Senegal - Private Sector Capacity Building Project

Document of The World Bank Report No. 14499-SE STAFF APPRAISAL REPORT REPUBLIC OF SENEGAL PRIVATE SECTOR CAPACITY BUILDING PROJECT JUNE 2, 1995 Industry and Energy Division Western Africa Department Africa Region  CURRENCY EOUIVALENT Currency Unit = CFA franc (CFAF) US$1.00 CFAF 486.2 CFAF 1 million = US$ 2.057 SYSTEM OF WEIGHTS AND MEASURE: METRIC Metric U.S. Equivalent 1 meter (m) 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi.) I square kilometer (km2) 0.39 square mile (sq. mi.) I hectare (ha) 2.47 acres (a) 1 metric ton (t) = 2,205 pounds (lb.) 1 kilogram (kg) = 2.2046 pounds (lb.) FISCAL YEAR January 1- December 31 ABBREVIATIONS AND ACRONYMS AGETIP Agence d'execution de travaux d'interet public CNES . Conseil national des employeurs du Senegal CNPS Conseil national du patronat du Senegal CRG Competitiveness Review Group LRC Legal Reform Committee MEFP Ministry of Economy, Finance and Plan PFP Policy Framework Paper PSAC Private Sector Adjustment and Competitiveness credit PSF ; Private Sector Foundation SAZFI . Societe d'amenagement de la zone franche industrielle SODI Societes des domaines industriels SONEPI Societe nationale d'etudes et de promotion industrielle SPIDS Syndicat professionnel des industries du Senegal UNACOIS . Union nationale des commerCants et de l'industrie du Senegal WAEMU West African Economic and Monetary Union ZOPP Zielorientierte Projekt-Planung or Project Planning by Objectives  REPUBLIC OF SENEGAL PRIVATE SECTOR CAPACITY BUILDING PROJECT Contents Credit and Program Summar .......... ................................................ i 1. THE MACROECONOMIC AND SECTORAL CONTEXT .......................................................... I A . B ackground .......................................................... I B. Recent Macrocconomic Performance .......................................................... I C. The Role of the Private Sector in the Economy .......................................................... 3 [I. THE ENVIRONMENT OF THE PRIVATE SECTOR .......................................................... 5 A. The Policy and Regulatory Environment ..........................................................5 B. The Legal Environment of the Private Sector .......................................................... 6 C. The Institutional Support to Private Sector Activities .......................................................... 6 III. STRATEGY FOR PRIVATE SECTOR CAPACITY BUILDING .......................................................... 9 IV. THE PROPOSED PROJECT ........................................................... 12 A. Project Objectives ........................................................... 12 B. Project Description .......................................................... . 12 1. The Private Sector Capacity Building Component .......................................................... 13 2. The Policv and Legal Reform Component .......................................................... 16 3. Specialized Services to Strengthen Government Capacity .................................. ......................... 18 C. Status of Project Preparation ............................................................ 20 D. Project Costs and Financing Plan ........................................................... 21 E. Project Implementation ........................................................... 22 F. Procurement and Disbursement .......................................................... 23 G. Accounting. Auditing and Reporting .......................................................... 27 H. Environmental Aspects ........................................................... 28 V. PROJECT BENEFITS AND RISKS .......................................................... 28 A . Benefits .......................................................... 28 B. Risks .......................................................... 28 VI. AGREEMENTS, CONDITIONALITIES AND RECOMMENDATION ................................................ 29 This operation was prepared by a team consisting of Mr. Cherif Azi (Sr. Operations Officer, mission leader), Mr. Pierre Morin (Public Enterprise Specialist), Ms. Ana Novaes (Economist), Ms. Marianne Fay (Economist), Mr. Sangone Amar (Operations Officer), Mr. Kishor Uprety (Counsel), Mr. Jan Hendrik Van Leeuwen (Consultant), Mr. Michael Brennan (Consultant). Mr. Brendan Horton was the peer reviewer, Mr. Jean-Louis Sarbib is the Department director, Mr. Emmerich Schebeck is Departmental Project Advisor, Ms. Silvia Sagari is the Division Chief. Technical support was provided by Brigitte Wiss.  Contents (Cont'd) ANNEXES Annex 1: Letter of Private Sector Development Policy Annex 11: Private Sector Foundation -- Table of Key Activities, Evaluation Criteria, Performance Indicators, and Implementation Timetable Annex III (a): Competitiveness Review Group -- Table of Key Activities, Evaluation Criteria, and Performance Indicators Annex III (b): Competitiveness Review Group -- Implementation Timetable Annex IV (a): Legal Reform Committee -- Table of Key Activities and Evaluation Criteria Annex IV (b): Legal Reform Committee -- Implementation Timetable Annex V (a): Privatization Component -- Preliminary Planning and Performance Indicators Annex V (b): Terms of Reference for Recruitment of an Advisor to the Cellule de Contr6le et de Gestion du Portefeuille de I'Etat Annex VI (a): Communications Component -- Preliminary Planning and Performance Indicators Annex VI (b): Terms of Reference for the Preparation of a Communications Program Annex VII: Estimated Project Costs and Financing Plan Annex Vill: Supervision Plan Annex IX: Disbursement Schedule Annex X: Documents in project file Map: IBRD 27057  REPUBLIC OF SENEGAL PRIVATE SECTOR CAPACITY BUILDING PROJECT Credit and Program Summary Borrower: Republic of Senegal Beneficiaries: The Government of Senegal and the private sector Amount: IDA Credit: 8 million (US$12.5 million equivalent) Terms: IDA Credit: Standard with 40-year maturity Program Obiectives The overall development objective of the proposed Private Sector Capacity Building project is to accelerate the growth of the private sector. To this end, the proposed project will help the Government of Senegal (GOS) complete the implementation of a three-pronged strategy aimed at enabling the private sector respond to the recent improvements in the policy environment. The two first elements of this strategy consisting of restoring and maintaining economic equilibria and removing policy constraints are being implemented in the context of the Policy Framework Paper for the period 1994-1997 and the Private Sector Adjustment and Competitiveness Credit. The third element of the GOS strategy, the implementation of which will be supported by the proposed credit, is aimed specifically at: (i) increasing the competitiveness and efficiency of private enterprises and business associations; (ii) deepening the policy reform process by analyzing remaining constraints to private sector activities and devising appropriate measures to eliminate them; (iii) improving the legal framework for private sector activities; (iv) accelerating the implementation of the government divestiture program; and (v) carrying out a program of communications and information to ensure that the main stakeholders in the economy understand and support the reform process. Project Description In support of these objectives, the project will help finance the implementation of three components: (i) a private sector capacity building component (US$6.3 million) to help private enterprises and business associations gain better access to business advisory services  ii through a Private Sector Foundation established by representatives of the private sector associated with APDF, an affiliate of IFC; (ii) a policy and legal reform component (US$2.51 million) to assist a Competitiveness Review Group (CRG) and a Legal Reform Committee (LRC), composed of representatives of the private sector and of the GOS, in continuing to identify and propose concrete measures to alleviate policy and regulatory constraints to the development of the private sector and in strengthening the legal framework for private sector activities; and (iii) a component of specialized services (US$1.9 million) to help the GOS accelerate the transfer of public enterprises to the private sector and carry out a communications program to widen and consolidate national consensus on reforms needed to promote the development of the private sector. Project Benefits: The project's most important expected benefit is its contribution to promote Senegal's economic growth by improving enterprises performance and strengthening the private sector, notably through interventions in an estimated 600 firms over the life of the project. At the enterprise and business association level, it will: (i) increase efficiency and competitiveness; and (ii) most importantly improve management skill and raise awareness among private entrepreneurs that benefits from business advisory services might outweigh their cost. The project will also contribute to foster Senegal's economic growth by laying the ground for a sustainable supply response of the private sector which will be encouraged by: (i) a favorable policy, legal and institutional environemnt; (ii) an increased potential for expansion in particular through the implementatition of the government's divestiture program; and (iii) the creation through through public debates within the CRG and the LRC and through the communications program of a national consensus on the importance of a private sector development culture. Project Risks: The most important risk is the possibility that the GOS relaxes its adjustment efforts or back-tracks on reforms already implemented. This risk is very small, however, because these reforms have been initiated after an intense national debate and have now gained a wide constituency. The second risk lies with the Private Sector Foundation whose role will be to improve the access of the private sector to external support services. In the event that this institution becomes inefficient and unresponsive to the need of the private sector, an important objective of the project might be in jeopardy. This risk should be mitigated by the fact that its Managing Director, recruited from the private sector after a strict selection process, is highly qualified and that careful attention has been paid to the preparation of a detailed and precise Manual of Procedures that should reduce the potential for poor  iii management practices. Finally, the private sector might prove to be unresponsive to the improvement of its policy environment and institutional support framework. This risk appears to be small in view of the substantial growth that has taken place since the devaluation in some sectors of the economy like manufacturing, fisheries and tourism. Environmental Risk: The proposed project which primarily aims at providing consultants services does not present the prospect of any environmental impact. It is therefore classified category C.  iv Estimated Project Costs and Financing Plan: (in USSOO0s) LOCAL FOREIGN TOTAL Estimated costs 1. Policy and Legal Reforms 2630 330 2960 2. Private Sector Foundation 5000 7400 12400 3. Technical Assistance to the GOS 1650 700 2350 4. Project Monitoring and Audits 100 150 250 5. Refund of PPF Advance 400 200 600 6. Contingencies 1120 620 1740 TOTAL 10900 9400 20300 Financing Plan IDA 3100 9400 12500 Government/Private Sector 7800 7800 Total 10900 9400 20300 Estimated IDA Credit Disbursements (in US$ million) IDA Fiscal Years 1996 1997 1998 1999 2000 2001 Annual 2.61 2.34 2.86 2.25 2.02 0.42 Cumulative 2.61 4.95 7.81 10.06 12.08 12.5  I. THE MACROECONOMIC AND SECTORAL CONTEXT A. Background 1.01 Senegal is a Sahelian country with limited natural resources and a population of /.4 million in 1990. Social indicators, such as life expectancy, primary school enrollment rate and infant mortality, are at the lower end of the range recorded in Sub- Saharan Africa. Per capita GDP, which was estimated at US$730 in 1993, places Senegal at the level of middle-income countries. 1.02 Senegal's economic perfornance during its first 30 years of independence (1960-1991) has been disappointing. Population grew at 3% per annum, while GDP grew at only 2.5%. Senegal's agricultural base has been steadily deteriorating because of poor weather conditions and resource management. Industrial production grew at 4.5% per annum between 1960 and 1985, and at 4.1% between 1986 and 1991. Export performance during this period compared unfavorably with most other West African countries and averaged only 2.4% growth per annum. 1.03 Given the private sector's predominant position in the Senegalese economy and the poor performance of the public enterprise sector, sustainable economic growth in Senegal can only come from the growth of the private sector. This sector, which contributed about 87% of GDP in 1987, consists of a small modern or formal sector and an informal sector which together employ 90% of the work force. The dynamism of the informal sector attests to the potential for private sector growth given an adequate environment. In contrast with the vitality of the informnal sector, the formal private sector, which has operated since Senegal's independence with excessive protection from imports and restrictive market-sharing arrangements, has been characterized by decreasing productivity and competitive efficiency, high costs, and slow growth. B. Recent Macroeconomic Performance 1.04 In the late 1980s, economic growth, which had reached 4.3% per annum on average during the 1984-1988 period, deteriorated because of an overvalued exchange rate and postponed necessary adjustments. Since the beginning of the 1990s, the economy experienced a serious decline with a contraction of output in key sectors. In 1991, in particular, fish processing declined in volume terms by 66.4%; phosphates by 24.1%; textiles by 36.8%; and food processing by 45.8%. Groundnuts exports declined in value by 41% during the same year. Low economic activity resulted in a shrinking tax base which forced the government to reverse import tariff reduction and to increase the taxation of petroleum products. In 1992-1993, the economy declined even further as the difficulties of pursuing an adjustment strategy based on internal  2 deflationary policies became more acute. The fiscal deficit and the balance of payment positions worsened; the fiscal balance (excluding grants) declined from a 0.2% surplus in 1991 to a 3.9% deficit in 1993. During the period 1988-1993, Senegal's economic growth stagnated at an average of 1.7% per annum. 1.05 In an attempt to reverse this economic deterioration, in August 1993 the Government of Senegal (GOS) adopted a series of internal adjustment measures including cuts in public sector wages. However, these measures were not sufficient to restore the competitiveness of the economy and its growth prospects. The extent of the appreciation of the real exchange rate, coupled with Government's inability to remove structural rigidities, made it more difficult for Senegal to restore competitiveness through internal adjustment alone. The decline in investments and exports, widespread smuggling and custom fraud, and increasing macroeconomic imbalances made inevitable the January 1994 devaluation of the CFAF. 1.06 With the devaluation, Senegal has now gained a unique opportunity to restore competitiveness and export-led growth, taking advantage of its strategic location and its sizable human resource base. Following an intense national debate which took place immediately after the devaluation, the GOS came to realize that this measure alone could not generate the indispensable supply-response of the private sector, particularly in terms of new investment and exports. Consequently, in early 1994 it outlined, and started to implement, a medium-term strategy for the development of the private sector. the key elements of which are: (i) a stable macro-economic environment; (ii) policy reforms favorable to sustained economic growth; and (iii) increased assistance to the private sector to help it expand and improve its competitiveness and expand its activities. The GOS's macro-economic objectives for the 1994-1997 period include a GDP growth rate increasing from the 2% achieved in 1994 to 4.5% in 1995, a return to low inflation after an initial adjustment in prices in response to the devaluation, with the inflation rate projected to decline from the 32% observed in 1994 to 8% in 1995 and 2.5% thereafter, a reduction of the current account deficit from 9.8% of GDP in 1994 to 7.3% in 1996, and a reduction of the budget deficit from the 5.7% of GDP reached in 1994 to 2.6% in 1995 and 2.4% 1996. In terms of policy reforms, the GOS has already implemented, in the context of a Private Sector Adjustment and Competitiveness credit supported by the Bank, most of the measures aimed at liberalizing prices and trade, eliminating rigidities in the labor code, liberalizing maritime transport and anticipates to improve, in 1995, the investment and export incentive systems. The third element of the GOS's strategy aims at encouraging the supply-response of the private sector by continuing to improve its environment, and facilitating the provision of business services to enhance the productivity and competitiveness of private enterprises, while resuming and accelerating the implementation of the Government's privatization program.  