reaching implications. Last, enterprises that provide essential public services and that were in danger of total collapse require immediate support. Project Objectives 48. The proposed project will assist the Government in implementing the first phase of its public enterprise sector reform program. More specifically, the project is designed to: restructure and rationalize the sector by reclassifying, closing down, privatizing and reorganizing enterprises; prepare and enact key changes in the sector's legal and institutional structure to streamline it, decentralize responsibility and accountability to enterprises, and institute a process of program contracts; design and execute changes in public enterprise price, investment and labor management policies; begin the rehabilitation of two key public service enterprises - SONELEC and EMN - and provide technical assistance for OPT; and prepare the subsequent phases of the public enterprise sector reform program.  - 18 - Project Description 49. The proposed project consists of (a) a component focussing on the management of the sector reform process and (b) three components to provide emergency support including physical rehabilitation of existing facilities, technical assistance and training to SONELEC and EMN and technical assistance and training to OPT. The key features of these components are described below. 50. Sector Reform. This component will help implement the first phase of the Government's reform program by developing sector policies, coordinating the sector restructuring process, and strengthening the responsible management and control institutions. The project will finance technical assistance (45 person-months) and training to CRSP to develop public enterprise policy, coordinate rehabilitation efforts, and monitor sector performance. Additional training will be provided to staff of "Directorate for Administration and Financial Supervision" in the Ministry of Finance, which is responsible for supervising the enterprises' financial performance. As support for the Government's reform program, the project includes the financing of consulting services and specialized expertise (82 person-months), to undertake studies of sector issues identified by the Government (salary policy and structure, training needs, monitoring systems, and budgetary systems) which will lead to improvements in those areas. The Government will also obtain advice and assistance to liquidate and privatize selected enterprises and to extend its restructuring to other sectors (fishing, banking, EPAPs) as well as to determine appropriate action for specific enterprises. Funds are allocated for technical assistance to the Ministry of Planning and enterprises in preparing the first program con- tracts for SONELEC and EMN. Other legal reforms will be carried out as identified in the enterprise action plans and for the sector as a whole to continue to refine and improve the present legal structure. As a means of identifying weaknesses and verifying the finances of SONELEC, OPT and EMN, external audits will be undertaken of their accounts starting with FY84. CRSP's accounts will also be audited. Technical assistance will be provided to prepare the next phase of the Government's rehabilitation program (45 person-months). This will include diagnostic studies of other enterprises, refinement of plans for enterprises already identified for rehabilitation, and further sectoral reforms. However, progress, satisfactory to IDA, to be achieved on the implementation of the sector reform program would be a condition of disbursement for these studies (Section 4(b) of Schedule 1 of the draft DCA). In support of these activities, the project will also finance office furniture, equipment, materials and vehicles, and the upgrading of office space for CRSP. In addition, there is provision for CRSP's operating expenses (travel, maintenance, services, supplies) including engagement of local consultants and staff for a four-year period. 51. Emergency Support for SONELEC. This component provides support to SONELEC to rehabiliuvte existing facilities, undertake technical studies, staff training and technical assistance to strengthen  - 19 - the organization and manage the rehabilitation process. The project will finance a technical assistance team (110 person-months) responsible for preparing details of the physical rehabilitation, developing systems and procedures, establishing internal controls, assessing staffing needs, and assisting management in carrying out its action plan and preparing its program contract with the Government. Funds are also available to finance specialized short-term assistance (29 person-months) for a tariff study and technical studies. Training (20 person-monthly) in identified areas will be provided to staff in operating entities in the region and abroad. The project also includes rehabilitation of SONELEC's physical facilities. Four separate sub- components were prepared for rehabilitation--water services and electricity services respectively in Nouakchott and Nouadhibou. Under this component, the project finances urgently required spare parts and equipment, meters and house connections, vehicles, and maintenance equipment, plus upgrading of physical connections, distribution networks and generating capacity. In the case of the Nouadhibou water system, the project will also finance the replacement of the main transmission pipeline. 