Senegal - Industrial Sector Restructuring Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P4691-SE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF TRE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 25 MILLION TO -vHE REPUBLIC OF SENEGAL FOR AN INDUSTRIAL SECTOR RESTRUCTURING PROJECT November 25, 1987 This document has a feskicted disbUiXM and way be used by o aly m tbe performance of thei offil dte Its contuen may s othemwise be dBookasd Wodd Da  CURRENCY EQUIVALENTS Currency Unit - CFA Franc (CFAF) 1/ US$1.0 CFAF 314 CFAF 1 million US$3,185 SDR 1 US$1.32109 WEIGHTS AND MEASURES 1 meter (m) 3 3.28 feet (ft) 1 kilometer (km) - 0.62 miles (mi) 1 kilowatt (kW) - 1,000 watts (W) 1 square kilometer (1km2) 0.39 square mile (sq mi) 1 hectare (ha) a 2.47 acres (a) 1 metric ton (t) - 2,205 pounds (lb) 1 kilogram (kg) - 2.2 pounds (lb) ABBREBVIATIONS AND ACRONYMS ASACE - Agence sensgalaise d'assurance crddit A l'exportation (Export Credit Insurance Agency) BCEAO - Banque centrale des Etats de l'Afrique de l'Ouest (Central Bank of West African Countries) CICES - Centre international du commerce extdrieur du S4n6gal (Senegalese Center for External Trade) SOPISEDIT - Soci4t4 financi&re s6n6galaise pour le d4veloppement de I'industrie et du tourisme (Development Bank for Industry and Tourism) SSE - Small-Scale Enterprise FISCAL YEAR July 1 - June 30 1/ The CPA Franc (CFAF) is tied to the French Franc (FF) in the ratio of PF 1 to CFAP 50. The French Franc is currently floating.  FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL INDUSTRIAL SECTOR RESTRUCTURING PROJECT CREDIT AND PROJECT SUMMARY * Borrower: Government of Senegal Beneficiary: - ManufacturirZ enterprises - Displaced -loyees of the industrial sector - Various agencies supporting the industrial sector Amount: SDR 25 million (US$33 million equivaleft) Terms: Standaid, with 40 years maturity Onlending Terms: - The apex line of credit would be made available by the Central Bank to participating banks at 5.02 p.a. for onlending to beneficiary enterprises at 9.5Z p.a., with maturities of 3-13 years and grace periods of 1-2 years. F Funds for the establishment of small-scale enterprises by displaced workers would be onlent to SOFISEDIT at 3.5% p.a., and to final beneficiaries at 8.52 p.a., with maturities of 3-6 years including un to one year of grace. As with the above line of credit, the foreign exchange risk would be borne by the Government. Financing Plant Government US$ 1.2 million IDA US$33.0 million Internal Financing/Subproject Sponsors (Line of Credit) US$ 6.3 million Subproject Sponsors (SSE lending scheme) US$ 0.3 million TOTAL US$40.8 million Economic Rate of Return: A minimum Economic Rate of Return of 102 is required for all investment subprojects under the line of credit. Staff Appraisal Report: Report No. 6947-SE Man: IBRD 20620 This document has a restricted distribution and may be used by recipients only in the perfo, Z.,; of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF SENEGAL FOR AN INDUSTRIAL SECTOR RESTRUCTURING PROJECT 1. The following memorandum and recommendation on a proposed devel- opment cxedit to the Republic of Senegal for SDR 25.0 million (US$33 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms, with 40 years maturity, and would help finance an industrial sector restructuring project. 2. Background. The Senegalese industrial sector, one of the most Xlvanced in the region, accounts for 302 of the country's GDP and employs 202 of the formal sector labor force. It comprises about 300 enterprises, most of which are privately owned. Agro-industries, which include the export-oriented groundnut and fish processing industries as well as the import-substituting sugar industries, are the most important and account for nearly one half of the sector's value added and employment. The textile industry, using local cotton represents 152 of the sector's value added and 1O0 of its labor force. Other industries operate in the metal, mechanical, paper and construction materials subsectors. 3. The industrial sector is characterized by minimal diversification and integration and its performance has been disappointing. Growth in industrial value added has been slow (4.32 p.a. in 1964-1984). Capacity utilization is low, averaging 60? industry-wide, particularly in textiles, groundnut oil milling and mechanical industries. Enterprise profitability has also been low and many enterprises have become heavily indebted. 