Report No. PID7551 Project Name SENEGAL-Private Investment Promotion Region Africa Regional Office Sector General industry and trade sector (50%); Payment systems; securities clearance and settlement (20%); Telecommunications (15%); Postal services (15%*) Project ID P051609 Borrower(s) GOVT. OF SENEGAL Implementing Agency MINISTRY OF ECONOMY AND FINANCE APIX Address: 52-54 rue Mohammed V. BP 430 Dakar. Senegal Contact Person: Mme. Aminata Niane, Directeur General Tel: 221-849-0555 Fax: 221-823-9489 Email: apix@sentoo.sn UPE Contact Person: Mr. Aliou Faye Tel: 221-823-3427 Email: upemefp@telecomplus.sn Environment Category C Date PID Prepared January 16, 2003 Auth Appr/Negs Date January 30, 2003 Bank Approval Date March 27, 2003 1. Country and Sector Background Senegal has sustained macroeconomic stabilization since 1994 and achieved a steady 5 percent GDP growth p.a. for the past five years. This good performance is yet to be reflected in significant progress towards achieving sustainable development and poverty reduction targets embodied in Millennium Development Goals (MDGs). Shortcomings are reflected in present social sector outcomes, notably education, but also in the stagnation of formal sector employment at around 200,000 jobs. Recent economic growth has a narrow based and is largely attributable to construction and other arguably non-sustainable factors. Growth has also yielded disappointing results in terms of income distribution. Further challenges lie ahead. At present, the formal sector provides no net new employment opportunities. The potential for expansion of agriculture and fisheries is limited by insufficient water in the north and low level civil war in the south of the country. Declining fish stocks have brought fisheries on the verge of crisis. In Senegal today about 200,000 people enter the job market each year. Many end-up un(der)employed or engage in subsistence jobs. During the late 1990s, the Government decided to prepare a private sector development strategy for Senegal. To this effect, with the support of the World Bank and other donors, a participatory approach was launched. In mid-1999, a draft strategy was presented to and endorsed by all stakeholders. In parallel, more detailed diagnostic work was undertaken with the technical collaboration of the World Bank. The resulting output included studies of the investment climate, infrastructure reform, pensions, trade policy, etc. The strategy and these studies were key inputs to the PRSP and form the basis of the present project. The PRSP vision for Senegal for first two decades of the twenty-first century is based on two pillars. On the equity side, the main goal would be to achieve the MDG quantitative targets in health and education, related to access and inputs. Beyond the quantitative goals lie qualitative output and outcome objectives regarding education and healthiness of the population, which would be reflected in a workforce capable of contributing to economic development. The wealth creation pillar strategy, under a high case scenario, would be based on: Continued macroeconomic stability and much improved public expenditures, with respect to transparency, the allocation process and outcomes. Steady private sector-based growth of 8-10 percent p.a. resulting in increased formal sector employment. Growth to be sustained by appropriate policies and development of certain sectors, such as: (a) construction; (b) extractive industries, petroleum, gold, iron ore etc.; (c) tourism; (d) export-oriented manufacturing, especially garments, in part stimulated by AGOA; (e) trade services sectors, in particular based on Senegal (especially the Dakar region) becoming a Gateway to West-Africa; (f) information technology and related value added service; and (g) SMEs, especially those involved in subcontracting activities, services, agri-business, and artisanal activities. The appropriate solutions having been applied in Casamance, the region is making positive contributions to the welfare of its people and to agriculture growth. Appropriate balance struck between environment impact and growth, through improved management of fisheries, and appropriate tourism and industrial development. Key reforms are either underway or are in the process of being formulated in Senegal. These initiatives are supported by the World Bank primarily through the ongoing second Transport Sector Project, the project described herein, the proposed Private Sector Adjustment Credit, and the proposed Energy Sector Reform Project. The reforms and actions supported by the project address two complementary issues. First, there are a number of policy and institutional brakes that lead to the underperformance of the economy. A second set of measures generally focus on promoting certain sectors of activities that need upstream work in order to be kick-started. In practice, the areas discussed below often incorporate an element of both themes. Furthermore, many of the measures, for instance pension reform, tend to be multidimensional, often encompassing both direct and indirect effects that relate to other areas. The various - 2 - reforms are also mutually reinforcing and interrelated. Therefore, while it would be possible to attain the overall goals in Senegal if the implementation in one area is deficient, a multifaceted approach is essential. However, stakeholders recognize that failure to adequately address certain fundamental areas, such as the investment climate and electricity reform, would gravely undermine the program, irrespective of how much progress is achieved elsewhere. 2. Objectives The objective of the project is to help create the conditions to stimulate a sustained increase in private investment in Senegal through improved investment climate, greater private participation in economic activities, and policty sector reform. The project is thus expected to make important incremental contributions towards Senegal attaining the 8 percent GDP growth called for in the Government's poverty alleviation program. 