Senegal - Second Public Works and Employment Project

Domte tof The World Bank FOR OFMICIAL USE ONLY MICROFICHE COPY Report No. P- 5741-SE Type: (PM) PEAN, L. / X33092 / J9 123/ AF5IN MEMORANDUM AND RECOMXENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT EQUIVALENT TO US$39 MILLION < TO THE REPUBLIC OF SENEGAL FOR A SECOND PUBLIC WORKS AND EMPLOYMENT PROJECT MAY 1, 1992 Thi docment has a restrictd distribution aDd way be used by reipients only in the performance of eir offkicd duties. Its contens may not otherwise be dislosed without World Bank authorization.  CUBMCY EUVALENTS Currency unit = CFA Franc (CFAF) US$1.0 = CFAF 278.7 CFAF 1 million = US$3588 SYSTEM OF WEIGHTS AND MEASURES Metric System July 1 - June 30 ABBREVIATIONS AND ACRONYMS A*DB Afrien Development Bank AGETIP Agence d'Ex6cution des Travax d'Intrgt Public contre le Sous-Emploi AMS Association des Maires du Sdndgal CIDA Canadian lIternational Development Agency ESAF Enhanced Struchtral Adjustment Facility FED Fonds Europeen de Developpement GDI Gross Domestic Investment GDP Gross Domestic Product GDS Gross Domestic Savings GNP Gross National Product GIE Groupement d'Interet Economique (3OS Government of Senegal ICB Interaional Competitive Bidding ICOR Incremental Capital Outut Ratio IPC nternational Finance Corporation ILO International Labor Organization IMP International Monetary Fund LCB Local Competive Bidding MIGA Multilateral Investment Guarantee Agency NGO Non-Governmental Organization ODA Official Development Assitce OECD Organization for Economic Cooperation and Development PER Public Expenditure Review PFP Policy Framework Paper PPF Project Preparation Facility SAL Structura Adjustment Loan SDA Social Dimensions of Adjustment SECAL Sectoral Adjustment Loan SFA Special Facility for Africa UMOA West Africa Monetary Union UNCDP United Nations Capital Development Program UNDP United Nations Development Program USAID United States Agency for International Development  FOR OMCIAL USE ONLY SECOND BUD=I WORRSiUND EN LQIDYMIEC CRED1 -AND ERQI SyUMMARY Borrower: Republic of Senegal Bmfidaer: nistry of the Economy and Fmnace Municipalides of Senegal C odkAiMAt: US$39 million Ierms: Sdard IDA terms, with 40 years maturity Eimnciang : Government: US$7 million VDA: US$39 million Municipalities: US$20 million Cofinancing: US$15 million TOTAL US$81 million lRate of RBunx: Not applicable Staff AMM Report No. 10421-SE This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not othewise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENATION OF THE PRESIDENT OF THE IPA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLC OF SENEGAL FOR A SECOND PUBLIC WORKS AND EMPOYMENT PROJECT 1. I submit for your approval the following memoranddum ad recomm ion on a proposed deopment credit to Senega for SDR 28.6 million, the equivalent of US$39 million on sadard IPA tm with a maturity of 40 years to help finance a second project for public works and employment. PART I: COUY POLICIES AND BANK CROU'S ASSISTAN STRATEY 2. Stuca Characteristics of the Economy. The Senegalese economy shares many characterstic with those of its Sahelian neighbors: limited naural resources; an agriculbtnul producton base that is deterioratn becmse of the adverse effects of poor weather and poor resource management policies and teciques; a high population growth rate (about 3.0% p.a.); and heavy dependence on externa funding. The domestic market is smal with a total population of about seven milion. Per capita GNP in 1991 was esdmated to be US$710. Economic policy in Senega has not co for poor resource endowment, and has, in the past, contributed to the laclduster ecnomic performance through encouraging a large public sector with a record of inefficient resource utilization, as reflected in the high ICOR. By the usual meas of social well-being, Senegal has fallen below the generally poor indicators for Sub-Saharan Africa as a whole Crable 1). 3. Despite considerabie efmrts at mode n, the economy is still dependent on traditional mainstays: millet cultivation and cattle raising for uomestic consumption, and groundnut production, fisg, and exploitation of phosphate deposits for exporL Agricultu production levels have barely reached those attained In the period before the 1983/84 drought and average rura incomes are lower in real tems than in 1960. Modern sector economic acvities, commercial facilities, and socia services are concenttd in Dakar and the coastal belt, resultig in important interregional diffences in economic potei and consumption patterns. h stagnadon of the modern private sector and slower growh of the public sector during most of the eighties have depresd urban incomes. With imited near-term potential for economic diversification, Senegal's economy is highly vulnerable to clmatic vagaries and adverse movements in inernational commodity markets. Lacking the rich agricutural potenti or mineral resources of other countries on the West African coast, Senegal's growth prospects will remain modest unless there is a significant improvemet in competitiveness. With more competitve productive sectors, the economy will be well-placed to take advantage of a favorable geographical location and an entepreneurial population to export light manfictu and services not only to the West Africa region but to European and North Ameican markets.  