Senegal

Decision Point Document (HIPC: June 2000)

Energy sector reforms include a liberalization of the power sector. With the privatization of the power company (Senelec) the door is now open for direct foreign investment to expand and upgrade the generation and distribution system so as to overcome the power outages that have been so disruptive and costly in the past. There has also been a progressive liberalization of the market for hydrocarbon products, though retail prices of petroleum products have been temporarily frozen at their February 2000 level in the wake of the significant increase in world prices. The authorities liberalized the import and distribution of hydrocarbon products. At the same time, existing surtaxes benefiting the local refinery will be gradually eliminated, thereby establishing a level playing field. The government has also undertaken the liberalization of domestic firewood prices by mid-2000 to encourage a shift to alternative domestic fuels with beneficial effects for forest preservation.

The transport sector has also witnessed major changes in recent years. As one of the gatekeepers of import-export traffic to West Africa, Senegal was already well endowed with an extensive transport infrastructure at independence and has a well-developed road network relative to the size and development of its economy. In the past, however, the Public Works Directorate (DTP) experienced difficulties in controlling costs and striking an appropriate balance between road maintenance and construction. The anticipated establishment of an Autonomous Road Agency-to be overseen by a Road Board with a majority of private sector members and to be regulated by the Transport Ministry-should help overcome chronic institutional weaknesses within the sector. Prospects are thus greatly improved for the effective implementation of an IDA-supported second transport sector program, which was launched in July 1999 and spans the period 1999-2004. Maritime transport has gained in efficiency as a result of privatization and air transport stands to benefit from a much-needed infusion of new capital after the sale of Air Senegal. Plans to privatize the Dakar-Bamako railway have been seriously delayed but the government is still determined to privatize the system, most likely before end-2000.

Senegal: Conditions for Achieving the Floating Completion Point
Private Sector Development. The government is to privatize 11 public sector enterprises as planned, so as to reduce the public sector ownership to about one fourth of the original portfolio; it will reduce the legal and administrative hurdles and other policy distortions that slow down private initiative and domestic production and demand, in particular for the small enterprises in the informal sector.

Past Reforms and Future Milestones

Reforms
o Privatization of SENELEC, the power company (1999)
o Privatization of road maintenance (1996)
o Implementation of staff reduction plan for SNCS, the national railway company (1998)
o Privatization of urban transport (1998)
o Employer and employee contributions to the National Retirement Fund increased as a first step to restoring financial equilibrium to the Fund (December 1995)
o Privatization of the [water supply] operating company (1996)
o Adoption of merit-based promotion system (2000)
o Restructuring and privatization of state enterprises to be completed by end-2000
Enterprises already privatized include:
(i) SONATEL (telecommunications)
(ii) Air Senegal
(iii) SDE water company operations
(iv) SENELEC power company

Future Milestones
o Privatization of SONACOS, the National Groundnut Oil Company
o Privatization of Dakar/Bamako railway operations
o Privatization of 11 remaining companies in public portfolio

Policy Framework Paper 1998-2000, February 27, 1998

In the parapublic sector, the 1994-97 program called for the restructuring of 22 of the 54 nonfinancial enterprises and commercial public establishments in the government's portfolio at end-1993. At end-December 1997, restructuring of 7 enterprises was completed: the Caisse de Péréquation et de Stabilisation des Prix (CPSP-1996), the Société Industrielle d'Assainissement du Sénégal (SIAS-1996), the Société Hotelière Saly (SH-SALY-1996), the Société Nationale des Eaux du Sénégal (SONES-1996), the Agence Sénégalaise pour.- 4 -l'Assurance du Commerce Extérieur (ASACE-1997), the Société Nationale des Télécommunications (SONATEL-1997), and the Société des Textiles de Kaolack (SOTEXKA-1997). Three others will be restructured by end-March 1998: the Société Sénégalaise des Phosphates de Thiès (SSPT), the Société de l'Hôtel de l'Union Teranga (SPHU-TERANGA) and the Société Nouvelle pour l'Approvisionnement et la Distribution du Sénégal (SONADIS), and an eleventh (DAKAR-MARINE) by end-July 1998. These restructuring arrangements reduced the government portfolio by 25 percent and generated CFAF 93 billion (3.5 percent of GDP) in 1997, largely from the sale of 61 percent of the capital of SONATEL. Efforts to privatize 11 other enterprises are under way; they will however not be completed before end-1998.