4. This poor performance is partly attributable to inappropriate sector policies which included an overly protective combination of tariff barriers and quantitative restrictions, an inefficient system of incentives granted on an ad- oc basis to individual enterprises, ineffective export promotion instruments and a cumbersome regulatory framework. With the support of the second and third Structural Adjustment Credits, the Gov- ernment has undertaken a comprehensive program of reforms. To ration- alize the protection system, it has: (a) reduced the average nominal level of duties to about 402 and narrowed the tariff range; (b) initiated a pro- gram to gradually remove all qualitative restrictions; (c) undertaken to progressively generalize the common regime to all enterprises by (i) substantially restricting the scope of reference prices to counter underinvoicing and dumping practices; (ii) eliminating product-specific exemptions (except as justified on social grounds); and (iii) discontinuing the practice of enterprise zonventions, and phasing out existing ones. The investment code was revised to set clear eligibility criteria, eliminate the bias towards capital intensity and induce efficiency through a system of declining benefits. In addition, procedures to grant investment code benefits have been streamlined. To promote industrial exports, the Government has (a) simplified the duty drawback system and other import procedures including custom formalities; (b) improved the export subsidy system; and (c) undertaken to restructure the Export Promotion Agency (CICES) and the Export Credit Insurance Agency (ASACE). Finally, to improve the operating conditions of private enterprises, the Government has taken steps to improve the labor law to enhance their flexibility in adjusting their work force to economic conditions and has initiated studies  - 2 - to improve labor productivity. Price controls are being relaxed in line with the removal of quantitative restrictions and administrative constraints to internal distribution are being eliminated. S. Rationale for IDA Involvement. Through financial and technical assistance under two Structural Adjustment Credits, IDA has been instru- mental in initiating the Government's industrial policy reform program. The proposed project is a logical complement to this program, and is necessary to sustain the momentum of the reform and ensure that its re- structuring objectives are met. The restructuring of Senegal's industrial stctor will require investments of over US$40 million. The proposed project will make a substantial contribution towards meeting these financial requirements, alongside BCEAO's rediscount and other resources made available by bilateral donors. 6. Project Objectives. In order to adjust to the new incentive system a number of enterprises will have to restructure and modernize their operations in an effort to regain competitiveness on both domestic and foreign markets. The reforms are also expected to foster a new generation of viable investments in the industrial sector, while inefficient activ- ities are bound to be phased out. The project aims at facilitating these adjustments byt (i) financing the restructuring of existing enterprises as well as new viable investment opportunities; (ii) supporting programs of assistance for displaced employees to alleviete the social cost of the reform; and (iii) strengthening the institutions involvred in the adjustment process, especially those dealing with export promotion. 7. Proiect Description. In line with the above objectives, the project would include: (a) an Apex line of credit for an amount of US$25 million, located at the Central Bank (BCEAO) to finance, through the banking system, fixed investments and working capital requirements of existing and new enterprises; (b) a retraining and small-scale enterprise (SSE) lending program for displaced employees of the industrial ector (US$5 million); and (c) a technical asststance component (US$3 Aillion) to: (i) strengthen the Ministry of Industry's capabilities; (ii) restructure export promotion institutions (ASACE and CICES); and (iii) assist BCEAO in operating the line of credit, as well as other institutions involved in the administration of the retraining and SSE lending programs. The total cost of the project is estimated at US$40.8 million equivalent with a foreign exchange component of US$28.9 million (712). A breakdown of the project cost and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursement, a-d the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group opezations in Senegal are given in Schedules C and D, respectively. A map is attached. The Staff Appraisal Report No. 6947-SE, dated November 25, 1987, is also attached. 