3 C. The Role of the Private Sector in the Economy 1.07 Senegal's private sector is large, dynamic and constitutes the backbone of the economy that it dominates in terms of contribution to GDP, employment and investment. According to a 1994 Private Sector Assessment (Senegal -- Private Sector Assessment, The World Bank, June 1994), the share of the private sector in the country's GDP is estimated at about 82% and represents virtually 100% of the value added in the primary sector, about 80% in the secondary and 77% in the tertiary sectors. Informal activities, including those of the agricultural sector that are largely carried out by small farmers, are those which contribute the most to the country's economy. The informal sector absorbs about 90% of Senegal's employed labor force. In con.rast. the modern sector, accounts for only about 2% of total employment, the remainder representing employment in the public sector. 1.08 Tile Informal Sector. In Senegal, as in most African countries, the informal sector dominates economic activity in the primary and tertiary sectors, i.e. in agriculture, trade and transportation. Several factors have contributed to encourage the growth of the informal sector. In addition to repeated periods of droughts of the last decades which have accelerated rural exodus, employment opportunities in the modern sector were linited because of sluggishness in the economy and, most importantly, of persistent rigidities in labor regulations. As employers of the modem sector kept the number of their employees at a minimum, large numbers of unemployed people, including school and university graduates, had no other choice than to resort to informal activities. Complex regulations and government controls have also encouraged small businesses to remain informal. In the Dakar area alone, where unemployment reached 24% in 1991, there are about 30,000 informal micro-enterprises employing a total of 57,000 people as compared to the 38,000 that are employed in the modern sector. 1.09 The characteristics of informal businessmen attest to the existence of a class of entrepreneurs striving to make a living. According to the Private Sector Assessment, about 80% of all informal entrepreneurs financed the creation of their enterprise with their or their family's savings, and bank credit plays a verv minor role at any stage of operation of informal firms. Informal entrepreneurs are young, between 25 and 44 years old on average, and almost half of them (40%) come from rural areas. Despite the numerous difficulties that they face, informal enterprises appear to be resilient and about 50% of them have been in existence for five years or more. An increasing number of college graduates and educated people that cannot find a job in the formal sector have turned to informal activities and, as a result, about two-thirds of informal entrepreneurs are fluent in French, which is the official language. Nevertheless the majority (90%) of them need training in accounting, management, machinery operation and want to know better the administrative regulations related to their business. They also declared that they were prepared to contribute to the cost of such training.  4 1. 10 The Modern Private Sector. Although employing a much smaller portion of Senegal's labor force, the modern private sector plays an important role in the economy. In 1987 it contributed about 26% of the countrv's GDP or about a third of the contribution of the whole private sector. Most of the enterprises of the sector are large, often with substantial foreign ownership, and operate generally in manufacturing, construction, trade, tourism and in insurance and banking. In 1988, the sector was estimated to include about 1,000 firms, of which 264 were in industry, 69 in construction and public works and 667 in services. 1.11 Private manufacturing is very concentrated. While a dozen fish processing enterprises compete on the export market, there are only two tomato paste canning factories, two flour mills, one sugar refinery, one factory producing edible oil, one major producer of milk products and one petrol refinery. Tourism, a potentially important sector in Senegal, has been reasonably successful in attracting private investors. In 1992, this activity contributed CFAF 42 billion to the balance of payments (equivalent to 10% of the country's total export receipts). 1.12 After the 1988 restructuring of the banking system, which resulted in the closure of several state-owned banks, the nine banks remaining in the system are largely private, with a substantial participation of foreign capital. The GOS holds up to 20% of the equity in only two of them. Three of the five major banks are controlled by French banks and a fourth by an American bank. With the exception of the Agricultural Development Bank (CNCAS), a first impact of the devaluation has been an improvement in the cash position of banks since most were creditors of foreign banks. 1.13 Public/Private Sector Interface. Since the Government initiated a divestiture program in 1987, 26 enterprises were privatized and 21 liquidated. Forty (40) enterprises are still Government-controlled. Of these only 13 have commercial or industrial activities. Public enterprises play an important role in strategic sectors and have a monopoly in water and power supply, in telecommunications and in processing and marketing of agricultural products such as rice, groundnuts and cotton. Since 1990-1991, the privatization process stalled partly because of deteriorating economic conditions marked by a continued recession and decreasing capacity utilization. Following the recent adjustment of the exchange rate, the GOS decided to resume its divestiture efforts as part of the reforms being implemented in the context of the 1994- 1997 Policy Framework Paper (PFP) and supported by the PSAC and the forthcoming Agriculture Sector Adjustment project. Presently 18 enterprises are earmarked for privatization --for six of them, privatization had been previously envisaged but not completed. Ongoing Bank supported operations include the restructuring and privatization of the water company, the strengthening of the railroad company and the privatization or liquidation of the airline company. The power company is expected to be restructured, and the role of the private sector in the energy sector redefined, in the context of an upcoming energy project for which the GOS has requested Bank's assistance.  5 1.14 Since Senegal's independence, the modern private sector has been operating with substantial protection from imports and restrictive market-sharing arrangements. It has, therefore, never become very efficient. In contrast with the informal sector, it has exhibited less dynamism and has been characterized by decreasing productivity and competitive efficiency, worn out equipment, high labor and transaction costs, and relatively slow, if not negative, growth. II. THE ENVIRONMENT OF THE PRIVATE SECTOR A. The Policy and Regulatory Environment 2.01. Until recently, the policy and regulatory environment impaired the competitiveness and development of the private sector. In addition to an overvalued currency. Senegale ;e enterprises benefited from excessive protection through high import tariff duties. Some public as well as private enterprises were further protected by a system of prior authorizations to import competitive products, an arrangement resulting from special agreements (Conventions Speciales) that gave them a monopolistic position in the local market and substantial tax benefits. Following the January 1994 devaluation, and as condition of the PFP for the 1994-1997 period, the GOS committed itself to: (i) provide a stable macro-economic framework; and (ii) eliminate all constraints to the development of the private sector. In early 1994, it took m-easures to restore macro-economic equilibria by containing the fiscal deficit while reducing its internal and external arrears. Along with measures to contain inflation, it lowered imports tariff duties to a maximum of 45%, not including a 5% stamp duty. The GOS anticipates to curtail further the level of nominal protection, which is still high by international standards. This will be done in the context of the harmonization of the tariff structures of the West African Economic and Monetary Union (WAEMU) member countries. The common tariff structure expected to be implemented by 1996 will include three tariff categories ranging from 5 to 30%. In late 1994 and early 1995, under the PSAC, the GOS took decisive steps to: (i) complete the liberalization of internal and external trade; (ii) improve exports and investments incentive regimes; (iii) liberalize maritime transport and reduce its cost; and (iv) eliminate rigidities in the labor market. As a result, only 11 prices remain administered, all special agreements have been terminated and all prior authorizations to import and export eliminated (except for imports of gold bars, silver bars and second hand clothes). Maritime transport has been liberalized while rigidities in the labor market have been significantly reduced through amendments to the Labor Code. The export and investments regimes are being reviewed with assistance from IFC's Foreign Investment Advisory Services (FIAS) with the objective of making them more supportive of private sector development. The review is expected to be completed during 1995.  6 B. The Legal Environment of the Private Sector 2.02 Senegal has one of the most comprehensive legal systems in the region and has been a legal training center for neighboring countries. The Civil and Commercial Code, as well as the Corporate Law include the basic provisions on contract law and secured interests. The Bankruptcy Law is quite modem compared to legislation on similar matters in other countries of the region. It includes provisions for judicial settlement of claims and allows receivers to carry out recovery procedures under the control of a judge. However, there is a lack of alternative means to settle business disputes quickly. Representatives of the business community, as well as law practitioners, agree that the content of the laws relating to private sector activities is quite adequate, although some gaps -- such as the opening up of the legal framework to the informal sector -- and some updating, simplification and refining might be warranted. 2.03 Problems facing the legal environment for private sector activities relate more to the cumbersome institutional framework, and regulatory and administrative hurdles than to the content of the law itself. Entrepreneurs perceive that the legal and regulatory environment is unreliable, that the application of business laws is complex, and that it does not ensure the efficient settlement of disputes in accordance with the law. Lack of trained and competent legal practitioners to apply the law (judges, receivers, clerks etc..) is often mentioned as being the major cause of the ineffective functioning of the legal system. This is aggravated by poor working conditions, dramatic shortages of material and equipment and dilapidated physical infrastructure. Finally, erratic publication of the Journal Officiel (Gazette), virtual absence of law reports, lack of information on prevailing regulations and procedures contribute to reduce the transparency of the system and lead to inconsistent treatment of business operators by the judicial system. As a result, access to the courts is costly, lengthy delays are common and the uncertainty regarding the enforcement of judgments adds to the transaction costs associated with doing business in Senegal. C. The Institutional Support to Private Sector Activities 2.04 In addition to a supportive policy and regulatory environment and to an adequate legal system, the availability of appropriate support services is indispensable for a sustainable development of the private sector. In Senegal, the institutional framework supposed to provide these services is comprised of: (i) about 40 public and private institutions that were established to provide assistance to private entrepreneurs, to promote laws and regulations favoring their interests and facilitate their dealings with the administration; and (ii) close to two hundred consulting firms offering advisory services in all areas of business operations. 2.05 Government Institutions. The Government created a number of public institutions to foster private Senegalese investments and facilitate operations of existing  7 enterprises. The most important of these are the Dakar Chamber of Commerce Clhambre de commerce de Dakar (CCD), the Societe nationale d'etudes et de promotion industrielle (SONEPI), the Societes des domaines industriels (SODIs) and the Sociegt d 'amnnagement de la zone franche industrielle (SAZFI). The role of the CCD, created during the colonial period, is to disseminate and explain the legislation applying to private enterprises and help private entrepreneurs overcome administrative hurdles. Although members of the CCD elect its Chairman, its employees are appointed by the Government ai.d act as civil servants rather than as efficient providers of business services. As a result, CCD is perceived as being another administrative outlet of the Government. 2.06 The three other institutions mentioned earlier were established in the 1970s. The role of SONEPI is essentially to promote the development of Small Scale Enterprises (SSEs) by assisting potential investors in preparing feasibility studies and in obtaining the required financing from the banking system. Despite substantial assistance received from various external donors, including the Bank, SONEPI has globally been ineffective. An assessment of its future role is presently underway and its privatization, if feasible, is envisaged. The SODIs are a network of institutions which administer industrial estates with a view to providing adequate infrastructure and facilities to new enterprises. The most important of these is SODIDA, the institution in charge of the Dakar industrial estate. SODIDA, which has succeeded in attracting 46 enteiprises is relatively well managed. Three other SODIs are in charge of smaller industrial estates in other parts of the country that house altogether 29 small-scale enterprises. Along with the decision to sell Government land to private entrepreneurs and to overhaul the land tenure laws, the GOS has recently decided to privatize the SODIs, starting with the SODIDA. The SAZFI was created to encourage the development of export-oriented enterprises. Enterprises established in the free trade zone benefit from total exemption from all direct and indirect taxes provided that they export more than 60% of their production. The zone also offers to prospective investors, land and adequate facilities and utilities. Despite a promising start, only 10 of the 32 enterprises whose application to operate in the zone was approved are still in business. Exports from the zone dwindled from about CFAF 5.5 billion in 1989 to about CFAF 3.3 billion in 1993 or a mere 1.5% of Senegal's total import. Three main reasons contributed to the relative failure of the SAZFI: (i) the enterprises' non- competitiveness due to the overvaluation of the CFAF; (ii) Government's denial, because of budgetary constraints, of some fiscal benefits initially granted under the zone regime; and (iii) the cumbersome and weak administration of the zone. In 1994, the GOS undertook to review, with the assistance of the FIAS, all existing export assistance schemes, including the free trade zone regime, to consolidate them into a unified and improved system. This new system is expected to be implemented in 1995. 2.07 Private Institutions. The most prominent of the private associations and trade unions is the Conseil national du patronat du Senegal (CNPS), a confederation of 14 associations of employers of the modem sector. The members of CNPS own about 600 enterprises employing about 75,000 workers. Two of the largest member organizations  8 are the Conseil national des employeurs du Senegal (CNES) which represents about 130 enterprises owned by Senegalese entrepreneurs and the Syndicat Professionnel des Industries du Senegal (SPIDS) representing about 100 enterprises with foreign participation in their capital. Entrepreneurs of the informal sector have various associations, the most important of which is the Union Nationale des Commerfants et de l'Industrie du Senegal (UNACOIS) established by traders in 1988. Despite being relatively recent, this institution has about 25,000 members . 2.08 Recently created with Bank support, the Agence d'ex&ution de travaux d'interet public (AGETIP) has been very successful in helping small, formal and informal enterprises of the private sector. Operating principally in the building and public works sector, AGETIP is a private sector non-profit association, which sub-contracts small- scale and informal construction businesses to execute labor-intensive, municipal public works contracts. Since its creation in 1990, AGETIP has greatly increased the efficiency, timeliness and quality of municipal public works. It has also greatly expanded small contractor participation in public sector contracts and has demonstrated remarkable efficiency and tangible results. In its first three years, it channeled funds to 119 sub-projects generating about 11,000 jobs of 30 days duration, average. 2.09 Business Advisory Services. In Senegal, there are numerous private companies, including some local branches of large international consulting firms, that offer business advisory services to private entrepreneurs. A recent survey of private sector demand for business services (Etude sur la Demande/Fondation du Secteur Prive, Africaine d'Ingenierie pour le Developpement, September 1994) identified 100 firms, 15 individual consultants and 65 research institutes and training institutions that propose consulting and business services. However, the range of services that they offer is generally limited to project feasibility studies and accounting in the area of enterprise management, and to technical advice in agriculture, hydraulics and public works. The quality of their services is unequal and the survey found that, on the whole, the expertise of local consulting firms is weak in such areas as personnel management and marketing, and is virtually non-existent in production management, manufacturing and product quality. This is one of the reasons which explains that, according to the survey, few enterprises use their services and of the 64 consulting firms or individuals questioned, only 26 percent have had contracts with the private sector, the others preferring to compete for government contracts. 