The government believes that the positive macroeconomic results now obtained and the structural and sectoral progress made so far are as yet insufficient to place the Senegalese economy on the road to strong growth and significantly reduce unemployment and poverty. The Senegalese economy is still fragile and structural impediments hamper its development. First, fiscal consolidation is hampered by the weakness of the country's overall fiscal effort (16 percent of GDP), a revenue structure that relies excessively on import taxes, the inadequacy of health care expenditure, and the inefficiency of education expenditure. Second, the restructuring of the parapublic sector and the envisaged reform of the civil service will require significant efforts in the years to come to further reduce the size of the government, refocus its functions, and create a more professional and more efficient civil service. Third, despite the improvement in external competitiveness, the development of the economy is still hindered by the high cost of the primary technical inputs (electricity, water, transportation), the lack of basic infrastructure, a high level of protectionism, and a persistently swollen bureaucracy. Fourth, although development of the private sector has progressed substantially, it still falls far short of expectations; foreign investment is very modest; and the country still depends quite heavily on official development assistance, which seems to be on the decline. Finally, despite the recovery of growth since 1994, most social indicators are extremely unsatisfactory and poverty is still widespread, both in rural areas and in the cities.

Near-term measures aimed at financial rehabilitation of the government employees' National Pension Fund (FNR) have been adopted, in particular in the form of increases in 1996 of individual contributions and the discharge of certain government obligations. Actions designed to ensure the medium- and long-term viability of the FNR are being prepared with technical assistance from the International Labor Office (ILO); the reform measures under consideration include transforming the Fund into an autonomous institution, streamlining benefits, and maximizing the profitability of the Fund's financial investments.

Regarding electricity, the process to privatize the Société Nationale d'Electricité-SENELEC (including the requisite liberalization of the electricity generation, transmission, and distribution activities) was initiated with the passage by the National Assembly of Law 98-01 of January 22, 1998 on opening up the company's capital to the private sector. The strategic operator will be selected during the second half of 1998 and the new company will be operational as of the first quarter of 1999. The State will not keep more than 41% of SENELEC's capital. The regulatory and legislative framework for the electricity subsector, which opens up electricity production and distribution activities to the private sector, will be adopted by the government before April 15, 1998. As part of this new electricity law, a regulatory agency will be set up by end of March 1999. In addition to reducing the cost of electricity, the purpose of the reform is to speed up country-wide electrification, in particular in the rural areas.

The government intends to withdraw from all commercial activities by end-2000, through privatizing financial and nonfinancial public enterprises, wholly or in part, or by reducing its share of the capital to 25 percent at most. In the case of certain public services, such as water distribution, urban transport, railways, ports and airports, it will seek to entrust the management to the private sector, while creating a asset holdings public company. Government participation in rural training, low-cost housing, and minerals-prospecting companies will be limited to 51 percent. The government will maintain a participation of between one-third and 41 percent in two strategic enterprises (SONATEL and SENELEC). The administrative unit responsible for managing this program will be strengthened. Before end-July 1998, this unit will prepare a report on economic and financial results in 1996 of the 37 enterprises in which the Government has a equity share of more than one third.

