Senegal - Energy Sector Adjustment Operation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-7207-SE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 74 MILLION (US$ 100 MILLION EQUIVALENT) TO THE REPUBLIC OF SENEGAL FOR AN ENERGY SECTOR ADJUSTMENT OPERATION APRIL23, 1998 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit = CFA franc (CFAF) US$1.00 = CFAF 583 (November, 1997) CFAF I million US$1,715 SYSTEM OF WEIGHTS AND MEASURE: METRIC Metric U.S. Equivalent I hectare (ha) - 2.47 acres (a) I kilovolt (kV) 1, 000 volts I Megawatt(MW) 1, 000 kilowatts (kW) I Gigawatt hour (GWh) I 1 million kilowatt hours (kWh) I barrel (bbl) = 0.16 cubic meter I ton of oil equivalent (toe) - about 7 bbl of crude oil ABBREVIATIONS AND ACRONYMS BOO Build, Own and Operate CAS Country Assistance Strategy CERER Center for Study and Research on Renewable Energy CPPR Country Portfolio Performance Review CTS Companie des Tourbes du Senegal DE Direction de I'Energie DNEF Direction Nationale des Eaux et Forets EMU European Monetary Union ENSUT National School for Advanced Studies in Technology ESAC Energy Sector Adjustment Credit ESAF Enhanced Structural Adjustment Facility ESPL Energy Sector Policy Letter ESRC Energy Sector Reform Cell EU European Union GPP Groupement Professionel du Petrole GoS Goveniment of Senegal ICR Implementation Completion Report IFC Intemational Finance Corporation IPG Interministerial Policy Group IPP Independent Power Producer LPG Liquefied Petroleum Gas MEFP Ministry of Economy, Finance and Planning MEMI Ministry of Energy, Mining and Industry MEPN Ministry of Environment and Protection of Nature ODA Overseas Development Assistance OECD Organization for Economic Cooperation and Development PASCO Private Sector Adjustment and Competitiveness Operation PETROSEN Societe Nationale des Petroles/Senegal Petroleum Company PFP Policy Framework Paper RENES Senegal Energy Redeployment Program SENELEC Societe Nationale d'Electricite du Senegal (Senegal Electric Company) SAL Structural Adjustment Loan SAR Societe Africaine de Raffinage/African Refining Company SONEES Socitete Nationale de I'Eau du Senegal VAT Value Added Tax WAEMU West African Economic and Monetary Unit FISCAL YEAR January I - December 31 Vice President: Jean-Louis Sarbib Director: Mahmood A. Ayub Sector Manager: Mark D. Tomlinson Task Team Leader: Nadjib Sefta The CFA Franc is tied to the French Franc (FF) at a ratio of FF1.00 = FCFA100. The FF is currently floating.  FOR OFFICIAL USE ONLY REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY ................................ PART I. MACROECONOMIC FRAMEWORK .1 A. Country Background ............................................. . . . . 1 B. Senegal's Past Adjustment Efforts .2 C. Strategy and ODbjectives for 1997-99 .3 D. Financing Requirements .3 PART HI. THE ENERGY SECTOR.4 A. Energy Resources and Consumption ..4 B. Energy Sector Institutions and Policies ..4 C. Issues in the Energy Sector ..5 (a) The Household Energy Sector .5 (b) The Petroleum Sector .5 (c) The Electric Power Sector .6 D. The Role of the Energy Sector in the Adjustment Process ..7 PART III. THE PROPOSED ENERGY SECTOR ADJUSTMENT CREDIT (ESAC) ...8 A. Objectives..8 B. Proposed Reforms for the Energy Sector . . . 8 (a) The Household Energy Sector .8 (b) The Petroleum Sector .9 (c) The Electric Power Sector .10 C. Link of Proposed Credit to the CAS 1.. . D. Poverty Impact .................................... .. 11 E. Credit Amount ..................................... , .,.,.,,,.,.l..1 F. Implementation, Communication and Monitoring 1.. . G. Procurement anu Disbursement ................................ .. 12 H. Actions Taken to Date and Conditionality . . . 12 I. Benefits and Risks..14 J. Environmental Impact ..15 PART IV. RECOMMENDATION .16 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Schedule 1. Summary of External Financing Gap ................................................ 17 Schedule 2. Letter of Sectoral Development Policy ................................................ 18 Schedule 3. The Energy Sector Analysis ................................................ 26 Schedule 4. Energy Sector Reforms: Policy Matrix ................................................ 36 Schedule 5. Timetable and Steps for Privatization of SENELEC ................................................ 38 Schedule 6. Indicators ................................................ 39 Schedule 7. Portfolio Review and Disbursement Performance ................................................ 40  i REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Senegal Beneficiaries: The Government of Senegal (GoS) Amount: IDA Credit: SDR 74 million (US$100 million equivalent) Terms: IDA Credit: Standard with 40-year maturity Program The objective of the proposed credit is to support a comprehensive Objectives program of reforms in the energy sector within the framework of the and Description: Government's medium-term reform agenda, which was outlined in the 1996-1999 Policy Framework Paper (PFP) and which was also articulated in the CAS that was presented to the Board on January 29, 1998. The overall reform agenda seeks to liberalize the economy, reduce the size of the public sector, foster private sector development, and support social sector development - with the ultimate objective of reducing the incidence of poverty. The policy reforms in the energy sector are necessary for establishing an environment conducive to supply- response in the energy sector and self-sustained growth of the private sector. The objectives of the reforms are to rationalize the procurement, production, distribution and consumption of energy. They will lead to the effective transfer of responsibility to local communities for the management and use of forestry resources, liberalization of the procurement and distribution of petroleum products, abolition of the monopoly and special convention enjoyed by SAR (the refining company), privatization of the local electric power utility, SENELEC, and opening up of the power sector to private investment. Benefits: The proposed reforms in the energy sector will result, in the medium- term, in more efficient electric power service, lower electricity and petroleum prices, thereby reducing factor costs, improving Senegal's competitiveness and growth prospects and increasing job opportunities. The household energy strategy is expected to reduce deforestration, raise rural incomes and employment and establish a sustainable basis for the production and management of woodfuels. An indirect benefit of the new petroleum price and tax policy would be greater predictability of fiscal revenues. Risks: The operation faces three major risks. The first one relates to the potential opposition to the reforms from vested interests, such as the trade unions  ii in the power sector, the petroleum refinery and distribution companies. A second risk relates to the implementation capacity of the Ministries corierned. A third risk relates to the lack of private sector interest in investing in the power utility, SENELEC. The GoS has already initiated steps to mitigate some of these risks, by broadening the ownership for the reforms. Nevertheless these risks are real, but are worth taking, given the large benefits to the budget and the economy at large. Rate of Return: Not Applicable Poverty Category: Not Applicable Estimated US$25 million equivalent would be disbursed upon credit effectiveness; Disbursements: US$75 million equivalent would be disbursed upon compliance with conditions for the release of the second tranche.  1 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THIE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED ENERGY SECTOR ADJUSTMENT CREDIT TO THE REPUBLIC OF SENEGAL 1. I submit for your approval the following report and recommendation on a proposed Energy Sector Adjustment Credit (ESAC) to the Republic of Senegal for SDR 74 million, the equivalent of US$100 million. The credit would be on standard IDA terms, with an amortization period of 40 years. The proposed credit would support implementation of the Government's energy sector adjustment program. The Government's program aims at restructuring the sector, establishing a sound policy and regulatory framework and fostering private sector participation. Implementation of this program is expected to expand the availability, increase the efficiency and, in the medium term, lower the cost of energy (electricity and petroleum). 2. The credit is a key element of IDA's country assistance strategy (CAS) that was reviewed by the Executive Directors on January 29, 1997. Senegal's adjustment efforts are supported by the International Monetary Fund (IMF) through a three-year Enhanced Structural Adjustment Facility (ESAF). The third annual arrangement in the amount of US$51 million was approved by the IMF Board January 13, 1997 to support Senegal's economic program in 1997. PART I. MACROECONOMIC FRAMEWORK A. Country Background 3. Senegal is a Sahelian country with limited natural resources and a population of 8.7 million growing at a high but declining rate of about 2.7% a year. Its Gross National Product (GNP) of US$560 per capita in 1996 places it among the lower-middle income economies. The level of urbanization is 42% and growing, placing it well above the sub-Saharan Africa average of 31%. Notwithstanding recent improvements, the country's social indicators are poor, by comparison with countries with similar per capita incomes. The adult literacy rate is about 33%; primary school enrollment is at 58%. Modern sector activities are concentrated along the coast and around the capital city of Dakar, which has a population of about 2 million. Foreign exchange reserves are earned principally from groundnut-oil, phosphate, and fish exports, and from tourism. Agriculture accounts for about 20% of Gross Domestic Product (GDP) and employs 60% of the population. Groundnuts are the most important crop, accounting for 75% of farm cash income.  2 B. Senegal's Past Adjustment Efforts 4. Senegal's adjustment efforts since the early 1980's fall into two distinct periods: the years to end-1993, whose results were limited; and the post-CFAF devaluation period, which has witnessed considerable success and laid the basis for enhanced sustainable growth. 5. Before the end of 1993, Senegal's adjustment efforts were supported by four IDA structural adjustment credits and one sector adjustment operation. The results, as reported in the Project Completion Reports, were disappointing. Some progress was made with privatization of public enterprises and on the simplification of the tax structure. However, efforts to introduce more flexibility in labor legislation, to reduce non-labor input costs, and to reduce the civil service wage bill met with only limited success. Moreover, Senegal's real exchange rate continued to be overvalued. The difficulties of pursuing an adjustment strategy based on internal deflationary policies became more acute, and the economic reform program went off-track in 1992. Senegal was unable to obtain a fourth year Energy Sector (ESAF) and Structural Adjustment Loan (SAL) IV was closed without the third tranche being disbursed. 6. To halt the deterioration of Senegal's economy, in August 1993, the Government adopted more rigorous internal adjustment measures, including cuts in public sector wages and an increase in import duties and taxes applied to petroleum products. These measures contributed to containing the budget deficit at 3.9% of GDP and the current account deficit at 10.3% of GDP. They were not sufficient, however, to restore the competitiveness of the economy and its growth prospects. 7. With the realization that internal adjustment measures were too little and too late, the Government of Senegal, in consultation with other member countries of the CFA franc zone, revised the parity of the CFAF from 50 CFAF [FF to 100 CFAF /FF in early January 1994. The exchange rate adjustment was accompanied by a comprehensive medium-term adjustment and reform strategy aimed at creating the conditions for strong and sustainable growth and poverty alleviation. The current strategy is based on fiscal and monetary stability and structural reforms intended to liberalize the economy, reduce the size of the public sector, foster private sector development and support social sector development. The overarching objective is to reduce the incidence of poverty. The macroeconomic adjustment and structural reform programs have been supported by the international community, including a three-year ESAF arrangement from the IMF, and structural and sectoral adjustment lending from the Bank. 8. The policy reforms pursued since early 1994 have led to a marked recovery of economic activity as well as a significant improvement in Senegal's financial position. After three years of virtual stagnation, real GDP increased by 2% in 1994, and has averaged around 5% during the past three years. Despite import liberalization, the growth in volume of exports was twice as fast as imports, thereby lowering the external current account deficit from over 10% of GDP in 1994 to an estimated 6% in 1997. Inflation has been brought down from 32% in 1994 (the year of the devaluation) to less than 3% in 1997. As a result of a strict budgetary stance, the fiscal deficit (excluding grants) fell from almost 6% of GDP in 1994 to less than 1.5% in 1997. The share of wages and salaries in total expenditures has declined from 41% in 1993 to 35% in 1997. 9. On the other hand, there is little doubt that these achievements were accompanied by social costs emanating from the dismantling of the public sector, which had dominated the economic scenery for over three decades. The unemployment rate remains high, and for urban youth in the 20- 34 age group, it has reached 40%.  3 C. Strategy and Objectives for 1998-2001 10. The GoS will continue to base its economic policy actions on the adjustment strategy adopted in 1994. The Government's overall development strategy is well articulated in the Ninth Economic and Social Development Plan, adopted by the National Assembly in February 1997 after extensive consultations with various segments of the civil society. The Plan's overarching objective is to reduce the incidence of poverty and create gainful employment opportunities for youth through a significantly higher and ambitious growth rate of 9% per annum during 1998-2001, as well as through effective measures of social and human development. Specifically, the authorities' strategic agenda can be grouped under the following six themes: (i) maintaining macroeconomic stability; (ii) encouraging private sector development and redefining the role of the state; (iii) promoting rural development as an effective poverty alleviation mechanism; (iv) accelerating human and social development; (v) fostering regional integration, particularly in the context of the West African Economic and Monetary Union (WAEMU); and (vi) providing specific attention to cross-cutting issues of increasing relevance to economic and social development, such as gender, capacity building and environment. The economy is still performing well below its potential, and for long-term economic growth to take hold there is need for continuing structural reforms. This would establish a climate that attracts foreign investment and stimulates private sector initiative, with measures to privatize public enterprises and reduce costs of production, including the cost of energy. Part of this strategy will also include the opening up of the energy sector to the private sector, as discussed below. D. Financing Requirements 11. The adjustment strategy described above is aimed at reducing Senegal's dependence on external assistance and ensuring its medium-term financial viability. An analysis of Senegal's primary linkages to the global economy indicates that the external conditions facing the country over the next few years appear generally favorable. Whether Senegal can exploit the positive external environment will depend critically on the depth and pace of policy reform, particularly in terms of unleashing the entrepreneurial spirit of the private sector and ensuring accompanying measures of social protection. Exports of agricultural products (groundnuts in particular) will continue to play an important role, but will remain sensitive to rainfall. In fact the risk of debilitating droughts is quite high: for a country that depends on agriculture for 20% of its value added and 60% of employment, there have been 12 years (including 1997) of severe droughts in the last 30 years. Growth of exports should allow the external current account deficit (excluding official transfers) to narrow from 6% of GDP in 1997 to about 5% in 2000. However, in terms of external financing, Senegal has failed to avail itself of the increasing private capital flows to developing countries (in 1996, for example, Senegal attracted less than US$10 million out of US$245 billion flows to developing countries). Prospects for Overseas Development Assistance (ODA) financing are not encouraging, given the movement toward fiscal consolidation in major Organization of Economic Cooperation and Development (OECD) countries and - of particular importance to Senegal - the budgetary restrictions associated with qualification for the European Monetary Unit (EMU) among European Union (EU) members. In this environment, Senegal's objective of making recourse to concessional sources of external finance alone may prove increasingly more challenging. Additional debt relief from Paris Club creditors and continued progress in privatization are options for covering the financing gap. Nevertheless, the GoS is expected to continue availing itself of concessional external assistance to carry through with its three-year investment program (1998-2000).  