52. Emergency Support for EMN. Support will be provided for physical rehabilitation of EMN's existing facilities, and technical assistance in order to strengthen the institution and to plan subsequent phases of rehabilitation. The project will finance technical assistance (96 person-months) comprising four specialists in the areas of adminis- tration, finance and accounting, maintenance and port operations, in order to supervise rehabilitation works, establish work methods and procedures, develop accounting and management information systems, provide on-the-job-training to EMN staff and assist management in preparing its program contract and carrying out its action plan. During negotiations, it was agreed that these specialists, selected in accordance with terms of reference acceptable to IDA, will have been appointed, and at least three taken up their positions as a condition of credit effectiveness (Section 6.01(i) of the DCA). Short-term advisors are also included to undertake technical, economic and financial studies. Additional staff training will be provided to EMN's senior management and staff in areas of administration, port operations, and maintenance. Considering that EMN will operate the existing port until 1987, when the new port is to open, the physical rehabilitation en- visaged under this component includes only repairs to Dort infrastructure. The project will finance repairs to the wharf plus equipment (forklifts, cranes, tractors, etc.), spares, and maintenance equipment that will subsequently be transferred to the new port. 53. Technical Assistance to OPT. The project will finance consultants to improve OPT's financial management and data processing systems and to prepare a detailed medium-term rehabilitation plan (39 person-months). A major element of these improvements will be an accounting system capable of separating postal and telecommunication accounts. Assistance includes acquisition of computer equipment, staff training (20 person- months), consulting services to develop and  - 20 - implement these new systems, and assistance to advance OPT's rehabilitation plans, especially with regard to organization and maintenance management. It will also examine OPT's financial prospects, taking into account recent investments. The appointment of a task force leader, acceptable to IDA, to supervise the consultants, and to plan and coordinate the OPT component's activities is a condition of disbursement for that component (Section 4(c) of Schedule 1 of the draft DCA). Implementation 54. The project will be implemented jointly by the Ministry of Plan and the three enterprises. Responsibility will be given to each enterprise respectively to execute the component supporting that enterprise's rehabilitation. These efforts will be monitored by CRSP, which will act as overall coordinator for the project. Specifically, CRSP will be responsible for: (i) undertaking studies of sector issues; (ii) devising systems to provide a base of financial and operational data; (iii) developing changes to the sector's institutional environment; (iv) coordinating the implementation of the Government's reform measures; (v) fulfilling the responsibilities of the Ministry of Planning in program contracts; (vi) preparing subsequent steps of its rehabilitation program; and (vii) reporting upon the project progress. 55. CRSP would be equipped and staffed under the project. The Government has enacted the appropriate legal instruments to create CRSP and has appointed a director acceptable to IDA. The appointment by Government of a chief advisor to CRSP and key professional staff under terms and conditions acceptable to IDA is a condition of credit effectiveness (Section 6.01(d) of the draft DCA). In addition, CRSP will collaborate with other ministries, especially the Ministry of Finance, in areas dealing with implementation of policies and institu- tional reforms, accounting training, budgets, and sector monitoring. Project implementation began in mid 1984 and is expected to 'Last until mid 1988, with disbursements continuing into FY1990. Project Costs and Financing Plan 56. The total cost of the project, net of taxes and including the PPF advance of USS 1.0 million, is estimated at about US$29.2 million (UM 2.3 billion equivalent) with a foreign exchange component of about US$ 25.2 million (UM 2.2 billion). It is the Government's intention to exempt investments under the project from duties and taxes. Estimated costs for each project component are given in the project summary, with details provided in Annex IV. Overall, contingencies amount to 7 percent for physical and 22 percent for price, for a total of 29 percent of base costs. Physical contingencies are based on provision of between 5 percent and 10 percent of the cost of physical works and equipment. Price contingencies are estimated at 5 percent for 1985, 7.5 percent for  - 21 - 1986, and 8 percent for each year thereafter for foreign costs, and 10 percent each year for local costs. 