Table 1. Key Social hdicators 198Q 1990 SSA 1988 opulado (million) 5.7 6.9 463.9 %urban 35.0 37.5 28.0 Growth Rate % 2.8 2.9 3.1 Pe9ltYb Crude Birth Rate (per 1000) 46.4 45.5 47.2 Total Fertility Rate 6.S 6.5 6.7 Obrtbs/woma) Crude Death Rate (per 1000) 20.8 16.0 15,8 Infant Mortality (per 1000) 14.7 8.6 10.8 Life Expectncy at Birth (yrs) 45.2 48.0 50.6 Medical Care Population per physician (000) 13.1 17.0 4.8 Population per nurse (000) 2.0 2.8 2.5 % of dcildren immunized 17.0 70.0 n.a. Primary Enrollment Ratio 46.0 55.0 68.0 Pupil/Teacher Ratio (primary) 46.0 54.0 40.0 4. Senegal entered the eighties with serious maro-economic imbalances. The original causes were varied but included the loss in 1965 of the prefereltial treatment accorded to the country's agicultural exports to the EEC and a series of poor rainfal years in the mid-seventies. Further, in 1976-1978, a fortitous series of good rainfall and harvests and high world prices for commodity exports (phosphate and groundnut products) led to a short-lived export boom making for a time, the potal efects of the increase in oil prices. Consumption growth, both by the Government (6.5% p.a.) and the private sector (5.0%) outstripped the GDP growth rate of just over 3% p.a. recorded in 1974-1978. The savings rate showed a dramatic decline, falling from 12.3% of GDP in 1975 to less tm 1% of GDP by 1979, after which it tuned negative. The spurt in expenditure ignited by the boom was sustained by exal borrowing of the Government, used to finance massive investments, often in non-productive assets. Between 1975 and 1980, disbursed Government and Govermment-guaranteed debt on commercial terms increased more than two-fold to about US$452 million. Count Policies and efrae 5. Senegal is currently in the last year of a medium term-economic reform program (1985-92) supported by three IDA SALs (1986, 1987, and 1990), a Financial SECAL (1989), a Trnsport SECAL (1991), and an IfF ESAF (1986). The objectives of the program have evolved over the years. Initially, the emphasis - SAL It and mI- was on a generalized effort to correct imbalances and establish the conditions for suswtainable growth by improving efficiency in the public sector (better imvestment programming), public enterprise reform, and increasing private sector incentives (price and trade liberalization) in industry and agriculture. More recently, under SAL IV, the focus has been on improving the regulatory framework for productive activities and achieving reductions in  -3- domestic costs through Internal deflationary meawures, and thus to improve competitiveness. IToughout the period, structral adjustment measures have aimed at providing a enabling environment for economic activity (e.g., trade policy and administrative and regulatory reform) and facilitating a supply response through the removal of economic distortions and constraints. Gains have been made in liberalizing and stabilizing the economy: macroeconomic balances, specifically the public sector and extrnal deficit as wJI as overall resource balances have improved markedly and inflationary pressure has been kept low (see Table 2). Progress has also been made on restructuring the public enterprise sector and the financial sector, including privatization of banks and enterprises. These gains remain fragile. External balance improvements have come largely from import compression and some improvement in the average unit prices of imports while growth in the volume and value of exports has been minimal. The improvement in fiscal balance in particular tends to mask serious problems in public expenditure management and an allocation of resources which does not support long-term objectives. Overall, growth over much of the past decade has been much lower than the inherent potential, especially in view of the significant amounts of external development assistance the country has received during this period, particularly in the context of the structural adjustment program. 6. Public expenditure management (with the exception of public investment programming since 1985) has been characterized by increasing inefficiency and worsening imbalances in resource allocation and use. Overall, the recent pattern of expenditures has favored consumption over investments: the investment share of total expenditure feU from nearly 40% on average during the early part of the decade (1981-83) to 32% in 1989/90. In real terms, public investment fell by some 30% during the period. But not all activities were evenly affected, with large increases in relative share for General Public Services (250% over the period), and agriculture. Ihe share of health pditures increased by 38% and education by 6%, both from a low base, there was also a high proportion of recurrent expenditure contained in the education and health figures because of the convention of treating all project-related external assistance as capital expenditure. 7. Within recurrent expenditures, the downward trend was reversed in 1986/87 and, by the end of the decade, real recurrent expenditures were back to the level of tie early 1980s. A major cauos was the lage interest burden arising from the (largely foreign) borrowing in the wake of the commodity price and oil price shocks in the mid-to-late seventies (para. 4). Within these broad developments, some trends are worth highlighting: compared to real expenditures at the beginning of the period, recurrent expenditures on health fell by 26%, on defense by 5%, and on General Public Services by 9%. The public sector wage bill dropped by 6.3%, but expenditures on operations and maintenance fell by 24%. In the face of continued weaknesses in revenue mobilization, the relatively high aggregate volume of expenditures has perpetuated the existence of short-term budgetary gaps, the financing of which has become the main preoccupation of government, often displacing medium and longer-term development issues. Furthermore, the manner in which revenues have been raised, in particular the heavy reliance on high taxation of a shrinking formal sector base and of petroleum imports, has aggravated the lack of private sector competitiveness. Finally, isitutional weaknesses in the budgetary planning and execution process has inhibited the use of the budget as an effective instrument for economic mamagement and spending patterns have diverged significantly from stated priorities. 