Africa Regional Office Sector Non-compulsory pensions; insurance and contractual savings (40%); Agro-industry (30%); Other industry (30%) Theme

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Initial Project Information Document () Report No: AB609 Project Name SENEGAL - Private Sector Adjustment Credit Region Africa Regional Office Sector Non-compulsory pensions; insurance and contractual savings (40%); Agro-industry (30%); Other industry (30%) Theme State enterprise/bank restructuring and privatization (P); Other economic management (S); Regulation and competition policy (S) Project P Borrower(s) REPUBLIC OF SENEGAL Implementing Agency(ies) MINISTRY OF ECONOMY AND FINANCE Address: Contact Person: Mr. Aliou Faye Tel: Fax: fayealiou@hotmail.com Environment Category C (Not Required) Date Prepared January 12, 2004 Auth Appr/Negs Date May 7, 2003 Bank Approval Date March 25, Country and Sector Background Senegal has sustained macroeconomic stabilization since 1994 and achieved a steady 5 percent GDP growth per annum for the past five years. This good performance is progressively being reflected through progress towards achieving sustainable development and poverty reduction targets embodied in the Millennium Development Goal. Earlier reforms that started in the mid-1980 s were mostly reversed or undermined by early 1990 s, as vested interests fought to retain their privileged status in areas ranging from corporate governance, to patron-client relations in the civil service, to elite biases in the education and health systems, to social protection that was financially unsustainable for even the relatively small formal sector of the economy. It is the intention of the Government s reform program to re-channel the energies of these often competent and energetic elites from rent seeking and defense of the status quo, to job-creating generation of wealth. In the late 1990s, the Government decided to prepare a private sector development strategy. To this end, with the support of the World Bank and other donors, a consultation process was launched. And subsequently, a draft strategy was presented to and endorsed by all stakeholders. In parallel, 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 and macroeconomic and poverty issues. Reflecting this work, the Government s private sector development strategy is to help achieve and sustain steady private sector-based GDP growth of about 8 percent p.a., resulting in increased formal sector employment, which for the past 5 years has remained stagnant, at around 200,000 jobs.

2 2 2. Objectives The proposed Private Sector Adjustment Credit (PSAC) is an integral part of the Bank Strategy approved by the board in April The objective of the Credit is to support the Government of Senegal in the implementation of sub-sector reforms aimed at improving the investment climate and accelerating private sector growth and employment. The private sector adjustment program thus supports the Government s Poverty Reduction Strategy, through improving the investment climate and implementing key sector reform by: (i) supporting the implementation of a private enterprise tax regime that stimulates investments through a level playing field and lower taxes, and allocates user fees for the private sector promotion purposes for which they are levied; (ii) restructuring the edible oil sector by eliminating or reducing policy distortions associated with non-tariff barriers and other domestic protection mechanisms; (iii) reforming postal services by introducing greater competition in the sector, restructuring the postal enterprise so as to enhance its sustainability and to create an autonomous financial subsidiary that would provide savings, and payment and transfer services; and (iv) bringing changes to the pension system to make it financially sustainable and to improve its corporate governance. The last three reforms entail substantial financial restructuring, involving clearance of arrears, that would need to be financed by the public budget. In the same vein, the proposed tax reforms, while revenue neutral or enhancing in the medium-term, may entail short-term revenue shortfalls. The proposed Credit thus aims to provide budget support to ensure that social and poverty alleviation programs are not disrupted. 3. Rationale for Bank's Involvement The PSAC would continue the Bank s support for meeting the objectives of the private sector development strategy through the implementation of key policy measures in the areas of tax, edible oil, postal services and pension system reforms. These areas are closely linked with the Bank s Country Assistance Strategy, as well as Government s Poverty Reduction Strategy Paper. 4. Description The proposed Credit includes actions in four priority reform areas: (i) taxation; (ii) edible oil sector; (iii) postal services; and (iv) pensions. The first tranche (US$10 million) of the proposed four-tranche operation would help initiate these reforms. The other three floating tranches would support specific reforms in each of the above areas. The first floating tranche (pensions) will be of US$14 million equivalent, the second floating tranche (postal) will be of US$12 million equivalent, and the last tranche will be of US$9 million equivalent. The proposed structure is designed for simplicity and to allow Senegal the flexibility of accelerating the reform program in selected areas, thus giving the Government the possibility to disburse the Credit more quickly, if needed. First Fixed Tranche The first tranche would be released after Government has conducted a series of actions that constitute the basis for the disbursement upon effectiveness including: (a) Taxation: a detailed action plan and associated timetable acceptable to IDA for the reduction of the METR and other tax reforms has been submitted; (b) Edible Oil: distortions in the areas of trade, domestic and financial policies have been reduced and/or eliminated in a manner acceptable to IDA and consistent with the agreed action plan; (c) Postal Services: (i) the draft postal law acceptable to IDA has been prepared; and (ii) Government has presented a recapitalization scheme acceptable to IDA and has formally agreed to cancel cross-debts; and (d) Pensions: (i)