4 12. Taking into account the projected trends, Senegal's external financing requirements for the 1998-2000 period are presently estimated at about US$1.5 billion. Thus, the proposed operation would provide about 7% of total financing needs. PART II. THE ENERGY SECTOR A. Energy Resources and Consumption 13. Senegal's energy resources are relatively limited. Energy consumption in Senegal is dominated by woodfuels, which account for 63% of energy used. Available forest stock information indicates that Senegal could reasonably expect to meet much of the demand for household fuels, provided it is properly managed. The country's untapped hydroelectric potential, based on the Senegal and Gambia rivers, is estimated at 1,000 MW. Fossil fuels in the form of heavy petroleum were discovered offshore at Dome Flore (100 million tons), but producing the oil may be uneconomical. Small amounts of natural gas were discovered and produced onshore near Dakar (Diam Nadio) and are being used to produce electricity. More recently, additional amounts of gas have been discovered at Thies that could also be used to generate electricity, but the reserves need to be confirmed. For now, however, most of Senegal's commercial energy needs are met by imported petroleum products which, in 1996, totaled 900,000 tons, cost an estimated US$180 million, and represented 18% of export earnings. B. Energy Sector Institutions and Policies 14. Energy policy, strategy and coordination are overseen by the National Energy Commission, an interministerial entity chaired by the Prime Minister. The National Energy Committee headed by the Minister of Energy implements the directives formulated by the Commission. Administrative and technical oversight of the sector falls under the Ministry of Energy, Mining and Industry (MEMI) with the exception of the supply of woodfuels, which is the responsibility of the Ministry of the Environment and Protection of Nature (MEPN). MEMI regulates certain parastatal companies and mixed-capital enterprises: SENELEC, in charge of electric power production, transmission and distribution; SAR (Societe Africaine de Raffinage), responsible for imports and production of petroleum products; several private oil companies responsible for the distribution of petroleum products; Senegal Petroleum Company (PETROSEN), involved in petroleum exploration. 15. The national energy policy is set forth in the Senegal Energy Redeployment Program (RENES, 1991) and in the document issued by the Interministerial Energy Council (1993). The global objectives of the GoS energy policy are: (a) to limit consumption of imported energy; (b) to rehabilitate the electric power production and transmission infrastructure; (c) to shift production and consumption toward local energy sources; and (d) to reduce consumption of environmentally destructive energy sources (wood and charcoal). Energy sector issues and the GoS strategy to address them are spelled out in the recently issued Letter of Development Policy (Schedule 2) and are discussed below. 16. To execute the energy sector reform program, the GoS has created an Energy Sector Reform Cell (ESRC) as well as an Interministerial Policy Group (IPG) which oversees the execution of the  5 reform process and its implementation. The Government aims to have ready for adoption by parliament a new Electricity Law, a new Petroleum legal and regulatory framework, and a new Forestry Law and their implementation arrangements by Board Presentation (for details see Schedule 4). C. Issues in the Energy Sector 17. Major issues in the sector include the high cost of electric power and petroleum, the limited access to and poor Iquality of power supply, and accelerated deforestation in areas supplying woodfuels to urban centers. These problems result partly from the limited hydrocarbon and forestry resources, inefficiencies due to oligopolistic situations and partly because of the limited size of the market. (a) The Household Energy Sector 18. Charcoal is currently produced inefficiently (an average of 16% of wood to charcoal conversion against 20% for normal operations) in the Kolda and Tambacounda regions, some 400 km away from the principal urban (Dakar and Thies) and peri-urban markets. Over the years, the operation of the charcoal industry has resulted in: the gradual loss of forest cover (approx. 30,000 ha/year) and thus of the ecosystem's carbon sequestration capacity and biodiversity; the degradation of the rural environment (particularly of the soils); the impoverishment of rural areas; an acceleration of the rural exodus; and a transfer of wealth from the rural areas to the urban areas. In addition to these negative impacts, it is anticipated that the Niokolo-Koba National Park, which is located in the southeastern corner of the Tambacounda and Kolda regions and which is a declared national and international biodiversity patrimony and "Biosphere Reserve," will come under threat of encroachment within the next decade, with irreparable biodiversity and ecological consequences at the national and globaLl levels. 19. Until April 1995, when a new Forestry Code was approved (Decree 95-357), the forestry legislation gave the Forest Service the exclusive prerogative to assign commercial exploitation rights over forest resources nationwide. Unfortunately, these rights were historically given only to urban- based traders resulting in the creation of a vertically integrated and oligopolistic industry with widespread problems. Symptomatic of the changes that have taken place in Senegal in the recent past, the new forestry code expressly provides for the transfer of responsibility from the GoS to the rural communities for the sustainable management and exploitation of the existing natural forest resources, and establishes that all forest resources exploitation activities must now involve consultation and approval by the affected rural communities. However the Code still has some shortcomings that have been rectified under the proposed program of reforms through the approval of a revised set of legislation (para 32). (b) The Petroleum Sector 20. Senegal's petroleum potential has yet to be established. Senegal is very under explored and the density of the wells to date is only 7% of the world average. Moreover, the wells have mostly been concentrated in two zones of the country. Future exploration will depend on increased efforts on the part of the GoS to attract oil companies. The legislative and fiscal framework that prevailed until the end of 1997 (Code No 86-13 of April 14, 1996) was not sufficiently attractive for private sector investment. It was recently modernized and made more competitive by the new Petroleum  6 Code 98-05. Simultaneously, PETROSEN's investments in exploration should cease. Petroleum exploration is an expensive and risky undertaking and should be left .o the private oil companies. Following discussions with IDA, the statutes of PETROSEN were revised in June, 1997 to limit its activities to promotion only. 21. The petroleum sector, downstream, is badly distorted, with some petroleum products heavily taxed and others subsidized. The SAR, a private company that is heavily subsidized, has a monopoly for the procurement and import of petroleum products and its private shareholders (Shell, Mobil, Elf and Total) are the only distributors of the products in the country. Similarly, there is a cartel on the transport of petroleum products. The domestic price of petroleum products in Senegal, at two to three times the economic cost, is one of the highest in Africa. The high cost reflects the existing oligopolistic situation within the sector and the Government's dependence on the sector for fiscal revenues. Because of the exceptionally high operating costs due to the design and size of its refinery, the GoS allows the SAR to charge the consumer an extra US$2.30/barrel to help cover its operating costs. This surcharge, which applies to both locally refined products as well as to products that are imported, costs the economy about $15.0 million a year (1996). In addition, because of a shrinking tax base and weaknesses in tax administration, the GoS has become increasingly dependent on the commercialization of petroleum products which account for about 13% of its total revenues (1996). However, because of its use of a stabilization tax (which is the difference between the consumer price and the other elements in the price structure) as a mechanism to ensure the desired level of consumer prices of petroleum products, Government revenues are significantly influenced by changes in world petroleum prices. In addition to uneconomic cost of refining, there are also inefficiencies relating to procurement, storage, transportation and distribution of petroleum products. With regard to petroleum product transportation, there are some 10 legally protected cartel companies. Lack of competition and excessive capacity further increase the cost of petroleum products. With regard to distribution, there were some 323 petrol stations with average sales volume of 653 m3/year. This sales volume is low even compared to other countries in the region and increases the cost of distribution. 22. Another issue relates to the heavy subsidization of LPG for household use. The cost of this subsidy to the State is projected to be over CFAF 10 billion (about US$20 million) in 1997. This partly explains the increase in the consumption of LPG from about 16,000 tons in 1986 to 68,000 tons in 1996, more than fourfold in less than 10 years. Gasoline and gas oil for the fish industry, as well as diesel and fuel oil to SENELEC are also subsidized. The growing burden of subsidies (provided as a negative stabilization tax) and the infrequent adjustments to consumer price to correct for changes in world prices have a negative impact on fiscal revenue. For example, in 1997, total Government revenue from petroleum products is projected to total CFAF 56 billion, while gross subsidies on petroleum products are projected to amount to about CFAF 28 billion. (c) The Electric Power Sector 23. A major issue in the power sector is the low level of coverage. The rate of electrification is dismally low since Independence. Moreover, access to electricity supply is largely confined to the capital city of Dakar and five major urban centers: Thies, St. Louis, Kaolack, Ziguinchor and Tambacounda. Village electrification is limited to areas in the immediate vicinity of these large population centers and some tertiary centers. The vast majority of the population living in the smaller centers (<1,000 inhabitants), numbering nearly 13,000, are without electricity supply.  7 24. The management and operation of SENELEC as well as the major uncertainties concerning its financial position and performance also constitute a serious problem. From 1992 to 1996, sales of electricity have increased by an average annual rate of 3.4% to reach a total sale of 922 Gwh in 1996. This is due to a substantial increase in domestic consumption and a sharp rise in industrial demand after the 1994 devaluation. In the absence of expansion of facilities, the increase in demand was met by a more intense use of existing generators. However, SENELEC now faces frequent capacity shortages, and brownouts are becoming widespread. This phenomenon occurred less frequently in 1997. 25. SENELEC's financial accounts show that the company sustained high losses of CEAF 7.0 billion in 1994, CFAF 7.2 billion in 1995 and CFAF 1.8 million in 1996 on an annual turnover of respectively CEAF 59 billion, CFAF 62 billion and CFAF 65 billion. Moreover, all the audit of the financial statements note that major uncertainties exist for practically all the items of SENELEC's balance sheet. It was therefore impossible for the auditors to give an opinion on the validity of the company's results, in particular whether they are positive or negative. The present average tariff is 70.6 CEAF /kWh or US$0.14/kWh which is high, even for a system of this size. There is at present little room for further substantive tariff increases. Furthermore, SENELEC's tariff structure is complex and has become inadequate. 26. The current shortage of generation capacity and falling level of investment has led to a deterioration of SENELEC's production facilities. A significant part of the existing capacity was put into service more than 12 years ago (prior to 1984). To overcome this problem, Senegal decided to attract private sector investment in the sector, with the assistance of International Finance Corporation (IFC). As a result of these efforts, SENELEC recently negotiated a contract with a private investor for the purchase of the power from a 50 MW combined cycle plant. The plant is expected to begin operations in 1998 and will be connected to SENELEC's 90 kV transmission system at the Cap des Riches substation. This investment will occur, prior to the establishment of an adequate legal framework, which the Government plans to rectify as soon as possible, so that clear rules and regulations will allow for fair and efficient competition, without relying on public subsidies. D. The Role of the Energy Sector in the Adjustment Process 27. The energy sector plays a pivotal role in the Senegalese economy and in the process of adjustment. Imports of energy weigh heavily on the balance of payments, averaging nearly 12% of total imports, and 17% of exports. Activities in the energy sector are also a significant part of Senegal's production; the combined turnover of enterprises in the sector constitutes nearly 40% of the country's industrial output. The energy sector is dominated by public sector enterprises. Public energy-related investment in hydrocarbon exploration and production, development of thermal generation facilities, and distribution of power amounted to approximately 11.4% of total industrial investment during the period 1993-96. However, not all of these energy investments were based on strict economic and financial considerations and consequently have sometimes yielded poor returns. 28. Due to these investments as well as managerial deficiencies, the financial performance of the energy sector enterprises has been poor and has contributed to the overall deterioration in the country's economic performance. 