8. Given Senegal's membership in the West African Monetary Union (UMOA), management of the size and composition of public sector revenues and expenditures is the principal method by  -4- which the Goverment can affect overill demand and domestic prices as well as the relative prices of tradeables and non-tradeables. The conduct of fisca policy, as briefly described above, has frequently had a negative impact on these objectives. For example, the persistently high public sector wage bill results from both a buoyant demand for labor by the public sector (employment grew by about 8% in the 10-year period) and high average civil service salaries (on average Senegalese civil servants are paid nine times per capita GDP compared to three times in a sample of non-CPA Franc countries). This constitutes a major cost factor for non-tradeables. Public sector wage levels also tend to drive wages in the formal sector as a whole. Finally, at the aggregate level, the large share o' the public sector in G3DP reduces resources and increases costs for the private sector. High energy prices are a ease In point; another source of high costs for the private sector derives from the persistence of public sector deficits which has meant accumulation of arrears, reduced access to credit, and higher interest rt for the private sector. At the end of the eighdes, after five years of deflationary policies, with their inevitable losses in potential output and the poitical difficulties entailed, the competitiveness of Senegal vis-&-vis its trade partners and competitors had actualy deteriorated. 9. The red economy has responded unevedy. Savings performance has improved moderately. But investment has stagnated (see Table 2) and is barely at the level required for mere asset mainenance. During 1985-90, agricultural output grew at an average of 8.5% from a low, drought influenced base. This performance, as well as the recovery of the vegetable oil milling sector, was more than enough to offset stagnation in the mining, fishing, and construction sectors, which had led growth in the seventies. Overall activity in the formal modern m ing sector has continued to decline over the last few years and growth in tour.sm has slowed down due mainly to the relatively high cost of this service In Senegal. Overall growth, as measured by real GDP has averaged about 3.4% anualy during 1985-90 compared with the average of 3.2% over the first half of the 1980s. 10. The pictre that emerges is that of an economy trapped in an unsible, low level equilibrium, with key productive sectors stagnant or in decline. Improvement in competitiveness which is key to generating new growth remains an elusive goal. This performance needs to be contrasted with the sinificant amount of external financing that Senegal has received over the past decade. Total official development assistance grew at the rate of 7.4% over the period, and currently stands at about US$600 million per anm. Net of principal repayment, per capita assistance rose to about US$91 in 1989 from under US$50 at the tmn of the decae.e. This represens over twice the average received by other Sub-Saharan African counties. Senegal will continue to need external financing to confront its development challenges, but it is important that such financing be used effectively and efficiently in particular to provide the basis for weaning the economy from such high levels of eternal financing in the fture. 11. The generally poor performance and weak progress made towards restoring competitiveness of the Senegalese economy are pardy the result of poor implem on of an adjustment strategy which requis strong and disciplined Government commiment and a capacity to restrain expenditures. Key areas of the reform program (mostly related to effective resource mobilization, agricultu sector reforms, the restructuring of public expenditures - including the reduction of the size of the civil service, and liberalization of the labor market) remain to be addressed or implemented and some policy reforms implemented earlier have since been partly reversed (trade liberalization). The results also reflect the difficulties of restoring competitiveness through a substntial and continued reduction of domestic costs in a rapidly changing intenational evironment. This implies several years during which the economy operates well below its poteni and high social  - 5- cost, wbile other counties in the region and throughout the world have drasticaUy inereased their competitiveness. Table 2. Selected Economic Indicators. (in % except otherwlse indicated) _______________________ ~86/87 87/88 88/89 89/90 90/91 Real GDP growth 4.2 4.4 3.6 3.6 1.2 GDP Deflator (au dange) _SD 2.5 1.8 1.8 2.1 Ratios to GDP Exports 15.0 15.2 15.9 15.9 15.9 Imports 21.5 20.4 21.3 20.5 21.4 GDI 13.7 12.9 11.9 12.1 13.1 GDS 6.9 7.1 6.6 7.4 9.4 Current Acct. Balance -11.3 -10.2 -9.6 -8.8 -9.2 Budget Balancel/ - 2.6 -2.6 -4.1 -4.3 0.2 Debt Service/xorts 29.7 31.2 31.1 28.7 23.7 1Gros ODA (US$M) 639.5 639.0 642.5 686.0 Of which IDA 114.5 87.5 54.5 50.0 ODA per capita (US$) 95.6 92.7 90.5 90.0 Oveall fiscal balance, cashibas, exclng grants. 