2. 10 The Private Sector Demand for Business Services. The recent elimination of protection, market distortions and the overvalued currency constitutes an opportunity for the private sector to develop and, at the same time, a threat for some existing enterprises. The private sector can now freely expand its activities in segments of the local market which were highly protected or in exports markets. However, some enterprises that were used to operating in a protected domestic market where considerations of competitiveness in quality and price were not relevant, will now have to face tough competition from imports or from more efficient local enterprises. The survey mentioned in the above paragraph was carried out during project preparation to  9 assess the demand of the private sector for external assistance. This survey questioned 67 fom,al and informal enterprises, 12 business associations, all major employers' associations, all Chambres de commerce and Chambres des metiers, as well as 64 firns and individuals providing expert services. It revealed that although most of the private enterprises and associations surveyed felt that they needed assistance in technical services. less than 20 percent of them have had recourse to such assistance. The findings of the survey indicate more specifically that there is a strong demand from private enterpr-ses for expertise in such areas as production management, product and packaging design, quality control methods, equipment selection and maintenance methods, cost accounting and product pricing, market research, personnel management and project feasibility analysis. Private sector associations expressed an interest in obtaining expert assistance in setting up information services and data bases, in organizing training courses for their members, in improving their capacity to enlarge their membership or raise funds, and in creating and commercializing technical publications. 2.11 Despite the existence of numerous support institutions, under existing institutional arrangements many Senegalese entrepreneurs cannot receive appropriate technical and managerial advice to improve their operations. While the large firms that need technical services can have recourse to their overseas partners or parent companies, smaller enterprises are handicapped in their search for expert advice. The main reasons explaining this situation are: (i) inability of small entrepreneurs to properly identify their needs; (ii) lack of information about the services that are available; (iii) limited range of services available locally; and (iv) lack of financial resources or the difficulty to assess whether the gain resulting from external assistance will be commensurate with its cost. III. STRATEGY FOR PRIVATE SECTOR CAPACITY BUILDING 3.01 Government Strategy. Following the January 1994 devaluation of the CFAF, the GOS realized that sustainable economic growth could not be achieved without a significant development of the private sector. The GOS recognized also that, although the devaluation removed a key constraint to the expansion of private sector activities, this measure alone could not generate the indispensable supply response of the private sector. Immediately after the devaluation, it prepared therefore the three-pronged strategy for the development of the private sector mentioned earlier (para. 1.06), and described in a Letter of Sector Development Policy (Annex I) which served as a basis for the design of the Private Sector Adjustment and Competitiveness credit (PSAC). With regard to the first element of the strategy aimed at restoring macro-economic equilibrium for the period 1994-1997, except for external arrears (due to slower IDA disbursements than expected), the criteria and benchmarks agreed for 1994 with the Bank and the IMF in the context of the PFP have been respected. As indicated earlier (para. 2.01), in the context of the ongoing PSAC approved by the Bank in February  to 1995, all monopolies previously granted to industrial or commercial enterprises, except for utilities, have been eliminated, internal trade and external trade as well as domestic prices liberalized and rigidities in labor code removed. The strengthening of the incentive systems for investment and export promotion is presently underway. The Government has now decided to implement the third element of its strategy aiming at pursuing the improvement of the policy and legal environment of the private enterprises and of strengthening institutional support to increase their competitiveness, both measures that are indispensable to ensure a sustainable development of the private sector. 3.02 To successfully implement this strategy, the GOS sought to ensure full participation of the private sector. A dialogue on the reforms needed to strengthen the sector supply-response to the change in CFAF parity was initiated in January 1994 during a seminar on enterprise competitiveness which was attended by representatives of the Government, the business community and the labor unions. Following this seminar, the GOS established two think-tanks to identify the key policy and legal constraints to private sector development and to propose solutions to eliminate them: the Groupe de Reflexion sur la Croissance et la Competivite (Competitiveness Review Group or CRG) and the Comite de Reforme Juridique (Legal Reform Committee or LRC). Both think-tanks are comprised of concerned government officials, representatives of private professional associations and labor unions. The CRG started to review, in February 1994, the policy and regulatory environment of the private sector. It has since participated to the design of the Government's reform program aiming at liberalizing prices and trade, eliminating rigidities in the labor market, liberalizing maritime transports, and improving the export and investment incentive regimes. In early 1994, the GOS created a Working Group to analyze the legal environment of the private sector. This group, assisted by a consultant financed by a Project Preparation Facility (PPF), issued a report in May 1994 that identified areas requiring substantial reforms. Since then, the Legal Reform Committee -- which has been operating informally since November 1994 and was formally established in February 1995-- has continued to prepare a program of reforms of the legal framework and follow-up on its implementation. Finally, to improve the institutional environment of the private sector, the GOS recruited consultants to prepare the creation of a Private Sector Foundation (PSF) the purpose of which is to help private enterprises and business associations get the support services that they need to improve their operations and competitiveness or efficiency. 3.03 Rationale for IDA's Involvement. Since the devaluation, the GOS, with the Bank's support. decided to resume its adjustment efforts. In support of this decision, in March 1994, the Bank's Board of Directors approved an Economic Recovery Credit to help improve the country's macro-economic equilibria and control inflation in the post devaluation period. This was followed by the PFP for the period 1994-1997 which presents the Government's macro-economic objectives as well as the strategy for the development of the private sector. The Bank initiated at the same time the preparation of a Country Assistance Strategy (CAS) and of the PSAC, both approved by the Board  11 of Directors in February 1995. With a policy environment that has already been substantially improved, the proposed Capacity Building project will complement the Bank's support for the implementation of the Government's strategy towards the private sector by helping it pursue the reform of the policy and legal environment while strengthening the competitiveness of the private enterprises. It will therefore respond fully to the Bank's objective, spelled out in the Country Assistance Strategy, of helping Senegal achieve sustainable growth with equity and targeted poverty reduction. 3.04 Lessons Learned from Previous Bank Experience. In the past, the Bank undertook to provide assistance to the private sector through Industrial Development and Finance (IDF) type-projects, the latest being the Investment Promotion project approved in 1981. This project provided technical services to SONEPI, the Government agency described in para. 2.06 above to improve its delivery of support services to private entreprereurs and a line of credit to a now defunct development bank (SOFISEDIT) to finance private investments in the industrial sector. As shown in the Project Completion Report of this and other similar projects, these attempts failed bzcause: (i) the policy environment of the private sector was inadequate; (ii) the private sector was practically not involved in the project design; and (iii) the assistance to the private sector was delivered through a supply-driven process and by govermment institutions that proved to be weak, bureaucratic and inefficient. The proposed project draws, therefore, on this experience. First, the proposed project will take place in the context of a greatly reformed policy and regulatory environment where the exchange rate has been readjusted, monopolies have been abolished and price and trade totally liberalized. Second, all key stakeholders of the private sector have been fully involved in the preparation of the project. As mentioned earlier (para. 3.02), representatives of the private sector participated actively in all stages of the project preparation. Through the CRG and the LRC, they contributed to the design of policy and legal reforms that are indispensable to a sustainable development of the private sector. Third, the assistance to the private sector will be delivered on a demand-driven and cost sharing basis. It will be delivered by the PSF which is a private institution created with the collaboration of the private sector. 3.05 The project design also takes into account OED's findings regarding the Bank's previous technical assistance projects, as well as the recommendations of the Bank's report on Free Standing Technical Assistance for Institutional Development in Sub- Saharan Africa. The assistance and training to be provided by the PSF will be on-the- job and of a short-term nature. Local consultants' input will be sought whenever possible in order to minimize incremental costs and ensure an adequate transfer of skills and know-how. During project appraisal a series of ZOPP workshops (Zielorientierte Projekt-Planung or Project Planning by Objectives) were organized with the support of GTZ (Gesellschaft fiJr Technische Zusammenarbeit) for the CRG, the PSF and the LRC. These workshops, carried out with all stakeholders, assured broad ownership and resulted in the preparation of project implementation planning that will facilitate a precise and timely assessment of implementation results and allow the design of corrective measures whenever necessary.  12 3.06 Coordination with IFC. The Bank and IFC have already cooperated closely in preparing the Private Sector Assessment on the basis of which a common strategy was agreed upon to assist the private sector in Senegal. The Abidjan-based African Project Development Facility (APDF), an affiliate of IFC in association with other development institutions, will participate in the proposed project as a founding member of the Private Sector Foundation. APDF, whose purpose is to provide assistance to African entrepreneurs in setting up new business, will share its experience with the Foundation while it plans to use the Foundation to gain better knowledge of the Senegalese business community. In terms of operations, IFC has made investments in three ventures in the financial sector, four in industry. one in services, two in agriculture and two in fish processing. IFC's current loan and equity investment portfolio is composed of five operations: ICS (phosphoric acid and fertilizers), African Seafood (fish processing), Africamer (fish processing), a leasing company and an agribusiness project. These projects did not perform well because of a combination of external factors, particularly high factor costs and low international prices, aggravated by an overvalued exchange rate. The performance of these projects is expected to improve after the devaluation and the improvement of the environment of the private sector. IV. THE PROPOSED PROJECT A. Project Objectives 4.01 The overall development objective of the proposed Private Sector Capacity Building project is to help the private sector respond to the recent improvement in policy environment and to enable it to take advantage of new opportunities to expand. To achieve this goal the project will support the GOS strategy for the private sector described earlier (para. 3.01) that it has started to implement in the context of the PFP and the PSAC. The specific objectives of the proposed project are to: (i) increase the competitiveness and efficiency of private enterprises and business associations; (ii) deepen the policy reform process by analyzing constraints to private sector activities and devising appropriate measures to eliminate them; (iii) improve the legal framework for private sector activities; (iv) accelerate the implementation of the government divestiture program; and (v) carry out a program of communications and information to ensure that the main actors in the economy understand and support the reform process. B. Project Description 4.02 In line with the objectives mentioned above, the proposed project -- which will involve an IDA credit to the Government of Senegal of US$12.5 million equivalent-- will have three components: (i) a private sector capacity building component; (ii) a policy and legal reform component; and (iii) a component of specialized services to strengthen the GOS capacity. The proposed project will finance, over a five-year  13 period, consultants' services, expert advice, equipment and operating expenses needed by the project institutions described in the following paragraphs. As mentioned earlier (para. 3.02), the project has been designed in parallel to the PSAC with the active participation of the representatives of the government and of the private sector who will be involved in its implementation. This collaboration was pursued during appraisal through workshops that helped finalize, for the PSF, the CRG and the LRC, their work program and a timetable to implement it, and identified appropriate criteria for periodic monitoring and evaluation of progress achieved. These workshops used the ZOPP method wxhich has proved a useful tool to build up ownership, and ensure adequate planning in other Bank supported projects. 1. ThLe Private Sector Capacity Building Component 4.03 The purpose of this component is to help private business associations and enterprises increas,. their competitiveness and efficiency through better access to business advisory services. Project preparation work revealed that none of the existing support institutions was capable of helping the private sector get the assistance it needs. While government controlled institutions were found to be bureaucratic and inefficient, private institutions lacked the organization and technical skills required to assist efficiently the private sector. It was, therefore, decided that the help envisaged in the proposed project would be better delivered by a Private Sector Foundation (PSF) to be created. The PSF will not, however, directly provide technical services to the private sector. It will act as a catalyst and intermediary between firms and institutions of the private sector that need assistance, and local and international suppliers capable of providing it. As reported earlier, to adequately design the role of the PSF, a survey was carried out during project preparation to assess the demand of the private sector for business services and the conditions under which these services could be efficiently delivered. Along with the findings reported in para. 2.10, the survey indicated that private entrepreneurs and institutions agreed that the assistance that they would get through the PSF should be: (i) demand-driven, with private institutions defining for themselves the type of service that they need; and (ii) delivered on a cost-sharing basis with the beneficiaries contributing to the cost of the services that they receive. The rationale for providing matching grants to private entrepreneurs is based on the fact that the private sector should not bear the full cost of external services needed to alleviate significant barriers to its development such as the relative infancy of entrepreneurship, market imperfections and externalities. This concept was used to provide Bank support to similar projects in India, Indonesia, Bolivia and Kenya for example. 