8. Actions Asreed Upon. Durina negotiations, agreements were reached with the Government on: (i) the onlending arrangements for the line of credit, eligible financial intermediaries, eligibility criteria for investments, subloan processing procedures, and terms and conditions; (ii) the retraining scheme for laid-off employees; and (iii) terms and conditions, eligibility criteria, and procedures for administering the SSE lending scheme for laid-off workers. Conditions for credit effectiveness are: ti) the signing of a protocol between the Government and the Central Bank specifying arrangements for administering the line of credit; (if) the  - 3 - iswiance by the Central Bank of a circular to the banking system, outlining the main features of the line of credit, including terms and conditions, eligibility criteria and administration procedures; and (iii) the signing of subsidiary relending agreements between the Central Bank and at least two participating banks, on terms and conditions satisfactory to IDA. Specific conditions of disbursement are: (i) for each participating bank, the signing of a subsidiary relending agreement with the Central Bank on terms and conditions satisfactory to IDA; (ii) for the SSE lending program, the signing of a subsidiary agree.ment between the Government and SOFISEDIT specifying terms and conditions, eligibility criteria, and procedures for administering the program; and (iii) for the technical assistance to support the export promotion agencies (ASACE and CICES), IDA's approval of their respective restructuring programs. 9. Benefits. The project would facilitate the process of adjustment of the industrial sector to the new incentive system. The provision of financing under the line of credit would sustain modernization efforts of existing enterprises, thus helping them regain or ma4ntain cuApetitiveness on both domestic and export markets, as well as foster the emergence of new industries. The reorganization of the export promotion and insurance agencies would enable the develonment of new markets abroad. The provision of technical assistance to the ministry of Industry would enhance its capacity to effectively implement the policy reforms. Finally, assistance to employees for retraining and setting up SSEs would alleviate the social cost of the reforms, thus enhancing their sustainability. 10. Risks. A risk, which could result in slow disbursement of the line of cre.it, is a possible reluctance on the part of the banking system to increase its exposure to the industrial sector perceived as more risky than traditional sectors such as commerce. To minimize this risk, terms and conditions of the line of credit (including the lending spread) have been structured in such a way as to be attractive to the banks. Another risk is that investments may be slow to materialize on account of the initial uncertainty caused by the reformed policy framework and lower effective protection. It is indeed expected that the line of credit will initially be used mostly to finance the restructurLig and modernization of existing enterprises. After the initial adjustment, the revised incentive system should, however, provide a sustainable basis for the development of new ir.dustrial investment opportunities. 11. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. November 25, 1987  - 4 - Schedule A SENEGAL INDUSTRIAL SECTOR RESTRUCTURING PROJECT ESTIKATED COSTS AND FINANCING PLAN Estimated Costs a/ Local Foreign Total ----------(US$ million)- Technical Assistance 0.9 2.4 3.3 Industrial Investments (Line of Credit) 6.3 25.0 31.3 Retraining and SSE Lending Programs 4.7 1.5 6.2 TOTAL 11.9 28.9 40.8 a/ including US$4 million of taxes and duties. Financing Plan Local ForeiRn Total --- --(US$ million)--------- Government 1.2 - 1.2 IDA 4.1 28.9 33.0 Internal Financing/ Project Sponsors 6.6 - 6.6 TOTAL 11.9 28.9 40.8  - 5 - Schedule B SENEGAL INDUSTRIAL SECTOR RESTRUCTURING PROJECT PROCUREMENT METHOD A"D DISBURSEMENTS Procurement Method Procurement arrangements are as follows: (a) Industrial Investments and SSE Proaram. Procurement under the apex line of credit would not be suitable for International Competitive Bidding given that proceeds will primarily finance restructuring investments involving partial replacement or upgrading of existing equipment and spare parts by private sector enterprises. Nor, because of their very small size, would investments uader the SSE lending program. Procurement for these components will be in accordance with normal commercial practices, with international shopping through at least three price quotations for imported items costing over US$50,000. Participating banks (including SOFISEDIT for the SSE lending program) will be required to maintain records of procurement. (b) Consulting Services to be financed under the project would be procured in accordance with the Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency. (c) Equipment (computer and vehicles) to be f4nanced under the technical assistance component would be procured by shtiping after receipt of at least three quotations. Disbursements Category Amount Z (US$ million) Line of Credit 25 100 (up to 80Z of subproject c at) Retraining and SSE Lending Program (a) Retraining of displaced employees 2 100 (b) SSEs 3 100 (up to 90Z of subproject cost) Technical Assistance 3 100 (equipment, vehicles) Estimated IDA Disbursements IDA Fiscal Year 88 89 90 91 92 93 94 95 96 97 98 ---------------------(US$ million)-------------------- Annual 0.3 2.2 4.1 5.0 5.2 4.8 4.3 3.1 2.2 1.5 0.3 Cumulative 0.3 2.5 6.6 11.6 16.8 21.6 25.9 29.0 31.2 32.7 33.0  - 6 - Schedule C SENEGAL INDUSTRIAL SECTOR RESTRUCTURING PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare: 21 months (b) Prepared by: Government with IDA assistance (c) First IDA mission: March 1986 (d) Appraisal mission departure: June 1987 (e) Negotiations: November 3, 1987 (f) Planned date of effectiveness: February 1988 (g) List of relevant PCRs and r?ARs: Investment Promotion Project (PPAR No. 4488)  -7- Schedul D STATUS OF ORLD BANK OPERATIONS IN SElECAL _______________________ _____ ---- ----_-- Pag Iot 2 A. Statment of Dank Loans end IDA Crdit. (so of October 80, 1967) _______._____________._____________________________________________ Loan/Crodit Amount (US$ ailiIon) Undlo- Number Year Borrower Purpose (lose esne llations) burned SUventon Loans A Tventy-six Credits fully disbursed 834.38 CREDITS 991-SE 1980 Senweal Smell Rural Operations 11.99 0.45 1961-SE 1989 Senegal T.A. for Planning 6.89 0.80 1186-SE 1981 Seneal Investment Prootion 2.60 0.74 109W-SE 1981 Senega Forestry 9.9a 6.53 1176-SE 19S2 Snegl Agricultural Roserch 19.60 6.36 ISIS-SE 1988 Senal Rural Health 15.00 4.96 1828-SE 1908 Seneogl Petrolem Exploration 9.60 2.17 i86SE 1988 Senegl Ph... Ind. Dov. Eng. 7.70 0.98 1898-SE 1988 Senegal Second T.A.-Paeapubtlc 11.09 4.50 140e-SE 1968 Senegal E.S. Rural Dev. 16.10 6.68 1446-SE 1984 Sonogal Fifth Highway 19.76 2.09 SF-15-SE 1984 Senegal Fifth Highway 10.76 0.60 1456-SE 1984 Senegal T.A. fcr Urban Mlt. & Rehnb. 8.06 0.16 SF-18-SE 1964 Senegal TJ.. for Urban oat. & Rehab. 2.95 1.81 1459-SE 1964 Segal Dakar Containor Port 2.65 1.07 SF-14-SE 1984 Sen"al Dakar Container Port 4.86 1.91 1654-SE 1985 Senegal Elvn Centers Water Supply 24.00 11.94 1632-SE 1986 Seneal Irrigetihn T.A 4.90 4.01 1719-SE 1066 SeneIl First Energy Sector Rehab. 20.00 16.28 1714-SE 196 Seneal Second Telecomunication* 22.9e 20.67 1735-SE 1987 Senegal Pr 'mry Education Dev. 12.00 11.45 A0270-SE 1987 Seeal Jrd Structural AdJustmnt 39.76 18.37 1820-SE 1987 Seneal d Structural AdJustment 44.74 86.22 e 1986 Senegal Agriculture 28.67 28.67 TOTAL NMSBER OF CREDITS * 24 887.97 191.14 LOANS 1412-T-SE 1977 Senegal Petite Coto Tourim 8.90 0.29 1418-SE 1977 Senegal Petite Cote Tourism 5.80 0.41 1978-SE 1981 SOFISEDITInvestment Promotion .6.5 1.81 TOTAL NUMBER OF LOANS a 3 20.16 2.61 ae TOTAL (net approved) 092.40 of which has been repaid to the Bank (amount A interest) 89.67 Total now outetnding 602.7s Total undisbursed 193.15 a NOT YET SIGN0 e. TOTAL APPROVED, REPAYMENTS, AND OUTSTANDING BALANCE REPRESENT BOTH ACTIVE AND INACTIVE LOANS AND CREDITS.  Scetdule O Pogo 2 of 2 8. Statemanu of IFC Inv.tesnts (as of September 80, 1947) A-ount (USM *lI orn) Equity Investmnt-- Nuber Fiscal Year Obliger Type. of etusno Loan Ynvemtnt Total 2025-SE 1967 Societet Idustriell. Fortillsor Plant 2.45 1.01 5.48 d Enarei& du Senoegl 1972 BUD Senegal Vegetable Export - 6.84 0.84 1482-SE 1974 SOFISEDIT Development - 0.84 6.84 Financo Company 5O-SE 1t"6 Banque d8Hb%tat Money and Capital - 0.47 0.47 du Senegal, S.A. Market 510-SE 1960 Societe Hoteliore Tourism 8.W0 - 3.00 di Bfarac&i^A, S.A. 22-SE 1982 Industries Chiolqu.s Fertilizer 25.0 - 25.00 du Senegal 778-SE 1984 Atrtcan Soatood Fish Procair.g 8.20 0.98 4.13 Plant 88"-SE 19s SOTI6A-SIMPANIC Print Manufacturlng 2.94 - 2.94 Total gro3a comitJento 86.59 8.59 40.16 Loee cancellations, termination., repayment, calen and loose 17.66 1.86 19.72 Tctal comtitmenta now held by IfC 18.78 1.78 20.46  18 MAURIl SENEGAL jokIott INDUoTRIAL SECTOR RESTRUCTURING PROJECT 0/0 L'W9f3 i( Ng cX ST NO PAVED ROADS SYLOUS PAVED OADS UNDER CONSTRUCTION A - GRAVEL ROADS EARTH ROADS 09ue'6 \, RA LROAPS B,..4. REGION CAPITALS REGION BOUNDARIES Tiougo*e Ngaurone Iiguere - . - INTERNATIONAL BOUNOARIEb - Va 'A tAbayeclc Kayor , <. 8oboGaroe lt4nd DQrOu Bogo CAP-VERT' I OAKAR Rufisue '. NN* IOUR8EL ODogou Tad r*el, i ossos ...- - aou  / ,.1.m,r dugne AOLACK 8rke'oae  0 C ER N N'   / /. 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