12. _ rowh __es_ndEcnomicI . In the meiwn:rm, even auming reasonably favorable developments in climate and terms of trade, the Senegalese economy can be expected to grow only marginally faster than the population. The physical constraints to development are not amenable to change in a medium-term perspective: improved soil and water resources management can affect agriculural production only gradually; mineral and fish resources are eurrentiy exploited at near-optmm rates; and posiuive results from implementng the recently-articulated population policy will come in the longer term. 13. Economic projections of the most likely development scenario - involving adequate rainfal (drought is an ever present risk), more efficient investment and faster usual growth of non- lraditional exports as a result of policy reforms under implementation and further debt relief - show modest GDP growth of about 3.8% per annum in the 1990s. If, contrary to the assumptions underlying these projections, the implementation of the reform agenda slows down or stagnates and if, as a consequence, external financing from donors were to drop to half (or less) of current levels, GDP growth could be no higher than about 2.3% per annum (implying falling income per capita) even with favorable rainfal and commodity prices. More vigorous efforts to address the compeWtiveness issue and to implement the reform agenda would, on the contrary, lead to faster growth.  -6- 14. In the bNgKr tm, Seegal's development potential continues to depnd on five fators: (a) an improved framework for intenational trade and continuing prosperity in OECD countries; (b) a much Improved domestic business enviroment conducive to private investment, including foreign ilvestment; (c) a productive, skilled labor force; (d) an early reversal of population growth trends; and (e) successful regional integration. If these conditions can be met, Senegal could take advantage of Its location, climate, and entrepreneurial population to develop expor of light manfctr and high-valued agro-industrial products and services. 15. The achievement of the growth targets ia para. 13 is predicated on favorable supply responses In agriculture and industry and on the capacity of the economy to generate resources for rehabilitation and new Imestment. For the major export crops, as well as ior raifed food crops, technical, Isthutonal, and environmental factors stUl represent important obstacles. Prospects for epanding fishing are limited. Finally, the expansion of the industrial sector will rely to a large extent on the revival of private sector activity and on the response by domestic and foreign investors to industrial incentives and to reduced costs of factors of production. 16. Continued investments in human resources development, in particular in education and health, would be required to create the productive labor force essential to long-term growth. In both sectors, adequate resource mobilization and cost containment through increased efficiency in service delivery and resource allocation should improve the quality of and access to basic services. Finally, sustining any improvemens in real per capita income will hinge on the ability of the Government to deal effectively with the difficult problem of rapid population growth. 17. The Government's povert alleviation strategy aims at improving access to key social services such as primary education and primary health, as the most cost-effective way of having a beneficial inmpact on the income-earning abilities of the mass of poor people generally located in rural areas but, increasingly, also in the low-income communities in urban zones. The policy has found concrete expression in three major programs: (a) a primary education project financed partly by IDA aims to increase resources allocated to prhmary education especially in rural areas. The program has indeed achieved significant operating economies through redeploying trained teachers from administrative jobs, instituting multi-grade teaching in rural areas and double-shifts in urb areas, and increasing the autonomy of regional school adminita. ITe overaUl impact on primary school enrollment rates has been negligible, however, given the relentless increase in school-age children and the slow rate of infirstructure construction. Recendy, Government has put increased emphasis on systematizing on- going, NGO-upported efforts in adult literacy by creating a Ministry with responsibflities for promoting literacy. So far, the Ministry's operational reach has remained limited. @) expanded primary health care through the expansion (on a national scale) of a hierarchical system of health services delivery (village health posts with trained nurses, supervised by doctors based at district headquarters where there is a health center, with several health centers under the planning and management direction of a regional hospital's chief medical officer). The network is based on population norms and, under an IDA-assisted health project, an effrt has begun to meet  -7- staftbig, equipment and budgetary allocation norms for each level. In recent yers, there has been a shift in health resources from hospital-based care to pdmary care and from Dakar to the regions. It is too early to judge if there has been a significant improvement in the health status of the poor as a result of this reorganization and resource re-allocation. (c) targeted programs of employment-creadon and small-enterprise promotion, principally through an Employment Fund for unemployed school leavers, returning migrants, and displaced former public sector workers affected by economic reforms; and through a Public Works Program with the dual purpose of rehalilitating urban infrastructure while providing short-term employment opportunities and training for small, indigenous construction sector companies and their employees. Ihe first has had a poor record in terms of the long-term viability of the enterprises created or the effective cost per job created. The second, initiated with funds provided under an IDA Credit, has had much better success in meeting its objectives; in addition, it has pioneered expedited methods of contracting and payment which have made possible the participation of small enterprises which would otherwise be ineligible or financially incapable to benefit from public sector contracts. 