4.04 The creation of the PSF was prepared by a Working Group composed of representatives of private sector institutions and enterprises that was formed in mid- 1994. Under the supervision of this Working Group, consultants financed by a Japanese grant to the GOS, were commissioned to prepare the PSF's Statutes, Bylaws and Manual of Procedures. Under the Statutes and Bylaws proposed by the consultants, the PSF will be a non-profit public service institution (Fondation d'Utilite Publique). The National Assembly of Senegal has adopted, during its March 1995  14 session, a law introducing the possibility of establishing Foundations, a form of institution that did not exist legally until then. The Private Sector Foundation was created by 35 founding members, the list of which had been agreed upon during project appraisal. These founding members include representatives of private professional associations of the formal and informal sectors -- including, inter alias the Association Senegalaise des Femmes d'Affaires --, of the banking sector and of the African Project Development Facility, as well as individuals selected for their competence and experience in business. During appraisal, representatives of APDF, an affiliate of IFC, participated in the mission's work aimed at preparing the creation of the PSF. According to the PSF's statutes, its organization structure will be made of: (i) an 18 member Board of Administrators, the " Conseil de Fondation" appointed in May 1995 by the founding members during their first general assembly; and (ii) a Managing Director recruited from the private sector through a transparent and competitive process. The Board of Administrators has been formed and has confirmed the nomination of the Managing Director during its first meeting. The Board will meet at least twice a year to approve the PSF annual work programs and budget, assess progress achieved in their implementation, and review the PSF annual accounts and audits. The Managing Director will also appoint ten representatives of the private business community who will constitute a Consultative Committee. This Committee will convene at least every two or three months to review and advise the Managing Director on the PSF's operations. In addition to the bodies mentioned above, the Managing Director will be assisted by a permanent team of two high level professionals, an accountant and a secretary, all to be locally recruited. During negotiations, agreement was reached that these dispositions will all be implemented and that no change in the PSF's Statutes, Manual of Procedures and higher management will be made without IDA's prior approval (para.6.01(a)). The appointment of the Consultative Committee and the recruitment of the PSF's permanent staff are conditions of disbursement for the PSF component (para. 6.03(a)). 4.05 The PSF's Manual of Procedures has been designed to ensure transparency in its procedures and accountability in the delivery of assistance to the private sector. The Manual details operating procedures governing all the steps from the identification of assistance needs of a would be beneficiary until the evaluation of the results of the assistance provided through the PSF. The Manual includes eligibility criteria for PSF's assistance as well as procedures for hiring consultants, supervising and evaluating the services that they would provide. During negotiations final agreement was reached on a cost-sharing formula, by which PSF's contribution will vary from 75% for consultants contracts under US$2,500 to 30% for contracts over US$20,000 (para. 6.01(b)). There will be a maximum cumulative contribution of US$40,000 per beneficiary. However, public enterprises and enterprises that employ more than 250 permanent workers will not be eligible for PSF's support. Over time entrepreneurs should "graduate" and accept to bear the cost of external business services they need. 4.06 In order to learn proper procurement practices, individual enterprises and associations will directly recruit the consultants they need. PSF will act only as an  15 advisor in helping prepare the consultants' terms of reference, short-lists and invitations to bid. This will contribute to limit PSF's staff, increase its cost-efficiency, and maintain the ratio of operating expenses to total budget to about 10%. Given the limited absorptive capacity of Sub-Saharan countries in general, this ratio cannot be reduced without jeopardizing the functioning of the PSF. The PSF will pay its contribution to beneficiaries only when it has been satisfied that proper procurement procedures have been followed and that the consultants have satisfactorily completed their task. Finally to ensure that PSF's operations are transparent, agreement was reached daLring negotiations that, in addition to the periodic reviews carried out by its Consultative Committee, the PSF will widely advertise its services through the media and will periodically make public the list of its beneficiaries and of the consultant firms that won technical services contracts (para.6.01(c)). 4.07 The Working Group reviewed and comnnented on the drafts of the legal documents and the findings of the study on the demand of the private sector for business services mentioned above. To continue ensuring a full participation of the private sector in the establishment of the PSF and therefore build its ownership of this institution, the Working Group remained actively involved in the preparation of PSF's work program and final legal documents. During appraisal, the Working Group participated in a ZOPP workshop which helped define the PSF's objectives, the tasks to be carried out, a timetable for their implementation, and monitorable evaluation criteria of progress achieved (Annex II). Through the direct assistance to private enterprises and training seminars for their personnel, the PSF will aim at achieving five objectives: (i) improved managerial capacity; (ii) improved technological skills; (iii) increased productivity and competitiveness; (iv) improved access to bank credit; and (v) promotion of exports. As envisaged in its Manual of Procedures, the PSF will package demands for training into modules whose objectives, terms of reference and arrangement for implementation will have to receive IDA's prior approval. 4.08 Agreement has been reached, also during appraisal, with the GOS and with PSF's founding members on PSF's Statutes and Bylaws, on the Agreement to be signed by the GOS and the PSF, and on the steps leading to the formal creation of this institution. The PSF's Manual of Procedures was discussed and amended and a draft version is ready for approval by the GOS and the founding members of the institution. The PSF was formally established, as a condition of negotiations, when the GOS issued a decree for the implementation of the law allowing the creation of Foundations, the General Assembly of the founding members approved PSF's Statutes and Bylaws, and the GOS adopted a decree establishing the PSF. The signature by the Government and the PSF of an Agreement (Convention) that will give to the PSF complete independence in recruitment and dismissal of staff, in operating the agency and helping private or business associations hire consultants services and the formal adoption by both parties of its Manual of Procedures are conditions of project effectiveness (para.6.02(a)).  16 4.09 Under this component, IDA funds in the amount of US$6.3 million will be made available as a grant by the Government to the PSF. These funds will finance incremental salaries of PSF's staff, office equipment and incremental operating expenses of the PSF (US$1.3 million). They will also finance, on a cost-sharing basis, consultants' services, technical services and training for eligible enterprises and business associations of the private sector (US$5 million). 2. The Policy and Legal Reform Component 4.10 The Policy Reform Sub-component. The purpose of this sub-component is to assist the GOS in continuing to identify, in collaboration with the private sector, policy and regulatory constraints to the development of the private sector and in formulating and implementing remedial measures. These tasks will be carried out within the CRG which is composed of representatives of the private formal and informal sectors, labor unions and concerned government officials. As mentioned earlier, the CRG has already participated in the design of the policy reform program carried out in the context of the PSAC. To organize the private sector participation in the preparation of the reform program implemented under the PSAC, the CRG set up a number of commissions that had the responsibility to analyze each specific area of the policy environment. The commissions reviewed the constraints to the promotion of competition and the problem of monopolies, the promotion of exports, the promotion of investments, the reduction of labor costs and labor code flexibility and the reduction of transport costs. The commissions reported to a General Assembly, comprised of nine representatives of the Government, five representatives of the Labor Unions and eight representatives of private sector associations. The Assembly discussed their proposals to alleviate impediments to private sector activities and reached a consensus on recommendations which were submitted to the Government. To carry out its work program under the proposed project, the CRG will maintain the same organization and procedures. 4.11 Building on its previous experience, the CRG has, during project preparation, prepared a work program aimed at following the implementation of the policy reform agenda of the PSAC, at analyzing remaining cross sectoral impediments to private sector activities, and at making specific proposals to complement the PSAC. During appraisal, the mission and the members of the CRG carried out a ZOPP workshop to prepare and agree upon a detailed work program, an implementation planning and criteria for evaluation of results (Annexes III (a) and III (b)). This work program focuses on three main objectives: (i) the rationalization, in collaboration with the LRC, of the legal and regulatory framework for the private sector; (ii) the increase of competition in the domestic market; and (iii) the facilitation of the development and creation of private enterprises. To analyze each of the measures included in its work program, the CRG will organize, as it has done in the past, Working Groups including the relevant representatives of the Government and the private sector. Specifically, the CRG will: (i) elicit from participants different perspectives on key competitiveness issues; (ii) commission experts, when necessary, to conduct diagnostic studies  17 presenting alternative policy options; (iii) invite individuals with appropriate expertise from Senegal and abroad to present their experiences; and (iv) propose to the GOS specific measures to improve the environment and competitiveness of the private sector. To facilitate the Working Groups' tasks, the CRG will gather and provide members with relevant information and will, when necessary, hire experts to carry out stludies to serve as a basis for the Working Groups' deliberations. 4.12 In Febriary 1994, the GOS appointed the Chairman of the CRG who was selected because of his professional qualifications, his extensive knowledge of the Senegalese economy and private business community, and the high respect he enjoys in the private sector. In addition to the Chairman, the CRG has a permanent staff limited to a Secretary General and one administrative assistant. Terms of Reference for the Secretary General recruited in June 1994, were agreed upon during project preparation. As conditions of negotiations the decree officially establishirg the CRG has been issued by the GOS and an Arrete which defines CRG's membership and the responsibilities of its Chairman and Secretary General in terms of organizing and carrying out the work of tl.e CRG has been issued by the Minister of Economy, Finance and Planning. 4. 13 Under this component the GOS will pass on as a grant to the CRG an amount of US$980,000 to help it implement this component. The project would finance, over a period of three years, incremental salaries of the CRG's staff, supplies and incremental operating expenses for the administration of the CRG (US$400,000). It will also finance consultants' services to carry out studies that would serve as basis for concrete action plans to be proposed to the Government. 4.14 The Legal Institution Strengthening Sub-component. This sub-component of the project aims at strengthening the legal framework for private sector activities and at improving the functioning of the judicial system in areas that have an immediate impact on enterprises' operations. In January 1994, a Working Group including representatives of the government, of the private formal and informal sectors, and of private legal practitioners was established with a mandate to identify key areas of the legal framework where reforms were needed. In May 1994, the Working Group completed a report that recommended reforms in various arcas such as the protection of the rights of the private sector, the dispute settlement mechanisms, the dissemination of information on administrative procedures and the consolidation, modernization and harmonization of the business laws. As in the case of the Private Sector Foundation and the Competitiveness Review Group, during appraisal a ZOPP workshop helped design, for the Legal Reform Committee, an action program and implementation timetable for this component along with monitorable evaluation criteria to measure progress achieved (Annexes IV (a) and (b)). This work program concentrates primarily on the attainment of five objectives: (i) the preservation and strengthening of private enterprises' rights in their dealings with the State; (ii) the modernization of the legislation to reflect the needs of the enterprise; (iii) the establishment of a "Centre de Formalites" to increase the efficiency of the judicial processes relating to private enterprises; (iv) the improvement of debt recovery mechanisms; and (v) the  18 improvement of the dissemination of business laws. In addition, the LRC will follow up on the rationalization of business laws in close cooperation with the National Commission that was established in the context of the ongoing regional project for the harmonization of business laws of the West African Economic and Monetary Union. 4.15 The preparation and implementation of the legal reform action plan will be carried out by the LRC. This Committee which was formally created by decree in February 1995, is composed of an equal number of representatives of the public and the private sectors and is chaired by the Minister of Justice. A full-time local legal expert has already been recruited as the Secretary General of the LRC. The Secretary General will be in charge of preparing the Committee's deliberations. To this end, the Secretary General will provide the Committee with available information relevant to its review of each topic of the action program and will recruit local short-term consultants to carry out any study deemed necessary by the Committee. 4.16 Under the proposed project, the GOS will pass on, as a grant, to the LRC an amount of US$1.53 million to finance the implementation of this component. The project will finance office equipment and operating expenses for the LRC (US$300,000), equipment to improve the functioning of the office of the registrar of the commercial court (US$250,000) and studies (US$980,000). 3. Specialized Services to Strengthen Government Capacity 4.17 Under this component, the project will help the GOS pursue its program aimed at liberalizing the economy. It will also help the GOS expand its policy dialogue with all the concerned segments of the Senegalese society and achieve a wide consensus on the reform program. The project will help the Government fulfill these objectives by: (i) reviving and pursuing the privatization of public enterprises; and (ii) carrying out a communications program to widely publicize the objectives of its policies towards the private sector and the results achieved in their implementation. 4.18 The Privatization Program. As mentioned earlier (para. 1. 13), as part of the adjustment program supported by the PFP and the PSAC, the GOS is to resume the implementation of its privatization program and, in particular to complete disinvestment from 18 enterprises during the period 1994-1997. The proposed project will help the Cellule de ContrOle et de Gestion du Portefeuille de l'Etat, a unit of the Ministry of Economy, Finance and Plan (MEFP) which is in charge of the divestiture program achieve this objective. The project will assist the Cellule in following-up on the implementation of the divestiture plans already underway in the context of the PASA for four enterprises: Societe pour le Developpement des Fibres Textiles (SODEFITEX), Socite d'Amenagement d'Exploitation des terres du Delta (SAED), Caisse de Perequation et de Stabilisation des Prix (CPSP) and Societe Nationale de Commercialisation des Oleagineux (SONACOS) and in achieving the privatization of the remainder. To this end, during project preparation, a consultant was hired to help assess the situation of the concerned enterprises and propose a divestiture strategy for  19 each of them. The consultant's report recommends the immediate sale of the assets of three enterprises Socite des Hotels Saly, Societe Nationale de Distribution (SONADIS) and Societe des Textiles de Kaolac (SOTEXKA), the sale of Government shares in two others Societe de I'Hotel Teranga and Societe Senegalaise des Phosphates de Thhes (SSPT), and studies for the privatization of the nine remaining enterprises. Rather than follow this last recommendation, the appraisal mission agreed with the GOS that to speed up the process, the execution of the privatization program would be sub- contracted to private specialized firms. During appraisal, agreement was reached on a preliminary implementation planning and performance indicators for this sub- component (Annex V (a)). During negotiations, agreement was reached for the recruitment of an investment banker on TORs acceptable to IDA (Annex V (b)) to prepare an action plan and the bidding documents required to sub-contract to the private sector the sale of the enterprises earmarked for privatization (para. 6.01 (d)). The submission of a time-bound action plan acceptable to IDA for the implementation of this sub-component is a condition of effectiveness (para. 6.02 (b)). 4. 