29. Energy prices are administered by the GoS and petroleum product prices are about three times higher than international prices. For petroleum products, levels have been set on the basis of fiscal and financial rather than economic considerations. Through taxes on petroleum consumption,  8 the energy sector has come to play a critical role in the mobilization of domestic resources. These taxes, concurrent with the financial requirements of the energy sector parastatals, have translated into high consumer prices for energy. By comparison, petroleum product prices in landlocked Mali, much of which comes from Dakar, are lower than in Senegal. As an input, energy therefore weighs heavily on the productive sectors and is one of the factors contributing to the high cost structure of the Senegalese economy, and its resulting lack of international competitiveness. For example, a comparison between tuna canning industries in Senegal and Thailand in 1993 indicated that the cost of electricity for these industries was four times higher in Senegal than in Thailand. In addition, the industrial and commercial sectors suffer from sudden and regular blackouts, of which more than 200 occurred last year. In the case of one factory, these interruptions led to a loss of 332 hours of production and a loss of FCFA 100 million that year. 30. The energy sector will thus need to contribute significantly to the achievement of the general objectives of the country's structural adjustment program and the medium-term recovery program outlined in para 10 above. Efficient management and operation of the various energy enterprises is an essential condition for improvement of the financial position of the public sector and must contribute significantly to the achievement of the stabilization objectives of the country as a whole. In addition, because of its pervasive effects on all sectors of the economy, energy must be supplied in a most reliable fashion and at the lowest economic prices in order to reduce distortions and ensure maximum efficiency in domestic production. And finally, the energy sector in particular is in a position to attract private investment and to mobilize significant internal and external resources. PART III. THE PROPOSED ENERGY SECTOR ADJUSTMENT CREDIT (ESAC) A. Objectives 31. The objective of the proposed credit is to support the implementation of a comprehensive program of reforms in the energy sector within the framework of the Government's medium-term reform agenda, which is articulated in the CAS presented to the Board on January 29, 1998 and the November 1996 Policy Framework Paper (PFP). The overall reform agenda seeks to liberalize the economy, reduce the size of the public sector, foster private sector development, and support social sector development, with the ultimate objective of reducing the incidence of poverty in the country. For the energy sector, the Government submitted to IDA in February, 1997 a Letter of Sector Development Policy outlining the measures it intends to take to address the serious problems and issues in the sector (See Schedule 2). The policy matrix outlining the reforms in the energy sector is given in Schedule 4. B. Proposed Reforms for the Energy Sector (a) The Household Energy Sector 32. Under the proposed program, further amendments to the Forestry Code approved in 1995 are being adopted to enhance local community responsibility and decentralization. These changes would be complemented by the effective transfer to local communities of the responsibilities for the management and use of forestry resources (woodfuel and charcoal). This would also involve: (a) the  9 implementation of sustainable community-managed forest management systems over an area of 300,000 ha within a period of six years, from which woodfuels would be rationally produced; (b) creation of a buffer zone around the Niokolo-Koba National Park, which is considered a national and international biodiversity reserve; (c) liberalization of the price of charcoal; (d) elimination of the subsidies on consumption of LPG; (e) promotion of the use of kerosene, and, (f) promotion of improved stoves. (b) The Petroleum Sector 33. The reforms proposed by the GoS include the following: (a) modifying the legal, fiscal and regulatory framework by adopting a new Petroleum Code, so as to encourage the private sector to explore for petroleum in the Senegalese sedimentary basin, and limit the Government's activity, and particularly those of the public sector company, PETROSEN, to only promoting private sector exploration and production; (b) liberalizing the procurement, import, transport and distribution of petroleum products by abolishing all the existing monopolies on these activities and by encouraging competition and transparency and giving due regard to the environment and security of supply. It would also mean the modification of the legal and regulatory framework to allow easy and equal access to current petroleum product import, filling, storage and transport facilities, which are adequate; (c) abolishing the monopoly and special convention enjoyed by the SAR, as well as the US$2.30/bbl supplement; and replacing it with a temporary and declining surtax on imported refined petroleum products that will initially be 20% and which will decline gradually to zero by the end of April 2002; (d) establishing a differential import duty on refined products (as compared with crude oil) the level of which will be initially 20% on white products and 5% on black products. This differential will not be applied to kerosene and LPG which are considered to be social products. As of January 1, 2000 the differential import duty will be in conformity with the External Tariff applied within the context of the West African Economic and Monetary Union (WAEMU). (e) the reduction of the prices of fuels for industrial use (black products) and of kerosene by lowering the nominal rate of the import duties, respectively by 10 and 30 points. In addition,, kerosene will benefit from bringing the level of its Value Added Tax (VAT) at that of LPG (10%); (f) modifying the petroleum product prices and taxation system in order to: (i) promote competition; (ii) reflect variations in economic cost; and (iii) remove progressively the existing subsidies (fuel for power generation and LPG). The Government, has decided in particular to replace the stabilization tax with a specific tax to better insulate the budget from changes in world petroleum prices. In addition, the GoS has decided to raise the price of LPG (through the gradual elimination of the negative stabilization tax to be completed by January 1, 2002), with the concomitant liberalization of charcoal prices to  10 promote competition between household fuels based on relative prices which reflect their economic cost. It has also decided to remove progressively the subsidy on fuel for power generation to be completed by January 1, 2001. (c) The Electric Power Sector 34. After many years of discussion and preparation, the GoS was recently able to reach the broadest possible agreement and consensus (with the private sector, political parties, labor unions, enterprises operating in the sector, etc.) on a comprehensive course of reforms for the power sector. These include: (a) modifying the legal and regulatory framework to encourage private sector investment in the production and distribution of electricity; (b) restructure the sector, by among other things, unbundling various relevant activities; and (c) privatizing the national electricity company (SENELEC). 35. In particular, the power sector reform program will include a progressive unbundling of the sector structure (generation, transmission and distribution) to permit a higher degree of competition in view of the possibilities of developing in the future a regional power market, which has been initiated with the Bank-supported Manantali project. The reform program would also permit private operators and investors to enter into other smaller urban centers and allow for mechanisms to be developed to permit rural electrification. This will require the enactment of a new Electricity Law, the preparation of regulatory instruments and the establishment of a regulatory authority. The preparation of the legal and regulatory framework has been initiated with the contracting of consultant services to: (a) prepare the legal and regulatory framework, including the drafting of necessary legislation and the establishment of regulatory authorities, and (b) to study the corporate restructuring of SENELEC. 36. Privatization of SENELEC, one of the largest public sector companies in Senegal, initially as a private monopoly, will be implemented by: (a) transferring to SENELEC legal ownership of all operational assets which are currently under the domain of the State (rather than just transferring the right to use the assets to the new owners) and operated by SENELEC; and (b) selling and transferring of a majority of shares. The new SENELEC will consist of separate business units for generation, transmission and distribution activities and all new generation facilities will be developed by private investors under Build, Own and Operate (BOO) schemes. The studies being conducted will define in what manner a progressive unbundling of the sector can be implemented in the long term, and how the three different activities (generation, transmission and distribution) will be separated. The GoS has procured the services of an Investment Bank to help it carry out the privatization of SENELEC which will be implemented by transferring a majority of its shares to a single Strategic Partner, to the Senegalese private sector and to SENELEC's employees, so that the State will own 41% or less of the shares of the new company. The share of the Strategic Partner in the company's capital will be defined during the privatization process, but will not be less than one third. A shareholders agreement would be concluded between the Strategic Partner and the State, satisfactory to the Association, which will contain clauses that will ensure that the responsibility for the company's management and operations will rest fully with the Strategic Partner. The steps and projected timetable for privatization of SENELEC is shown in Schedule 5.  11 C. Link of Proposed Credit to the CAS 37. The CAS presented to the Board on January 29, 1998 envisages a two-pronged approach: + Support of policies and programs aimed at more rapid and sustained growth, which would involve deepening the reform in the fiscal, trade, financial, and external debt sustainability area; stepping up efforts to improve the environment for private sector development and accelerating of the privatization program; strengthening infrastructure to make Senegal more competitive; and ensuring that the sustainability of long term growth is not jeopardized by environmental problems; and * ensure the social sustainability of the program through investments in health and education. 38. The CAS envisions an adjustment operation in the energy sector in FY98 given the urgent need for reforms in this sector, which until recently had been strongly resisted and the fact that it would facilitate a response from the private and rural sectors. D. Poverty Impact 39. The proposed credit will not directly contribute to poverty reduction but would do so indirectly by releasing fiscal resources now channeled to publicly-owned enterprises which could be spent on the social sectors. Also, indirectly the credit would help by supporting policies designed to accelerate broad-based income growth and increase the availability and quality of basic goods and services, including energy. In particular, lower electricity and petroleum prices in the medium term will reduce primary factor costs, thereby improving Senegal's competitiveness and growth prospects. In addition, rural electrification will help to improve the literacy and health of the rural population; and the household energy strategy, which the reform program supports, will generate employment and economic development opportunities in the rural villages and raise incomes, including those of women. E. Credit Amount 40. The proposed IDA credit of US$100 million represents about 7% of total financing requirements for the 1998-2000 period, estimated at about US$1.5 billion (para 12 and Schedule 1). This adjustment credit will be disbursed in two tranches, a first tranche of US$25 million upon credit effectiveness and a tranche of US$75 million, upon satisfaction of the conditions for the second tranche. F. Implementation, Communication and Monitoring 41. The Ministry of Energy, Mines and Industry, working in close cooperation with the Ministry of Economy, Finance and Planning will have overall responsibility for the execution of the reform program. The GoS has created an ESRC to execute the program and appointed an IPG to coordinate the execution of the reform process. The reform program would affect certain segments of society, in particular workers laid off for economic reasons. Implementation of the proposed reforms, including the privatization of SENELEC, creation of a regulatory authority and other institutional arrangements  12 would cost the Government an estimated US$9 million (but does not include the payment of severance packages, settlement of public sector arrears, and transfer of shares to SENELEC's employees at a discounted price). Broad debate with concerned actors and opinion makers (parliamentarians, journalists, unions, charcoal traders, consumers) was an important element in the progress made thus far on the reforms and will continue during the entire period of the reform process. To measure the impact of the reforms on energy use, prices, competitiveness, rural incomes and employment, a number of performance indicators have been agreed upon with the Government (Schedule 6). G. Procurement and Disbursement 42. Procurement procedures are designed to allow rapid use of the credit proceeds and efficiency and accountability in the process. Procurement and disbursement arrangements will follow the simplified procedures approved by the Board on February 1, 1996. Proceeds of the credit will be deposited by IDA in a Central Bank account at the request of the Borrower. If, after deposit in this account, the proceeds of the credit are used for ineligible purposes (i.e., to finance items imported from non-member countries, or goods and services on the Bank's standard negative list), IDA will require the Borrower to either: (a) return that amount to the account for use of eligible purposes; or (b) refund the amount directly to IDA. The credit administration will be the responsibility of the Ministry of Finance. Although an audit of the deposit account will not be required, the Bank reserves the right to require audits at any time. H. Actions Taken to Date and Conditionality 43. The following actions have already been taken: (a) A Letter of Sector Development Policy outlining the energy sector reform program and signed by the Minister of Economy, Finance and Planning as well as the Minister of Mines, Energy and Industry was submitted to IDA in February, 1997; (b) ESRC was created to execute the reform program and an IPG was set up to oversee the implementation; (c) Approval by Parliament and signature of the law authorizing the privatization of SENELEC; (d) The Government has engaged a Consulting Firm and has selected an Investment Bank to help it with the new electricity law and privatization of SENELEC; (e) The Government has engaged a consulting firm to help it with liberalization of the petroleum sector and with the revision of its pricing and tax structure; (f) The Government has transformed all prices on petroleum products into ceiling prices (March 1997); and (g) The statutes of PETROSEN have been modified (June, 1997), to limit its activities to promotion of Senegal's hydrocarbon potential only.  13 44. The following are conditions of Board presentation: (a) Maintenance of macroeconomic policy framework, consistent with the overall reform program supported by the Bank; (b) Approval by Parliament of the new electricity law and corresponding regulations, their signature, and publication in the Official Journal; signature and publication of thedd&rets d'application; (c) Transferring to SENELEC the legal ownership of all operational assets which are currently in the domain of the State and operated by SENELEC; (d) Approval, signature and publication of the new legal texts and regulations that would (i) abolish all existing monopolies for importation, refining, transport and distribution of petroleum products; (ii) establish clear rules aimed at bringing about competition in the sector; and, (iii) allow third-party access to storage and transport facilities for petroleum fuels; (e) Approval, signature and publication of the legal, regulatory and administrative bills and texts which in particular will allow: (i) the elimination of the US$2.30 surcharge on petroleum products sold by SAR and of the rule that limits the sale of SAR products to SAR members only; (ii) the establishment of a temporary and declining import surtax on refined products, in accordance with the conditions defined in para 33 (c); and (iii) the establishment of a general import tariff on petroleum products which will result in import duty differentials as defined in para 33 (d); (f) Signature and publication of a decree establishing the new petroleum product pricing policy, in accordance with the principles as defined in para 33 (f); (g) Publication in the Official Journal of the new Petroleum Code; (h) Publication in the Official Journal of the new Forestry Code; and (i) Confirmation to IDA of the timetables listed in para 33 (f) for the total elimination of subsidies on LPG and on fuel for power generation. 