Poctumnt of The World Bank FOR OMCAL USE ONLY Repot No. P-6308-BEN MEMORAIDUM AMD RECOENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPIENT ASSOCILATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 7 MILLION TO THE REPUBLIC OF BENIN FOR A RURAL WATER SUPPLY AND SANITATION PROJECT MAY 11, 1994 MICROGRAPHICS Report No: P- 6308 BJ Type: MOP This document has a retricted distibution and may be used by recipients only in the perfonasace of tbeir official duties its contents may not othewise be disclosed whout World Bank authorization. CURRENCY EQUIVALENTS Currency Unit: CFA Franc a (CFAF) US$1 = 590 CFAF FIMCAL YEAR January I - December 31 SYSTEM OF WEIGHTS AND '1IEASURES METRIC) 1 meter (m) = 3.28 feet (ft) 1 kilometer (kn) = 0.62 mile (m) 1 liter (1) = 0.26 US gallons 1 cubic meter (mn) = 35.3 cubic feet (cu ft) 1 liter per capita per day (Icd) = 0.26 US gallons per capita per day ABBREVIATIONS AND ACRONYMS (English/French) DANIDA Danish International Development Assistance DH Directorate of Water/Direction de l'hydraulique DHA Directorate of Hygiene and Sanitation/Direction de l'hygiene et de l'assainissement CAA Debt Management Agency/Caissc autonome d'amortissement ICB international competitive bidding/appel d'offres international LCB local competitive bidding/appel d'offres local MEMH Ministry of Energy, Mines and Water/Ministere de l'6nergie, des mines et de l'hydralique MS Ministry of Health/Ministfre de la s"e NGO non-governmental organization/organisation non gouvernementale RWS Rural Water Supply RWSG-WA West Africa Regional Group of the UNDP/World Bank Water and Sanitation Program SBEE Benin Power and Water Utility/Societe b6ninoise d'1lectricit6 et d'eau SRH Water Works Regional Office/Service r6gional de l'hydraulique UNDP United Nations Development Programme UNICEF United Nations Children's Fund/Fonds des Nations Unies pour l'enfance VLOM village level operation and maintenance a. The CFA Franc exchange rate Is ixed at a rate of 100: 1 with the French Franc. The latter is a floating curecy. FOR OFFICIAL USE ONLY REPUBLIC OF BENIN RURAL WATER SUPPLY AND SANITATION PROJECT CREDfIT AND PROJECT SUIMMARY Borrower: Republic of Benin Beneficiary: N/A Imnplementing Agency: Directorate of Water (DH) Amount: SDR 7.0 million (US$9.8 million equivalent) Terms: Stanard with 40 years maturity, including 10 years of grace Financing Plan: Foreign Local Total (US$ million) Govermnent of Benin 0.16 0.29 0.4.5 Communities 0.59 0.18 0.77 Government of Denmark 3.36 0.62 3.98 IDA 8.44 1.36 9.80 'OTAL 12.55 2.45 15.00 Econonic rate of return: N/A Poverty Category: Program of Targeted Interventions Staff Appraisal Report: Report No. 12860-BEN |Tis document has a restricted disribuion and may be used by recipit only in the performance ofthe loffcal duties. Its contents may nototw be disclosed witout World Bank mwaiuon. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE EDA TO THE EXECUtIV DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF BENIN FOR A RURAL WATER SUPPLY AND SANITATION PROJECT I. I submit for your approval the following memorandum and recommendation on a proposed credit to the Republic of Benin for SDR 7.0 million, the equivalent of US$9.8 million, to help finance a Rural Water Supply and Sanitation Project. The credit would be on stanard IDA terms with a maturity of 40 years. Part I of the document discusses Benin's development issues and prospects, the key priorities of the economic reform program at the macroeconomic and sector levels, and the Bank Group assistance strategy. Part II of the document describes the proposed Credit. PART I: COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. BACKGROUND 2. Benin is a West African country of five million people with a total GDP of about US$2 billion (1992). Its economy is highly open and strongly dependent on primary and tertiary activities. The primary sector, which accounts for 37 percent of total GDP, provides the country's largest export commodity: cotton. A large teriary sector dominated by commerce accounts for 50 percent of the country's GDP, and its dynamic re-export activities account for 64 percent of the country's total export revenues. In contrast, the country has a small secondary sector which barely accounts for about 13 percent of GDP. 3. Unlike many other CFA zone countries, Benin implemented an ambitious reform program, and achieved an average real growth rate of 4 percent for 1991-93, with real per capita income increasing by 0.8 percent annually during the same period. On January 12, 1994, the parity of the CFA franc, which had rer .ined fixed at CFAF 50/FF 1 since Benin's independence, was changed to CFAF 100/FF1. To take advantage of the positive effects brought about by this action, the G'wranment, with IDA and IMF assistance, quicldy adopted and implemented a program of economic measures to reinforce the reforms achieved in the past years. A thorough review of Benin's development performance was presented in the Policy Framework Paper (PFP) distributed to the Board on March 14, 1994 (Report no. SecM94-251). 4. To reflect the changing environment created by the parity change, the Country Assistance Strategy presented below aims to promote a private sector supply response and to strengthen the market orientation of the economy by supporting policy measures which are critical for the country's long-tern prospects: ?ublic france management, human resource development, and the public sector's administrative capacity to implement the reforms. -2- B. RECENT ECONOMIC AND SOCIAL PERFORMANCE 5. Upon assuming office on April 4, 1991, following the first multiparty elections, the Government of Benin adopted a strong economic reform program. This program has been supported by IDA through a Second Structural Adjustment Credit (approved in June 1991), and by the IMF through a three-year ESAF (approved in January 1993). 6. Benin's economic performance has been very positive since 1989. The new development strategy centering on the rationalization of the role of the state has produced positive results. In addition to the resumption of growth, substantial progress has been achieved in improving the population's living standards, and adjusting the economy through structnual reforms. The policy dialogue with the IMF and the Bank has been strengthened as demonstrated by the continued support of both institutions since 1989. 7. The objectives of the Government's adjustment program were to: (i) create the conditions for a sustainable recovery of economic activity, leading to a projected real growth rate of 4 percent per year by 1993; (ii) improve the Government's financial position by generating a balanced primary budget in 1991 and a surplus thereafter; (iii) contain the rate of increase of domestic costs and prices to about 2.5 percent a year so as to improve external competitiveness, given the fixed exchange rate; and (iv) improve the balance of payments position by pursuing policies to provide incentives for an expansion of exports and efficient import substitution. Reforms were implemented in the following areas: restructuring of the tax system; liberalization of the price, trade and fimancial sectors; reform of the public administration and rationalization of the public enterprises sector; and improvements in agriculture, education and economic management. 8. The results of the program have been encouraging. Real GDP has grown at an annual rate of 4 percent during the 1991-93 period. A primary budget surplus of 2.2 percent of GDP was attained in 1993. The overall budget deficit (on a commitment basis, excluding grants) fell to 4.7 percent of GDP for the same year, a substantil improvement from the 10 percent level of 1990. The inflation rate (measured by the implicit GDP deflator) was limited to an average of 3 percent for 1991-93. And, thanks to increasing export revenues, the balance of payments current account deficit was contained at 9.8 percent of GDP in 1993, as compared to 8.2 percent in 1992, despite a substantial decline in world cotton and oil prices. 9. The tax reform has simplified the tax system, broadened the tax base, and improved tax adminitation. The corporate profit tax rate was reduced from 48 to 38 percent to provide incentives for private sector investment, and a single rate value-added tax (VAT) of 18 percent covering most goods was introduced in May 1991. The VAT was later extended to the telecommunicatons sector (1992) and petroleum products (1994), to simplify tax collection, and now represents 11 percent of total Government revenues. - 3- TABLE 1. MAIN ECONOMIC INDICATORS Actual Estimate Projections 1989 1990 1991 _1992 1993 1994 1995 199S Annual Rates of Growth t') GOP at Market Price -2.8 3.6 4.7 4.2 3.3 2.2 5.0 5.8 GOY -4.4 5.2 5.4 1.5 2.7 1.4 3.7 5.5 GOY per Capita -7.3 2.0 2.2 -1.7 -0.5 -1.A 0.8 2.5 Total Consumption per Capita -8.2 0.8 3.6 -2.3 40.1 -8.3 -2.4 0.0 Private Consumption per Capita 8.2 0.8 3.6 -2.3 0.4 -6.6 -1.6 0.7 External Debt Tota: OOO(in US$ mltion) 801.6 833.9 881.4 1367.0 1471.0 1558.0 1605.0 16190 0001D mport of G&S 172.0 138.8 135.2 243.8 260.S 312.9 302.6 283.4 O0OOGOP S3.9 45.6 46.7 63.1 68.9 120.9 109.1 102.3 Total Debt Serice (US$ mfllion) 132.9 79.6 64.5 177.2 79.2 79.7 74.6 73.0 Debt Service/lmport of G&S 28.5 13.2 9.9 32.1 14.0 16.0 14.1 12.8 DebtSenvceGOP 8.9 4.4 3.4 8.1 3.7 6.2 5.1 4.6 Debt ServicelExport of G&S 43.5 19.8 14.2 48 0 24.1 24.8 21.4 19.4 Oebt Servce/lExport of G&NFS 43.5 13.8 14.2 34.7 17.0 18.2 15.5 13.9 NaflorL Accunts: Gros lnvestmentUGOP 12.4 13.5 13.7 13.3 13.9 19.0 19.5 19.5 OomestIc Savinos/GOP 3.6 5.5 5.6 3.9 3.2 6.5 6.5 6.8 National Savings/GOP 8.3 8.1 8.6 5.7 5.4 7.0 7.5 8.0 Marginal Savings Rate 1.1 0.3 0.0 0.1 0.0 0.1 0.1 C.1 Public l'-strnenUGOP 7.9 7.5 7.6 0.7 7.4 10.S 10.9 10.6 Public Saving5GOP -4.9 .4.1 -'.8 -2.1 0.1 -1.6 0.3 1.1 Private InvestmentGDP 4.5 6.0 6.1 6.6 6.5 8.3 8.6 8.9 Prvate Savings/GOP 8.5 9.6 7.4 6.0 3.1 8.1 6.2 5.7 Rato of PublictPrivate Invstont 2.1 1.7 1.7 1.4 1.5 1.6 1.6 1.5 Incir. CapitaUOutput Ratio (ICOR) -4.7 3.0 2.7 3.1 4.0 6.8 3.3 3.2 Public Finance M of GOD). Government Revenue 1/ 9A 9.9 11.5 12.2 12.6 13.3 12.9 12.8 otw: F=Wal Revenue 7.2 7.9 8.8 10.0 10.7 11.7 11.3 11.4 Total Expendlures 20.2 19.9 18.7 19.9 17.0 24.1 21.8 20.9 o/w Primary 11 5 11.4 10.9 12.1 10.2 11.4 9.5 8.8 Primary OefiUcSurplus -2.0 -1.4 0.5 1.2 2.2 0.7 2.2 2.9 Oerall Oeficit/Surplus 2V .10.6 -10.0 -7.2 -7.9 -4.7 -10.8 48.9 -8.1 Other Economic Indhators: lmpliit GOP Oeallor(1992-10 ) 91.2 94.1 97.1 100.0 103.1 128.6 141.2 145.8 Annual percentage Change 3.2 3.2 3.1 3.0 3.1 24.7 9.8 3.1 Exports Grwth Rate -25.7 1.1 7.5 1 4 -2.2 2.2 6.8 6.9 ExporWtGOP (Ind. Re-Expor) 20.5 22.0 24.0 23.3 21.8 34.0 32.8 33.1 Imports Growth Rate -32.8 e.s 11.9 44 3.1 .8.7 4.6 5.5 ImportslGOP 31.3 32.9 34.6 33.2 33.8 49.0 45.9 45.8 Currnt Account Salance (US$ millin) 1/ -95.2 -130.1 -130.4 -176.8 -209.7 -185.0 -175.9 -182.1 Currnt AccountGOP -5.5 *8.2 -5.9 -8.2 -9.8 .14.4 -12.0 .11.5 Extemal Terms ofTrade (1992*100) 112.2 135.7 116.7 100.0 97.1 93.7 88.5 87.S Resrves in monts of imports 0.1 2.0 4.0 4.6 4.2 3.1 3.4 3.6 1/Excluding ofidcal grants; 2/ Cormmitment basis Sources: Official data; Bank and Fund staff estnmtes and projecto -4- 10. Deregulabon and trade reforms. Price controls were lifted for most commodities in 1991, and removal of most quantitative restrictions and simplification of import tariffs implemented. All import licensing requirements were eliminated in March 1993 and, to improve the customs administration, the Government contracted a pre-shipment inspection company in 1991 to help increase and secure customs revenues. The performance of the pre-shipment system was recendy reviewed by the Govermnent and the Bank, and the Government has adopted the recommendations of the review on revenue collection and the customs administration. Most export taxes were abolished in 1993, and most duty exemptions were elinminated l. In January 1994, the tariff structure was simplified (there are four rates ranging from 5 percent to 20 percent, with a temporary zero rate for re-exports). 11. Following the collapse of the banldng sector, the Govermment implemented a financial sector reform program aiming at: (i) the restoration of the sector's viability through portfolio restucuing (iquidation of the state banks and recovery of their assets); (ii) the improvement of financial intermediation; (iii) the opening of banking activity to the private sector; and (iv) the rehabilitation of the rural credit network. All state-owned banks were closed and the system was opened to private investors. A program to recover assets from liquidated banks and to reimburse depositors was iniated. Confidence in the barking system has been restored as shown by the substantial increases in new commercial banks and in private deposits. Five private banks have been established and are now operating. Financial intermediation remains nevertheless limited as 99 percent of deposits and 79 percent of credits to the economy were short term (less than two years) in 1992, and the ratio of credit to deposits was still a low 21.8 percent at end-1993. 12. External debt. Once of major concern, Benin's extenal debt situation has significantly improved. Over the last three years, Benin has not contracted new commercial debt. It has furthermore proceeded to buy-back part of its commercial non- guaranteed debt, at a 15 percent discount, for a total amount of US$4.76 million. Benin became eligible for aid under the Special Program of Assistance for Africa in 1989. Benin has rescheduled its debt with the Paris Club in 1989, 1991 and '993, and official bilateral creditors have moved increasingly towards providing grants ther than loans. As a consequence, total debt service obligations, which accounted for 34.8 percent of exports in 1992, have falen to just 17 percent in 1993. TotaJ debt outanding and disbursed (DOD) accounted for 68.9 percent of GDP in 1993, and the sbare of multilaterals represented 49 percent of the total. IDA's share of DOD is 31 percent. 13. The Govemment also implemented a major public administrtion reform with a view to reducing the wage bill and increasing overall efficiency. The main elements of the reform were: civil service reduction, strict limits on new hiring, and performance audits of the Ministries of Finance, Education, Health and Rural Development. The civil Exemptions for selected necessity goods, were introduced on a temporary basis, as an accompanying measre to the devaluation in January 1994. - 5 - service voluntary departure program, initiated in 1989-90, has enabled the Government, with donor assistance, to reduce the proportion of the wage bill in fiscal revenues from 79 percent in 1991 to 58 percent in 1993. Under the 1992-93 departure program, close to 5,000 persons (including a large number of temporary employees) have left the civil service. Given the success of the program, the Government intends to make additional audits of remaining ministries as the next step in its long-term strategy of administative reform. 14. Public enterprise sector. Between 1990 and 1992, eight public enterprises were privatized, 14 were liquidated and II were offered for privatization. The Government has undertaken a number of diagnostic studies to rehabilitate/restructure additional enterprises and is currently resucuring the telecommunications and postal agency (OPT), the social security fund (OBSS), and the Cotonou port administration (PAC). It is also committed to improve the performance of the electricity and water utlity (SBEE). As of end-1993, the Govenzment's portfolio was reduced to 15 commercial and industrial enterprises and 12 administrative agencies. The Government is now attempting to privatize the insurance parastatal SONAR and exploring action programs to deal with the situation of three major loss-makdng enterprises: the sugar factory (SSS), the cement plant (SCO), and the palm oil processing enterprise (SONICOG). The profitability of SSS and SCO will be reassessed in the context of the devaluation, and a divestiture sttegy has been agreed upon for SONICOG. 15. Given the importance of cotton, the Government's program emphasized the rehabilitation of the sector as the major contributor to economic growth in the medium- term. In addition to the introduction of an efficient producer price system, the Government, with IDA support, improved the extension services and introduced measures to increase the productivity and cost efficiency of the parastatal SONAPRA. Cotton output increased from 20,000 tons in 1l'82/83 to 200,000 tons in 1992/93 and is estimated to reach 270,000 tons in 1993/94. Despite these results, further development of the cotton sector in the medium term is constained by the existing ginning capacity estimated at 170,000 tons. 16. The Government also introduced measures to improve the public sector's adminitrative capacity. The budgeting process has improved with the adoption of new budget procedures and a unified presentation for the budget. However, project execution and implementation remain problematic. The rate of execution of the 1993 PIP is estimated at 68 percent. The difficulties which still hamper program implementation include: (i) slow disbursement of counterpart fimding for externally-financed projects; (ii) lack of coordination between agencies (Ministry of Planning, project managers and executing agencies, and debt management agency) and inadequate monitonng arrangements by the Ministry of Planning; (iii) inefficiencies within the debt management agency (delays in processing and authorizing disbursements); and (iv) cumbersome and inefficient procurement mechanisms. The IDA-fmanced Pre-Investment project (FY91) is assisting the Government in improving investment project preparation and creatng a pipdine of investment projects. Further improvements are expected with the assistance of the IDA-financed Economic Management projec. (PAGE), approved by the Board in -6- November 1993, and with the expected adoption of a procurement code. These issues are being addressed with an effort to improve financial management and investment programming for each sector and within each ministry. 17. Poverty reduction. Benin's social indicators are among the lowest for Sub- Saharan Africa. The illiteracy rate stands at 77 percent, and as of 1992 the enrollments rates in primary szhools and in the secondary education system were ordy 47 percent and 11 percent, respectively. Despite overall food self-sufficiency, it is estimated that malnutrition affects 18 percent of the population and about 30 percent of children. According to the Poverty Assessment, fifteen percent of the population is absolutely poor on the basis of the income needed to satisfy minimal nutritional requirements and other expenses such as clothing, fuel and household wares. Another 15 percent is believed to be vulnerable to poverty, including female headed households (at least 20 percent of the total), old people and children without family ties, farmers and fishermen without access to natural resources, refugees and retenched civil servants. Life expectancy is 49 years for men and 51 years for women. Infant mortality is high, 131 per thousand births, and much higher for children under the age of five: 147 per thousand. 18. Despite these poor social indicators, the policies implzmented under the adjustment program have allowed an improvement of living standards. Real GDP per capita increased from US$365 in 1988 to US$411 in 1993. Higher cotton producer prices and the improved capacity of the sector raised income among the rural population. In the urban areas, to counteract the negative effects of the civil service reform program, the hiring freeze and the restructuring of public enterprises, several measures have been implemented. First, severance pay was provided to the departing civil servants. Second, a training program which provides assistance to workers affected by the restructuring of public enterprises was initiated. Third, a labor-intensive public works program directed towards rehabilitating and expanding the road network and sanitation system in Cotonou and Porto Novo provided employment for some 1,500 persons. Fourth, an employment and enterprise promotion unit has been set up with assistance by UNDP to promote the creation of small and medium-scale enterprises. Fifth, a rehabilitation program under SAL II addresses the needs for basic social infrastructure, such as rural roads, primary schools and community health dispensaries. Finally, a Social Fund has been established to finance priority health and education expenditures. 19. In order to mitigate the immediate negative effects of the devaluation on the poor, the Government has decided to: (i) maintain the prices of generic essentiad drugs at pre- devaluation levels through selected subsidies and temporary suspension of the import tariff (5 percent); and (ii) continue to exempt agricultural inputs from import duties. 