19 The Communications Program. The purpose of this sub-component is to help the GOS consolidate and widen the dialogue that was initiated with representatives of the private sector through the CRG by publicizing its economic objectives, the proposed measures to achieve them and the results actually achieved. This will contribute to introduce transparency in, and accountability on, the GOS's strategy for the private sector. It will also educate the concerned economic actors and strengthen the national consensus with the civil society on the reforms needed. In addition to disseminating information on the GOS economic policy reforms, the program will aim at improving the Government's communications system. This program will be carried out through the most popular media (press, radio and television) as well as through less formnal media such as posters in neighborhood cafes, stores, etc. It will also include speeches by government officials associated with representatives of the private sector, conferences and seminars. During appraisal agreement was reached on preliminary planning and performnance indicators for the implementation of this sub-component (Annex VI (a)). To prepare an adequate action plan, a short term consultant will be hired, on terms of reference to be agreed upon during negotiations (Annex VI (b)), to design, in collaboration with concerned Government officials and private sector representatives, a communications program that will achieve these objectives (para. 6.01 (e)). During negotiations, assurances has been reached that the private sector, through the CRG, will participate in the design of the Communications program (para. 6.01 (f)). The submission of a communications program acceptable to IDA, including an implementation timetable and criteria for evaluation of results achieved is a condition of project effectiveness (para. 6.02 (c)). 4.20 An amount of US$1.9 million of the credit proceeds will be allocated to this component to finance: (i) consultant services, office equipment and incremental operating expenses for the implementation by the Cellule of the privatization program (US$1.25 million); and (ii) consultant services, office equipment, incremental  20 operating expenses and communications costs for the implementation of the communications program (US$650,000). C. Status of Project Preparation 4.21 Project preparation, which started in 1993, was somewhat delayed when priority was given, after the devaluation of January 1994, to the preparation of the Private Sector Adjustment and Competitiveness credit. This development has, however, increased the chances of success of the proposed project by removing, first, the policy constraints to the development of the private sector. It has also contributed to enhance project ownership through the dialogue between the GOS, the private sector and IDA, which was initiated during the preparation of the PSAC. The participation of the private sector and concerned government officials in the preparation of the project culminated with the ZOPP workshops that took place during project appraisal for the PSF, CRG and LRC components. 4.22 The project preparation was assisted by a Japanese grant of US$435,000 extended in June 1992 to the GOS with the Bank as executing agency and a PPF advance of US$600.000 approved in two tranches in March 1994 and March 1995. These funds financed consultants' services, operating expenses and salaries that have helped advance the preparation of each component of the project. This allowed to achieve the following results: a) Competitiveness Review Group. The Chairman has been appointed and the Secretary General and the support staff recruited; since the preparation of the PSAC in the first half of 1994, the CRG is operational; consultants helped in identifying areas of the policy and regulatory environment of the private sector that need reforms; b) Legal Reform Committee. A local consultant has helped a Preparatory Commission identify areas of the legal environment of the private sector that require reforms; all the members of the Committee have been appointed and the Committee has been established by decree and its Secretary General has been recruited; c) Private Sector Foundation. Consultants from India and Kenya have shared their experience in establishing and operating similar institutions; they have helped the Working Group that prepared the creation of the PSF define the role of the PSF; consultants have carried out a survey on the demand of the private sector for business services; other consultants have prepared the legal documents required for the establishment of the PSF as well as its Manual of Procedures; the Managing Director has been recruited; and  21 d) Technical Assistance to the GOS. A consultant has been recruited and has helped assess the situation of the enterprises that will be privatized; another consultant is in the process of being recruited to help prepare the communications program. D. Project Costs and Financing Plan 4.23 The proposed project is estimated to cost, over a five year period, US$20.3 million equivalent, price and physical contingencies included but taxes and duties excluded, with a foreign exchange component of US$9.4 million. Base costs calculated on the basis of January 1995 prices, are estimated at US$18.56, and total contingencies amouiit to US$1,74 million (or 8.6% of total project costs). Physical contingencies have been calculated at 5% for equipment and materials. Price contingencies have been estimated at: (i) 2.4% per annum for foreign exchange expenditures; and (ii) 7.8% in 1995 and 2.5% per annum thereafter, for local expenditures. 4.24 The project cost will be financed by an IDA credit of US$12.5 million and US$7.8 million provided by the private sector, for the most part, and by the Government. These counterpart funds will consist of the incremental salaries paid by the government and the private sector to the participants in the work of the CRG and LRC, of incremental salaries and part of the operating expenses for the privatization and communications sub-components, and of the contribution of the private sector to the cost of the assistance received through the PSF. Detailed cost estimates and financing plan that are in Annex VII are summarized in the following tables. Table 1 Estimated Project Costs (1) (in US$000) Local Foreign Total 1 Policy and Legal Reforms (a) Competitiveness Review Group 1,130 50 1,180 (b) Legal Reform Committee 1,500 280 1,780 2. Private Sector Foundation 5,000 7,400 12,400 3. Assistance to the GOS (a) Privatization Program 900 600 1,500 (b) Communications Program 750 100 850 4. Project Monitoring and Audits 100 150 250 5 Refund of PPF Advance 400 200 600 6 Price and Phvsical Contingencies 1,120 620 1 740 TOTAL 10,900 9,400 20,300 (1) All costs are net of duties, and direct and indirect taxes.  Table 2 Financing Plan IDA 3.100 9.400 12.500 Government/Private Sector 7 80() - 7.800 TOTAL 10,900 9,400 20,300 E. Project Implementation 4.25 Project Management. There will be no project coordination unit. The project institutions directly concerned by each component of the project are responsible for its implementation. This will enable them to better institutionalize the objectives of the project, as recommended by the OED's guidelines for technical assistance project in the Africa Region. Responsibilities for project implementation and management lie with: (a) the CRG for the implementation of the policy reforrn sub-component; (b) the LRC for the implementation of the Legal Reform sub-component; (c) the PSF for the implementation of the private sector capacity building component; and (d) the Ministry of Economy, Finance and Plan (MEFP) for the implementation of the privatization program, and the communications program. 4.26 Procurement and accounting for the PSF, the CRG and the LRC will be the responsibility of the PSF. Formal agreements to this effect, the draft of which was agreed upon at negotiation (6.01 (g)), will be signed between the PSF and the CRG and LRC respectively as conditions of disbursement for the PSF, CRG and LRC components (para. 6.03 (b)). 4.27 Monitoring, Evaluation and Periodic Review. The CRG, the LRC, the PSF and the MEFP will each be responsible for monitoring and evaluating the implementation of their respective work programs. The Planning and the Table of Key Events and evaluation criteria prepared during appraisal for the first three institutions will serve as a basis for monitoring and evaluation (Annexes II (b) through IV (b)). For the Privatization and the Communications programs, the reference will be the implementation planning and criteria for evaluation that will be agreed upon, along with the action plan of each sub-component mentioned earlier in (paras. 4.18 and 4.19). During negotiations, agreement was reached that all the following dispositions for project monitoring, evaluation and periodic review will be complied with (para. 6.01 (h)): (i) three months before the end of each calendar year, the GOS and IDA will  23 convene an annual review meeting to review a detailed work program to be carried out during the next year by each project institution. The preparation of the work annual programs will take into account the progress achieved during the past year and the initial implementation plans will be revised as needed to include additional objectives and evaluation criteria, if warranted; (ii) two IDA-Government reviews of the project, in lieu of a mid-term review, will be carried out about one and half year and three years following the date of credit effectiveness to measure progress accomplished against targets and to make in due course any adjustments that might be required to ensure that the objectives of the project will be achieved; and (iii) these reviews will be preceded by a full technical audit of all components and a ZOPP workshop to re- evaluate the objectives of each component in light of progress achieved and to adjust the project implementation planning for the reminder of the period. As a result of these workshops, implementation planning will be updated for the next eighteen months. Finally, a detailed supervision plan for all three components (Annex VIII) including specific expected outputs and performance indicators has been prepared as part of the ZOPP implementation planning exercises that included the persons responsible for the execution of each component. F. Procurement and Disbursement 4.28 Under the proposed project, procurement will concern only office equipment and vehicles, operating costs of the project institutions and consultants services. The table below summarizes the project elements and their estimated costs and proposed methods of procurement.  24 Table 3. Summary of Proposed Procurement Arrangements (US$ million) Project Element Procurement Method Total I_________________________ Costs ICB NCB Other NBF Goods * Office Equipment & Vehicles . 35 . 1 .45 (.35) (.1) (.45) Consultancies | Studies 1.4 1.4 (1.4) (1.4) * Consultant Services 4.6 6.9 4.6 (4.6) (--) (4.6) * Training 1.6 1.6 (1.6) (1.6) * Audits and implementation .3 .3 evaluation (.3) (3) Service contracts * Communication .4 .1 .5 Services (A4) (.1) (.5) Other * Operating Expenses 3.45 3.45 (3.05) (3.05) * PPF Refund .6 .6 (.6) (.6) Total .75 12.65 6.9 20.3 _________________________ __ (.75) (11.75) (--) (12.5) Note: Amounts in parenthesis are amounts financed by the Credit Operating Expenses include incremental salaries of permanent staff of the CRG. the PSF and the LRC along with miscellaneous expenses such as office supplies, utilities etc. All costs are net of duties and direct and indirect taxes NBF means Non-Bank financed 4.29. The PSF will be responsible for the procurement of its own goods and services and for those of the CRG and the LRC and the MEFP will be responsible for procurement of goods and services for the privatization and communications sub- components. Goods to be procured, in accordance with IDA's guidelines of January 1995, under the project (US$450,000) consist of office equipment, computers and vehicles. Because adequate local representation of foreign suppliers exists and availability of after sale services and maintenance is essential, contracts of less than US$30,000 will be procured through local shopping provided that the aggregate amount of such procurement does not exceed US$100.000. Contracts over or equal to US$30,000 will be procured, in packages of at least US$100,000 whenever possible,  25 through National Competitive Bidding (NCB). Consultants' services (for studies and technical services) which represent the bulk of IDA financing (US$7.8 million) will be contracted in accordance with IDA's Guidelines for the Use of Consultants (August 1981 version). All consultant contracts, whose cost will be equal or above US$50,000 for individual consultants and above or equal to US$100,000 for firms, will be subject to prior review by IDA and contracts below this threshold will be subject to an ex-post review by the Association. However, prior review will apply to the terms of reference of such contracts, to single source hiring of firms and individuals, to assignments of contracts of a critical nature as determined by IDA. and to amendments of contracts raising the zontract value above these thresholds. Standard Letters of Invitation to Bid that will be used for the recruitment of consultants were agreed upon with IDA during negotiations (para. 6.01 (i)). 4.30 Technical Assistance to be financed by the PSF. As mentioned above in para. 4.06, eligible private enterprises and associations will be assisted by the PSF in contracting directly the technical services they need. The statutes and Manual of Procedures of the PSF specify that, to be eligible to PSF financing, beneficiaries may select: (I) individual consultants directly from the roster through the comparison of at least three Cvs; and (ii) consulting firms through competitive procedures acceptable to IDA. In both cases and for each assignment, the concerned beneficiary will select or invite consultants to bid on the basis of a short list drawn from a roster prepared by the PSF. This roster will be updated twice a year to include new consultants or exclude unsatisfactory ones. Agreement with the PSF on this roster, where consultants will be classified by category of service, is a condition of disbursement for the PSF component (para. 6.03 (c)). Standard Letters of Invitation to Bid that the beneficiaries of the PSF will use have been agreed upon with IDA during negotiations (para. 6.01 (i)). The carrying out by PSF's beneficiaries of procurement procedures satisfactory to IDA is an eligibility criterion to PSF's financial support. Only contracts the cost of which will reach or exceed US$100,000 will be subject to IDA prior review. Contracts under this threshold will be subject to an ex-post review. 4.31 To ensure that procurement will be carried out adequately, AGETIP, an agency which has a well-established track record of efficient procurement strictly following IDA guidelines, has been contracted to act as the procurement agency for all components of the project until project effectiveness. During this period, AGETIP will train the concerned personnel of PSF in procurement. At the end of this training, PSF will be responsible for the procurement of the goods and services financed by the project for the private sector (PSF, CRG and LRC). PSF will execute procurement in accordance with procedures described in its Manual of Procedures which have been approved by IDA. Goods and services for the privatization and the communications components will be procured by the MEFP in accordance with the above provisions. 4.32 Disbursements. As shown in the following table, disbursements will be made on the basis of 100% of total expenditures free of direct or indirect taxes and duties for IDA's share of the cost of goods and consultants services.  26 Table 4. Allocation and Disbursements of the IDA Credit Categorv of Disbursement Amount (I) Percentage of Expenditure Financed (US$ million) (free of taxes and duties) 1. Goods * Private Sector .25 100% * GOS .05 100% 2. Sub-projects (2) 5.0 100% of amount paid by PSF 3. Consultant Services * Private Sector 1.76 100% * GOS 1.1 100% 4. Service Contracts .5 100% 5. Operating Expenses * Private Sector (3) 2.0 - Until October 31, 1998 100% - Thereafter 85% . GOS .3 - Until December 31, 1997 100% - Thereafter 85% 5. Refunding of PPF Advance .6 100% 6. Unallocated .94 L L L LTotal 12.5 L:__ (I) All amounts have been calculated net of duties and direct or indirect taxes (2) Cost-sharing formula in Annex 11, page 5 (3) The financing will be reassessed during the second IDA-Government project review, to assess the feasibility of decreasing it to 85% 4.33 The percentages above are based on the provisions 309 and 1091 of the Law 92- 40 of July 9, 1992 of the Government of Senegal which exempts the goods and services, financed by IDA credits, from taxes and customs duties levied by the Government of Senegal. If any change is made to this Law which has the effect of levying taxes or customs duties on such goods and services, the percentages referred to in the above table will be decreased to reflect this change. The project will refinance the PPF advance upon project effectiveness. As in the case of procurement, the PSF will act as disbursement agency, for all goods and services financed by the credit for the private sector while the MEFP will disburse for the privatization and the communications components. Disbursements will be fully documented except for payments of contracts of less than US$100,000 equivalent, which will be made against certified Statements of Expenditures (SOEs). Documents for withdrawal under SOEs  27 will be retained by the PSF and the MEFP and made available for independent auditors and for review by IDA during supervision missions. 