45. The following are conditions for release of the Second Tranche: (a) Maintunance of satisfactory macroeconomic policy framework; (b) Consistent with the objectives of the Letter of Energy Sector Development Policy, the Borrower has taken all necessary steps within its control to bring at least 59% of SENELEC's total share capital to the point of sale to: (i) a Strategic Partner; (ii) other entities in the private sector; and (iii) SENELEC's personnel; (c) Establishment of an autonomous Regulatory Authorit' cis envisaged in para 42 in the Letter of Energy Sector Development Policy and in accordance with the new Electricity Law;  14 (d) In accordance with the decrees on petroleum product pricing and on the temporary import tax on refined products (see paras 44 (d), (e) and (f)) the Borrower has: (i) issued and published a legal or regulatory instrument to complete the adjustment of prices of petroleum products for 1999, in accordance with criteria agreed upon with the Association; (ii) reduced the level of the subsidy on LPG, for 1999, in accordance with the mechanism, timetable and figures agreed upon between the Borrower and the Association, and has taken all legal or administrative measures required for the total elimination of subsidies by January 1, 2002; and (iii) reduced the rate of the subsidy on fuels for power generation, for 1999, in accordance with the mechanism, timetable and figures agreed upon between the Borrower and the Association, and has taken all legal or administrative measures required for the total elimination of subsidies by January 1, 2001. I. Benefits and Risks 46. The reforms in the energy sector will, in the medium term, result in improved electric power service, lower electricity and petroleum prices, thereby reducing factor costs, improving Senegal's competitiveness and growth prospects and increasing job opportunities. The household energy strategy is expected to help reduce deforestation, raise rural incomes and employment and establish a sustainable system for management and production of woodfuels. 47. The abolition of the US$2.30 per barrel surcharge enjoyed by the refinery, SAR, and its replacement with temporary and declining tax on the importation of refined products, will result in lower petroleum prices for consumers. It will also free up significant amounts of Govermnent revenues. Similarly, the gradual elimination of the subsidies on LPG and fuel sold to SENELEC will have a positive impact on the budget. A further budgetary benefit for the GoS will be the proceeds of the sale of SENELEC. In view of these expected substantial benefits, it would be useful for the GoS to explore other measures to further reduce prices by, for example, lowering the import tax on some imported white petroleum products and heavy fuel for industry and bringing them in line with those of the WAEMU countries. In order to promote kerosene as a household cooking fuel, the level of taxation on this product will substantially reduced. These reductions would increase the competitiveness of Senegal's economy and enhance the protection of the environment. Another important benefit of changing the current price and tax structure of petroleum products, is the fact that the Government will be able to project with much greater certainty the fiscal revenues that it can expect from the sector, which will be less linked to the international price of petroleum. 48. Implementation of these changes would result in the short term to an increase in the prices of LPG and electricity. In the case of LPG consumption, the negative impact of the price rise on the family budget is likely to be cushioned by the more efficient use of LPG stoves, the promotion of cheaper kerosene, and, because households are multiple fuel users, by the use of improved charcoal stoves. Also, the Government has decided to lower the tax on kerosene to make this fuel more attractive for household cooking. In addition, by liberalizing the price of charcoal, there would be more fair and effective competition between household energy fuels, based on relative prices that reflect their economic cost. In the case of electricity, the impact on the consumer of eliminating the subsidy on fuel for power generation will be reduced, both by the lower generation cost of the installed capacity operated by a private Independent Power Producer (IPP) and the harnessing of the energy efficiency potential, and other cost savings, within SENELEC through better management.  15 49. The proposed credit faces three major risks relating to: (a) political and social opposition to the reforms; (b) the Government's implementation capacity; and (c) the lack of private sector interest in SENELEC. With regard to the first, the reforms face potential opposition from: (i) the trade unions against privatization of SENELEC; (ii) the four private oil companies and the transport companies to liberalization of the petroleum sector; and (iii) the charcoal traders to transferring part of the wood-fuel activity to rural communities. This is particularly true as the country heads into an election cycle. With regard to implementation capacity, there is need for intense and optimal collaboration between the Ministry of Energy and the Ministry of Finance and Economy. This is particularly true with the liberalization of the petroleum sector, which could lead to some "informalization" of the sector, with adverse impacts on the environment, security and fiscal revenues. Finally, there is the possibility that no buyers would be found for SENELEC, because its prospects are not considered attractive enough and because of perceived country risk for foreign investors. 50. To mitigate these risks the GoS has launched a large scale information and promotion campaign about the reform process and its benefits for the economy at large and for consumers in particular. The fact that consumers will benefit immediately from the proposed reforms because of lower prices of sorne petroleum product will send a positive signal about the stated objectives of the reform process. T]he GoS further has opened a dialogue with the various interested sector operators to convince them of the importance and seriousness it attaches to the reforms as well as to offer them incentives such as proactive clear rules to stimulate the entry of new distributors. Measures are also being taken (new legal and regulatory framework for the petroleum sector) to minimize the risk of "informalization" of the sector. In the case of the SENELEC staff, both a social plan as well as a transfer of 10% of the SENELEC shares (at a possibly discounted price) to its staff are under consideration. As to the implementation capacity, better monitoring by the IPG as well as technical assistance and training are expected to overcome any inadequacies in coordination and execution of the reform program. As to the sale of SENELEC, the GoS will make fundamental changes within both the management of SENELEC and the sector itself with a view to establish the"responsibility of ownership", backed up by a legal framework that attracts the private sector. It is clear that the settlement of the cross debts between the GoS and SENELEC prior to offering SENELEC for sale will have a positive impact as well. 51. In sum, while there remain some real risks, the alternative of not proceeding with this operation poses an even greater risk to the success of Senegal's overall adjustment efforts. Fragile though it is, there is a momentum for reform in Senegal for the first time in years. The probability that it will be sustained and reinforced will be greater with Bank support. Moreover the risks are worth taking, given the large benefits to the budget and the economy at large. J. Environmental Impact 52. This operation does not have a direct impact on the environment. However, environmental concerns have been built into the preparation of this operation: (1) the Forestry Code is expected to transfer management of the forests to local communities; this, together with the implementation of the recently approved Sustainable and Participatory Energy Management project, would: (a) help reduce deforestation and soil degradation; (b) contribute to reducing the loss of carbon sequestration capacity and of biodiversity; and, (c) reduce carbon dioxide emissions; (2) the Petroleum Code is expected to make it more attractive for oil companies to come and explore for hydrocarbons, but it also includes financial obligations of operators concerning their environmental responsibilities; (3) similarly, the  16 new laws relating to petroleum product procurement and distribution will include guidelines that would apply to a number of financial and technical aspects, including the environment; (4) the privatization of SENELEC would require the new owner and operator, as well other investors in the power sector, to strictly respect the environmental guidelines that will be part of the new Electricity Law; and finally, (5) as part of the technical and financial evaluation/audit of SENELEC (for privatization purposes), it is explicitly required that consultants will take into account existing environmental liabilities of SENELEC, if any. During the supervision of the program, attention will be paid to the implementation of the environmental provisions of the reforms and new regulations being put in place. PART IV. RECOMMENDATION 53. I am satisfied that the credit will comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. James D. Wolfensohn President by Sven Sandstrom Washington, D.C. April 23, 1998 Attachments  17 SCHEDULE 1 Page 1 of 1 REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT SUMMARY OF EXTERNAL FINANCING GAP 1998 9 (US$ Millions) 1. REQUIREMENTS FOR EXTERNAL FINANCING 2,203 2,379 2,515 7,097 1 . Imports of Gjoods and Non-financial Services 1,799 1,916 2,049 5,764 2. Total Scheduled Debt Service Obligations of which, 294 267 286 847 (i) Interest 107 100 96 303 (ii) Amortization (without IMF) 127 135 167 429 (iii) IMF Repurchases 60 32 23 115 3. Reserves Build-up (14) 73 52 111 4. Other Factor Payments 34 35 37 106 5. Current Transfer Payments 85 88 91 264 6. Change in Arrears 5 0 0 5| 11. OWN RESOURCES 1,728 1,860 2,001 5,589 1. Exports of Goods and Services 1,541 1,641 1,745 4,927 2. Current Transfer Receipts 107 111 114 332 3. Income Receipts 27 27 28 82 4. Foreign Direct Investment 51 106 93 250 5. Other Capital Flows 2 (25) 21 (2) III. GROSS FINANCING GAP 475 519 514 1,508 1. Foreign Financing: 408 430 442 1,280 (i) Project Aid 302 325 341 968 (ii) Non-Adjustment, Non-Pr. 55 57 52 164 (iii) Projected IMF Purchases 48 48 49 145 (iv) Acljustment Support 3 0 0 3 2. Debt Rescheduling 0 0 0 0 IV. RESIDUAL FINANCING GAP 67 89 72 228  18 SCHEDULE 2 Page 1 of 10 REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT LETTER OF SECTORAL DEVELOPMENT POLICY January 30, 1997 A. Objectives 1. The Government of Senegal carried out the first energy sector project between 1987 and 1992 with support from its development partners. Financing was mobilized under the program to perform the most urgent rehabilitation work and bolster infrastructure. The program also helped improve sector management policy. Several years ago a new economic environment was put in place with the implementation of an overall economic adjustment program and a shift in the State's role towards planning, regulatory and oversight functions. 2. Against this backdrop, a second energy project - built around a series of major energy sector reforms - is now in preparation. The purpose of this Letter of Development Policy for the Energy Sector is to outline Government 's decisions in this connection, along with a timetable of steps to be taken. This letter is to be seen in the context of the macroeconomic framework defined by the Government with a view to achieving a significant rate of economic growth while maintaining a stable financial and fiscal position in the medium term. 3. The above-mentioned macroeconomic framework was set forth in the agreements signed by the Government with international donors. The particulars are included in the medium-term (1994- 1997) economic and financial policy framework paper (PFP) and in the private sector development policy letter, both of which were completed in 1994 and endorsed by the International Monetary Fund and the World Bank. The PFP, which was updated in 1995 and 1996, sets forth the steps which the Government intends to take in the energy sector overall. Those steps are detailed herein. B. Macroeconomic Framework 4. In terms of macroeconomic objectives, the country's overall adjustment policy was geared to achieving GDP growth of 4.5% to 5% per annum beginning in 1995, in order to bring about a yearly increase in annual income per capita of at least 2% and create 20,000 new jobs. Effective in 1996, a return to a lower inflation rate of between 2% and 3% per annum (based on the GDP deflator) was also to take place. Th.is would gradually narrow the external current account deficit (excluding grants) from 9.8% of GDP in 1994 to 6.8% by 1997 5. The Government brought in arrangements providing for private investmnent incentives and guarantees including, inter alia, the Investment Code, permission to repatriate capital and profits, new tax legislation, and coverage of the currency convertibility and foreign exchange risks.  19 Schedule 2 Page2of 10 C. Current Situation and Sector Constraints 6. The Government has analyzed the set of constraints and obstacles facing the sector, has formulated appropriate orientations and strategies, and has decided on specific actions to be taken in each energy subsector in order to achieve the overall objectives set. Cl. General Considerations 7. Senegal's energy balance shows, at the primary energy level, a preponderance of wood (61%) extracted from natural forests, followed by petroleum products (37%), virtually all of which are imported. 8. Prices are high in Senegal owing to such objective constraints as the lack of revenues from hydro or petroleum products, the size of the system (determined by market size) which limits potential for taking advantage of economies of scale or using certain technologies, and limited forest resources. 