20. Because of the important steps taken by Benin to stabilize public fmances, contain costs and inflation, and liberalize trade, the positive results achieved so far will be reinforced by the devaluation of the currency effected in January 1994. The gains in external competitiveness will help Benin deepen its structural adjustment of the economy, and accelerate growth rates through export expansion and efficient import substitution. - 7- The Governnent has reinforced its overall adjust- - zit strategy, as negotiated with the IMF and the Bank in the context of the recently approved PFP. C. EXTERNAL ENVIRONM4,14T 21. Despite the production and GDP gains mentioned above, Benin's development remains vulnerable to the external enviromnent, which is characterized by a high dependence on one major export commodity (cotton), sensitivity to economic policies and developments in neighboring countries, other C.FA zone countries and Nigeria, and acute reliance on foreign financing for the investment program. 22. CGtton represents 25 percent of the country's total export earnings, and 74 percent of domestic export earnings. The producer price system and the sector reforms introduced by the Government have resulted in productivity increases which have allowed for substantial output increases despite declining world prices. Jnvestments in rural road infrastrcture and ginning capacity could bring about additional cost reductions for the sector. Nevertheless, the country's long-term balance of payments prospects will remain uncertain, unless the current dependence on cotton exports is reduced. 23. Export diversification in agriculture and in the manufacturing sector is, therefore, a Government priority. The devaluation of the CFA franc, imnprovements in the performance of the public sector, and the recently-adopted trade reform should help Benin develop alternative sources of export growth as well as efficient import substitution, as they all contribute to reducing distortions in the incer.tive framework for private activity. The Government has requested the Bank's assistance to identify new agricultural products which could be internationally competitive and to help promote private sector initiative in those activities. 24. In 1993, re-export activities accounted for 66 percent of Benin's total exports, while trade with Nigeria provided 50 percent of total customs revenues in 1992. Thanks to its dynamic re-export sector, Benin has been able to take advantage of smuggling oppornmities offered by the foreign exchange control and trade restictions imposed in Nigeria, such as import prohibitions on rice, flour, wheat and certain textiles. Before the devaluation of the CFA franc, trade with Nigeria was supported by the large parallel financial market in Benin, which ensured Nigerian importers with unlimited access to foreign exchange, and in particular to CFA francs. In return, the nairas in circulation in Benin fueled the demand for Nigerian goods. While the devaluation of the CFA franc, combined with appropriate trade reforms, would promote import substitution and domestic exports, and increase incentives towards formal activities, the prospects of the re-export sector remain uncertain, given the unpredictability of developments in the exchange rate and trade policies of Nigeria. 25. Reliance on external fnancing for the investment program. The share of the domestic fnancing of the investment budget remains insufficient at 8 percent for the 1993 ptablic investment program (PIP). Despite improvements in the structure of public expenditures, a large proportion of non-wage recurrent costs is still being externally - 8- finnced under the PIP. Under the adjustment program, the Government is committed to increase its financing of non-wage expenditures in the social sectors and of the total investment program. While adjustnent takes place, external financing of the investment program will continue to be crtical. In the context of the SAL II measures, budgetary allocations to non-wage current expenditures in the social sectors have improved; they will, howeve., need to be significantly increased to achieve the development objectives of the Government. D. COUNTRY'S DEVELOPMENT OBJECTIVE AND POLICIES 26. To maintain and accelerate the improvement of the overall welfare of the population, Benin will need to keep its GDP growth rate above the population's growth of 3 percent per year, and to increase access to basic social services. The economy is currenty characterized by: insufficient export diversification, a narrow industrial h'ase and low level of domestic savings and investment (respectively, 3.2 percent and 13.9 percent of GDP in 1993). Furthermore, without a significant improvement in the incentive framework, better public infrastructure and services and a strengthening of the administrative services, the potential for sustainable growth will remain limited. Given these constraints, the Government's development strategy is centered on further rationalizing the role of the public sector, to create an environment favorable to private sector activity and to improve the provision of social services through increased quality and coverage. 27. The Government's rural development strategy was discussed with the donor community at a seminar held in Cotonou in 1990. The agreement reached at the seminar was confimed in the Letter of mral development policy of May 1991. The stra's objectives are to: (i) increase export earnings through improved competitiveness and crop diversification; (ii) redefine the role of the state while improving the efficiency of its intervention; (iii) promote poverty alleviation improved food security; and (iv) preserve Benin's natural resources and enviromnent. 28. The cotton sub-sector policies constitute a good example of what is needed for a strong supply response: a pricing system guaranteein; t floor price to producers, supply of inputs on credit, reorganization of the production responsibilities towards the farmers, and divesting the public sector from actual production. In line with the sector rehabilitation efforts implemented so far, the Goverment has decided to promote further private sector initiative by allowing the private sector 'J build, operate and manage giming facilities. SONAPRA's 2 capital will be opened to farmers; input distribution has been opened to private sector operation; and the transfer of marketing to the farmers' unions will be continued. In contrast, palm oil production bas been declining as a result of the aging of the plantations, a chronic water deficit limiting yields, declining profitability in relation to other production, and very low prices on the international market. Experience in other countries has shown that palm oil production and processing 2National Agricultural Promotion Company (Soci6t6 nationale pour la promotionl agricole) -99. have proved to be viable only in small-scale operations. The Govemment is, therefore, in the process of transferring the plantations to the cooperatives, and reassessing the profitability of the sector and of the SONICOG in light of the devaluation. 29. Diversification of agricultural exports is expected to come from the promotion of such non-traditional exports as pineapples, yams aid vegetables. Increased food production will also benefit from the exchange rate adjustment, allowing local producers to rec ,ture the domestic market lost to unofficial imports from Nigenra. The Govermnent will promote production o7 tradable goods through: (i) improved infrastructure (rural roads) and agriculture extension; (ii) improv-d services to the private sector, especially information on prices and markets and mdrket studies; and (iii) improved access to credit for small and micro-enterprises. In line with its public sector restructuring strategy, the Government will no longer engage in direct productive activities. 30. The Government's transport sector strategy was discussed with IDA and other donors during a November 1993 round table meeting in Cotonou. The Government's strategy aims at: (i) safeguarding the competitiveness of the Benin transit corridor by improvmg the country's road network; (ii) maintaining rural and urban infrastructure through the restructurig of the Road Fund and traffic safety and management; (iii) establishing priorities for new investments; (iv) improving the planning, programming and management of investments capacity; and (v) expanding private participation in public works. 31. The Government will also implement its rural water supply sector strategy. A Letter of Sector Policy has been presented to IDA in the context of the Rural Water Supply and Sanitation Project. This strategy would allow the Government to increase the impact and use of safe water and sanitation facilities, whie ensuring long-term sustinabiity by developing private capacity to provide these services, refonning overall sector management and financing through decentralization of decision-makig at the community level. 32. In 1990, the Government adopted an education sector strategy, which was subsequendy presented to IDA in a Letter of Sector Policy in the context of the second Strcural Adjustment Credit and the Education Development project (scheduled for Board consideration on May 17, 1994). The sector program puts emphasis on primary education and girls' enrollment. It aims at increasing the gross enrollment rate in public prmary schools from 51 percent in 1993 to 59 percent by 1999. In parallel, the scholarship policy was reviewed in order to reduce the share of scholarships m sector expenditures. Moreover, the Ministry of Education has been reorganized in order to improve overall fancial and administaive management. Under this strategy, salary expenditures are expected to be reduced from 83 percent of the education budget in 1993 to 70 percent by 1999. 33. In the context of the IDA-finaziced Health Services Development project (FY89), the Government adopted a health sector policy. Key elements of the strategy include: - 10- strengtiening the administrative and financial management of the sector, improving sector coordination and beneficiary participation, improving the quality and coverage of basic services, expanding family planning, and developing indicators to monitor program implementation and impact. The on-going IDA project is assisting the Government in implementing this strategy. 