18. A household socio-economic survey is underway, whose findings, expected in May 1992, will help Government to better design and target its poverty-alleviation programs. But even without the benefit of the results of a detailed survey, it is clear that the tasks facing the Government are enormous. Social indicators in Senegal have steadily faUen behind low Sub-Saharan Africa averages in the last decade. Even with a major restructuring of public expenditures and improved efficiencies in the delivery of services, Stnegal will still need increased resources to move towards parity with similarly-situated countries. 19. The integration of women in development programs is a Government objective, as reflected in the institution of a Ministry for Women and Family Affairs. A modernized family code formally recognizes, for the first time, married women as having property and other economic rights independently from their roles as mothers, wives, or daughters. Maternal and infant health programs have received funding largely from NMOs and income-generating activities targeted at women have been included in several Government-sponsored programs, including the IDA-supported Small Rural Operations project and a USAID-supported credit program. However, much remains to be done. In agreement with Government, the Bank has recendy completed an assessment of issues and problems in gender and development. Discussions are on-going with the aim of making developmrau strategy and planning more gender-ensitive. zo. Enviromnental concerns in Senegal center on the effects of rapid population growth on urban and rural and ecologies. In the urban context, the problem is that of both household and industi waste disposal and the capacity of the sanitation infrastructure to cope with the increasing demands of economic activities and larger populations. Any long-term solution would need a strong institutional locus for its effective implementation. The Government is interested in fosteing competent and financially sound loc. government structures. The Government's commitment to decentalization is concretely expressed in the "communatEs rrales", and in municipal government structures. Physical planning and the organization of environmental management functions, such as waste disposal and sanitation, have lagged behind the rapid growth of urbanization, especially in the  -8- Dalkr region. A water and waste disposal master plan for the urban centers was complete in 1990 and the resultant investment program discussed at a donors round table later the same year. Under a third water supply project currently under preparation, ID fiuancW support is planned for the potable water and waste disposal needs of the Dakar metropolitan area through at least the urn of the century. Beyond that, Government has begun to seek support from the donor commnity for the early planning stages of a major aqueduct project (Canal de Cayor) which will also have agricultura uses. The main issues in the water and sanitation sectors relate to water tariffs (some users are subsidized, the public sector does not pay its bills regularly and is a heavy user of water, and poor urban households cannot afford the developmental costs of classic house-to-house connections) and to the ownership and management of the water supply parastal, SONEES (Socit Nationale d'Exploitation des Eaux du S6ndWal, the privatization of which is under consideration). 21. In the rural sector, with the expansion of groundnut growing into marginal areas, the increase in demand for wood for household energy and for construction, and periodic droughts, the delicate balance that sustained traditional crop production systems has been broken. The loss of forest cover to fuelwood demand has hastened topsoil erosion by wind and water and has reduced the moisture retention capacity of most soi's. Rains, when they do come, are just as likely to accelerate erosion and leach out remaining nutrients as to provide the water needs of planted crops. Both the colonial system and its succcssor regimes have tended to favor crop production. This has resulted in the alienation of significant aaeage of traditional grazing lands to crop production (most recendy when the sylvo-pastoral zone of Khelkom was assigned to a religious brotherhood for crop production purposes, without the consent of existing pastoralist groups). The overall result has been overgrazing in the narrow, North-East zones to which cattle-raising has been confined. A revised forstry code has been completed and is expected to become law by Fall 1992. The IDA-supported pilot project in Natural Resource management includes attempts to promoe greater loal paricipation in land use decision-making. The ultimate objective is reforms of land tenure systems, which should encourage more sustainable farming practices that, for example, recognize the shortening of fallow systems and so encourage investment In on-farm investments to reduce or retard soil erosion and the incased use of organic fertlizers to restore soil fertility on intensively farmed plots. 