9. The population has little access to commercial forms of energy. C2. Constraints by Subsector C2.1 The Petroleum Subsector 10. Senegars hydrocarbons are supplied exclusively through imports by Societe Africaine de Raffinage (SAR), which stand at approximately 900,000 tons per annum, for a foreign exchange cost of about CFAF 75 billion in 1995, and CFAF 92 billion in 1996. SAR is also the country's only refiner of crude petroleum. The company faces two major problems: first, the limited size of the market; and second, obsolete facilities and delays in updating them, despite the "supplement" of US$2.30/bbl it receives by way of remuneration for its activities. 11. Domestic production is under the responsibility ofPETROSEN, representing less than 1,000 tons of crude oil in 1995, which was sold to SAR; and 55 million n2 of gas, used to supply gas turbines at SENELEC. The major constraint for PETROSEN continues to be securing financing for exploration activities, particularly given the difficulty of mobilizing public funds. 12. Petroleum products are distributed by four large companies that share the market among themselves without much competition. Transport has been handled since 1972 by a consortium of transport companies, each of them being assigned to a given distribution company.  20 Schedule 2 Page 3 of 10 13. Quarterly setting of prices for petroleum products based on import parity was introduced under the first stage of the reform recommended by a 1987 study conducted by the firm ADL. Certain aspects of the refonn, such as passing through market prices variations into selling prices to the consumer, have not yet been fully implemented. Also, the tax burden on prices for petroleum products, particularly diesel oil and those products used in industry, pushes up the cost of production factors, to the detriment of a more competitive economy and recovery of growth. C2.2 The Electricity Subsector 14. Electricity is exclusively thermal generated. SENELEC holds a distribution monopoly and has installed capacity of 280 MW, consuming 300,000 tons of petroleum products for an output of about 1,000 GWh per annum. SENELEC also purchases part of the surpluses (4 GWh in 1994) generated by the country's few self-producers (ICS, CSS and SONACOS, which produce 100 GWh per annum with installed capacity of 90 MW). 15. Electrification rate is 25% nationally, 50% in cities, and only 5% in rural areas. The proportion of the population lacking access to electricity is well above the world average (75% versus 40%). 16. Stagnating investment levels at SENELEC since 1990, owing chiefly to a freeze on donor financing, have led to deteriorating production equipment and declining economic and financial results. Despite the recent recovery, the main problems (a large power capacity deficit, a troubled financial relationship between the State and SENELEC, a low electrification rate) continue to persist, and any lasting success of the restructuring efforts undertaken will hinge upon solving them. C2.3 Rural Electrification 17. Electrification is still quite poorly developed in rural areas- about 250 villages have been supplied with electricity, of a total of some 14,000 - chiefly because insufficient resources are available to cover very high investment and operating costs, in a context where rural electrification operations are not financially self-sustaining. If the current trend continues, the percentage of the rural population with access to electricity will fall, since the connection rate (2% per annum) lags behind demographic growth (about 3% per annum). 18. Electrical service in rural areas, however, is a source of significant social progress, allowing access to health care and education, making possible income-generating productive activities, and generally promoting rural economic and social development. This helps curb the rural exodus by firmly rooting populations to their native soil, thus limiting uncontrolled expansion in cities. Rural electrification is therefore a major challenge for Senegal, and it is crucial that an overall strategy be mapped out to step up the pace of connections.  21 Schedule 2 Page 4 of 10 C2.4 The Household Fuel Subsector 19. National consumption is an estimated 330,000 tons of charcoal and 1,500,000 tons of fuelwood, representing the equivalent of greater than 4,000,000 m3 of wood. Demand for charcoal is met through intensive extraction of fragile forest resources and strips 30,000 ha of natural forests of their cover each year. 20. Current practices to supply fuelwood and charcoal are causing rapid degradation of forest cover. The forestry frontier recedes further and further each year and today lies more than 400 km away from the capital city. Finally, the fact that local populations do not take responsibility for the problem stands in the way of effective forest resources management on their lands. 21. The switch to butane fuel that took place in 1974 as a result of butane price subsidies and major private investments in equipment and infrastructure for storage, filling and distribution continues to have visible effects today. But this policy has come at a high cost for the State, currently totaling 'CFAF 6 billion in the form of price subsidies, without ecunting tax exemptions on gas equipment. 22. Lastly, the campaigns to promote improved stoves and substitute peat for charcoal have shown little results to date. D. Energy Policy 23. Despite the constraints noted, Senegal's energy sector also enjoys, inter alia, the following significant assets for development: * a complete petroleum industry operating at world class standards; * an electricity subsbctor that is organized rationally and features skilled human resources; and * a household f-uel subsector that has a clear objective to achieve sustainable management of forest resources. 24. In this context, the country's energy policy will focus on three basic fronts: * the economic, to rationalize conditions of supply, production, distribution and consumption of energy while bearing in mind the country's long-term interests; * the environmental, respecting fundamental ecological balance and encourage rational management of rural areas where forests are being exploited for energy; * the social, to expand the population's access to modem forms of energy, which is a condition sine qua non for success in combating poverty, improving public health, reducing illiteracy, developing agriculture, promoting women, etc.  22 Schedule 2 Page 5 of 10 25. The strategy calls for actions to be taken in the petroleum and electricity subsectors as well as the household fuel subsector, as outlined below: * liberalizing the importation, transport and distribution of petroleum products; and eliminating the special arrangement with SAR, and replacing it with a temporary degressive import surcharge on refined petroleum imports; * introducing automatic quarterly adjustment of prices for petroleum products in line with international prices; * amending prevailing legislation and regulations to promote lively competition and encourage private-sector involvement in investment and management in the electricity sector; * privatizing and restructuring SENELEC; and * transferring the management and exploitation of wood resources to local collectives. 26. The Government has decided to employ two new bodies to implement this strategy and related action: (a) An Interministerial Steering Committee on Energy Sector Reform with representatives from all ministerial departments concerned, having responsibility for coordinating and guiding the implementation of reform; and (b) a Technical Unit composed of specialists in relevant areas, having responsibility for performing work as needed to carry out the reforms and to prepare and implement the second energy project. E. Petroleum Products Subsector 27. Most activities in this subsector are already being carried out by private operators, but in a monopolistic way. The reforms are intended to lower the cost of products by deregulating these activities completely and stimulating competitiveness. 28. All segments of activity will be deregulated by the end of December 1997, by eliminating all existing monopolies (importation, refining, transport and distribution). Competition will be stimulated by creating a level playing field for all concerned in the subsector while ensuring security of supply, safety, and environmental protection. Barriers to entry (physical and financial capacities, applying equally to importation, transport and distribution) will be fixed and controlled by the public authorities. They will need to be set at levels that enable requirements to be met in terms of security, safety and transparency, taking care not to discourage potential new players. Importers will be allowed to group their purchases on the international market, using specific mechanisms that will be refined further, to take advantage of economies of scale available in the Senegalese market. 29. The Government will adopt amendments to existing legislation and regulations, by the end of 1997 and after consulting the operators concerned, to allow third-party access to existing storage facilities and pipeline transport for petroleum products. The particular instruments in question are the SAR by-laws, publication of specifications for products considered eligible to gain access to such facilities and of technical standards to be met in the process, and setting, approval and publication by facility owners of prices for services rendered (third-party use of their facilities).  23 Schedule 2 Page 6 of 10 30. By the end of December 1997, the arrangement between SAR and the State will have been terminated and the US$2.30/bbl supplement on prices ex-SAR eliminated. An import tax on refined petroleum products will be introduced in December 1997. The Government will adopt a plan on this temporary degressive surtax, in conjunction with the World Bank, by the end of June 1997 31. Taxes and prices: The overall aim of reforms in this area is to ensure that prices reflect economic costs. Over the longer term, with a more open market (involving a larger number of players which are smaller in size), prices will be fully deregulated. In the interim, however, price controls will remain in effect. A new pricing structure for petroleum products will be defined and implemented by the end of December 1997, based on a series of principles and target deadlines: (a) adjustment of prices ex-SAR and consumer prices in line with variations in costs, in particular for imports, such adjustments to be made quarterly until the end of 1998 and monthly thereafter; (b) existing prices will become ceiling prices immediately; (c) margins will be expressed in terms of value (not as a percentage) at the various levels in the process (importation, distribution, retail sale), and will take into account the technical features and cost specific to each product; (d) the current system of cross subsidies for transportation will be reviewed, in the new context of liberalization, to protect the interests of remote consumers and ensure coverage of the entire country; (e) taxes on products will be streamlined and tax neutrality (by product, by type of use) will be sought; and (f) subsidies on fuels used in producing electricity and on consumption of electricity by Compagnie des Phosphates de Taiba will be eliminated. 32. With respect to petroleum exploration, the Government 's policy is to step up exploration for hydrocarbons to increase the likelihood of discovering reserves that can be exploited. In this context, the Government and the public enterprise PETROSEN will concentrate solely on the promotion of Senegal's sedimentary basin. The PETROSEN by-laws have been amended in June 1997. F. Electricity 33. The electricity subsector faces a number of challenges, and the way they are handled will to a great extent determine the success of the country's adjustment program. That is the reason why the Government views development of this subsector as highly significant.  24 Schedule 2 Page 7 of 10 34. The main objectives of the GovernmentXs policy for the electricity subsector are: (a) to ensure a supply of electricity to the population and other consumers under the best possible conditions of safety and price given the country's economic situation; and (b) to accelerate electrification in both urban (60% by the year 2000) and rural (15% by the year 2000) areas. 35. The Government is aware that these objectives can only be achieved, first, by finding ways and means of locking in the encouraging results obtained in the past three years in terms of improving management and operating results; and second, by making the subsector substantially more effective and productive through greater involvement by private operators. This will call for a major restructuring of the subsector, in order to: (a) transfer electricity production and distribution to the private sector; and (b) promote competitiveness at all possible levels in line with the features of Senegal's power sector. Fl. Overall Framework 36. Important changes are to be made in the structure of the electric power industry and in the ownership of resources used in electricity production and distribution. To this end, the Govemnment means to privatize SENELEC in the short term. On the other hand, since the Government does not wish to create a permanent private monopoly, this implies, in the medium term, bringing as much competition as possible into the sector. In this context, it has been decided to undertake a gradual process of vertical de-integration of the electric power industry. The implications of this process - and the legislative amendments it will necessitate - will be examined and the necessary changes made. The Government also intends to create a streamlined public structure in charge of rural electrification, and an energy oversight agency. 37. Promoting competition will, however, be subject to certain constraints specific to the Senegalese electric power sector (see above) in particular: (a) its relatively small size at present; and (b) the low rate of electrical service coverage, especially in rural areas. These constraints have been taken into account in the reforms to be undertaken. F2. Reforms in Electric Power Subsector Structure and Ownership 38. To achieve the medium-term objective, which is to lay the groundwork for creating a competitive environment in the subsector, the Goverinent has decided to open up all new production to the private sector, chiefly under the BOO formula (Build, Own, Operate). In locales where electricity service already exists, distribution concessions will be granted, when they expire, under a call for tenders from private operators, local collectives and cooperatives. The same procedure will be followed, to the extent possible, for locales now lacking electricity. 39. With respect to the short-term objective of making SENELEC more efficient, the Government will privatize the company immediately, under an organized call for tenders, by transferring a majority share to a strategic partner to the Senegalese private sector and to SENELEC staff. The strategic partner's management responsibilities and commitments in terms of further electrification will be set forth in a new set of conditions and a new concession agreement  25 Schedule 2 Page8of 10 40. From the outset, the strategic partner will be required to maintain separate accounts for its three operating segments: Production (P), Transmission (T), and Distribution (D). Any new production capacity deemed necessary will be added under calls for tenders issued to private investors, since SENELEC is no longer authorized to develop its own production capacity. F3. Legal Framework 41. The Government will draft, by the end of 1997, an Electricity Law establishing the organizational and legal framework of operations by the subsector. This legal framework will encompass: (a) the sector's structure and modus operandi ensuring maximum competitiveness in production and distribution, as well as provisions governing relations among the various participants; (b) the State's role with respect to electricity policy, planning and regulation, in particular concerning the principles of tariff policy; and (c) rules governing the operations of the regulatory agency. The Law will take into account the decentralization policy introduced in 1997 and the future context of regional cooperation in terms of electric power production and transmission, particularly in states members of the Senegal River Development Organization, the Gambia River Development Organization, and the West African Monetary Union. 