4.34 The IDA credit is expected to be disbursed for the categories shown in the Table 3 above over a period of five years after project effectiveness according to the disbursement schedule in Annex IX. Although the disbursement profiles for technical services projects in the Africa Region are, on average, about 84 months, a shorter implementation is foreseen for the proposed project because: (i) the CRG and the LRC, which will focus on the follow up and the deepening of the reform program supported by the PSAC, are expected to complete their work over a two to three year period; and (ii) project implementation will concentrate on the execution of work programs that have been designed in detail during project preparation. 4.35 To expedite project implementation, two Special Accounts will be opened at a commercial bank acceptable to IDA and maintained and operated on terms and conditions also acceptable to IDA by: (i) the GOS for the privatization and communications components; and (ii) the PSF for all other components of the project. The special account administrated by the GOS will be in the amount of CFAF 150 million (or about US$300,000). The special account for the private sector components will be in the amount of CFAF 300 million (or about US$600,000). The Association will make an initial deposit in the Special Accounts upon credit effectiveness. Replenishment requests will be accompanied by proof of eligible expenditures acceptable to IDA, by up-to-date bank statements and reconciliation of the concerned Special Account and will be fully documented except for expenditures below US$100,000 for goods and services from consulting firms, and US$50,000 for services of individual consultants, for which the borrower will be allowed to submit claims on the basis of SOEs. Documentation used for SOEs will be retained and made available for review by Bank supervision missions and by the auditors of the project accounts. G. Accounting, Auditing and Reporting 4.36 Project accounts will be maintained in accordance with internationally accepted standards by: (i) the MEFP for the privatization and communications components; and (ii) by the PSF for all other components. The PSF will establish proper accounting with an experienced accounting firm, to be financed by the project, which has already been recruited. The establishment of the accounting system is presently underway for the PSF, the CRG and the LRC and during negotiations, agreement was reached that this accounting system will also be applied to the components managed by the Government (para. 6.01 (j)). The establishment of an operational project accounting system will be a condition of effectiveness (para. 6.02 (d)). All project accounts including the two Special Accounts and SOE will be audited annually by independent auditors acceptable to IDA recruited by the Government, as a condition of effectiveness (para 6.02 (e)), on a pluriannal basis and in accordance with Terms of Reference and short list acceptable to IDA to be agreed upon during negotiations (para. 6.01 (k)).  28 The audit reports will be submitted to IDA no later than six months after the closing of the fiscal year in Senegal. Each of the project institutions will report semi-annually on the results achieved with regard to the component for which they are responsible no later than a month after the end of the concerned semester. In addition to the financial audits, the PSF will be subject to annual management audits whose reports will be submitted to IDA in the same conditions as the financial audit reports. The PSF will computerize its MIS system to facilitate monitoring and reporting on the provision of business services to the private sector. H. Environmental Aspects 4.37 The proposed project which aims at providing primarily consultants' services does not present the prospect of any environmental impact. It is therefore classified category C. V. PROJECT BENEFITS AND RISKS A. Benefits 5.01 The project's most important expected benefit is its contribution to promote Senegal's economic growth by improving enterprises performance and strengthening the private sector, notably through interventions in an estimated 600 firms over the life of the project. At the enterprise and business association lev.el, it will: (i) increase efficiency and competitiveness; and (ii) most importantly improve management skill and raise awareness among private entrepreneurs that benefits from business advisory services might outweigh their cost. The project will also contribute to foster Senegal's economic growth by laying the ground for a sustainable supply response of the private sector which will be encouraged by: (i) a favorable policy, legal and institutional environemnt; (ii) an increased potential for expansion in particular through the implementatition of the government's divestiture program; and (iii) the creation through through public debates within the CRG and the LRC and through the communications program of a national consensus on the importance of a private sector development culture. B. Risks 5.02 Several risks could affect the implementation of the project. The most important of them is that the GOS relax its adjustment efforts or back-track on reforms already implemented. This risk is very small, however, because these reforms have been initiated after an intense national debate and have now a wide constituency which supports them. In addition, there are dispositions of the PFP as well as the PSAC requiring a periodic evaluation by the Bank and the IMF of the overall policy framework which will act as an incentive to the government to remain on track. The  29 second risk lies with the PSF. In the event that this institution becomes inefficient and unresponsive to the need of the private sector, an important objective of the project might be in jeopardy. This risk should be mitigated by the fact that its Managing Director, recruited from the private sector after a strict selection process, is highly qualified. In addition, during project preparation, careful attention has been paid to the design of a detailed and precise Manual of Procedures that should reduce the potential for poor management practices. This risk will be, however, closely monitored and the project supervision plan will also call for attentive and frequent supervision mostly at the initial stage of the project. Finally, the private sector might prove to be unresponsive to the improvement of its policy environment and institutional support framework. This risk appears to be small in view of the substantial growth that has already taken place since the devaluation in some sectors of the economy like manufacturing, fisheries and tourism. VI. AGREEMENTS, CONDITIONALITIES AND RECOMMENDATION 6.01 During negotiations, agreement has been reached on the following: (a) any change made in the PSF's statutes, Manual of Procedures and higher management will require IDA's prior approval (para. 4.04); (b) the PSF's cost-sharing formula for the financing of business services for private enterprises and business associations (para. 4.05); (c) PSF will widely advertise its services and will periodically make public the list of its beneficiaries and of the consultant firms that won technical assistance contracts (para. 4.06); (d) the Terms of reference for the recruitment of an investment banker to help prepare an action plan for the privatization program (para. 4.18); (e) the Terms of reference for the recruitment of a consultant to help prepare an action plan for the communications program (para. 4.19); (f) the private sector will participate, through the CRG, in the design of the action plan for the communications program (para. 4.19); (g) the formal agreement to be signed between the PSF and the CRG and the LRC, respectively, by which the forner will be responsible of procurement and disbursements for the two other institutions (para. 4.26);  30 (h) the implementation of the dispositions for project monitoring, evaluation and periodic review (para. 4.27); (i) standard Letters of Invitation to Bid for the recruitment of consultants (paras. 4.29 and 4. 30); (j) the GOS will adopt PSF's accounting system for the components that it will manage (par. 4.36); and, (k) the Terms of Reference for the recruitment of an auditor for the project's accounts (para. 4.36). 6.02 Conditions of effectiveness will be: (a) the signature of an Agreement (Convention) between the GOS and the PSF and the formal adoption by both parties of the PSF's Manual of Procedures (para. 4.08); (b) the submission by the GOS of a plan, acceptable to IDA, for the completion of the privatization program (para. 4.18); (c) the submission by the GOS of an action plan, acceptable to IDA, for the communications program (para. 4.19); (d) the establishment of an operational accounting system for the project (para. 4.36); and, (e) the recruitment of an auditor for the project's accounts (para. 4.36). 6.03 Conditions of disbursement for the PSF, CRG and LRC are: (a) the appointment of the Consultative Committee and the recruitment of the PSF's permanent staff (para. 4.04); (b) the signature of the formal procurement and disbursement agreements between the PSF and the CRG and the LRC, respectively (para. 4.26); (c) the agreement by IDA of the roster of consultants prepared by the PSF (para. 4.30); 6.04 Recommendation. Subject to the above terms and conditions, the proposed project would be suitable for an IDA credit of SDR 8 million (US$12.5 million equivalent) to the Republic of Senegal on standards IDA terms with 40 years maturity.  ANNEX I 31 Page 1 of 12 REPUBLIC OF SENEGAL PRIVATE SECTOR ADJUSTMENT AND COMPETITIVENESS PROJECT LETTER OF PRIVATE SECTOR DEVELOPMENT POLICY (Translation of French version signed on January 13, 1995) BACKGROUND AND GENERAL OBJECTIVES 1. With the Franc CFA parity change of January 11, 1994, the Government of Senegal initiated an overall adjustment of the economy to restore lasting macro- economic equilibria, sustainable economic growth and poverty reduction. This strategy is presented in the Policy Framework Paper (PFP), covering the period 1994-1997, prepared in June 1994 and approved in July 1994 by the World Bank and International Monetary Fund. 2. Regarding the macro-economic objectives, the adjustment policy aims at achieving a rate of growth of real GDP of 4.5 to 5% per year starting in 1995, which will result in a per capita revenue growth of at least 2% yearly and the creation of 20,000 new jobs. This policy will also ensure the return of the inflation rate, as measured by the GDP deflator, to a low level of 2-3% per year after the unavoidable rise of inflation associated with the devaluation estimated at 35% in 1994 and 8% in 1995. Likewise, this policy will lead to a progressive reduction of the current deficit of the balance of payments (excluding grants) from 9.8% of the GDP in 1994 to 6.8% in 1997. 3. The Policy Framework Paper (PFP) that defines the macro-economic objectives for the period 1994-1997 is comprised of a set of measures aimed at ensuring the success of the new adjustment program. In addition to mitigating the social impact of the parity change and contributing to the application of a tight monetary and fiscal policy, the measures spelled out in the PFP aim at pursuing the liberalization of the economy, in particular, by introducing structural reforms needed to improve the functioning of the factor markets. Additionally, a public investment program -- based on the development of human resources as well as of infrastructure and on a prudent and sustainable management of natural resources -- will be implemented. 4. To ensure a sustainable economic recovery, a quick and significant increase of private sector activities is required. To achieve this objective, the Government prepared a strategy and an action plan that it will implement in the context of the Private Sector Adjustment and Competitiveness Program for which it requested the support of the World Bank.  ANNEX I 32 Page 2 of 12 THE STRATEGY AND ITS SECTORAL OBJECTIVES 5. To achieve the macro-economic objectives set for the 1994-1997 period, the Govemment is committed to consolidate the competitive gains resulted from the devaluation in order to encourage investments and promote exports. To this end, the Government had announced in the PFP that it would take all necessary measures to remove obstacles to the development of the private sector and to stimulate and reinforce its capacity to respond to the recent adjustment of the CFAF parity. 6. The Govemment sought the active participation of the private sector in preparing the strategy mentioned above in order to avoid the difficulties experienced in the past during the implementation of the previous adjustment programs . To this end, the Government established, in February 1994, the Competitiveness Review Group (CRG) formed by representatives of the Government, the private sector and the labor unions. Through the CRG, the Government sought to promote a dialogue among different social partners in order to precisely identify the constraints to private sector development and achieve a consensus regarding the necessary measures to remove those constraints. Thus, in March 1994, the CRG created several commissions formed by representatives of the Government, workers and entrepreneurs. These commissions reviewed the key areas of concern for the private sector and analyzed the problems that required measures to be taken in the short- and medium-terms. These measures will complement those taken immediately after the CFA parity change to: (i) adapt the tariff and the indirect tax regimes to the new circumstances resulting from the devaluation; and (ii) align the prices of public services to their economic costs. 7. indeed, in the aftermath of the devaluation, the Government reformed the Value Added Tax (VAT) system by establishing a maximum rate of 20% and reduced the taxation on imported goods to a maximum of 459% (not including a customs stamp of 5%). In addition, the Govemment limited the impact of the devaluation on the utility prices and petroleum products by increasing these prices by only 20% to 30%. 8. Overall, as demonstrated by the National Consultation Conference (Journees de concertanion nationale) organized by the Government on July 22-24, 1994, the implementation of the action plan and of the development strategy for the period 1994- 2000, discussed during this conference, is placed under the aegis of consensus among the different economic and social partners of the society. The private sector development strategy that emerged from the consultation process is essentially centered on price and trade liberalization as weUl as on the improvement of the institutional and regulatory framework of the private sector. The objectives of this strategy are: (a) in th short-term: (i) to strengthen domestic competition and improve the competitiveness of the enterprises; (ii) to emphasize the development of exports and promote investment; and, (iii) to improve the functioning of the labor market; and, (b) in-the medium-term: (i) to revitalize and rationalize private sector support institutions; (ii) to  ANNEX l 33 Page 3 of 12 improve the access of the private sector to bank credit; and, (iii) to improve the judicial framework and the regulatory environment of the private sector. 9. Regarding the short-term objectives, the consultation process with the private sector led to an action plan to be quickly implemented so that the economy can profit from the recent adjustment of the exchange rate. This plan is based on four pillars, namely: the promotion of competition, the development of exports, the promotion of investment, and the strengthening of enterprises competitiveness. The objectives supported by this plan were already approved by the Tripartite Commission in charge of managing the devaluation. This Commission is formed by Government officials and by leaders of the business community and labor unions. The measures included in this plan are described below and presented in the policy matrix, in annex, which is an integral part of this letter. 10. Finally, the preparatory work to achieve the medium-term objectives mentioned above has already started. A Private Sector Capacity Building project for which the Government has already obtained the World Bank support is presently under preparation. This project will aim at, in particular, at improving the support system for and the legal framework of the private sector. The improvement of the legal environment of the private sector will aim, in particular, at adapting the Senegalese judicial and regulatory framework of the private sector to the regional structure defined by the African authorities of the CFA Zone. Regarding the objective of improving the private sector's access to credit, the enterprises financing problems will be examined within the overall improvement of financial system of the Union kconomique et monetaire de l'Afrique de l'ouest (UEMOA). THE MEDIUM-TERM ACTION PLAN 11. In the post devaluation period, the strengthening of competition is a necessary condition to keep the competitiveness edge, induce a rapid response from the private sector to the parity change and stimulate exports and production growth. Thus, the Govemment has decided to take measures to: (i) promote competition in the economy; (ii) complete the liberalization of external trade; (iii) promote investments; and, (iv) improve the competitiveness of the Senegalese enterprises. A. The promotion of competition within the economy 12. Elimination of special agreements and protocols. In the past, the Government had granted special agreements or protocols to 26 enterprises. These agreements and protocols provided to beneficiary enterprises, among other benefits, tax holidays and in certain cases the monopoly to produce and/or to import. In the context of previous adjustment programs supported by the World Bank, the Government was committed to: (i) 'put an end to the principk of granting of special agreements or accords to public or private productive enterprises; revise the existing agreements in order to subject beneficiary enterprises to the common incentive regime applied to all other enterprises  34 ANNEX I Page 4 of 12 while respecting the legal commitments of the State" (SAL II); (ii) "undertake a review, to be completed in June 1987, of all special agreements, and prepare a program to revise these agreements" (SAL III); and (iii) "terminate the granting of new agreements, repudiate those which had expired and put an end to the policy of granting special fiscal treatmnnt to companies". In addition, for three enterprises (CSS, SOCOCIM and SAR'), the Government had agreed to amend the provisions of their agreements, in particular, with respect to the mechanism of price setting (SAL IV). 