3. Rationale for Bank's Involvement Under the project, the Bank group will provide essential financing and technical support to help the Government of Senegal implement deep reforms aimed at moving the country towards a higher, sustainable growth path. The World Bank Group. notably IDA, MIGA, FIAS, the social protection team and WBI, have been deeply involved in project preparation and have helped bring together stakeholders. As the project is implemented, the Bank team is expected to be called upon to act as an honest broker to help resolve problems, should they arise. The credibility of government to see through the reforms and the participatory process would thus be strengthened. Government officials, the private sector and donors consider that the World Bank has the knowledge required to provide timely advice and technical assistance to manage the complexities of the program. Through Bank involvement, Senegal will thus benefit from lessons learnt elsewhere. There has been a conscious effort in the deign of the project to avoid duplicating the initiatives of other donors. Given the relatively high costs of the reforms that have been identified, the reform program cannot go ahead and be implemented without substantial IDA funding. Finally, the Bank has had relatively good experience with implementing projects in the sector in Senegal (all final ratings of recent projects were "satisfactory"). This project, whose design wherever possible is output/outcome based, not only aims to replicate this past success, but also to surpass it in terms of high developmental impact. 4. Description The overall objective of the Government's reform program, underpinned by the PRSP, the private sector development strategy, and other strategic analysis, is to create the conditions to sustain high per-capita GDP growth of at least 8 percent per-annum. The Government aims to reach this objective through a series of important policy and sector reforms aimed at eliminating inefficiencies and distortions that lead to misallocation of resources, constraining Senegal's international competitiveness, and through capacity building. The project will support these initiatives through a series of interrelated actions aimed at stimulating private investments, and consists of the four mutually reinforcing components described below. The support under the Credit will be through the financing of consulting services and studies, goods, computers and equipment, a handful of vehicles, training and minor repairs (civil works). - 3 - Project Component 1 - Improving the Investment Climate The objective of this component is to improve the investment environment, by facilitating the policy, legal and regulatory interface, and the dialogue process between the public and private sectors. This objective will be achieved through judicial reform, a better business environment and trade facilitation, enhanced capacity to regulate infrastructure and resolve post-privatization issues, and by reactivating the public/private consultative process. The implementation of the proposed activities will facilitate and expedite private transactions and reduce their costs. The following activities will be supported under this component: (a) legal and judicial reform; (b) business environment enhancement, covering administrative barriers and tax reform; (c) trade facilitation, encompassing customs and the airport; (d) infrastructure regulation; and (e) private-public consultative process. Project Component 2 - Facilitating Private Participation and Enhancing Competitiveness In recent years, investment in Senegal has been concentrated in a handful of subsectors. Foreign Investments have been mainly in infrastructure and, to a lesser extent, mining and export activities, notably fishing. Construction has been a leader in the formal sector together with tourism and fisheries, while the informal sector has been providing subsidence living opportunity for a large part of the workforce. In-spite-of the favorable impact of these investments on Senegal's competitiveness, exports and growth, employment in the formal private sector has largely stagnated and the outlook for fisheries is limited. The objective of the private participation component is to: (i) stimulate a higher level of foreign investment in infrastructure, export-oriented firms and other sectors and broaden private participation in economic activities; and (ii) increase the productivity of the local private sector. This objective will be achieved through the implementation of the following subcomponents: (a) investment facilitation support, encompassing support to APIX, funding of strategic infrastructure studies, and institutional capacity building within key embassies; (b) a matching-grant facility to improve private sector competiveness; (c) capacity building within support institutions and private associations; and (d) support to divestiture and oversight of public entities. Project Component 3 - Stimulating Sector Investment and Implementing Policy Reform The objective of this component is to promote subsector reforms that would: (i) directly stimulate growth and development in areas where Senegal benefits from untapped potential; (ii) improve the situation in other activities that affect ability of the private sector to operate effectively and competitively; and (iii) free-up public and private resources, which would be available to fund pro-poor private initiatives and, indirectly, finance private investment. The implementation of the subcomponents described below would be further reinforced by the initiatives described in the previous two components. The implementation of certain reforms (namely pension, edible oil and postal) would need to be