42. The Electricity Law will be enforced by a regulatory agency to be created with the following core functions: (a) granting (and revoking where applicable) various types of operating permits (independent production, concessions); (b) interpreting and applying the principles of tariff policy set forth in the Law; and (c) defining operating standards and rules for the electricity sector. Initially, a Government agency within the Energy Ministry will perform this regulatory function, through a small specialized unit with a skeleton staff. This agency will be responsible, at a preliminary stage., for monitoring and approving competitive bidding processes undertaken to obtain additional capacity for electricity production. F4. Energy Management 43. The Government of Senegal plans to pursue and carry further its energy efficiency efforts with a view to reducing the import bill, lowering the cost of production factors, and contributing to protection of the global environment. 44. To this end, the energy oversight agency which is to be sei up as noted above will be responsible for identifying potential energy savings and for taking action to inform, support and advise the various operators. The agency will also examine tax and regulatory measures to be put in place to encourage sound energy management.  26 Schedule 2 Page 9 of 10 F5. Rural and Peri-urban Electrification 45. Taking electricity to rural areas and certain peri-urban areas, whelher by developing networks or through decentralized channels, is costly, and the result could be a product that is too expensive for the populations concerned. The Government plans to support such expansion efforts by granting subsidies under its social policy. These operations could be entrusted to the private distribution finns nearest the areas concerned, under regulated bidding procedures. 46. This matter requires further analysis and more detailed proposals, in particular with respect to investment programming and sources and types of financing. The restructuring of the sector as described herein is expected to foster the development of capable organizations with an interest in such activities. G. Household Fuel 47. The overall aims are to: (a) develop, on a sustainable basis, energy resources from national forests; (b) enable local collectives to benefit from revenues derived from forest resources; and (c) promote substitute fuels that are adapted to Senegalese cooking methods to ensure their technical and economic feasibility. 48. With a view to achieving these objectives, the Forestry Code adopted in 1993 (legislation) and 1995 (regulations) calls for introducing the following major reforms: (i) Charcoal is to be produced on the basis of sales of standing timber and considering forest regeneration capacity. A presidential decree issued in 1996 eliminated the forestry levy and introduced a system of taxes that are differentiated depending on whether wood comes from a managed area or from a natural forest. (ii) The local collectives concerned will be the legal managers of forests on their land and the beneficiaries of revenues generated. To this end, the decrees enforcing regionalization, which were signed in January 1997, call for the management of forest resources to be transferred to local collectives. 49. In this context, the legislative and regulatory provisions of the new Forestry Code will be revised by June 30, 1997, to reflect the policy of regionalization and to offer guarantees with respect to forest management and the transfer of forestry-generated resources to rural populations. 50. As part of that review, the following measures will be provided for: * The legal managers of resources will be the beneficiaries of any revenue generated by the sale of wood from the forests; * Quotas will be quantities to be extracted each year, fixed in terms of volume of standing timber or cord-wood, considering forest regeneration capacity; and * Forestry services will put in place, by June 30, 1998, measures to ensure rational and controlled forestry development, based on yearly quotas, covering the entire forested area in Senegal under a horizon to 2005. By 2005, these measures are to cover the Tambacounda and Kolda regions.  27 Schedule 2 Page 10 of 10 51. The price of charcoal is to be deregulated not later than December 31, 1999. A regulatory system will be put in place, however, to minimize the supply risk and ensure a truly competitive subsector. 52. A plan to eliminate the butane gas subsidy will be adopted by the Government not later than December 31, 1997, reflecting the financial constraints facing the State. The subsidy will be eliminated gradually by semiannual increments, and the process will be complete by December 31, 1999. 53. Finally, the Government intends to take steps as needed to diversify cooking fuel used in households. The plan, in particular, is to promote kerosene - to be introduced as a household fuel by the end of Juine 1998- and develop other potential resources. H. Approach to and Means for Implementation 54. The Government of Senegal is aware that placing the ambitious program described herein into effect will require substantial effort, time and financial resources. Support will be sought from the World Bank and other donors. [stamp - Ministry of Economic Affairs, Finance and Planning- signed] [stamp - Ministry of Energy, Mines and Industry: The Minister- signed]  28 SCHEDULE 3 Page 1 of 10 REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT THE ENERGY SECTOR ANALYSIS A. Energy Resources and Consumption 1. Energy consumption in Senegal is dominated by woodfuels, which account for 53% of energy used. Available forest stock information indicates that Senegal could reasonably expect to meet much of the demand for household fuels, provided they are properly managed. The country's hydroelectric potential, based on the Senegal and Gambia rivers is estimated at 1,000 MW, which has yet to be tapped. Fossil fuel in the form of heavy petroleum was discovered offshore at Dome Flore (100 million tons), but producing the oil may be uneconomical. Small amounts of natural gas, however, were discovered and produced onshore near Dakar (Diam Nadio) and were used to produce electricity. More recently, additional amounts of gas have been discovered at Thies that could also be used to generate electricity, but the reserves need to be confirmed. For now, however, most of Senegal's commercial energy needs are met by imported petroleum products which, in 1996, totaled 900,000 tons, cost an estimated US$180 million in 1996 and represented 18% of export earnings. B. Energy Sector Institutions and Policies 2. Energy policy choices, directions and coordination are overseen by the National Energy Commission, an interministerial entity chaired by the Prime Minister. The National Energy Committee headed by the Minister of Energy implements the directives formulated by the Commission. Administrative and technical oversight of the sector falls under the Ministry of Energy, Mining and Industry (MEMI) with the exception of the supply of woodfuels, which is the responsibility of the Ministry of the Environment and Protection of Nature (MEPN). MEMI regulates certain parastatal companies and mixed-capital enterprises: Senegal Electric Company (SENELEC), in charge of electric power production, transmission and distribution; SAR (African Refining Company), responsible for imports and production of petroleum products; several private oil companies responsible for the distribution of petroleum products (Mobil, Elf, Total, Shell); Senegal Petroleum Company (PETROSEN), involved in petroleum exploration and production; and Senegal Peat Company (CTS), responsible for the development of peat reserves. Other ministries are key players, including the Ministry of the Economy, Finance and Planning; the Ministry of Infrastructure and Land Transportation, responsible for oversight of hydrocarbon transportation; the Ministry of Modernization and Technology and the Ministry of Water Resources, both of which are involved in solar energy programs; the Ministry of National Education, which has over-sight of the Center for Study and Research on Renewable Energy (CERER); National School for Advanced Studies in Technology (ENSUT); and the Cellule de Combustibles Domestiques, which is an inter-ministerial body created in 1993 to serve as a formal link between the different Government al institutions and operators in the sector.  29 Schedule 3 Page 2 of 10 3. The national energy policy is set forth in the Senegal Energy Redeployment program (RENES) formulated in 1980 and revised in 1991 and in the document issued by the Interministerial Energy Council (1993). The global objectives of the GoS energy policy are: (a) to limit consumption of imported energy; (b) to rehabilitate the electric power production and transmission infrastructure; (c) to shift production and consumption toward local energy sources; and (d) to reduce consumption on environmentally destructive energy sources (wood and charcoal). The sector institutions and Government policy and strategy are discussed in greater detail below. C. Household Energy Sector 4. The household sector is the principal energy consumer (58%) followed by transport (20%), industry (17%) and the tertiary sector (5%). Total charcoal consumption in 1992 was estimated at 330,000 tons (equivalent to 1.8 million tons of fuelwood), of which 76% is consumed in the principal urban areas. The capital city of Dakar alone is responsible for an annual consumption of more than 100,000 tons of charcoal. Total consumption of fuelwood was estimated at some 1.5 million tons in 1992, 86% of which is consumed in the rural areas. The table below presents a background of energy consumption by the household sector for 1987 and 1992. Table 3.1: Household Energy Consumption by Fuel and Region (1987-1992) ('000 toe) :____ .1987 - __ ; . =199=2 g l Regilon:- C*ewo hr .JGsFewn4 %aca a Tt1 Dakar 2 92 10 104 3 103 27 133 Thies 5 11 1 17 5 10 3 18 Kaolack 6 7 0 13 7 11 1 19 Ziguinchor 2 8 1 11 6 11 1 18 St. Louis 4 9 1 14 3 13 1 17 Other towns 27 15 1 43 70 41 5 116 Total Urban 46 142 14 202 94 188 38 320 Rural 501 14 2 517 520 46 7 573 Total 547 156 16 719 614 234 45 893 Source: Direction Nationale des Eaux et Forets (DNEF) 5. Household energy demand patterns are determined by a combination of factors including but not limited to geographical location (urban/rural and distance/accessibility to supply sources), family size, relation between level of household incomes and fuel prices (purchasing capacity), market availability of fuels, and cultural habits (fuel choices and method of fuel use). An analysis of the tables 3.1 and 3.2 and of various studies in the sector reveals the following key trends:  30 Schedule 3 Page 3 of 10 * The consumption of fuelwood dominates in the rural areas, gas tends to replace charcoal as the primary household fuiel in Dakar and Thies (given end-use efficiency differences charcoal consumption is still higher than LPG on nominal terms), and charcoal is still the main household fuel in the other secondary cities; * LPG is making substantial inroads in the principal cities, but charcoal is still consumed in large quantities because urban consumers tend to use several fuels, often concomitantly; * The consumption of charcoal is concentrated in the Cape Verde peninsula and in the Thies region, which is home to most of the country's urban dwellers; and * Charcoal represents about 27% of final consumption of traditional fuels but accounts for 55% of the out-take of forest resources for energy use. Most of the wood collected by rural dwellers comes from dead wood, whereas charcoal is produced most of the time from the cutting of live trees. This highlights the high proportion of forestry resources extracted for charcoal. 6. Consumption of LPG has gone from 3,500 tons in 1974 to 16,000 tons in 1986 and then to approximately 68,000 tons in 1996. The penetration of LPG in Senegal has been promoted by an aggressive program of cross-fuel subsidies, which is currently estimated at 10 billion FCFA per year. The promotion of LPG in Senegal has been primarily supported by the subsidy policy of the GoS since 1974 and by the CILSS/FED Regional Gas Program (1990-93). Consumption of LPG has increased by some 12% per year for the last five years (well over population growth) and by now more than 70% of urban households and 25% of rural families utilize LPG on a regular basis. Nationwide it is estimated that close to 45% of households have purchased an LPG stove. Furthermore, in 58% of households in Dakar and 43% of households in Thies, LPG has replaced charcoal as the primary cooking fuel. 7. Kerosene is used in the household and informal sector essentially for lighting purposes only. A couple of pilot activities were done in the mid-1980s by CERER and the World Bank's Energy Sector Management Assistance Program (ESMAP) to test the feasibility of introducing kerosene as a cooking fuel. Although small consumer trials showed that kerosene could be utilized for cooking purposes, a stove fully suited to the local cooking needs was never promoted.  31 Schedule 3 Page 4 of 10 8. The consumption of wood energy in the informal and industrial (artisanal) sectors has not been studied extensively and therefore is not well known. However, it is thought to be very low (5%) in relation to the household sector and very frequently directly associated to it (informal household-based enterprises). Small restaurants are the leading commercial energy consumer in the cities. A survey conducted in 1991 showed that there were some 3,000 restaurants with an estimated annual consumption of 4,200 tons of wood (half of Dakar's fuelwood consumption), 3,600 tons of charcoal (3% of household consumption) and 700 tons of gas (2% of household consumption). Other urban users of woodfuels include tailors (ironing), cloth-dyers, pot makers and blacksmiths. Bakeries are permitted to operated wood-fired ovens only in the rural areas. D. The Petroleum Sector 9. The petroleum sector is of crucial importance for the development of Senegal, as it affects domestic competitiveness and the external and fiscal balances. Potentially, Senegal does have hydrocarbon resources. But as described below, exploration to date has not led to any significant commercial discovery. 10. Sector Organization. The Ministry of Energy, Mines and Industry (MEMI) is responsible for the petroleum sector and sets petroleum product prices through its Directorate of Energy (Direction de l 'Energie - DE). The Directorate is also responsible for the supervision and control of private companies involved in petroleum exploration and production. Policy decisions are made by a National Energy Commission under the President, after a review of options by a National Energy Committee. 11. PETROSEN, a state-owned enterprise, was established in 1981 to promote petroleum exploration and production. PETROSEN has been relatively successful in attracting petroleum companies to Senegal and has in fact become a joint-venture partner in some investments. But the main sector institution is the Societe Africaine de Raffinage (SAR), a private company established in 1962. 