1/ 57. The project is to be financed by an IDA credit of SDR 16.9 million (US$16.4 million) covering 56 percent of total project costs. In addition, the SONELEC component will be cofinanced by CCCE with a contribution of FF 25 million (US$3.0 million) for the Nouakchott electricity component and a French bilateral grant from FAC of FF 7.3 million (US$0.9 million) for technical assistance. EIB has agreed to appraise the water and electricity subcomponents at Nouadhibou, for a total of about ECU 6 million (US$4.8 million). The European Economic Community has approved a special credit to the Government from the EDF of ECU 1.6 million (US$1.3 million) to finance, in parallel, cargo handling equipment, physical repairs and spare parts for the EMN component. CCCE has already approved its loan to SONELEC of FF 89 million (US$11.0 million) at 5.5 percent for 16 years, including 6 year grace period, which covers the SONELEC component under this project plus funds to finance new generating facilities. The potential EIB loan of ECU 5-6 million (US$4.0 million) would be from their risk capital fund, lent to Government at about 2.5 percent for 20 to 25 years, for onlending to SONELEC on slightly harder terms. The EDF loan is under special conditions, that is, 0.75 percent commission fee and repayment over 50 years including 10 years grace, which will be passed on to EMN from Government as equity. The participating enterprises and Government will finance 12 percent of total costs. IDA's proposed credit would finance 100 percent of foreign costs of the Sector Reform and OPT components, share the costs of the EMN component (IDA finances some equipment, technical assistance, training and studies) and the SONELEC technical assistance sub-component, and meet 100 percent of the foreign cost of the water sub-component in Nouakchott. The German KfW has indicated its interest to participate in the financing of the SONELEC component (Nouadhibou water system), and has programed up to DM 8 million for that purpose. Given the time required by KfW for the appraisal and presentation to its board, it was agreed during negotiations between IDA, KfW, and the Government that: (a) IDA increase its financing to enable total coverage of project costs; (b) if and when the KfW loan is approved, all three parties will agree on goods and services, not yet ordered, and eligible to KfW financing; and (c) the amount corresponding to the goods and services in (b) would be cancelled from the IDA credit. 1/ Local costs (14%) are mainly wages which are projected not to increase as quickly as local prices.  - 22 - Revolving Funds 58. To expedite implementation of the sector reform component, the Government would establish a Specir.l Account in a local bank as a revolving fund for IDA's contribution to the sector reform component. This account would be financed with an initial deposit of US$250,000 from the proceeds of the proposed credit upon credit effectiveness. Similarly, a Borrower's Account of UM 750,000 (US$10,000) would be established in a local bank to finance the local component of CRSP's operating costs. Replenishment of the Borrower's Account would take place quarterly. Details of the operation and establishment of this fund were agreed upon during negotiations. Its funding will be a condition of credit effectiveness (para 6.02(g)). Budgetary provision for CRSP's local costs would be inscribed in the annual operating budgets for the Ministry of Planning, starting in 1985. Assurances that adequate provision for 1983 :5s been made is a condition of credit effectiveness (para 6.02(a)). The enterprises will follow their usual business banking practices for transactions under the project. On-lending Arrangements for the IDA Credit 59. The Government will on-lend that portion of the IDA Credit to each enterprise corresponding to its respective component excluding the financing provided under the project for external audits which will be passed on to the enterprises as grants. The terms and conditions of this on-lending, as agreed during negotiations and presented in the Project Summary, should be consistent with the implementation period and overall useful life of the works performed and goods acquired, and at -he Bank's lending rate at time of Board presentation. The Government will bear the foreign exchange risks. Signature of the three on-lending agreements (between the Government and each enterprise) would be a condition of effectiveness (Sections 6.01 (a), (b) and (c) of the draft Development Credit Agreement). Accounts and Audits 60. Each agency would establish separate accounts for its component. During negotiations agreement was reached that the enterprises' and CRSP's accoubts would be audited annually by independent auditors, acceptable to IDA, in accordance with appropriate auditing principles. The reports would be submitted to IDA by each implementing agency within six months of the close of its fiscal year. Finances 61. Deta'led analysis has been made of the financial prospects of the major beneficiaries under the project. In the case of SONELEC and EMN, their present financial situations require cost reductions and tariff increases in order for the enterprises to be financially self sufficient, service their debts and contribute to future investments.  - 23 - SONEL'fC has agreed co measures to reduce its operating costs which will improve its financial position considerably, and to increase its average tariffs, in light of inflation and foreign exchange fluctuations, as a condition of effectiveness (para 6.02 tb) of the draft DCA). Projections, prepared by the appraisal mission, indicate that increases in average tariffs in 1985 to compensate for inflation and the effects of devaluation (estimated at about 16 percent), combined with improvements in SONELEC's operating efficiency, will be sufficient to put SONELEC into a better liquidity position in 1985 so that it can cover operating costs and service debts. As for EMN, its average tariffs had been low relative to comparable ports in the region but were recently raised by 25 percent across-the-board. Various other ports charges were also raised at the same time and new charges added. It was agreed during negotiations that EMN would increase tariffs as necessary in order to achieve an operating ratio of 65 percent starting in 1986. Agreement was reached during negotiations on the attainment of specific financial covenants which require the establishment of adequate fees in the case of SONELEC and OPT based on a general price covenant, and satisfactory operating rates for EMN so as to enable these enterprises to reach financial self-sufficiency, in light of inflation and the results of proposed tariffs studies, combined with the measures to improve the enterprises' efficiency (Section 4.07 of the draft Development Credit Agreement and Sections 4.03, 4.04, and 4.03 respectively of the draft Project Agreements for SONELEC, OPT and EKN). Procurement 62. For items financed respectively by CCCE, FAC, EIB, EDF, and KfW (para 57) the procurement policies and practices of these organizations would apply. Procurement of goods and services to be financed by the proposed IDA credit would be in accordance with Association's guidelines. Consultancy services and technical assistance posts will be filled in agreement with the Association guidelines. Contracts for technical assistance in SONELEC amounting to US$0.9 million and in EMN amounting to about US$0.7 million equivalent have already been awarded. For purchases of less than US$10,000 for minor goods, spare parts and office equipment, implementing agencies would be permitted to shop internationally or locally, following receipt of three quotations. Cumulative ceilings of US$100,000, US$50,000, US$20,000 and US$50,000 have been set for such purchases respectively for SONELEC, EMN, OPT and CRSP. Contracts less than US$100,000 may be procured following local competitive bidding in which foreign firms may partici- pate and in accordance with procedures satisfactory to the Association, up to cumulative ceilings of US$250,000, US$2,0,000, and US$100,000 respectively for SONELEC, EMr and OPT. All civil works and major equipment will be grouped wherever possible into contracts over US$100,000 for SONELEC and EMN and would be procured following ICB procedures. There would be limited international competitive bidding for OPT's purchase of computer equipment. Provision has been made to allow retroactive financing of up to US$200,000 for comiputer equipment and related technical assistance acquired by OPT between March 1, 1985  - 24 - and credit signature, subject to IDA's approval. Certain spare parts and equipment may be purchased directly to ensure compatibility while SONELEC will undertake physical works under force account. All contracts over US$20,000 each will be subject to prior Bank review, with smaller contracts subject to selective post-award review. It is estimated that over 90 percent of the total value of all contracts let for financing by IDA will be reviewed a priori. A procurement table is shown in Annex V. Disbursements 63. The proceeds of the Credit are estimated to be disbursed as shown in the Project Summary and Annex VI. It is anticipated that the project will disburse over a five year-period, reflecting the substantial technical assistance element of the project. All disbursements from the Credit account would be fully documented except for contracts of less than US$10,000 equivalent, plus EMN's office rehabilitation, training, and CRSP's operating costs and office upgrading, which would be disbursed against statement of expenditure