34. The Government will review its poverty reduction strategy in view of the results of the Poverty Assessment. The main elements of the strategy are expected to include: (i) measures to ensure adequate delivery of basic services through continued rehabilitation of facilities; (ii) promotion of employment and income-generating activities for the poorest segments of the population; (iii) development of social indicators and of a monitoring system; (iv) continued emphasis on the provision of primary education and health services; and (v) promotion of a population policy. 35. Macroeconomic Prospects. Economic growth, which was estimated at 3.3 percent in 1993, is expected to be reduced to 2.2 percent in 1994, before increasing again to 5 and 5.8 percent in 1995 and 1996, respectively. The improvements would be due to continued strong perfonnance in the cotton sector and an anticipated increase in the investment rate following the restoration of external competitveness. Private investment is projected to increase from an estimated 6.5 percent of GDP in 1993 to an average of 8.6 percent over 1994-1996. Such real GDP growth rates would allow a real per capita income growth rate of 2.5 percent in 1996. 36. The agricultural sector will remain the main source of growth, with the more efficient cotton sub-sector leading the expansion. Despite the positive results achieved thus far, cotton production in the medium term is constrained by the environmental limit to further extensions, and will also depend on the ability to extend the ginning capacity beyond the current limit. Growth prospects for food crops, fruits and vegetables will depend on the extent of the improved competitiveness resulting from the devaluation, (particularly relative to Nigeria), the efficiency of input supply and extension services outside of the cotton sector, and the improvement in marketing and distribution channels. 37. Growth in the industrial sector, which is likely to remain modest, would be led by the small and medium-scale enterprise sector, and come from: (a) new activities spurred by the devaluation, and (b) increased overall efficiency through continued rehabilitation/restructuring c' public enterprises, in particular in the cement, textile and palm oil processing industries. Regarding petroleum, a further decline in production is expected unless additional investments are made to maintain current production of the Seme field at 1 million barrels per year. Further development of the tertiarv sector will mainly depend on the safeguarding of Benin's comparative advantage in transit and transport activities, on economic developments in these sectors in Togo, and on developments in Nigeria. Trade and transit activities would also benefit from continued liberalization efforts in order to establish positive incentives towards formal (rather than informal) activities. -11- 38. The public finance situation is expected to improve as the Government continues to: (i) reform the tax system; (ii) improve public expenditure management and budgetary procedures; (iii) reform the civil service and contain the wage bill; and (iv) increase the efficiency of public investment. The domestic paymnts arrears are expected to be eliminated over the 1994-96 period. The overall budgetary deficit is projected first to increase to 10.8 percent of GDP in 1994 but to fall to 8.9 percent in 1995 and 8.1 percent in 1996, as revenue collection is improved through the tax and trade reform. 39. After the January 1994 exchange rate realignment, the deficit of the current account of the balance of payments is expected to increase from 9.8 percent of GDP in 1993 to 14.4 percent in 1994, but to 11.5 percent by 1996, helped by a continued strong performance of cotton exports, the development of food crops and of non-traditional exports as well as the expansion of re-exports activities. After a decline of 2.2 percent in 1993, exports are projected to grow by 2.2 percent in 1994 and by an average of 6.8 percent a year in 1995-96, while imports would first decline by 8.7 percent in 1994 but increase by an average 5.2 percent per annum in the following two years. External financing, although important -- the cumulative gross financing gap is estimated at US$288 million for the 1994-96 period -- is not a major constraint. The PFP scenario identifies its financing as IDA contributions (US$64 million), use of IMF resources (US$75.1 million), and bilateral donors financing (US$89.9 million). The remaining gap is to be financed by debt relief (US$21.4 million), and additional donors contribution (US$39 million). E. IDA COUNTRY ASSISTANCE 40. Since the adoption of the structural adjusment program, the policy dialogue with the Government has significantly improved and has been extended to address sector reforms. Through economic and sector work (ESW) and technical support, IDA has assisted the Govermment in defining its development strategy. IDA will support the above strategy by increased ESW, its lending program and a systematic review of portfolio performance. 41. The main macroeconomic and sector objectives of IDA assistance are to: (i) encourage and support the private sector supply response; and (ii) ensure adequate provision of basic social services. The main development constraints will be addressed on a cross-sector basis so as to: (i) integrate the need to reinforce the administrative/institutional capacity in the sector; (Ci) support the new role of the state as a facilitator and promoter of an appropriate environment for private activity; (iii) draw attention to the impact on the environment and the protection of natral resources; and (iv) promote women's participation in economic activities. The lending program will contnue to promote a participatory approach and involvement of beneficiaries as was the case with severl projects (Community Based Food Security project of FY94, Rural Water and Sanitation project of FY94). 42. In order to increase public savings, the Govermment will continue to control the wage bill tightly. Combined with current efforts in resource mobilization (through the - 12- tax, trade and tariff reforms), this will enable the Government to increase its contribution to the investment program. Public investment is projected to grow from 7.4 percent of GDP in 1993, to an average of 10.7 percent in 1994-96, while increasingly reflecting the Government's priorities to improve and maitain the country's infrastructure in the transport and telecommunications, health and education sectors. 43. The Government intends to consolidate the progress it has made in creating an enabling environment for private sector activity through (a) improvements in the economic and social infrastructure, and (b) rationalization of the incentive framework, including tax and tariff reform, modification of the regulatory, legal and institutional environment for private initiative, and improvements in financial intermediation. This framework should also contribute to attract increased foreign investment as the economy's competitiveness improves and the profitability of investment increases. 44. In the health sector, the Govenmment is committed to improve the delivery of prinary social services, rehabilitate and maintain health centers, and improve the sector management capacity through institutional stengthening. The Government will adopt a population policy and extend family planning services. In the education sector, the Government will further reallocate resources from personnel expenditure towards equipment and rehabilitation, give priority to primary education, introduce more selectivity in university education, and reform the sector so as to make it more responsive to and in line with, the labor market constaints and needs. 45. Economic and Sector Work. The sector lending program will increasingly rely on analytical sector work. Our understanding of the economic environment and potential for growth will be enhanced by a Country Economic Memorandum which will be discussed with the Government in late FY94. A Public Expenditure Review is planned for FY95. Sector work will increasingly be used to deepen and promote sector reforms, prepared in close collaboration with the Govermment and the donor community. Progress in implementing the reforms and the strategy for rural development will be reviewed at a Round Table meeting in September 1994. The Transport Strategy, which was presented at a seminar in November 1993, will be fully developed by end FY94. The Government's private sector promotion strategy will be reviewed and discussed at a donor Round Table scheduled for September 1994. The Poverty Assessment will be discussed with the Govermment by end FY94. A Gender Issues Paper is planned for FY95. 46. Lending Strategy. In support of the stabilization efforts of the 1989-1991 period, adjustment operations (two strucr adjusment credits) accounted for 52 percent of total commitments, while investment lending was mainly oriented towards the rehabilitation of infrastructure, the suctuing of the cotton sector, and the health sector. With the consolidation of the adjustment reforms, lending (FY92-94) increasingly supported the mrual sector (33 percent of lending), infrastucture (30 percent) and the social sectors (25 percent). With adjustment operations accounting for 32 percent of total lending, the FY95-97 portfolio will support the Government's efforts to increase the role of the - 13- private sector (19 percent), while addressing enviromnental protection (9.5 percent) and population, health services and nutrition (9.5 percent). TABILE 2: IDA LENDING PROGRAM, PASf AND PROJECTED - FY89-FY97 (US$ miDion and in percent of to lending) AD Lendlng 190.8 (100) 72.9 (100) 125-155(100) Total Adjustment 100.0 (52) (32) of which: Structural Adjusment 100.0 (52) (13) Sector Adjustnent (19) (Private Sector Development) Agriculture and Rural 33.3 (18) 23.8 (33) (23) Development Energy 15.0 (8) Transport and Telecom. 16.0 (8) (2 Industry and Finance 2.5 (1) 3.8 (5) Urban 22.0 (30) Economic Management 5.4 (3) 5.2 (7) Education 18.1 ( Health 18.6 (10) (9.5) Environment (9.5) (a): FY95-97 represents the "base case' lending. 