90% of its shares are owned by major multinational oil companies (Elf, Total, Mobil and Shell), 10% by the GoS (PETROSEN). The operations of SAR are regulated by its Convention d'Etablissement with GoS which was revised in 1990. The agreement confers to SAR the monopoly for crude oil imports and refining, as well as for imports of refined products. The company owns and operates a relatively simple hydro skimming type refinery near Dakar. In 1983, the refining capacity was expanded from 0.9 to 1.4 million tons/year. Storage capacities are very high for crude oil (190,000 tons), but only limited for refined products (35,000 tons), which makes SAR dependent on the installations of the oil companies. The refinery acts as a service operation for its shareholders, who pay for using its services. SAR employs some 230 persons. 12. A large volume of petroleum products (40% of total domestic demand in 1996) is delivered directly to the most important consumers, like SENELEC or Phosphates de Taiba. Retail distribution of petroleum products is the responsibility of subsidiaries of multinational oil companies (Shell, Mlobil, Elf and Total). The oil companies are organized in the Groupement  32 Schedule 3 Page 5 of 10 Professionnel du Petrole (GPP). Responsibility for transport lies with a legally protected cartel of seven Senegalese firms, each of which is assigned to one oil company. Every oil company controls a net of gas stations with its brand. The stations are managed by independent owners or tenants who buy the products from the oil company and resell them. 13. Petroleum Resources. Senegal's sedimentary basins cover a total surface of 175,000 km2 of which 110,000 km2 are prospective for hydrocarbons: 70,000 km2 onshore, 23,000 km2 in the shallow offshore (0-200 m water depth), and 20,000 km2 in the deep offshore (200-2,000 m water depth). Petroleum exploration started in 1954. About 55,000 km of seismic lines have been shot and over 120 wells drilled. As proven by the Diam Nadio and Dome Flore deposits, petroleum has been generated and has accumulated. Gas reserves at Diam Nadio are estimated to be over 500 million m3, of which some 130 million m3 has been produced and used to generate electricity. Diam Nadio also yielded over 160,000 barrels of oil. The Dome Flore is a salt dome located 60 km offshore from Casamance in the southwest corner of Senegal in water depths of 40/60 m. Some 100 million tons (one billion barrels) of oil have been discovered at Dome Flore but the oil is heavy (9.1 to 9.60 API) and their development may not be economical. 14. Petroleum Consumption. Consumption of petroleum products doubled during the 1970s, stagnated in the 1980s, but again began to rise in the 1990s. Total domestic demand was around 900,000 tons/year, and total demand including aviation, marine bunkers and exports at about 1,133,000 tons/year in 1996. In the future, fuel oil consumption is likely to decrease if the hydroelectric plant in Manantali is put into operation, and will disappear should adequate gas resources be proven. Table 3.3: Demand for Petroleum Products (1986-1996) 2 6000 tons _____________________ 9 1957 1988 1989 1996- 199 2 9 Liquefied Petroleum Gas 16 17 25 29 33 38 43 47 52 60 68 (LPG)__ ___ ___ ___ _ _ _ Kerosene 11 It 10 10 10 12 13 12 13 13 13 Gasoline 88 86 83 80 77 75 74 68 63 64 66 GasOil 154 118 129 138 150 191 206 201 198 224 290 Diesel 50 28 66 59 50 60 76 82 77 70 67 Fuel Oil 303 320 334 335 331 328 357 334 358 366 382 Total Domestic Consumption 622 580 647 651 651 704 769 744 761 797 886 Aviation 133 134 163 159 144 158 150 138 161 183 199 Marine Bunkers 88 112 54 70 87 28 28 25 28 32 34 Sub-Total 221 246 217 229 231 186 178 163 189 215 233 Exports 76 38 32 10 34 10 11 14 13 14 14 Total Demand 919 894 896 890 916 900 959 921 963 1026 113 2 From 1991 to 1996, exports have not been separated from total demand figures, and figures included are for lubricants and bitume. Also marine bunker figures are only for small fishing boats "pirogues".  33 Schedule 3 Page 6 of 11 15. To meet its commercial energy requirements, Senegal has to import all of its oil. In 1996, it imported 645,000 tons of crude oil and 403,000 tons of refined oil products for CFAF 92.0 billion (US$180 rnillion), accounting for 12% of the country's imports and costing the equivalent of 18% of export revenues. The virtually complete dependence on imported oil places a heavy burden on Senegal's balance of payments, though the liberalization of oil imports should lead to more competition and thus to a slightly lower oil import bill. 16. Petroleum Product Pricing. The price structure of petroleum products in the fourth quarter of 1991 was as follows: Table 3.4: Price Structure for Petroleum Products (September 1991) Wi . vCEAFx/h CFA F/I __________ GasoIne __: Kerenie= Ga0is ;i -: .ue 12.-> < Super Regular Fishing Land Sea Fishing Diesel Diesel 1500 3500 SENELEC _ SENELEC _ Ex-refinery Price 6,213 5,782 5,782 5,622 5,487 5,487 5,487 62,512 62,512 32,62 29,119 29,119 Import Duties 2,796 2,602 2,530 2,496 28,130 28,130 14,68 7,280 7,280 (45%) _ . . _ . Stabilization 12,603 12,430 6,511 4,466 5,249 8,119 3,637 40,893 18,205 29,64 35,472 2,974 Distribution 2,716 2,451 2,382 2,111 1,944 1,394 1,376 17,370 13,941 12,12 11,826 9,227 Margin I_ |VAT 8,272 7,910 2,946 5,151 10,423 8,595 6,23 5,856 3,402 Retain Margin 900 825 825 825 700 ; = Consumer price 33,500 32,000 15,500 18,500 21,000 15,000 10,500 159,328 131,383 95,32 89,556 52,002 17. Following the devaluation in 1994, the prices were increased between 15 and 50%. The present price structure is given in the following table: Table 3-5: Senegal: Price Structure for Petroleum Products (March 1997) Gasoline Gasoline Gasoline Kerosene Gas Oil Diesel Diesel Fuel Oil Fuel Oil Fuel Oil (Super) (Regular) (Fishing) (Land) (SENELEC) (1500) (3,500) (SENELEC) Ex-Refinery Price 10,266 9,504 9,504 11,527 11,174 128,194 128,194 79,421 73,690 73,690 Import Duties 3,593 3,326 - 4,034 3,911 32,049 32,049 19,855 18,423 18,423 Stabilization 19,829 17,608 9,706 (957) 5,894 - (48,298) - (46,678) Distribution Margin 3,354 3,354 3,840 3,354 3,354 19,438 19,438 19,438 19,438 19,438 VAT 7,408 6,758 - 3,592 4,867 35,936 26,277 23,743 22,310 10,075 Retail Margin 1,050 . 950 950 950 800 - - - - Consumer Price 45,500 41,500 26,000 22,500 30,000 215,617 157,660 142,457 133,861 60,448 Price 09/91 33,500 32,000 15,500 18,500 21,000 159,328 131,383 95,320 89,556 52,002 lPrice Change +36% _+30% +48% +22% +43% +35% +20% +50% +49% +15%  34 Schedule 3 Page 7 of 10 E. Electric Power 18. Power generation in Senegal is entirely thermal based, most of the fuel being imported. Small amounts of natural gas and light petroleum discovered locally have been used since 1983 to produce electricity. The country's hydroelectric potential based on the Senegal and Gambia rivers is estimated at 1,000 MW but this potential has yet to be tapped. 19. Power Sector Organization. Until December 1971, electricity supply was in the hands of private companies operating under concessions granted by the Government. In January 1972, the GoS terminated the concessions of the most important private company and transferred its functions to the public sector. It was, however, only in 1983 that SENELEC in its present form was created to be responsible for the generation, transmission and distribution of electricity in all of Senegal. Unlike its counterpart in Mali and Mauritania, SENELEC is not involved in supplying water. SENELEC is governed by a Board composed mainly of public sector officials, and day-to-day management is delegated to a Director General. SENELEC has a large number of employees (2,163), of which about 12% are classified as professionals, all Senegalese nationals. 20. The number of connections per employee is about 152. The total number of staff has been slightly reduced in the past five years, but it remains high for a company of this size. Nevertheless, there is a shortage of suitably qualified staff as many professional posts have gone unfilled. Training is the responsibility of a department attached to the Directorate of Human Resources. Sector regulation, policy and coordination are ensured by MEMI, and MEFP also participates in tariff approval. 22. Existing Power Facilities. The existing supply system in Senegal is comprised of an interconnected power system with a capacity of about 280 MW, and some isolated centers totaling 50 MW, including Saint-Louis (11 MW), Kahone (15 MW), Boutoute (10 MW), and Tambacounda (5 MW). The largest plant is located outside the capital of Dakar (Cap des Biches) with a capacity of 188 MW. All of the plants are thermal-based, and the annual consumption of petroleum products amounts to 300,000 tons. SENELEC also purchases excess energy (4 GWh in 1994), from independent producers of electricity who have an installed capacity of around 90 MW. Senegal's principal transmission grid comprises of 60 km of 220 kV, 295 km of 90 kV and 2,000 km of 30 kV lines. It has in addition 650 km of 6.6 kV and 2,500 km of low voltage lines. A BOO contract has been negotiated, by which the utility will purchase 400 GWh per year on a take-or-pay basis. The corresponding 50 MW plant is expected to begin operations in 1998. 23. Access to Power Service and Consumption. In 1995, SENELEC had more than 280,000 customers, of which 3 industrial consumers (TAIBA, SOCOCIM, ICS) accounted for 20% of the energy sold. Of this total, 170,000 customers are in the Dakar area and the remainder (110,000) in the interior. The rate of electrification is low, about 25% (50% in the urban centers and 5% in the rural areas). The demand for power more than doubled between 1975 (381 GWh) and 1995 (899 GWh). Power consumption increased from 285 GWh in 1970 to 534 GWh in 1980 (87%), 621 GWh in 1985 (16%), 722 GWh in 1990 (16%) and 899 GWh in 1995.  35 Schedule 3 Page 8 of 10 24. Electric Power Sector Issues. A major issue in the power sector is the low level of coverage. The nurnber of connections has remained virtually stagnant. Moreover, access to electricity supply is largely confined to the capital city of Dakar and five urban centers: Thi6s, St. Louis, Kahone, Ziguinchor and Tambacounda. Village electrification is limited to areas in the immediate vicinity of these large population center and some tertiary centers. But the vast majority of the population living in the smaller centers (<1,000 inhabitants), numbering nearly 13,000 are without electricity supply. 25. A second issue relates to inefficient and non-transparent management and operations and deteriorating financial performances. Because of serious and recurrent weaknesses in book- keeping practices, as well as in management practices, the results of audits of SENELEC's account by independent auditors, were always a disclaimer of opinion until fiscal year 1994. After a first refusal to certify 1994 accounts, SENELEC and the auditor worked together at the beginning of 1996 in order to address problems identified and carry out all necessary corrections. A second report published in March 1996, concluded on the certification of the company's 1994 corrected accounts with reserves that are, however, of a very serious nature, mainly concerning the reconciliation of customer accounts. 26. The key financial indicators of SENELEC's activity for the period 1991 to 1995 are shown in the table below. In spite of an increase in energy sales, SENELEC's financial performance has been chronically weak in the past few years. Recurrent high losses due to low productivity and high non-technical costs led to a contraction of the company's equity. From 1991 to 1995, energy sales grew at an average annual rate of 5.1% and reached 900 GWh by 1995. This improvement was due to a substantial increase in domestic consumption over the whole period and a sharp rise in industrial demand after the 1994 devaluation. As there has been no expansion of general facilities, the increase in demand was met by a more intense use of existing generators. 27. The company sustained high losses of CFAF 7.0 billion in 1994 and CFAF 7.2 billion in 1995, or nearly 11% of revenues. The last tariff increase was granted in 1994, and prior to that, in 1989. The tariff level has been stable since 1986, because the GoS did not pass on to SENELEC the decrease in the cost of fuel which it enjoyed due to the lower prices of crude and the weakness of the US dollar. The 28% increase in the tariff allowed in 1994 compensated the impact of the CFAF devaluation on operating costs (+24%) and the increase in some taxes. The present average tariff is 70.6 CFAF /kWh or US$0.14/kWh which is high, even for a system of this size. Furthermtore, the tariff structure is complex and has become inadequate. Although SENELEC has been implementing a tariff structure since 1976 based on long-term marginal costs basis, this includes a steep degressive scale for higher levels of consumption, which is not relevant any longer as SENELEC now faces frequent capacity shortages.  36 Schedule 3 Page 9 of 10 Table 3.6: SENELEC's Recent Financial Indicators (CFAF millions) IS isSia- '- 199 99S30 1994: 1995 737 809 794 865 899 Energy sales (GWh)__ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ Average tariff(CFAF/kWh) 59.5 56.1 58.1 68.8 70.6 Total revenues (a) 45,320 46,699 47,775 62,100 66,217 Operating income (b) 4,008 349 (66) 4,717 4,995 Net income (c) (5,023) (2,577) (3,218) (7,045) (7,262) Rate base (d) (Historical value) 111,425 110,591 107,048 119,353 126,457 Rate of return on rate base (%) 4% 0% 0% 4% 4%0l Debt service ratio 1.5 0.9 0.8 0.8 Self-financing ratio (%/.) 94% 55% (17%) (17%) Debt equity ratio (%) 0.9 0.9 0.9 I 1.1 0.9 Current ratio 1.4 1.4 1.1 1.1 1.0 (a) Including rent and maintenance of meters, reimbursable works, works done by EDM for itself and other revenues (b) Before interest (c) After income tax, interest, write-off of doubtful debts (d) Two-year average net fixed assets in service. 28. The 1994 CFA Franc devaluation had a strong impact on SENELEC's operating costs. Firstly, SENELEC registered a CFAF 7.2 billion foreign exchange loss, both on long-term debt and short-term suppliers credit. The repayments and interests on those foreign debts doubled. Then, there was a sharp rise in direct generation costs (mainly gasoil and heavy fuel) in 1994, which was further increased because of a more frequent use of expensive gas turbines to meet a higher demand. Lastly, as no reevaluation of fixed assets has been realized, the depreciation is still calculated on a historical value basis. On the other hand, manpower c3sts remained under control, with a reasonable 10% rise in 1994, due to stabilization of the number of employees and a strict wage control after the devaluation. 29. From 1991 to 1994, the gross internal cash generated amounted to an average of CFAF 11.5 billion per year and reached CFAF 17.3 billion in 1995. However, mostly due to the devaluation of the CFAF , the net internal cash generated became negative in 1994 and 1995, at about minus CFAF 2.0 billion. For the same reason, the debt service coverage ratio has deteriorated. In 1994 and 1995, the ratio fell under the 1.0 level, so that SENELEC's revenues were too low to meet debt services. As a result, SENELEC's capacity to invest decreased sharply and the self-financing ratio also declined from 55% in 1993 to -17% in 1994 and 1995. 30. Although SENELEC's current ratio appears acceptable, its net working capital is tied up in customers receivables (CFAF 36 billion by the end of FY 1995, representing about 6.5 months of billing). The breakdown of these figures shows rather good performances regarding private consumers and chronically bad results for administration and public companies (especially SONEES, the water company). If not solved, this situation will generate acute liquidity problems for SENELEC in the future.  37 Schedule 3 Page 10 of 10 31. SENELEC's accounting system includes a special principle which has a significant impact on the company's financial statements. SENELEC is allowed to enter in its account a deductible provision for replacement and maintenance of the company's fixed assets (5% of the amount of gross fixed assets in service at the beginning of the year, except if the annual net income is already negative without this provision). Even though this is not really a reserve, it is normally imputed on a special reserve account at the end of the year. As this provision is added to the common depreciation of assets, this practice allowed SENELEC to constitute an apparently comfortable CFAF 42 billion net reserve at the end of 1995. However, in real terms, the reserve is more than balanced by the cumulated retained losses (CFAF 59 billion, at the end of 1995), and it should therefore be converted into equity.  