22. PubUc sector nagement has become an area of increasing concern to Government. In the past, frequent changes in personnel at the policy making ministerWi level brought in their wake changes in emphasis or priorities. Recendy, public sector management initiatives have been consolidated under a Ministry for Government Modernization. Already, a clearer sense of purpose has emerged, reflected in more focused objectives for the on-going IDA-supported Development Management now placed under this ministry. The principle guiding the Government's public sector management strateg is to modernize existing functions by using state-of-the art techniques and tools - - including office technology - and to improve ways of measuring performance. The approach is to adapt or import workable solutions either from the private sector or from more progressive administrations elsewhere, not to rely on organizational redesign and technical assistance. This new approach will build on the results achieved under three IDA-financed projects in improving several key functions (debt management, project planning, customs and income tax administration, personnel management in the civil service and the management of the portfolio of companies owned or controlled by the state). More generally, institutional development and capadty building, especially for policy making, require greater attention. The Government is aware of these needs and the Bank's strateW will help to address them through various means: O) close supervision of relevant on-going operations; (ii) proposing Senegal as one of the focal countries for the African Capacity  -9- Building Foundation; and (lii) using the recently approved Institutional Development Fund to help Government prepare a comprehensive instituonal development strategy. Besides, Government nstitutions, such a strategy would also aim at improving the policy making capacity of key groups who play an important role In shaping economic policies (university, professional associations, unions, etc..). 23. Until recently, Govement's approach to private sector developnent was to concede, often bowing to pressures exerted by donors, that the regulatory environment was too burdensome and rigid; deregulation has thus been tentative, timid and grudging. Significant changes have occured in the past two years, pardy as a result of the discrediting of socialist planning methods with the collapse of the erstwhile eastern bloc economits. A more important factor has been the deep distress of both the parastatal sector and the monopolistic industriat structures that constted the modern private sector in Senegal. The most tangible result of this change has been in the rapid progress made in the privatization program since November 1990: all but three of the signifcant publicly- owned enterprises that had been in the process of privatization since 1986 have now been sold or liquidated. In addition to the acceleration in the privatization program, institutional reforms in the labor market, in deregulation, and investment incentives are continuing. The Status of the Poicy Dialogue 24. Senegal has evolved a corporatist society with a thriving tradition of trade unionism and a large, self-confident civi service, originally designed for a colonial territory six to seven times larger in population than present-day Senegal. Among other consequences, this tradition makes change of any kind subject to a consensus which, in the area of strong economic adjustment, has proven elusive so far. In particular, policy changes perceived as likely to have an adverse impact on unionized workers or civil servants have been very difficult, at times impossible, to achieve. And yet, given the large and central role of the public sector and given the imperative to improve competitiveness through intenal deflation, most of the more significant policy reforms will require adjustments that affect civil servants and trade unionists. Ihe Bank's policy dialogue has been conducted in this context, with halting progress over the past two years as short-term financing concerns have come increasingly to the fore. Three areas, all .dated to these difficult questions, have tended to dominate: () pubUc expendite effectiveness: of particular significance have been the civil service wage bill (with its impact on expenditure composition and wage levels in the economy) and the efficiency of higher education expenditures; (ii) labor market reforms necessary to introduce flexibility; and (iii) price administration: markets for such key goods and services as basic wage goods (rice, sugar, bread and cooking oil), the principal agricultural commodity (groundnuts), and energy are stil largely controlled by a government which, out of respect for a long-standing political tradition, has felt unable to alter this situation. 