13. In compliance with its commitments, the Government did not grant any new special agreement since 1987. A new price structure for the products of CSS, SOCOCIM and SAR was implemented. However, although the review of the special agreements was completed, as originally envisaged, in 1987 and an action plan for their renegotiation was prepared, the Government was unable to implement this plan. The main reason for the failure of the Government to meet its commitment in this area was that none of the concerned enterprises would have been able, without the protection granted by the special agreements, to compete with imported products, in particular, because of an increasing overvaluation of the CFA Franc. Under those circumstances, it was not possible to overcome the enterprises resistance to the elimination of their privileges which, in addition, were granted by legal contracts. 14. With the parity change, the Government recognizes that these enterprises should now be competitive under the incentive framework common to all other enterprises. The Government has therefore decided to terminate all existing special agreements and protocols and it is committed not to grant such agreements in the future. Since 1987, of the 26 special agreements initially granted, ten have lapsed because the beneficiary enterprises do not exist any longer and five other have expired. In June 1994, the Government has confirmed in writing to the beneficiary of the agreements that have expired that their specific advantages are terminated and will not be renewed. For those agreements that are still current, the Government concluded negotiations aiming at terminating the agreements/protocols conceming: SOCOCIM, ICS, ICOTAF, SIPS, SOTEXKA, SODEFITEX, GMD, SENTENAC, SNTI and SOCAS2. The negotiations that the government initiated in August 1994 aimed at: (i) abolishing the import prior authorization that protected these enterprises and to grant to those which still needed time to adapt to foreign competition a reasonable and decreasing tariff protection; (ii) to phase out the fiscal and other advantages included in these agreements. Thus, the Government's objective with regard to the special agreement of each enterprise had been spelled out in an action plan that was discussed with the World Bank in Octobe lCSS: Compagnie sucn1re du Scnigal, SOCOCIM: Sociiti de commercialisation du ciment and SAR: Socield africaine de raffinage. 2 ICS: Indstens chimiques du S&nigal, ICOTAF: IndusMes cotonnicres africaines, SIPS: SocietU industrielle du papier es catonnages du Sinegal, SOTEXKA: Socicti de texnk de Kaolac, SODEFITEX: Societd pour le diwloppement desfibrea textiles, GMD: Grands Moulins de Dakar, SENTENAC, SNTI: Socdti nationale de la tomate industrielle, and SOCAS: Socidtc des conserveries alimentaires du Scnigal. The CSS special agrement will be renegotiated in the context of the Agricultural Sector Adjustment Program.  35 ANNEX I Page 5 of 12 1994. Since, agreements that would terminate immediately the existing special agreements/protccols have been signed in November by the Government with the management of the enterprises mentioned above The only enterprises that would continue to beniefit from some fiscal advantages are ICS and SODEFITEX, two enterprises whose production is virtually totally exported. Three enterprises only (SNTI, SOCAS and SOCOSAC) were granted a temporary tariff protection varying from 10 to 20%T that would phase out over a three year period. 15. Price liberalization and promotion of domestic competition. In the context of the project supporting the adjustment program for the private sector, the Government is comiritted to complete the liberalization of prices in the domestic market. To achieve this objective, the Government has already liberalized in June 1294 the price of soap, milk, concrete iron, sodas, instant coffee and yeast that were frozen after the devaluaton. With regard to prices that are subject to prior approval (homologation), those of tomato paste and of imported vegetable oils were liberalized in Januayu 1991. The price of wheat flour were liberalized in November 19. As for administered prices, tnose of fresh tomato, of locally produced vegetable oils (excluding peanut oil) ald of cement have also been liberalized in January 1995. The prices of rice and sugar will be liberalized in the context of the ASAP (Agricultural Sector Adjustment Program) in June 1995 for the former and in the context of the revision of the CSS special agreement the latter. In conclusion, only the prices and tariffs of bread, locally produced medicine, butane gas and services relating to transports (transit, maintenance and towing boats), will continue to be subject to prior approval; and only those of petroleum products, charcoal, electricity, water, telephone, public transportation and health services will continue to be administered. 16. To promote competition in the domestic market, the Government has proposed in August 1994 to the National assembly which approved them: (i) a law establishing the principle of free access to industrial, commercial and artisan professions; only the exercise of a limited number of professions affecting the general social interest will continue to be subjected to a prior authorization; and, (ii) a law on prices, competition and economic litigation that establishes a competition commission in charge of investigating anti-competitive practices and defines measures, including the establishment of prices controls, to sanction these practices. An application decree of the law concerning professions requiring prior authorization will be adopted in Febnay 1995. In January 1995, the Government has adopted an application decree of this law which indicates, in particular, except for those products whose price will continue to be administered, i.e. products for which there is a natural monopoly, a very limited number of producers or that have an impact on public hygiene, health or on the environment, price controls will not be used to sanction anti-competitive situations. The above measures which constitute an important step towards strengthening and promoting competition will be followed and consolidated by the adoption, after 3They consist of 28 professions that affect public health and security and the environment or are related to transportation, tourism, banking and funance.  ANNEX I 36 Page 6 of 12 consultation with the World Bank, of additional decrees with regards to the other aspects of the law. In 1995, an evaluation, of the outcome of the application of the law on prices, competition and anti-competitive practices and amendment, also after consultation with the Bank, of any of its dispositions that as proven to be inadequate. B. Liberalization of external trade 17. Imports. In the context of SAL II and III, the Government committed itself to reduce domestic market protection, in particular, by: (i) eliminating, in accordance with an agreed on timetable, import restrictions over goods not produced in Senegal and over a certain number of goods produced domestically; (ii) limiting the application of import reference values (valeurs mercuriales); and, (iii) establishing a new tariff structure. The Government did eliminate the prior authorizations to import, except for certain agricultural products whose local production was threatened by external competition and for the products of enterprises benefiting from a special agreement or protocol for the reasons mentioned above in paragraph 13. 18. The import reference values and most of the import restrictions were eliminated in 1987 while import tariffs were lowered during the period 1986-1988, as envisaged in the previous adjustment programs mentioned above. Unfortunately, these reforms were followed by a sharp decline in some activities of the manufacturing sector and by a substantial fall in fiscal revenues. These unfavorable developments can be explained by the fact that other measures, including the devaluation of the CFAF, needed to improve the competitiveness of the enterprises had not been taken. In 1989, facing a dramatic deterioration of industrial output and employment and a critical drop in fiscal revenues that threatened the macro-economic equilibrium of the country, the Government decided to increase import tariffs and to reintroduce the import reference value system. 19. In order to profit from the devaluation and increase the competitiveness of the enterprises, the Government has now decided to liberalize foreign trade and put all enterprises currently benefiting from a special agreement or accord under the common incentive regime applicable to all enterprises. In particular, the Government will abolish all prior authorizations to import except for two products (gold and silver in bars and second-hand clothing). Consequently, seven4 out of the 18 prior authorizations to import that were still in effect were lifted in lune 1994. Prior authorization to import three other products (polypropylene bags, tomato paste and vegetable oil) has been abolished in October 1994. Prior authorization to import cement was lifted in November 1994. The authorization to import wheat flour will be abolished in November 1995. The time lag in liberalizing imports of the latter product is explained by the fact that the present special agreement with the milling enterprises stipulates that it can only be denounced after a one year advance notice. Thus, 4Cereals, jewehy, newspaper and periodics, pre-recorded tapes, mineral and chemical fertilizers, jute bags, and noix de kola  ANNEX I Page 7 of 12 although this agreement has been terminated in November 1994, the elimination of the prior authorization to inport wheat will become effective a year later. All other prior authorizations to import which concern agricultural products will be addressed in the ASAP. 20. Regarding the import reference value system, the Government adopted in June 1994 an arrett supprr.ssing the reference value system which is in effect since the beginning of lamaway 1995. The time lag between the publication of the arreti and its effective application is explained by the need to avoid, in the second semester of 1994, a decrease in fiscal revenues that could be detrimental to the 1994 economic and financial prof ram. Since the beginning of January 1995, the valuation of tariff duties is based only on the CIF value of imported goods. 21. Finally, mechanismi to control the quality of imported products and to prevent fraud, under and over invoicing and dumping practices will be reinforced according to the provisions of the international agreements ratified by Senegal. In this context, an anti-dumping law based on GATT rules and disciplines was adopted in August 1994 by the National Assembly. The application decree of this law was adopted in nu 1225. This decree defines a process for applying antidumping measures that is fully compatible with GATT provisions. It indicates that: (i) consumers and importers will be represented in the commission that would investigate reported dumping; and, (ii) only temporary tariff surcharges established in full compliance with GATT and the with the agreements resulting from the Uruguay Round wil be applied to sanction dumping practices. However, the Government will not adopt a national legislation to enact the Uruguay round provisions concerning safeguards measures. In the event that the Govemment decides to use these provisions it will do in accordance with international agreements, in particular, with those relating to the GATT and the Uruguay Round. 22. Exprts. The Government is committed to stimulate and diversify Senegal's exports, in particular, in sectors such as fishing, agro-industries, horticulture, textile, services and tourism, and non-traditional exports in general. In the last three years, exports of goods and services (excluding factor services) represented only about 24- 25 % of GDP (as compared to 31% for imports). A particular effort will, therefore, be made to promote non-traditional exports. Besides the overvaluation of the CFA and the high cost of technical factors of production which have been now adequately addressed by the parity change, the development of exports is precluded by lengthy and costly bureaucratic procedures, the multiplicity of interlocutors, the cost of maritime transportation and the poor product-quality offered by Senegalese enterprises as compared to the quality standards required on international markets.. 23. The promotion of exports requires, first, the elimination of all barriers to the exercise of this activity. In this context, in June 1994, the Government abolished the remaining prior authorizations to export except for precious metals and minerals, and groundnut oil whose liberalization will be addressed in the context of the ASAP. Consequently, the remaining prior authorizations to export cereals, confectionery  38 ANNEXI Page 8 of 12 peanuts, and jewelry were eliminated by decree in June 1994. The prior authorization to export tomato paste will has been eliminated in October 1994. 24. In addition, in order to reduce the cost of export activities and encourage their development, the Govemment adopted in June 1994: (i) an arrete authorizing exporters to import packaging material under the temporary import regime; and, (ii) a decree abolishing the levy of COSEC (the Conseil sln,6galais des chargeurs or shippers association) on exports and on the importation of inputs for the production of goods to be exported. Finally, the Government has adopted in October 1994 a decree simplifying export procedures and introducing new compatible with the international norm NS 06-001 which will greatly reduce delays and costs. 25. The status of competition in Senegal and the implementation results of the measures relating to trade and price liberalization will be annually reviewed in consultation with IDA. This review will aim at verifying that external trade enjoys a reasonable degree of competition with imports mostly in the sectors where there is a limited number of local producers. It will also aim at assessing the impact of all measures taken by the Government in these areas and ,in particular, of those which might have been taken in application of the antidumping law. More generally, this review will assess the impact of these measures on the liberalization of trade and prices and on the economy. C. Investment Promotion 26. Currently, there are several different investment incentive regimes in Senegal: the tax code, the investment code, the industrial domain regime, and the export processing regime (Free Trade and Single Factory Zone -- FTZ and SFZs). Despite the existence of these regimes which provide substantial fiscal advantages to potential investors, the level of new investments in the last years has been disappointing. The complexity of the different incentive regimes coupled with the long uncertainty generated by the exchange rate policy largely explain the weak performance of direct investments between 1986 and 1993. Indeed, during this period negative rates of foreign investment were recorded. The recent CFA devaluation will certainly improve substantially the profitability of investments made in Senegal. Nonetheless, an improvement in the incentive regimes is required to achieve a significant increase in the level of investment. 27. The improvement of the investment incentive system will concern, first, the export processing zone regime. Its fiscal incentives ought to be aligned on those granted in accordance to best international practice and the agreement procedures to the benefits of the FTZ or SFZ ought to be streamlined. As a second step, the Government has decided to rationalize the others incentive regimes that currently grant investment benefits only on an exceptional basis. The objective is to consolidate all existing incentives schemes into a unique common system applicable to all investors and whose application would be automatic, simple and prompt in order to build up the  3 9 ~~~~~~~~~ANNEX I Page 9 of 12 confideiace of the potential investors which is indispensable to increase the level of investments in Senegal. The government is presently carrying out, with the Bank's assistance through FIAS, a comprehensive review of the export processing zone, the temporary import regime, the investment code and the industrial domain regime. The recommendatio is of this review expected to be completed by February 1995 will be discussed with IDA in April 1995 with a view to prepare action plans for their implementatior.. These plans will be implemented in 1995 in the context of the Private Sector Adjustment and Competitiveness credit. The aztion plan relating to the investment incentive regimes will be implemented in the context of the revised PFP for the period 1994-1997. 