47. IDA Lending Program, FY95-97. The FY95-97 lendig strategy has been adjusted in view of the parity change so as to help Benin maximize the benefits of the enhanced exernal competitiveness. Assuming satisfactory performance, total lending for PY95-97 under the base case scenario is expected to be in the range of US$125-155 milion, of which adjustment lending would account for 32 percent. This 'base case" program is founded on the satisfactory conuation of the reform program, to be implemented in the context of the proposed structual adjustment operation SAL m. A high case scenario would be triggered by an acceleraton in implementing the reforms, and would be sustained by timely disbursement of the adjustment credits' second tranches and significant improvements in procurement and disbursement of counterpart funding. Failure to meet satisfactorily these criteria would prompt a reduction of the lending program to a low case scenaro, concentrating on the projects direcdy targeting poverty alleviation and delivery of primary social services. - 14- PROPOSED LENDING PROGRAM - FY95-FY97 Bans Case. US$1254155 million 1) Satisfactory imnplementation of the reform program, as demonstrated by timely disbursement FY95: SAL 11m; PSD; Transport Sector; of adjustment lending (SAL m and PSD). Population and Health; Environment; 2) Implementation of actions to improve FY97: Agriculture Sector; procurement procedures and practices and l ____________________________________ ensuring adequate disbursement. High Case. Acceleration of the program as demonstrated by: Composed of above projects, plus: FY96: Telecom. Sector; Energy; Public 1) Timely disbursement of the adjustment lending Enterprise Sector Management; (second tranches of SAL Im and PSD). FY97: Women in Development; Labor Force 2) Significant improvement in procurement Development; practices, demonstrated by a shortening of delays for awarding and signing of contracts. 3) Significant improvement in the disbursement of counterpart funding for externally-financed projects, in line with sector priorities. Low Case. 1) Policy slippage, as demonstrated by failure to reach agreement with the IMF, shown by the FY95: Environment; Population and Health; periodic IMF reviews of the program 2) Delays in inplementing structural reforms under SAL m and PSD, demonstrated by delays in disbursing the second tranches by more than eight months. 3) Significant deterioration of procurement practices. Delays in disbursing the counterpart funding for externally-financed projects due to reasons other than budgetary constraints. 48. In view of the reforms already implemented over the past two adjustment programs, structural adjustment lending for FY95-97 will focus on fiscal and financial policies and on improving the economic environment for the private sector. Remaining sectoral reforms will be addressed thiough specific sector operations. The base case scenano includes two adjustment credits: a SAL HI and a Private Sector Development operation. The investment projects are in the following sectors: transport, population and health, environment, and agriculture. Under the high case scenaro, additional operations would include: a telecommunication sector project, an energy sector project, a public enterprise sector management project, a women's initiative pilot project, and a - 15- labar force development project. The low case scenario lending program would concentrate on the population ama health and environment sectors. 49. The objectives of the proposed Structural Adjustment Credit (SAL m, FY95) are to assist the Government in implementing its reinforced reform program as presented in the PFP. It will focus on key macroeconomic obstacles and constraints to growth and private sector development, mainly by: (i) further improving public expenditure management in order to increase the share of non-wage recurrent expenditures; (ii) improving resource mobilization through the tax and trade reforms, so as to increase government revenues as a share of GDP (currently at 12.6 percent), and to eliminate disincentives to private sector activity; and (iii) reforming the fmancial sector so as to increase available resources for investment. 50. Promotion of Private Sector. IDA will assist th- Government to establish an overall favorable environment and adequate infrastructure wo promote private enterprise. The proposed Private Sector Development (PSD) operation (FY95) will help reform the regulatory and incentve framework, improve the functioning of the legal system, and streamline the institutional setting for promoting private initiative. The Government will further pursue its private sector development strategy through other sector operations: a Transport Sector project (FY95), an Energy Sector project (FY96), a Telecommunications project (FY96), and an Agriculture Sector project (FY97). A Labor Force Development project (FY97) would help promote vocational training and improve technical skills in line with the needs of the labor market and the growing private sector. 51. Promotion of Basic Sodal Services. The Bank recently approved two important projects: the Community Based Food Security project (April 12, 1994) and the Education Development project (May 17, 1994). The Rural Water and Sanitation project presented with this Strategy Note will significantly improve safe water supply and sanitation to the rural population. The proposed Population and Health project (FY95) will address the population constraint by promoting a national family planning system and improving the health and nutrition status of women and children. 52. Areas of Spec Emphasis. The Government has prepared with Bank assistance a National Environment Action Plan, which was adopted in 1993. IDA will assist the Government to implement the recommendations of the action plan through a proposed Environment Support Program (FY95). A Public Enterprise Sector Mtanagement project (FY96) will pursue the rehabilitation of remaining public enterprises and the improved management of the current state portfolio. The promotion of women's activity and initiatives is being addressed within each sector project, such as those on Private Sector Development, Rural Water and Sanitation and Food Security. In order to tackle the specific constaints to women's role on development, a Women's Initiative Pilot project (FY97) has been initiated. This project will be based on the results of the Gender Issues Paper, in particular regarding legal issues. Institutional capacity and administrative reform wiU also be approached on a cross sectoral basis; each project includes a sector capacity building and management strengthening component. -16- 53. Portfolio Implementation and Management. Since 1969, Benin has received IDA credits, totalling US$498 million (net of cancellations), of which US$140 million were undisbursed as of April 12, 1994. The current portfolio consists of 16 projects, of which one sttuctural adjustment credit, representing a total Bank commitment of US$240 million. Total disbursements for FY93 were US$37 million and US$10 million for FY94 as of April 28, 1994. The portfolio is concentrated in the following areas: agriculure, road construction and maintenance, energy, economic management, education and health, and to a lesser extent port expansion, urban and rural water supply, development of small- and medium-scale enterprises, forestry, public enterprise sector rehabilitation, telecommunications, and rural savings and credit. In the 1970s, the Bank Group's dialogue with Benin was limited and conducted in the context of individual lending operations. With the approval and implementation of SAL I and SAL II, considerable progress has been made in extending the policy dialogue to macroeconomic issues as well as to sector development issues e.g. education sector reform, agriculture strategy, transport sector strategy. 54. The main issues affecting project implementation are: (i) delays in decision making; (ii) inadequate administrative procedures resulting in insufficient delegation of authority; (iii) insufficient information flows between agencies; (iv) inefficient internal organization of ministries; and (v) inefficient procurement practices. Although overall status rating is satisfactory (1.9), these bottlenecks contribute to reduce the implementation capacity in Benin. 55. The annual portfolio reviews (ARPP) revealed: (i) d.elds in effectiveness: on average, project effectiveness is delayed by 11 months, reflecting for some part the delays in obtaining ratification of the project and credit agreement by the Parliament where the Government does not hold a majority; (ii) prcurement issues: after substantial delays, the Govemment has adopted a Procurement Code, which has been agreed by the Bank, and has recently presented it to the Parliament for discussion and ratification. Besides technical difficulties such as the drafting of bidding documents, evalpation of bids and negotiations of contracts, unjustified delays in contract awarding and signing continue to delay project execution and implementation. The use of implementation manuals and implementation schedules is expected to help improve the procurement process. A p ent seminar was held in Cotonou in March 1993, and a joint regional p seminar took place in April 1994 in Abidjan (C6te d'Ivoire); (iii) counterpi1 funding issues: the 1992 Country Implementation Review (CIR) identified the lack of coordination between the Ministry of Finance, the Ministry of Plan and the sectoral Ministries as the man cause of inadequate budgetary disbursement of counteWrpart funds, and the recent review of the PIP confirmed this. The Goverment has recently created a special unit at the Ministry of Finance to monitor and ensure timely availability of counterpart funds; (iv) dsbursement lags: significant disbursement lags are explained by initial delays in project effectiveness. Other delays stem from inefficiencies within the debt management agency, CAA. Poor administation of the special accounts by the CAA, has significantly hampered project implementation and has slowed down disbursement. During the 1993 Annual Meetings, an agreement was reached with the Government whereby future special accounts would be opened in -17- commercial banks and managed by project managers. Furthermore, an action plan agreed with IDA to restrucure the CAA, will be finalized with the Govermnent in the context of the Economic Management project. To initiate an action program dealing with the disbursement problems, a regional seminar took place in Abidjan (Cote d'Ivoire) in April 1994, in which Beninese project managers participated. TABLE 3: BREN - SELEED INDICATORS OF BANK PORTFOLIO PERFORMANCE AND MANGEMENT Incator FY91 FY92 FY93 FY94 Ponfolio Perfonnance Number of projects under implementation 16 16 16 16 Average implenaentaion period years) 3.45 3.80 4.24 4.31 Average ratings Development objectives 1.44 1.63 1.50 1.60 Overall status 1.75 1.81 1.88 1.87 Percent of projects rated 3 or 4 Development objectives 6.3 5.9 Overall status 13 12.5 3 5.9 Disbursement ratio (%) 27 22 17 10 Memorandum item: % completed projects 21 rated unsatisfrctory. (a) Porfo,0o Mawagement Supervision resources (total staff-weeks) 140.1 282.5 293.5 228.4 Average supervision (staff weeks/project) 9.4 20.5 18.9 13.1 Supervision resources by location (in%) Percent Headquarters 85.83 89.39 92.37 90.98 Percent Resident mission 14.17 10.61 7.63 9.02 Supervision resources by rating category (staff-weeks/project) Projects rated 1 or 2 8.67 20.46 19.13 16.13 Projects rated 3 or 4 14.86 21.06 15.48 11.52 Memorandum item: date of lastlnext June 1992 CPPR (Next CPPR2 FY95) (a): FY93 and FY94 not available - 18- 56. Role of the Resident Mission. Following the successful June 1992 CIR, the Resident Mission will initiate the FY95 Country Portfolio Performance Review. Over the last year, local staff have been trained in both procurement and disbursement at Headquarters; they will become increasingly involved in the quality control of disbursement and procurement documents, and will be able to provide direct assistance to Government on these matters. 