38 SCHEDULE 4 Page 1 of 2 REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT ENERGY SECTOR REFORMS: POLICY MATRIX REFORMS ACTIONS TO DATE BY BOARD PRESENTATION BY SECOND TRANCHE A. Macroeconomic policies and Since 1994, the GoS has been implementing Maintenance of a macroeconomic policy Maintenance of a macroeconomic performance a stabilization and structural reform program framework, consistent with the objectives of the policy framework, consistent with supported by the Bank and the IMF. overall structural reform program 1998-2000 the objectives of the overall Agreement was reached on a macroeconomic (PFP) supported by the Bank and the IMF. structural reform program 1998- program and financing plan (PFP) for 1994- 2000 (PFP) supported by the Bank 1997 supported by the Bank and the IMF and the IMF. B. Energy Sector Policy The GoS issued an Energy Sector Policy Progress in implementing the energy sector Progress in implementing the Letter (ESPL) in February 1997, which is reform program spelled out in the ESPL and in energy sector reform program consistent with the PFP. The ESPL spells out accordance with the detailed implementation spelled out in the ESPL and in the GoS' reform program for the energy plan outlined under items Cl, 2 and 3. accordance with the detailed sector. This reform program covers the implementation plan outlined under power, hydrocarbons and household sectors. items Cl, 2 and 3. To execute the energy sector reform program, the GoS has created an ESRC as well as an IPG which oversees the execution of the reform process and its implementation. C. Legal/ Regulatory Framework and Privatization of SENELEC Cl. Electricity Sector Reforms in the power sector are spelled out (I) Approval by Parliament of the law (I) Establishment of an in the ESPL and center on the introduction privatizing SENELEC, its signature, and autonomous Regulatory Authority of competition and private sector publication in the Official Joumal. as envisaged and provided for in participation in the sector and call for: (a) all new Electricity Law. new generating capacity addition to be (2) Approval by Parliament of the electricity installed by the private sector, (b) law and corresponding regulations, its (2) Privatization of SENELEC by privatization of SENELEC, and (c) setting signature, and publication in the Official effective and full transfer of (a) of a transparent regulatory framework. Journal; and signature and publication of the responsibility for management and "ddcrets d'application". The new framework operations of SENELEC to the The GoS has engaged a consulting firm and will establish the following elements and Strategic Partner and (b) the an investment bank to: (a) prepare the new principles for: (a) clear separation of majority of shares of SENELEC to electricity law, and (b) privatize SENELEC. responsibilities among sector authorities with a strategic partner (min. 33%), to a regard to policy and planning, regulation, and the Senegalese private sector and managerial functions, (b) transparent SENELEC's personnel (max. 10%) regulations, (c) the progressive unbundling of so that the State will keep 41% or generation, transmission and distribution less of the shares of the new segments of the industry,(d) introduction of company. In this context, the debts competition in generation and distribution; (e) and arrears between SENELEC and open access to the grid; and (f) the financing, the State will be identified, institutional organization and technical certified and will either be settled specifications for rural and peri-urban or be the object of a separate and electrification. specific agreement. (3) Transferring to SENELEC of legal ownership of all operational generation, transmission and distribution tasets which are currently in the domain of the State and operated by SENELEC. C2. Hydrocarbons Sector (I) Reforms in the hydrocarbons sector as (I) Approval, signature and publication of new The Borrower has complied with spelled out in the ESPL will focus on: (a) legal texts and regulations which will allow: (i) the agreed upon measures and full liberalization of all segments of the abolishing all existing monopolies for timetables on petroleum sector activity; (b) the encouragement of fair and importation, refining, transport and distribution reforms in a manner acceptable to transparent competition; and (c) the setting of petroleum products, (ii) establishing clear IDA (see in particular the up of a new regulatory framework, rules aimed at bringing about competition.; (iii) conditions for Board Presentation) particularly relating to the new pricing and allowing third party access to import, storage taxation system on petroleum products. and transport facilities for petroleum products. (2) As of March 26, 1997 the GoS has (2) Approval, signature and publication of the  39 REFORMS ACTIONS TO DATE BY BOARD PRESENTATION BY SECOND TRANCHE transformed all petroleum prices into ceiling legal, regulatory and administrative bills and prices. The GoS has engaged the services of texts which in particular will allow: (i) the a consulting firm to prepare: (a) the elimination of the USS2.30 surcharge on liberalization of the import, transport, and petroleum products sold by SAR and of the rule distribution (including third party access to that limits the sale of SAR products to SAR port, storage and transport facilities) of all members only; (ii) the establishment of a petroleum products; (b) abolishment of the temporary and declining import surtax on US$2.3 /bbl supplement to the SAR as well refined products, in accordance with the as the SAR special convention and replacing conditions agreed upon with IDA; and (iii) the it with a temporary and declining import tax establishment of a general import tariff on on imported refined products; (c) adopdon of petroleum products which will result in import a new price structure for petroleum products. duty differentials, in accordance with the conditions agreed upon with IDA; (3) In June 1997, the statutes of PETROSEN were mnodified to limit its activities to (3) With regard to petroleum product prices and promotion of Senegal's hydrocarbon taxes, the following will be done: adoption and potential only. implementation of pricing policy that would result in prices reflecting economic costs through a new price structure, characterized by: (i) price-caps at all levels (ex-depot distribution-,transport-,and retail margins, final prices); (ii) automatic revision of petroleum product price caps as a function of world market prices (quarterly in 1998 and monthly thereafter); (iii) margins expressed in value; (iv) provide for simpler tax regime and phased removal of all subsidies (LPG, fuel for power generation); and (v) competitive transport prices. (4) Adoption, signature and publication in the Official Joumal of the new Petroleum Code to make exploration in Senegal more attractive to private investors. C3. Household Energy Sector Reforms in the household energy sector are (1) Submission to IDA of a timetable for the Progress in implementing the spelled out in the ESPL and will be realized elimination of subsidies on LPG as outlined in reform program in the household through the devolution of control of the paras 51 and 52 of the ESPL; energy sector in general; forestry resources to the local collectivities (2) Publication in the Official Journal of the implementation of the plans to and the liberalization of household fuel new Forestry Code; signature of the decrets eliminate LPG subsidies. prices reflecting their economic cost. This d'application. These measures will take into transfer in particular concems the production account the regionalization policy and offer of fuelwood and charcoal. To that effect, a guarantees for the transfer and management of revised Forestry Code, ij the spirit of the forest resources to the rural communities and regionalization process, has been adopted on which inter alia will confirm that: (i) the legal December 27 1997, which would enhance managers of the forest resources are the local community responsibility. beneficiaries of the revenues resulting from the sale of woodfuels; (ii) charcoal will only be produced from wood sold for that purpose; and (iii) the harvesting will take into account the regeneration capacity of forests and will be expressed in terms of volume of standing wood.  40 SCHEDULE 5 Page 1 of 1 REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT TIMETABLE AND STEPS FOR PRIVATIZATION OF SENELEC Law authorizing privatization of SENELEC 01/22/98 Financial audit of SENELEC 01/31/98 Amendment of law transferring all operational assets currently in the domain of the 03/30/98 State l Approval of the new Electricity Law 03/30/98 Technical and legal audits of SENELEC 04/30/98 Evaluation of all of SENELEC assets 04/30/98 Economic evaluation of SENELEC 05/30/98 Settlement of all cross-debts 06/15/98 Preparation of prospectus to attract potential candidates as Strategic Partners 07/30/98 Launch of bids for Strategic Partners 08/15/98 Evaluation of bids 11/30/98 Award of contract 01/15/99 Beginning of negotiations 02/05/99 Taking over responsibility for management and operation by Strategic Partners 03/20/99 First Board Meeting, voting on statutes and designation of directors 03/25/99 Sale of shares to employees of SENELEC 04/15/99 Sale of shares to public 06/15/99  41 SCHEDULE 6 Page 1 of 1 REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT INDICATORS Annual indicators over a period of at least five years 1) Petroleum sector indicators a) Increased competition to import refined products: * % of refined products imported other than by SAR (%) b) Increase in competition to market petroleum products: * number of distributors; * %0 of sales by new distributors compared to total sales (%); * level of investments in distribution facilities (FCFA/year). 2) Electric sector indicators a) Quality of service improvement - Data to be collected from at least two industrial consumers and SENELEC: * number and total length of interruptions of service of at least 15 minutes each; b) Expansion of the electric sector: * urban, rural and global electrification rate (%); * evolution of average consumption per inhabitant (kWh/inh); * evolution of non domestic sales (kWh); c) Tariff impact: * evolution of the average price for low and medium voltage customers (FCFAIkWh). 3) Household energy sector indicators * number of forest development plans and simplified schemes implemented; * total forest surface brought under community management; * proportion of wood cut in managed zones; * evolution of LPG, kerosene and charcoal consumption.  42 SCHEDULE 7 Page 1 of 2 REPUBLIC OF SENEGAL ENERGY SECTOR ADJUSTMENT CREDIT PORTFOLIO REVIEW AND DISBURSEMENT PERFORMANCE 1. The Bank's portfolio in Senegal has registered a strong improvement during the past two years, reflecting both the positive impact of the reform program (lack of counterpart funds no longer a critical issue) as well as the sustained efforts by the country officials and the Bank. In particular, the increasing role of the Resident Mission in portfolio management has been a very positive factor, involving clear and persistent follow-up until problems are resolved, regular meetings with the Club of Project Directors, pre-screening of disbursement operations in the field, and the growing experience of the locally recruited procurement/implementation officer. 2. FY97 terminated with 20 operations of which 14 were active and 6 closed, but were still disbursing during FY97. The commitment value of the 20 operations in FY97 was US$583.3 million, while the 14 active operations were valued at US$378.2 million. Out of five projects rated "Unsatisfactory" in FY96, four were upgraded to "Satisfactory" as a result of improved performance. The only remaining project rated unsatisfactory (Small Rural Operations II) was restructured in February 1997. Results so far are encouraging, and the status of the project is expected to be upgraded during FY98. Disbursement performance also improved significantly: the disbursement ratio increased to 30.4% in FY97 compared to 15.8% in FY96 and 15.3% in FY95 (actual disbursements increased by 61% between FY95 and FY97 from US$70 million to US$113 million). The disbursement lag decreased from 33.5% in FY95 to 21.4% in FY96 and only 12.3% in FY97. SENEGAL: Portfolio Performance (FY95-97) X~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..... Vio .. ....g V.9i Number of Projects 17 19 20 Commitment Value (US$ Millions) 607.9 646.1 583.3 % of DO Problem Projects 5.9 15.8 5.0 % of IP Problem Projects 5.9 15.8 5.0 % of IP/DO Problem Projects 5.9 15.8 5.0 Number of IP/DO Problem Projects 1 5 1 Number of Projects Rated DO PP for the last 2 FYs 1 0 1 Number of Projects Rated IP PP for the last 2 FYs 1 0 1 Number of Projects Rated DO PP for more than 12 months 0 0 1 Number of Projects Rated IP PP for more than 12 months 0 0 1 Disbursements (US$ Millions) 70.4 89.2 113.4 Disbursements as ratio of Opening Undisbursed Balances 15.3 15.8 30.4 N.B.: DO = Development Objectives; IP Implementation Progress; PP Problem Project  43 Schedule 7 Page 2 of 2 3. There is, of course, room for further improvement, in particular in the area of financial accountability, i.e., audits/financial reporting and procurement. Only 50% of audit reports due in FY97 were received, and the number of qualified/unsatisfactory audits increased by 80% in FY97. On procurement, dlespite five procurement and disbursement seminars offered to the Senegalese officials during FY97, progress was impeded, in large measure due to the outdated procurement code still in force. The adoption of a new procurement code is under consideration. 4. A highly participatory CPPR was carried out in June 1997. The two main themes that emerged from the CPPR discussions were the need to: (a) strengthen the capacity of key ministries through adequate training and equipment for project design, implementation, monitoring, and evaluation; and (b) encourage "sustainability" by strengthening the capacity of the Government and beneficiaries to enable them to carry on projects beyond the Bank-supported implementation period. Specific action plans were agreed upon for a number of projects as well as for generic themes. Implementation of these actions will be monitored by the Resident Mission. 5. Senegal is one of the countries selected Bank-wide for the Portfolio Implementation Plan (PIP) exercise, whose objective is to achieve a major improvement in the performance of projects at risk. The strategy will focus, inter alia, on retrofitting the portfolio where necessary. Mission in portfolio management. better linking local auditing firmns with internationally recognized auditing firms, strengthening capacity in procurement and financial management/auditing through training and dissemination of relevant materials, using trust funds more effectively to help capacity building and promptly completing Implementation Completion Reports (ICRs) following project closing. 6. Considering the scheduled closing of some ongoing projects and the approval of new operations during the proposed CAS period (FY98-2000), it is expected that the portfolio will consist of about 2:3 projects at the end of FY2000. Four of these projects would be sector investment operations (in the health, education, agriculture, and water sectors) that are typically more supervision-intensive. Efforts in the area of financial accountability will also need to be enhanced. Resources for portfolio management will, therefore, need to be increased during FY99- 2000.