28. In the meantime, the Government has decided to adopt several measures to simplify and ease investment procedures and regulations. Firstly, it has reviewed the cost of creating new enterprises and adopted in December 1994 a law to reduce it. Secondly, in order to facilitate the dealings of enterprises with the government, a cunsus of enterprises and associations will be carried out in 1995 with a view to providing individual enterprises with a unique identification number that they will be able to use with any government body. Thirdly, in order to strengthen the enterprises capital base, the Government proposed to the National Assembly which approved them in July 1994: (i) a law allowing them to adjust their balance sheets to reflect the impact of the devaluation without increasing their tax liability; and, (ii) a law allowing the State to sell public land to industrial and commercial ventures. The application decrees of these two laws has been adopted in Januay 1991. D. Enterprise Comtetitiveness 29. The January 1994 devaluation and the enterprises continuous own internal adjustment efforts should result in a stronger and long lasting competitiveness position. The Government aims at consolidating these efforts by reducing the cost of utilities (facteurs techniques de production), the cost of maritime transportation as well as the cost of labor which constitute an important part of the enterprises cost of production.. 30. With respect to utilities, the Government will continue its policy measures adopted in the aftermath of the devaluation. Thus, in the context of the third and fourth water projects supported by the World Bank and other donors, the management of the Societ nationale des eaux (SONEES) will be privatized in order to increase SONEES productivity and control over its costs. With regard to energy costs, the Government has already requested the support of the World Bank for a comprehensive program to overhaul the energy sector. Before the end of February 1995, the Government will submit to the World Bank a report indicating its objectives, strategy and action plan that it intends to implement in the energy sector to: (i) eliminate inefficiencies and resulting rents and, therefore, reduce the cost of energy to enterprises and individual consumers; and, (ii) promote investments in the sector and facilitate their financing. This report will, in particular, include a definition of the role of the state and the private sector in the development of the sector and the streamlining of the  40 ANNEX I Page 10 of 12 legal and regulatory framework which presently limits competition and justifies the existence of monopolies. 31. Maritime transport. With regard to maritime transportation, the Government has decided to take measures to reduce its cost and simplify its procedures. To this end, the Government has abolished in June 1994 COSENAM's5 monopoly to exploit the national maritime traffic rights. In June 1994, the Government decided also to give to private exporters and importers the majority in the Board of Directors of COSEC, the shippers association in charge of administering Senegal's traffic rights. Through this decision, the Government want to ensure that the interests of the shippers are well represented in the allocation of maritime freight between eligible maritime carriers. In addition, in order to open maritime traffic to increased competition, the Government has decided to apply strictly UNCTAD's recommendations which limit Senegal's traffic rights to the maritime traffic, to be administered by COSEC, carried out by vessels operating regular lines under conference arrangements. This measures which has been adopted in Januar 1995, should result in greater competition and, therefore, in a decrease of the maritime transportation cost. 32. Finally the Government is intent on reducing the cost of the services offered by the port and the airport of Dakar. To this end, it has decided to reduce the cost and simplify the functioning, management and utilization of physical areas under customs supervision, by establishing a system of inviolable seals. This system will be introduced before the end of January 1991. In addition, in order to reduce the transit costs of imported and exported goods in the port and airport of Dakar (maintenance, transit, landing costs etc), a study will be carried out and its recommendations implemented in the first semester of 1995. 33. Labor cost and flexibility. Under previous structural adjustment programs supported by the World Bank, the Government had committed itself to introduce greater flexibility in the labor market and in the determination of the salary structure of the economy. Twice in the past, in 1987 and 1991, the Government prepared draft laws in accordance with commitments made in the context of SAL 11, HI and IV. The morosity of the labor market due to the weak performance of the economy coupled with the relative lack of information of the public opinion about the necessity of these measures, precluded the adoption by the National Assembly of a new labor law reflecting government commitments. This new law aimed at: "(i) eliminating the monopoly of the government bureau of labor over hiring, thus allowing enterprises to freety hire their workers; (ii) introducing more flexibility in the renewal of fixed-term contracts; (iii) allowing enterprise facing economic hardship to adjust their labor force; (iv) revising the salary structure in order to reduce labor cost and to give to the labor market a larger role in determining wages, reducing thereby the role of the State in 5 COSENAM: Compagnie sanigaialaise de navigation maritime  ANNEX I 4 1 Page 11 of 12 setting up salaiy structures; and (v) making optional the negotiation of national labor contracts. " 34. Although the draft law was not adopted, the Government acting by decrees managed to: (i) eliminate the bureau of labor monopoly and liberalize hiring by enterprises; (ii) authorize the renewal, over a five year period, of fixed-term contracts; (iii) amend the investrient code in order to exempt new companies from the rigidities of the labor coee; and (iv) extend the investment code more liberal dispositions concerning labor to enterprises operating in the export processing zone. 35. Despite these improvements, the Government considers that the flexibility and the productivity of the labor force should be strengthened as envisaged in the previous adjustment programs. Learning from previous experience, the Govemment has initiated a dialogue with tLe different social partners on the reform of labor practices. The Government also encouraged labor unions and business associations to achieve a consensus that would facilitate the adoption of the required amendments to the labor code. This dialogue resulted in the identification of two measures that the government has decided to implement. The Government, first, abolished in June 1994 the monopoly of BMOP' for hiring longshoremen whose remuneration was placed under the general provisions of the labor code which allows piece-work compensation. Secondly, the Government plans to authorize companies to freely adjust their labor force to the level of their economic activity. Discussions of this measure held at the national level -- in particular during the July 1994 National Partnership Forum -- have already established the basis of a consensus and this measure has been adopted in November 1994. THE PREPARATION OF A MEDIUM-TERM ACTION PLAN Judicial framework and technical assistance to the private sector 36. In addition to creating an economic environment that is attractive to private initiative, the Government considers that it is important to improve of the legal and regulatory framework of the private sector and to increase enterprises productivity. The Government has requested and obtained the assistance of the World Bank to implement the necessary measures to achieve these objectives in the context of the Private Sector Competitiveness Technical Assistance Project. To identify judicial constraints affecting the private sector, the Government has established at the beginning of 1994, a working group including representatives of the government, private entrepreneurs and lawyers. This working group has identified, in a preliminary report submitted to the Government in March 1994, a first series of reforms to improve the judicial framework of the enterprises. These reforms relate to: (i) the provision to 6BMOP: Bureau de la main d oeuwvre du port.  42 ANNEXI Page 12 of 12 enterprises of legal securities in their dealings with the State; (ii) the creation in the courts of a specific office of the clerk for commercial matters; (iii) the reform of the law and supporting professions dealing with bankruptcy and receivership procedures; (iv) the assistance needed by the National Commission in charge of the harmonization and of the codification of the commercial and civil codes; (v) the creation of an arbitration body; (vi) the creation of a new judicial framework for micro enterprises; and (vii) the dissemination of legal information. A judicial reform group has since been established to prepare the implementation of these reforms. 37. The strengthening of the management capacity of the enterprises will complement the measures taken in the policy environment. To this end, the Government plans to create a Private Sector Foundation (PSF) that will play an intermediary role between the private Senegalese enterprises and the sources of foreign and local technical assistance. The PSF will have a status and a management similar to AGETIP. The Foundation will administer, on a grant matching basis, a technical assistance fund that would help enterprises to get the technical assistance that they need to increase their technical a and managerial capacity. 38. Operating in parallel in the context of the Private Sector Competitiveness Technical Assistance Project (PSCTAP), the PSF, the legal reform committee and the Competitiveness Review Group will, therefore, constitute the three components of this project. 39. These two operations, the PSAC and the PSCTAP, will both benefit of the financial and macroeconomic stabilization policy that the Government is pursuing. In the long term, the policies to improve the productivity of the production factors will contribute to maintain the competitiveness of the economy. This will be a necessary condition for the Senegalese enterprises to benefit as much as possible from the regional integration. In addition, competitiveness creates better conditions to reduce poverty, in particular, by job creation. Finally, it is a sure instrument for achieving the Government's growth objectives. Washington, DC January 13, 1995 For the Government of Senegal (The original letter in French is signed) Papa Ousmane SAKHO Minister of Economy, Finance and Planning  SENEGAL PRIVATE SECTOR CAPACITY BUILDING PROJECT PRIVATE SECTOR FOUNDATION KEY ACTIVITIES, EVALUATION CRITERIA, PERFORMANCE INDICATORS, AND IMPLEMENTAk ION PLANNING' OBJECTIVE 1: Management capadiles are strengthened/Improved Evaluation Criteria: Enterprises: Management capacities are improved in at least 50% of enterprises monitored, through adoption of recommendations and of more rational management methods. Organizations: At least 50% of beneficiary organizations have expanded their range of services to meet their members needs. OBJECTIVE ACTIVITY PERFORMANCE INDICATOR 1.1 - Increase use of 1.1.1 - Finance information seminars on business - 16 visits minimum per month to beneficiaries advisory support advisory services - During the first 6 months of operations, one activities 1.1.2 - Make management experts (personnel, marketing, seminar is organized in Dakar and one in a procurement, etc.) available region 1.1.3 - Finarce feasibility studies of existing enterprises - After 3 months, the PSF handles a minimum of 5 and on the establishment of new ones requests for assistance per month 1.2 - Strengthen 1.2.1 - Finance information and sensitization campaigns capacities of 1.2.2 - Support upguading of employees of professional At least 6 requests for ssistance are professional organizations At lea per for organizations to 1.2.3 - Help strengthen business management assistance handled per year provide services services ( At least 3 centers in 3 professional organizations to enterprises 1.2.3.1 - Help professional organizations to set up over the 18 months namgement centers 1.2.4 - Help devise shot manuals on management issues - 6 manuas over the 18 months weit ' These have been defined for the period lkading up to the first proect review o| __o  OBJECTIVE 2: Strengthening of technical and technological know how Evaluation Criteria: - At least 50% of the enterprises benefiting from this component have adopted a new technology or upgraded basic technological capabilities. - 60% of local service providers have expanded their range of technical know-how. OBJECTIVE ACTIVITY PERFORMANCE INDICATOR 2.1 - Increase 2.1.1 - Support continuing training in production - 3 ntaining programs per month ramnilianity with techniques new production 2.1.2 - Finance experts and consultants providing - support activities per month techniques technical support 2.1.3 - Help service providers to expand the scope of their operations in support of the private sector 2 support activities per month 2.1.4 - Help organizations to expand the scope of their operations v__ 2.2 - Promote 2.2.1 - Help create and update data banks on locally - Identify and evaluate existing database networks technological available technical information - During the first 6 months, I database, and over transfers through 2.2.2 - Help disseninate available technical information the 18 months, 2 databases information and 2.2.3 - Facilitate access to existing data banks - A technological information bulletin will be exchanges published within the 18 months  OBJECTIVE 3: Production costs in the private sector are competitive Evaluation Criteria: - 50% of beneficiaries of this component have set up a cost accounting system or improved an existing accounting system. - Production costs of the enterprises monitored show a 10% improvement in at least 50% of cases. OBJECTIVE T ACTIVITY | PERFORMANCE INDICATOR 3.1 - Provide assistance to imnprove productivity 3.2 - Provide diagnostic surveys of production managemient\ 3.3 - Provide enterprises with inventory management know-bow 3.4 - Help minimize input delivery times - 3 group seminars per year 3.5 - Facilitate creation of raw materials procuremnt - 20 individual support activities per year groups 3.6 - Help optimize raw materials consumption 3.7 - Help set up energy and water saving plans 3.8 - Facilitate access to expertise to shorten the pruduction cycle 3.9 - Help set up maintenance plans 3.10 - Help reduce reject rates If M o XtI  OBJECTIVE 4: Facilitate access to credit Evaluation Criteria: - 90% of credit applications assisted by the PSF and submitted to financial institutions meet the latter's eligibility requirements and criteria and the PSF lias brought to successful conclusion 8 applications financed by financial institutions. - 90% of beneficiary enterprises are satisfied with PSF assistance under this component. OBJECTIVE ACTIVITY PERFORMANCE NDICATOR 4.1 - Help upgrade financing methods - Over the I8 months: - 6 different topics covered - 10 participants per group 4.2 - Help entrepreneurs establish a mutual guarantee - 2 funds created and 2 existing ones strengthened o\ fund 4.3 - Promote the emergence of specialized expertise to - 2 experts trained and in operation guide the enterprises in their negotiations with banks - A feedback system is organized with the banks, with a 75 % satisfaction rate among the banks 4.4 - Help train entrepreneurs in credit negotiation - Seminar organized by the experts 4.5 - Finance the preparation of credit applications to lending institutions - 3 applications per month I-S  OBJECTIVE 5: Increased market penetration Evaluation Criteria: - At least 50% of beneficiary enterprises have diversified into new markets and products, with a minimur.. of 5 enterprises. - PSF assistance under this component has generated an average increase in revenues .qual to P' least twice the grant paid. OBJECTIVE ACTIVITY PERFORMANCF INDICATOR 5.1 - Finance - 35 promotion crampaigns per year campaigns 5.2 - Finance extenul - Minimum 10 research projects per year market research 5.3 - Ensure 5.3.1 - Promote knowledge of standards and legislation on - 3 sectoral seminars in export sectors accessibility of external markets market infonnation 5.3.2 - Help set up subscriptions to market data banks - 3 data banks made available 5.3.3 - Help set up market data bank terminals - Legislation of 5 target countries made available 5.3.4 - Help set up subscriptions to specialized market to beneficiaries. journals 5.4 - Improve product 5.4.1 - Subsidize quality management programs (TQM), - Minimum of 5 quality rmanagement progranms design/quality etc. s2nd presee itaion - I seminar on quality sensitization is held before S.4.2 - Finance training in quality _ 1gement hlaunching of the programs - I development seminar is held during or after the introduction of quality maagement programs o X  IMPLEMENTATION iMEmFABLE OBJECTIVE 6: Ine Foundalion becomis operational Evaluatlon Criteria: I - The Foundation is set up and starts operations no later than October 31, 1995. 2 - The manual of procedures has proven effective over the first I8 months. 3 - Budgetary estimates proved realistic over the first I8 months. 4 - Subsidies to enterprises enabled them to generate an increase in turnover averaging at least double the subsidies granted. S - Beneficiaries are satisfied with PSF operations. r M~~l,S 1996 ACTIVITY RESPONSIBILITIES 6 7 _ 9 1 I112 1 2 3 4 5 6 7 - 9 10 11 12 6.1 Fonnal 6.1.1 Signalure of the decree GOS creation of ianplenentling the Law the of Fouidantions 4 Foundation ol l______________.___ 6.1.2 Signature of authorizing decree 6.1.3 Establishmnent of list of GOS founders GOS ____ 6.1.4 Drafting of statutes W13/GOS 6.1.5 Fotaiding Assembly. PSE/AGETIP Board of the Foundation, adoption of statutes 6.1.6 Registration fornalities 6.1.7 Publicationithe ie - - Official Gazette 6.1.S MD takes oflice T he foundation is scheduled to be operalional by October, 1995. From thal date, it should be ready to respond to any request for assistamce.  OBJECTIVE 6 cont'd: 1995 1996 ACTIVITY RESPONS1BILIT1ES 5 6 7 8 9 |10 |i IL 1 2 3 4 5 6 7 8 9 O I- 12 6.2 Secure PSF 6.2.1 IDA credit approval WB financing 6.2.2 Signature of PSF/GOS (GOS Agreement [Convention] ___ 6.3 Installation 6.3.1 Identification of MDl premises 6.3.2 Procurement of MD -