3 3 improved financial sustainability - parametric reforms in a manner acceptable to IDA implemented through the introduction of automatic indexation of benefit parameters and ceiling for contributions for IPRES and FNR; and (ii) financial restructuring - satisfactory plan produced to resolve arrears issue and to credit affected workers accounts. Floating Tranches The general conditions before release of the floating tranches relates to maintaining satisfactory macroeconomic performance and satisfactory implementation of the private sector strategy In addition Government would demonstrate that progress has been achieved in carrying out the program outlined in its letters of sector policy. Specific conditions for each tranche are as follows: (a) Tax Reform: METR for industry has been reduced to a maximum of 28 percent in the absence of any tax exemption regimes; specific tax regimes including inconsistencies with the CET and VAT are eliminated, except for limited exceptions exporters and extractive sectors, which may be subject to a separate framework, and the tourism sector, where faster depreciation of investments in hotels will be allowed; and utilization of user fees (CFCE) are reduced to 3 percent and at least one percentage point allocated to the existing matching-grant scheme; (b) Postal Services Reform: Legal and regulatory environment has improved with the adoption of the new postal law; and the effective transfer of responsibilities for postal regulation to ART; relationship between La Post and its shareholder, Government has been clarified and a performance contract acceptable to IDA has been signed between the State and La Poste; and the postal financial services subsidiary has been created and the postal financial services of La Poste are separated from the mother company with the opening balance sheet is prepared after recapitalization of La Poste; (c) Pension Reform: A new Commission including independent members with relevant professional background has been created with the mandate to oversee social security system reforms and supervise governance; a new IPRES investment policy and processes based on international best practice adopted; a proposal for consolidation and/or integration of existing programs developed and implemented; a new private pension policy has been developed and implemented; and the arrears to IPRES have been paid by Government resulting in the restitution of affected workers rights. 5. Financing Source (Total ( US$m)) BORROWER ($0.00) IDA ($45.00) Total Project Cost: $ Implementation Implementation Period: 21 months, April 2004-December Executing Agency: Ministry of Economy and Finance

4 4 7. Sustainability The proposed PSAC would provide the required resources to help implement the financial restructuring of the pensions system, the edible oil sector and the post office. The Private Promotion Investment 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 investment. 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. Together, these project will help ensure the sustainability of the reforms. 8. Lessons learned from past operations in the country/sector There are three main lessons from SAL IV and overall adjustment implementation in Senegal. First, the importance of dynamic leadership of policy reform should not be understated. Second, the complex nature of macroeconomic adjustment operations placed substantial burdens on Senegal's administrative capacity, and consequently, there was a recognized need to shift from fewer and more complex operations to a series of specific and well-focused operations and conditionalities. Third, the implementation of the reforms had some serious sequencing shortcomings because of the difficulty in implementing key measures. These lessons explain the shift to sectoral adjustment operations beginning with the Financial Sector Adjustment Loan (Financial SECAL) in December The Financial SECAL was a success, leading to a more active role by BCEAO in bank supervision and monitoring, a substantial reform of credit policies, the liquidation of seven banks and the restructuring of two others. The Transport Sector Adjustment Loan (Transport SECAL, 1991), the Private Sector Competitiveness and Adjustment Credit (PASCO, 1995) and the Agricultural Sector Adjustment Credit (AgSECAL, 1995) were also rated satisfactory. Investment Climate Thanks to the participation of FIAS in the design and implementation of tax and administrative barrier reforms, Africa-wide and international experience is fully reflected in the project. One lesson learnt is that initially promising reforms do not necessarily lead to sufficient improvements in the investment climate. In view of this, reforms need to be underpinned by surveys and quantitative methods, and monitored vis a vis national as well as international benchmark. The other lesson learnt is that the reform process is iterative, and requires strong stakeholder participation and ownership. Pension Reform The conceptual ground for the pension reform in Senegal has been laid through economic and sector work initiated in Bank lending in support of such reforms is usually through fairly substantial adjustment operations (Russian Federation, Ln. 4234, and Bulgaria, Ln. 4081). This approach facilitates the financing necessary financial restructuring, but suffers from the fact that the time frame for adjustment operations is shorter than the one needed to ensure sustainability through appropriate systems and capacity building. There are also examples of pension reform being supported under investment operations, for instance in Mali (Cr. 3394) and at the municipal level in Brazil (Ln and Ln. 4537). Such approaches are partial as they tend to respond to capacity building needs, without tackling significant policy reforms and required financial restructuring. The PIPP address the former area while the PSAC

5 5 focus on the latter two. Postal Reform A comprehensive review of the postal sector worldwide shows that mere corporate transformation in the postal sector has not led to performance improvements. A comprehensive reform covering the entire sector stands as the best vehicle to provide a conducive environment for change and sector development. In the postal sector, three important components of reform relate to the definition of (i) a clear sector policy by which the Government identifies its objectives for the postal sector, (ii) the definition of an adequate status, organization and a viable financial structure for the historical postal operator, and (iii) the definition of a corporate strategy and an adequate capacity building plan, including the diversification from the core activities to leverage the economies of scale and scope embedded in the postal network. This project addresses all three of these needs. Edible Oil Sector Reform The reform of the groundnut sector has been a priority in Senegal since well before Since then, three IDA Credits have supported this reform with limited success. Lessons learnt indicate that when the projects (including the recently completed private sector project, Cr. 2759) that focused mainly on divestiture failed because there were too many uncertainties regarding future sector policies, including trade policy and financing regimes. While some reforms were implemented under sector adjustment Credits (Cr and Cr. 2681) these were limited by the short timeline of the operations: subsequent reforms were not implemented. The main lessons learnt include the importance of ensuring the buy-in of stakeholders, tackling sector policies in a manner that ensures transparency and maximize competition potential, and providing a safety net and/or alternative activities to affected farmers. The project and the proposed complementary PSAC, together with the ongoing rural development project (Cr. 3219), build on this past experience as well as parallel similar efforts underway in Mali, Benin and, with limited success, Uganda in the area of cotton reform. 9. Environment Aspects (including any public consultation) Issues : 10. List of factual technical documents: Task Manager Iradj Alikhani Telephone: Fax: (202) Contact Point: Task Manager Iradj A. Alikhani The World Bank 1818 H Street, NW Washington D.C

6 6 Telephone: Fax: 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project.