25. To gain a better understanding of the Government position and to move the dialogue toward long-tm development questions, a Bank team met, in early Jamnary 1992, with the Cabinet for a 3-day seminar on economic policy. The seminar provided the occasion to clarify differences in approach and to reach a common understanding of the larger context in which the Senegalese economy has to develop. The Government was able to take full measure of the trade-offs involved in pursuing its development priorities. One of the first results of the seminar has been in education policy where Government has undertaken to sponsor a public debate on how to reform the higher education sector, hitherto a taboo subject. Progress is also being made on the package of agricultural  -10- sector reforms. Countr Lending Straeg anW Priorities 26. As of February 29, 1992, the Bank Group had approved 98 operations in Senegal for total commitments of about US$1.2 billion, consisting of 66 IDA credits (including three Special Fund and two SFA credits), 20 Bank loans, and 10 IFC operations. To date, 46 credits and the 20 loans have been fully disbursed. Of the 20 operations still under disbursement, four (SAL IV -including supplement, the BankinglFinancial SECAL and the Transport SECAL) are adjustment operations. The rest are divided between agriculture (four), infastucture (four), human resources development (four), industry, telecommunications and energy (one each) and a Technical Assistance Project. Table 3. Conmosition of IDA Conunitents, FY87-91 U1S dlion Agriculture 120.9 26.0 Industry and Energy 33.0 7.0 Infrastructure 106.7 23.0 Human Resources 64.0 14.0 Adjustment (SAL and SECAL) 132.1 28.0 Technical Assistance 11.5 2.0 Total Commitments 468.2 100.0 27. B assistance strategy in Senegal is guided by three basic objectives: (i) promoting competitiveness and establishing the basis for self-sustained growth; (i) supporting human resource development; and (iii) improving management capacity in the public sector, especialy in areas such as poverty alleviation and the environment, where effective public sector action is a necessary condition f- successful development. 28. rgoed Lending Progrm. For the immedife future, the Bank strategy for Senegal will remain pointed essentially in the direction of supportirg the reforms which are necessary to accelerate economic growth, while emphasizing investment lending in areas with promise under current circumstances. The country's meager resource base and its consequent growth prospects are a cause of increasing concern, b"h for the Government and for its partners in the donor community. With this in mind, in coming years, operations will be focussed on reducing waste, improving the efficiency in the use of existing assets and promoting an incentive framework that harnesses and develops the exisig potential. In paralel, successful efforts will be deepened and replicated. 29. Given thc stagnation and, in some regions of the country, the decline in living standards over the past decade, it is unreaistic to expect that the required increase in domestic savings can be mobilized rapidly for rehabilitation and new investment and, particularly, for the efficient operation and maintenace of existig assets and infrastructure. Thus, substantial concessional assistance wil continue to be necessary through the medium-term. If the country can demonstrate a sustained commitment to adjustment and rapid progress, a commensurate program of financial support for macro and sectoral adjustment operations will remain the major thrust of our country assistance  strategy for Senegal in the coming years. 30. The base lending program for Senegal currently under consideration for the period FY92-96 includes 10 operations for total IDA lending of about US$300 million, mostly for investment operations. Adjustment lending would respond to progress in the restoration of competitiveness, with the share of adjustment increasing with the speed of policy reform. 31. The emphasis on investment and sector operations, while reflecting an assessment that a minimum, albeit still fragile, macro-economic environment has bcen established, also reflects a growing awareness that realization of the economy's growth potential demands a more focussed approach to sectoral policy reforms and investment requirements. Thus, the assistance would move from a phase of supporting an improved overall policy environment to one which w(.uld address supply response measures more directly at the sectoral level and, which, with a clearer link to directly productive investments, would promote growth more effectively. 32. In agriltre, planned operations include continued improvement of agricultural services, a Natural Resources Management Project, which would focus on institutional and legal reforms to enhance local management of forests, and a pilot operation to encourage on-farm private investment. Should progress in policy reform allow it, a sector adjustment operation would be based on the implementation experience of the agriculture component of SAL III, which highlighted the urgency of addressing outstanding sector policy constraints. The operation would focus on four major areas: privatization of groundnut marketing and processing; an appropriate, market-based protection regime for locally produced cereals and reduction of the state's role in marketing and prices; completing the liberalization of agricultural credit; and initiating land tenure reforms. In order to increase the likelihood that such reforms will be long-lasting, such an operation would include significant cofinancing from all key donors who would also endorse the reform package. 