57. Involvement of Beneficiaries. Borrower ownership and involvement of beneficiaries has progressed with the preparation of recent operations. In the Urban Management and Rehabilitation project, residents of a neighborhood were involved in project design; the Community Based Food Security project and the Rural Water Supply and Sanitation project are demand driven and directly involving local communities. 58. FIAS, IFC and MIGA. In 1992, the Foreign Investment Advisory Service (FIAS) undertook a review of the investment climate in Benin. The report presented a thorough analysis of the investment code and of the commercial and employment legislation; it identified a number of obstacles to private sector operation and presented recommendations for reforms. On the basis of this study, the Government has reviewed the pertinent legislation, and it intends to introduce the necessary reforms to improve the overall environment for private sector activity, in the context of the upcoming SAL HI and the Private Sector Development operation. 59. IFC became involved in Benin in 1991. Total net commitment held by IFC amounted to US$0.9 million as of March 31, 1994, of which US$0.55 million in loans and US$0.35 million in equity participation. Equity participation is in the banking sector (Bank of Africa-Benin) and to a lesser extent in fish processing (SOBEP). Loans were approved for the same SOBEP and for a pineapple plantation (Fruitex). IFC is currently considering a loan in the leasing sector (BeninBail) for an amount of US$0.14 million. IFC's participation is expected to increase as a catalyst to promote foreign investment in Benin. 60. Benin signed the MIGA convention on April 17, 1986, but has not yet ratified the agreement. 61. Aid Coordination. Next to IDA, the European Union and the United Nations system are Benin's most important multilateral donors. France remains the larges. source of bilateral aid, but Switzerland and other OECD countries including Germany, Norway, Denmark, the Netherlands and the United States also provide significant support. Regional aid institutions such as the African Development Bank and Fund, the West African Development Bank (BOAD) and the Arab aid agencies have a growing presence as well. In its aid coordination role, IDA assisted the UNDP in organizing a Round Table Meeting in April 1992 to mobilize financing for Benin's medium-term public investment program. As a follow-up, Sector Round Tables have been scheduled for key sectors, and are expected to be completed by end 1994. - 19- 62. Relations with the IMF. As noted earlier, the IMF approved its first-year SAF program for Benin under which SDIR 6.26 million was provided in June 1989, the second-year SAF in July 1991, and a three-year ESAF in January 1993. The IMF mid- term review of the first-year ESAF program (August 1993) was satisfactory. On the basis of this review and the outcome of the PFP negotiations, the IMF has approved the second year of the ESAF in March 1994. The PFP scenario assumes IMP allocations to reach a possible US$75 million for 1994-96. F. AGENDA FOR BOARD CONSIDERATION 63. Main Risks. As presented above, Benin's external environment will continue to constitute the major risk of slowing the reform process and preventing the achievement of the poverty reduction objectives. This risk is, however, mitigated by the policy agenda adopted by the Government to increase the diversification of the economy and to reduce its vulnerability. 64. The assistance scenario faces three additional risks. FM, because of the upcoming elections and increased political pressure and resistance, in particular in the context of the recent devaluation, some policy slippage may occur in the management of the wage bill and in the firther reduction of personnel expenditure. The Government is, however, committed to reinforcing the adjustment of the economy, as demonstrated by the adoption and implementation of the reforms presented in the PFP. Second, notwithstanding the adoption of the Procurement Code by the Parliament, delays in significantly improving procurement practices, would continue to slow down the execution of the investment program, and to act as a disincentive for private initiative. To mitigate this risk, the Government has agreed to train staff and project managers, who now regularly attend procurement seminars. IDA will closely monitor progress in procurement practices, which constitutes a trigger point for a low case lending program. Third, failure to improve the quality and sector allocation of the Public Investment Program could reduce the impact of the economic program on the welfare of the population and, in particular, on the poor. In tur, the slowdown of the reform program could jeopardize the disbursement of the external resources needed to sustain the investment program. The Bank will continue to review the quality and sector allocations of the PIP under the next structural adjustment credit. The timely disbursement of IDA lending will, in turn, help mobilize needed external resources. 65. Criteria for Assessig Progress. In view of the above-mentioned risks, progress in the following prionty areas will be regularly reviewed: (i) fiscal discipline, containment of the wage related expenditures, the levels of public investments and non- wage rcurrent costs, in particular in the social sectors; (ii) adoption of the reforms for the private sector; and (iii) portfolio management with a particuiar focus on procurement, disbursements and provision of counterpart funds for projects. Delays in meeting SAL Im and the PSD pre-Board conditions and delays in disbursing the respective second tranches in excess of eight months would imply policy slippage and would result in the reduction of the lending program (para. 47 above). - 20- 66. Summary Asseswnent. Since the adoption of the first structural adjustment program, the Bank has been instrumental in mobilizing external resources to help Benin meet its development objectives. The second phase of the adjustnent program confirned the Government's commitment to embark on an ambitious reform program to consolidate the market orientation of the economy. As explained above, results so far have been encouraging. After this transition period, Benin is now entering a new phase of its development as its new democratic system settles. The necessary consensus building with a diverse Parliament has, however, introduced delays in meeting pre-set performance objectives. As the electoral deadlines approach, pressures on the Government to relax its reform stance may increase. As demonstrated by the adoption and the initial implementation of the reforms contained in the PFP, the Govermnent is nonetheless committed to fully exploiting the new environment and opportunities created by the devaluation of the currency after some 40 years. Continued strong IDA support will, therefore, remain critical in helping the Goverunent consolidate past achievements and further implement the conditions for sustainable development. PART H: THE PROPOSED PROJECT 67. Sector Background. The rural population of 3.1 million, scattered in 3,500 villages and 23,500 smaller settlements, represents 60 percent of Benin's population. Forty-four percent of the rural population has potential access to modem water points (about 3,200 boreholes equipped with handpumps and 1000 modem wells) under the responsibility of the Directorate of Water (D)11 of the Ministry of Mines, Energy uid Water (MEMH), but 25 percent of the handpumps are not in working condition. In addition, those water points are seldom used during the rainy season and the daily consumption during the dry season is less than four liters per person, compared to a daily consumption of 35 liters in Cotonou. SBEE, the national water/power utility, provides water services to the urban population and to residents of large villages. SBEE's small piped systems, albeit correctly maintained, are also under-utilized by villagers. Adequate rural sanitation facilties are almost non-existent. The health situation has not improved, as it is apparent from the very large number of Guinea worm cases and from the prevalence of waterborne and water-washed diseases. The sector is still totally dependent on foreign fmancial and technical assistance. 