certified by CRSP's Director or the enterprise Director-General. The supporting documentation would be held at CRSP and the enterprises for review by IDA and external auditors. The total amount of such disburse- ments is estimated at US$750,000. Reimbursement applications should not be submitted for less than US$20,000. Benefits and Risks 64. The reform of sector management should lead to benefits to the public enterprise sector as a whole. By instituting more rational enterprise/government interaction, the operations of public enterprises should be made more efficient. The restructuring of the sector, by closing certain enterprises and the sale and reorganization of others, would lead to reduced Government subsidies and a smaller burden on public finances. The rehabilitation of public enterprises providing essential services, should bring users higher levels of service. Successful rehabilitation of these enterprises will provide an example to other enterprises with effects spreading throughout the sector. While the project is justified on its institutional objectives, tangible benefits will be realized through the rehabilitation of SONELEC and EMN. The economic ra:e of return (ERR) calculations, based on revised tariff levels, ir.cicate that both these components are economically Justiif.ed. For SONELEC, the ERR has been estimated to be 44 percent for the component as a whole. For EMN, the ERR has been estimated to be 68 percent. The average economic rate of return on these components, which account for 80 percent of total project costs, is estimated at 44 percent. 65. From zn engineering perspective the project entails very few risks. However, the project's more serious risks lie in its institutional reforms and strengthening, given Mauritania's weak absorptive capacity and institutional base. The proposed approach (para  - 25 - 41), which takes these risks into account, is to use this first project as an opportunity to learn more about the sector's problems, to develop Government's institutional capacity, and to provide Government with the means to measure the effects of its rehabilitation program. The expected satisfactory results of the project should encourage Government to proceed further and to maintain its resolve to reform the sector. However, intensive supervision by the Bank will be necesary and it is estimated that in at least the first two years about 30 staff-weeks of time annually will be required for this purpose. PART V - LEGAL INSTRUMENTS AND AUTHORITY 66. The draft Development Credit Agreement between the Islamic Republic of Mauritania and the Association, the draft Project Agreements between the Association and OPT, EMN, and SONELEC, the Recommendation of the Committee provided for in Article V, Section I(d) of the Articles of Agreement of the Association, are distributed to the Executive Directors separately. 67. Special conditions of the draft Development Credit Agreement are listed in Section I of Annex III of this report. Special conditions of Credit effectiveness comprise: (i) The Government to include adequate budgetary allocations on its 1985 Budget for the operation of CRSP, for the settlement of arrears due to OPT in 1985 (para. 31); (ii) Government to approve a new organization structure for SONELEC, satisfactory to IDA (para. 37); (iii) EMN to appoint four specialists, and three of them having effectively taken up their positions (para. 52); (iv) the Government to approve a tariff increase for SONELEC, to compensate for inflation and devaluation (paras. 32 and 61); (v) the Government to appoint a technical advisor and key professional staff for CRSP (para. 55); (vi) the execution of the subsidiary loan agreements between the Government and OPT, EMN, and SONELEC (para. 59); and (vii) the Government to establish, in a commercial bank a revolving fund and make the initial deposit (para. 54). Disbursement conditions are that: (a) the funds allocated for preparation of the next phase of Government's rehabilitation plan will be contingent on progress, satisfactory to the Association, on the implementation of Government's reform measures (para. 50; the funds allocated for the OPT component will be contingent or he appointment by OPT of a project task force leader (para. 53).  - 26 - 68. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI - RECONMENDATION 69. I recommend that the Executive Directors approve the proposed Development Credit. A.W. Clausen President Attachments Washington D.C. March 1985  -27- ANNEX I T A Le UA PACE I Of 5 MAUKITANIA -SOCIAL INDICATORS DATA SHEET MAURITANIA RerPRrNcE cROUPS (UKIGHTED AVIRAG5S /a MOST (MOST RECENT ESTIMATE) tb RECENT NIDDLC INCOMC MIDDLE INCOME i9601 197d1k ESTIHATILk AFRICA S. OP 4AHARA N. ArRICA & MID EAST AM (TCOUS4ID S. CI) TOTAL 1030.7 1030.7 1030.7 ACRICULTURAL 395.1 395.3 394.6 cU PM CAPITA (liS) 100.0 210.0 470.0 1112.9 1149.6 Bil CSwiM M CAPITA (KLLOGRAMS OF OIL EQUIVALENT) 12.O 115.0 132.0 529.0 622.1 POMULTM IED VIL STArSTICS POPULATION,MID-YeAR (THOUSANDS) 970.0