33. In infastructure, the country's road network is seriously dilapidated due to insufficient allocation of funds for regular maintenance. The Bank's dialogue on key sectoral issues has resulted in a Transport Sector Adjustment/Investment Operation (PAST), approved by the Board in FY91. The hybrid form of the project resulted from the need to promote important policy reforms throughout the different transport subsectors. The PAST addresses six major sectoral policy issues: (i) strengthening sectoral investment planning and project selection criteria, including a sector-wide shift away from new construction toward urgently required maintenance; (ii) a three-fold increase in the allocation of revenues te road maintenance financing (Road Fund); (iii) shifting reliance for the major part (75%) of road maintenance from force account to execution by private contractors, and improving the administration's maintenance planning, programming and supervision capacity; (iv) improving the management structure and autonomy of some of the key parastatals in the sector, e.g., railway, port, and airline; (v) manpower planning and management; and (vi) improved efficiency in all subsectors. A follow-up operation is planned. Other infrastructure operations include: an Urban Development Project, designed to provide institutional development support and resources for infrastructure investment to municipalities under the fledgling decentralization program; an Energy Project (m1) focusing on rationalizing distribution systems and rehabilitating existing thermal plants. Energy sector policy issues such as pricing of fuelwood, the main source of energy in rural areas, would be tackled through, inter alia, a new Forest Code. A second Public Works and Employment Project is discussed further in this report. 34. Previous interventions in education have been directed toward strengthening primary education, especially in rural areas, restructuring educational expenditures toward the primary level, and at technical and vocational training to support the requirements of the productive sectors. In headth, the emphasis has been on strengthening the delivery of primary care in rural areas, on  - 12 - developing health, and nutrition education, and on developing a coherent approach to the provision of low-cost senti drugs. In addition, under SAL m, the Government formulated a national gopudaUa policy statement which has since been translated into an operational Population Action and Investment Program. 35. Additional efforts are required to develop the socia sectors during this period of economic adjustment and to improve the interna and eternal efficiency of the resources allocated to this sector. A health and population services project was approved by the Board in Apnrl 1991. The lending program includes a follow-up project. Two operations in the education sector are currendy under preparation. The first is likely to target primary educadon and seek to improve the enrollmhet ratio by I% per annumr. A second operation, depending on progress in the policy dialogue in the sub- sector, would target higher education, where the basic requirements are to improve internal efficiencies, control aecess, and rehabilitate infrastructure. In both instances, the Banks' involvement will be conditioned by sectoral policy reform programs. 36. A Private Sector Development Project would aim at consolidating improvements in the regulatory and financial environment achieved so far, as well as in helping to establish an appropriate framework for efficient support services for private sector business promotion. Its scope and content would depend on progress in the overall policy dialogue. 37. Economic and sector work. Considerable economic and sector work has been completed on Senegal in recent years. It included studies to provide the analytical foundation for policy and institutional reforms and investment operations in Senegal, and studies of region-wide developmental issues for which Senegal was often selected as the country case. A Public Expenditures Review (PER) was recently completed and should help reorient public resource allocation in favor of the priority sectors and improve expenditure planning and management. A macroeconomic updating report was prepared in parallel and should provide a new impetus to the dialogue on macroeconomic issues with the Government and other donors. Sector work recently completed to support the policy dialogue includes studies of industrial policy, the informal sector, higher education, health financing, family planning issues and environment strategy - several of these studies have region-wide implications. The program includes assessments of gender issues, the environment, institutional development, poverty, and a review of private sector development issues. In the coming two years we have programmed work on competitiveness issues, export promotion, and administration decentralization. We are also undertaking major studies of trade policy and regional integration issues at the level of the West Africa Monetary Union. IFC and MIGA Activities 38. Past domestic policies have produced a domestic private sector which is still small and oriented mostly towards trade-related domestic activities. Ihe IFC has undertaken 10 operations in Senegal, of which three are on-going. Two of these operations are in the fishing sector: African Seafood, a fish processing plant (loan of US$3.3 million and equity of US$970,000 in 1984) and Africamer, a fishing company (oan of US$3.45 million in 1989). Both are suffering from management problems and depletion of the resource. The third operation (Industries Chimiques du Senegal, ICS - a fertilizer plant) received a US$25 million loan in 1982 and a second loan (US$12 million) and equity participation (US$150,000) in 1988. Last year's restructuring is beginning to bear fruit and, for the fist time in its history, ICS is expected to show positive results in 1991. Because of the general climate toward private sector activity (para. 23), new investment opportunities remain limited. The establishment of the African Enterprise Fund has, however, enhanced IFC's ability to  - 13 - reach smaller businesses, a development which may increase IFC Senegalese portfolio in due course. In order to coordinate Intervetions in support of the private sector, a