68. The sector faces four issues: (a) Ownership: the development of rural water and sanitation services has followed a supply-driven public works approach. The central government and donors have taken all investment-related decisions without involving local communities. Donors' preferences have dictated technology and type of services (handpumps, open wells, standposts or small networks) imposed on the villagers. (b) Local Capacity Buiding: rural water supply (RWS) projects have been prepared by international consultants and contracted by large-scale foreign firms, using heavy equipment or carried out on force account by DH, which has not supported the emergence of local contractors and consultants. In turn, this has created a bias against using simpler and low-cost technologies based on the improvement of traditional sources -21 - of supply and precludes small communities to have access to safe water. (c) Sanitaion and Hygiene Educafion: sanitation has usually been neglected in RWS projects and the few construction programs focusing on on-site sanitation failed to attract interest because of the excessive costs of the latrines proposed to villagers. The hygiene education message delivered during community development sessions has been too ambitious in regard of the limited time spent by extension workers--usually civil servants--with the communities. Follow-up sessions have not taken place after the commissioning of the facilities and most of the message is lost. (d) Sustainability: funding has not been available for monitoring and supervising the use and maintenance of rural water facilities. Apart from the central funding of its staff costs, DH has not received any budget and had to act as a subcontractor of RWS projects to finance its operational needs. These policies have reflected a widespread view that the performance of the sector is only related to the number of water points constructed regardless of their use or their operating condition. 69. Recognizing the limited impact and lack of sustainability of RWS facilities, DH and SBEE proposed a new development strategy, approved by the Government in March 1992, which calls for a bottom-up approach to the construction and maintenance of water facilities and for a drastic change in the role played by the public sector. The latter should no longer directly provide rural water supply and sanitation services, but rather act as a promoter and a facilitator of services. The strategy is based on the following principles: (a) decentralization of the decision-making process to the village level, with special emphasis on the participation of women; (b) financial participation of the communities towards initial investment costs, in line with their willingness to pay for a given type of service; (c) reduction of construction and maintenance costs; (d) privatization of construction and operation and promotion of local execution and design capacities; and (e) integration of sanitation and hygiene education in RWS projects. 70. Project Objectives. The main purpose is the demonstration of the new sector strategy, whose objectives are: (a) to maximize the impact and use of safe water supply and sanitation facilities in rural areas; and (b) to ensure that the future development of the sector will actually respond to the demand of rural populations. The adoption of a decentralized approach would help ensure that investments are demand-driven. This requires to create an enabling environment for local contractors and consultants, for commercializing village-level operated and maintained (VLOM) pumps and spare parts through private networks and for promoting affordable solutions for on-site sanitaton. 71. Project Description. The project comprises four components: water supply for rural communities in two regions (59 percent of project costs net of PPF refinancing), provision of VLOM pumps to cover the needs of all RWS projects (II percent of project costs), sanitation and hygiene education for rural communities (14 percent of project costs) and capacity building (16 percent of project costs). Water supply facilities would include some 310 point sources (200 new and 110 rehabilitated) and about ten small piped systems in two regions (Zou and Atlantique departments). The number and type of the water facilites to be provided is indicative as rural communities would initiate their own individual projects with the assistance of local NGOs. Funding would also be provided for the execution of some 200 point sources carried out by UNICEF with local -22 - contractors in the Zou department. In addition the project would supply some 1,500 VLOM handpumps to cover the needs of all RWS projects carried throughout Benin during the implementation period, in order to lay the ground for efficient operation and maintenance in the four regions not directly affected by the project. Sanitation facilities would be constructed in schools and health centers, in parallel with the implementation of a training and marketing program for promoting on-site sanitation systems for households and communities. Hygiene educadon would be incorporated into the promotion, mobilizaton and traiing program for communities interested in improving their water supply and sanitation facilities. Capacity building through training and communication campaigns would target all actors of the sector that would have to acquire new skills in promoting, planning, constructing, managing and monitoring rural water supply and sanitation facilities. 72. Project Financing. The Project cost of US$15.0 million equivalent would be financed as shown in Schedule A. The IDA credit of US$9.8 million equivalent would finance 65 percent of total project costs. The Government of Denmark would provide US$4.0 million on a grant basis under joint co-financing arrangements with IDA. The Govermnent of Benin would finance US$0.5 million and the communities would provide US$0.8 million towards the investment costs of improved water supply and sanitation facilities. Procurement arrangements and disbursements are shown in Schedule B. 73. Project Implementation. To develop ownership, the village would submit an application to improve water supply to the regional unit of DH (SRH). After review, the SRH would contract one local NGO--or a joint venture between a NGO and local consultants if the technical solution is complex--to assist the community to mobilize and to prepare a project document that would provide the preliminary design of the facilities and a description of the operation and mainenance arrangements. The SRH would then prepare the procurement documentation and packages for boreholes, large wells and piped systems. Villages would contract local artsans or provide in-kind contribution for the simpler works and would also contract directly the distrbutor of handpumps for delivery and ins,allation. The NGO would train the community in managing and maintaining its water facilities and provide follow-up support and would carry out the hygiene education program throughout the process. 74. DH would be the executing agency of the project. A small team set up under the General Manager of DH prepared the Implementation Mamnal and is launching the communication and dissemination campaigns. The teams of the SRHs (comprising engineers, community development specialists and accountants) would manage the project at regional level, program the construction contracts and delegate supervision to local consulting engineers. An international NGO would manage the training program with the collaboration of Beninese institutions experimented in participatory methods and provide periodic assistance to the supervision and evaluation of the activities of local NGOs. 75. DH would delegate the implementation of the Sanitation component to the Directorate of Hygiene and Sanitation (DHA) of the Ministry of Health which has set up -23 - two regional teams (comprising one planner and two trainer/promoters for construction and hygiene education). The teams would: (a) develop training and promotional materials and train masons and small contractors who would be licensed to construct and promote on-site facilities; (b) initiate the program for the construction of facilities in schools and health care centers in association with a specific hygiene education and enviromnental sanitation program; and (c) develop an extensive marketing and promotion campaign to increase demand for improved facilities. 76. Project Sustainability. The overall project concept is geared to ensure greater sustainability. The demand-driven approach would create genuine ownership of the facilities by the villagers. Operation and maintenance of the water systems would be independent of government's subsidies or technical inputs. The sysiematic recourse to the local private sector and local organizations in executing works and providing goods and services would further enhance the sustainability of the project. In addition, the integration of water supply, sanitation, hygiene education and capacity building would maximize the health benefits and ensure a long-term impact. 77. Lessons Learned. This would be the first free-standing rural water project supported by IDA in Benin. The design of the community-based approach essentially builds on the experience gained in preparing and executing RWS projects in West Africa, particularly C6te d'Ivoire and Ghana. The experience of RWS projects financed by other donors in Benin has been thoroughly reviewed during the preparation of the strategy document and has confinmed that: (a) the participation of communities to niaintenance activities greatly increases the availabifity rate of handpumps, but does not bring by itself a sensible improvement of the use of water facilities; and (b) the expectation that the health benefits of improved water supply could be easily perceived by the villagers and would in turn reinforce the sustainability of the services has not materialized. The portfolio of IDA-supported projects in Benin has faced for some time generic country issues related to procurement and disbursement practices as well as to the lack of counterpart funding and of adequately trained accounting staff in the civil service. They are addressed by incorporating in the design of the project specific solutions tested in recent operations to: (a) facilitate access of small contractors to public contracts and streamline disbursements from the Special Account (Urban Rehabilitation and Management Project-Cr. 2338-BEN and Second Water Supply Project-Cr. 1721-BEN); and (b) establish decentralized accounting systems (National Resource Management Project-Cr. 2344-BEN). 78. Rationale for IDA Involvement. IDA has been mainly active in urban areas, with the Second Water Supply Project (Cr. 1721-BEN). More recently, the West Africa Group of the UNDP/World Bank Water and Sanitation Program (RWSG-WA, Abidjan) assisted the Government in formulating the sectoral strategy in accordance with principles outlined in the Africa Region RWS Seminar of May 1990. IDA's participation would: (a) reinforce the Government's commitment to policy reforms; (b) help to eliminate bottlenecks created by conflicting donors' interests, particularly in technological choices; (c) bring about a more comprehensive perspective of the respective roles of the public -24- and private sectors and of local conmunities within the framework of Benin's structural adjustment process. 