complemented by a significant amount of financial restructuring that would be financed in part through the proposed private sector adjustment - 4 - credit. The following sectors and areas will be covered: (a) pensions reform; (b) telecommunication reform and development of the information technology sector; (c) postal reforms, covring both post and financial services; (d) support to the development of tourism; (e) promotion of the music industry; and (f) edible oil sector reform. Project Component 4 - Supporting Implementation and Capacity Building The project will, in substance, be implemented by beneficiaries. In addition a professional project management unit (PMU) has been established. This PMU is currently housed within APIX but under the project will be accountable to the project steering committee. The PMU would oversee the financial management, procurement, reporting, monitoring and evaluation, audit, public information and related functions as well as manage a handful of actions the coordination which will be outsourced to a team leader (e.g. tourism). While most partner organizations have the capabilities to manage the complex activities supported by the project, strong complementary implementation capacity is needed to ensure high that project objectives are met. The Credit will thus finance a team of high caliber local professionals located at the PMU consisting of a project manager, financial and procurement specialists, program officer, and the related support staff. The management of the matching-grant will be outsourced to a team of local and international consultants. This unit will also be responsible for ensuring adequate monitoring and evaluation, and undertaking the impact assessment of various components, preparing quarterly progress reports, and facilitating the mid-term review and orderly closing of the project. In addition to the above, the Credit will also refinance US$1.99 million of PPF resources used to prepare the project. The component will also finance the following additional activities: (a) public information and communication campaign; (b) strengthening UPE; (c) implementation and dissemination of the new procurement code. 5. Financing Total ( US$m) BORROWER $17.00 IBRD IDA $46.00 LOCAL SOURCES OF BORROWING COUNTRY $3.00 Total Project Cost $66.00 6. Implementation The overriding principle guiding the institutional and implementation arrangements for the Project is to delegate the maximum feasible operational responsibility and independence to agencies and managers selected to implement the Project components. Overall responsibility for the implementation and coordination of the Project will be entrusted to the Steering Committee under the purview of the Ministry of Finance who would be responsible for implementing the project. However, the Ministry would delegate its oversight role to the project Steering Committee and various Technical Committees, Working Groups and/or Task Forces. Day-to-day project implementation will be delegated to a professional secretariat, the PIU. To this effect, the Ministry has established and staffed the PIU and has delegated project management to it. The PIU will - 5- serve as the Secretariat of the Steering Committee and will be charged with ensuring adequate overall financial and administrative support to the designated implementing agencies of the Project. In addition, while responsibility for implementing the components will ultimately be the responsibility of the appropriate stakeholder, they will be supported by convened task forces and units which have already been established for this purpose. 7. Sustainability The project provides financial, technical assistance, and associated institutional and policy support for a well-defined, time-bound process involving permanent improvements in the policy and institutional environment, and stimulating private investments. The irreversible nature of these actions significantly enhances the likelihood that once implemented they will be largely sustained. The participatory approach and the public information campaign programmed under various activities further enhances ownership and sustainability. Furthermore, the design of certain components further enhance sustainability, especially in the following areas: (1) support to APIX will be output based and declining over time; this will reduce donor dependency and increase ownership; (2) the matching-grant will become a revolving fund sustained by user fees; (3) the creation of new public institutions is discouraged in favor of autonomous private arrangements (e.g., for tourism promotion) with own revenue generation capacity. 8. Lessons learned from past operations in the country/sector In view of the ambitious goals supported by the project, particular attention has been paid to ensuring that its design reflects not only the Bank's experience in Senegal and Sub-Saharan Africa, but also integrates approaches being currently pursued in other developing countries. Project preparation significantly benefited from the inputs of various networks and central departments, notably social protection, and the postal and telecommunication unit, while also bringing in the expertise of the World Bank's global product groups, including FIAS, MIGA, WBI, and the SME department. 9. Environment Aspects (including any public consultation) Issues : The project involves mainly institutional capacity for policy reform and financial restructuring of the pension system. There are no direct or indirect physical investments and no environmental issue is present. 10. Contact Point: Task Manager Iradj A. Alikhani The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: (202) 458-0345 Fax: (202) 477-2978 11. For information on other project related documents contact: The InfoShop The World Bank -6- 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending January 24, 2002. -7-