79. The project is in line with the country assistance strategy presented to the Board at this time, which emphasizes private sector promotion as well as the provision of basic infrastructure. The project is closely linked to the other two FY94 investment operations in Benin, the Food Security Project (Cr. 2601-BEN) and tile Education Development Project and shares with the former project a common approach by supporting local development initiatives and promoting a partnership between the Government and NGOs. 80. Agreed Actions. Before Negotiaons: (a) an international NGO has been contracted to manage training activities; (b) the teams of the SRHs and of the regional sanitation units have been selected; and (c) a draft letter of sector policy and a draft Implementation Manual have been trasmitted to IDA (these documents were discussed and agreed upon during negotiations). Agreement on the discntuation of force account by January 1, 1995 and the divestiture of DH's drilling rigs before January 1, 1996 vas obtained during negotations. Before ffectiveness: (a) the contract for supplying handpumps would be awarded; (b) the Special Account would be opened by DH in a commercial bank; (c) a Project Account would be opened with an initial deposit of CFAF 30 million; and (d) auditors would be appointed and an accounting and budgeting system would be set up in DH. 81. Environmental Aspects. The project has been assigned to category B. An environmental study was carried out in January 1994, the conclusions of which are summarized as follows. Improvement of sanitation facilities and hygiene education would bring improvements of the village environment and particular attention should be paid to design and execution of the physical works to mitigate potential negative envirommental effects. Groundwater resources to be mobilized will be minimal. Wherever higher yields or spring water would be tapped, hydrogeological investigations will be conducted to ensure sustainabiity and adequate management of resources. Water quality will be tested and monitored. The interactive design and implementation process should also result in better siting of point sources in regard of potential contamination and better management of water point surrounds. Technological options focus on renewable energies (handpumps and solar energy). The project does not include dams or resetdement. 82. Poverty and Program Objective Categories. By targeting rural communities and particularly small communities which could not have access to safe water and improved sanitation, the project would benefit the poorest strata of population. Women would be the primary target of the mobilization process as the sustainability of cost recovery mechanisms would depend on their contributions. As such, they would be encouraged by the NGO teams to grasp opportnities to participate at all levels which would help them develop skdlls in decision-making and in management, which will be applicable in other domains. -25 - 83. Project Benefits. The primary outcome of the project should be to create an enabling environment for the provision of sustainable basic infrastructure planned, designed and managed at grassroots level, which could be easily replicated throughout the country. Project benefits would consist first of time saved by women and children in fetching water which would translate into improved productivity and greater opportunities for education and training. Health benefits would be generated by the extended use of safe water sources in conjunction with sanitation and hygiene education. Moreover, the promotion of small contractors would create new employment opportmities in rural areas through the use of more labor-intensive execution methods. 84. Risks. Main risks pertain to: (a) the capacity of DH to adjust to its new responsibilities and its commitment to not interfere with communities' decisions; and (b) the effectiveness of NGOs and other private actors in dealing with decentralized communities and cooperating with governmental entities. To mitigate these risks, strengthening of DH and SRHs through selection and training of key personnel is already takng place through PPF financing. NGOs and private contractors would also be prequalified and trained well in advance of the start-up of field operations. The training program will be extended throughout the implementation phase to allow for self- evaluation and exchanges of experience and lessons between the various actors, and complemented by the feedback from the external monitoring team. 85. 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 it. Lewis T. Preston President Attachments Wasington D.C. May 11, 1994 - 26 - Schedule A Page 1 of 1 REPUBLIC OF BENIN RURAL WATER SUPPLY AND SANfTATION PROJECT Estimated Project Cost and Financing Plan Summary of Project Costs (in US$ millon) % Of Component Foreign Local Total Base cost A. RURAL WATER SUPPLY 5.72 0.90 6.62 53 B. VLOM PUMPS 1.28 0.00 1.28 10 C. SANITATION 1.17 0.38 1.55 13 D. CAPACfTY BUILDING 1.51 0.35 1.86 15 E. PPF REFINANCING 1.17 0.00 1.17 9 TOTAL BASE COSI 10.85 1.63 12.48 100 Physical Contingencies 0.97 0.16 1.13 9 Price Contingencies 0.73 0.66 1.39 11 TOTAL CONTINGENCIS 1.70 0.82 2.52 20 TOTAL PROJECT COST 12.55 2.45 15.00 120 Project Fing Plan On US$ mion) Source of Funds Foreign Local Total Government of Benin 0.16 0.29 0.45 Communities 0.59 0.18 0.77 Govemment of Denmark 3.36 0.62 3.98 IDA 8.44 1.36 9.80 TOTAL SOURCES 12.55 2.45 15.00 - 27 - Schedule B Page 1 of 2 REPUBLIC OF BENIN RURAL WATER SUPPLY AND SANITATION PROJECT Procurement Methods and Disbursement Amounts and Methods of Procurement (in US$ million; amounts financed by IDA are shown In inaics) Description ICB LCB Shopping Other NIr Total Civil Works 4.62 1.87 0.33 0.10 0.00 6.92 3.14 0.98 0.17 0.05 0.00 4.34 Handpumps, Equipment, 1.50 0.42 0.27 0.00 0.20 2.39 Vehicles, etc. 1.02 0.27 0.17 0.00 0.00 1.46 Consulting Services, 3.52 0.00 3.52 Training, Technical 2.39 0.00 2.39 Assistance and NGO Services Operating Costs 0.78 0.22 1.00 0.44 0.00 0.44 PPF Refinancing 1.17 0.00 1.17 1.17 0.00 1.17 Total 6.12 2.29 0.60 5.57 0.42 15.00 IDA 4.16 1.25 0.34 4.05 0.00 9.80 a? Not IDA-financed -28- Schedule B Page 2 of 2 Disbursemt of IMA Credit on US$ miion) Category Allocated Amount Method of Disbursement 1. Civil Works 3.90 68% of expenditure 2a. Fqwpment for Part A 0.25 63% of expenditure 2b ';i'pply of Handpunps 0.95 68% of exenture 2c. Equipment and Vebicles for 0.15 63% of expenditure DH and DHA 3. Consulting Services, and 1.69 68% of expenditure Technical Assistance (including NGOs and UNICEF) 4. Training 0.45 68% of expenditure 5. Operating Costs 0.40 Declining rate averaging 56% of expenditure 6. PPF Refinancing 1.17 Amount due 7. Unallocated 0.84 TOTAL 9.80 EstlmatedDisbursements of IDA Credit by Semester (US$ milon) FY95 FY96 FY97 Si S2 SI S2 SI S2 Semestrial 2.63 1.20 2.12 1.34 2.34 0.17 Cumulative 2.63 3.83 5.95 7.29 9.63 9.80 - 29 - Schedule C Page I of 1 REPUBLIC OF BENIN RURAL WATER SUPPLY AND SANITATION Timetable of Key Project Plcessing Events (a) Time taken to prepare 3 years (b) Prepared by Government with IDA and RWSG-WA (UNDP/World Bank Water and Saitation Program) assistance (c) First IDA mission July 1991 (d) Appraisal mission departre November 1993 (e) Negotiations April 1994 (f) Planned date of effectiveness July 1994 (g) List of relevant PCR and PPAR: None - 30 - Schedile D Page 1 of 1 Disbursements The bulk of the portfolio has been put in place since Benin's move to a democratic government and a market-oriented economy in 1991. Credit effectiveness and, for that matter, project implementation of some operations have been delayed because of the insistence of the newly elected Parliament, in which the Government only hold a small majority, to review in detail the related legal documents. Moreover, project implementation issues, such as poor administration of special ascounts and non-compliance with the Bank's procurement procedures have slowed down disbursements. A country implementation review in June 1992 addressed these and other issues and agreed upon specii:Y corrective actions, such as carrying out an audit of the government debt management agency (CAA), restructuring of some projects and organization of a disbursement seminar for project coordinators which took place in February, 1993. A Bank procurement seminar was also organized in April 1993 and a new Procurement Code has been submitted to the Parliament. The reorganization of the CAA is expected to be completed shortly. Moreover, in September 1993, the Government agreed to improve management of special accounts, formerly administered by the CAA. Special accounts would be opened and maintained in a commercial bank, in line with Bank's Disbursement Departnent's recommendations. A country portfolio performance review is scheduled for FY95. - 31 - Anmex Al Page 1 of 2 Benin - Bank Grou, Fact Sheet. FY91 -FY97 IBRD/IDA Lending Program, FY 91- FY97 Past Curret [Planned Category FY91 FY92 FY93 FY94 FY95197J (a) Commitments (US$m) 87.70 36.10 3.80 33.0 125-155 Sector (%) Agriculture 38 39 100 29 23 Industry and finance Power 46 Public sector 16 16 management Infrastructure and urban 61 26 development Human resources 55 9.5 Environment 9.5 TOTAL 100 100 100 100 100 Lending instrument (%) Adjustment loans 63 32 Specific investment loans 37 100 100 100 68 and others TOTAL 100 100 100 100 I0 Disbursements (US$m) 46.51 46.65 36.80 8.53 137.14 Adjustment loans 23.08 25.25 15.74 .68 46 Specific investment loans 23.43 21.40 21.06 7.85 91.14 and others Interest (US$m) 2.08 2.50 2.77 2.05 7.20 (a) This represents the base case lending program. - 32- Annex Al Page 2 of 2 Benin - IFC Program FY91 - FY94 Past Qgrent Category FY91 FY92 FY93 FY94 IPC Approvals (US$m) 0.34 0.41 0.29 Sector% Agribusiness 100 100 Capital markets 100 TOTAL 100 100 100 Investment instrument (%) Loans 82 100 100 Equiy 18 Quasi-equity TOTAL 100 100 100 - -33 - An= A2 Page 1 on2 Benin: Priority Poverty Indicators P.a4f Mpg ,ea ae. 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Группа Всемирного банка · Memorandum & Recommendation of the President
Benin - Rural Water Supply and Sanitation Project
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Memorandum & Recommendation of the President
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