An investment bank has been chosen to propose before end-July 1998 a strategy for the sale of the Méridien-Président hotel. The studies that will lead to the creation of a private operating company for public transport in Dakar-to replace the Société des Transports du Cap-Vert (SOTRAC)-are well under way; the request for bids is expected to be launched in June 1998 and a strategic partner chosen by September 1998. The privatization strategy of the Société Immobilière du Cap-Vert (SICAP) should allow its privatization by the end of the year. Given the complex nature of the Société Nationale de Commercialisation des Oléagineux (SONACOS) privatization process and the lack of success with previous attempts, the government has chosen an investment bank to propose a new privatization strategy that could allow for the choice of a buyer by end-1998. As for the SENELEC, it is now planned to issue a request for bids in August 1998, after completion of the technical and financial audits, and to proceed to the choice of strategic partner by end-December 1998; the latter would take up duties in the first quarter of 1999, after the terms of the contract have been negotiated. The establishment of a private company (with minority share holding by the governments of Senegal and Mali) to operate the Dakar-Bamako rail link is expected by December 1998. A bank acting in the capacity of financial advisor will be chosen to select the strategic operator of the international line. Four small enterprises (the Société des Habitations Modernes-HAMO, the Manufactures Sénégalaises des Arts Décoratifs-MSAD, the Société du Domaine Industriel de Dakar-SODIDA, and the Société Nationale d'Etudes et de Promotion Industrielle-SONEPI) will be privatized by end-December 1998. The list of enterprises to be privatized in 1999-2000 will be finalized at the time of the midterm review of the first annual arrangement under the ESAF. The 1998 privatization program and the program envisaged for 1999 and 2000 should reduce the government share in public and semipublic enterprises from 71 percent on average at end-1997 to 43 percent in 2000. Several of these enterprises will be simply asset holding public companies after the management has been turned over to a private partner. These will include SONES (water distribution, Dakar-Marine (shipyard), and Dakar-Bamako (railways).

In the area of maritime transport, the port of Dakar will have to be made more competitive and the secondary ports reintegrated into a local development support system. In the case of the Port Autonome de Dakar (PAD), particular emphasis will be placed on conserving past gains in personnel management. The goal will be to reduce the excessive burden of the wage bill on the production cost structure. In this respect, the number of permanent PAD staff will be reduced to a maximum of 460 in 1999 and 425 in 2000. The corresponding personnel cost will be reduced to 27 percent in 1999 and 25 percent in 2000 of total operating costs (including depreciation).

Actions with regard to air transport are aimed at ensuring safety, increasing the national supply of air transport, and promoting the international traffic platform at Dakar airport. In particular, Air Senegal should be fully privatized by December 1999. Prior to the privatization of the company and to ensure a more streamlined process than in the past, a business plan will be prepared and discussed with the World Bank by September 1998; it will focus on reducing staffing, covering the liabilities incurred by the loss of two aircraft, and making the enterprise attractive to potential buyers. SONATRA-Air Senegal has been recapitalized and its debt to the ASECNA has been restructured (two of the conditions for successful privatization). In addition, the government intends to privatize Senegal's airports and to reorganize the civil aviation sector. To this end, preparatory studies will be launched in April 1998 to be concluded by October 1998. The government will then be able to take the relevant decisions in January 1999 and present the legislative texts before June 1999. This privatization and restructuring of the sector could be implemented by January 2000.

A draft master plan for developing sea fishing was prepared in 1997. It includes measures for fishing research, resource management, development of small-scale fisheries and new marine production (including aquaculture), in addition to sector financing. Discussion of the draft master plan will take place during the first quarter of 1998. The new code that is being prepared aims to ensure the sustainable development of fishing resources. In particular, it provides for the creation of a national advisory council on sea fishing to promote investment and sector regulation. It will be submitted to the National Assembly in the second half of 1998. The privatization of refrigerated warehouses, currently run under a management lease, will take effect by the end of the first half of 1998.

Reduce the size of the o Complete execution of the public enterprise public enterprise sector restructuring program by 2000 with a view to and enhance its reducing the government's holdings to less efficiency. than 25 percent, with the exception of a few enterprises (asset holding companies, training and promotion companies, and strategic enterprises such as SONATEL and SENELEC)
o Complete the privatization of SSPT, By end-March SPHU-TERANGA and SONADIS. 1998
o Complete the privatization of DAKAR- By end-July MARINE. 1998

Privatize SOTRAC, SICAP, the Méridien- By end-Président hotel and 4 small enterprises December (SODIDA, MSAD, HAMO and SONEPI). 1998
o Privatize SENELEC: launching of bids. August 1998
o Adopt a new strategy for the privatization of July 1998 SONACOS (see G below).

Groundnut sector.
o Privatize SONACOS:
- define a strategy; June 1998
- select a reference partner. Dec. 1998

Cotton sector.
oMaintain the free determination of the sale 1998-2000 price of fiber to local textile mills.
o Implement the plan to rehabilitate/ privatize Q4 1998 SODEFITEX.

Livestock
o Pursue privatization of SODESP and 1998-99 veterinary medicine.

o Complete the privatization of fishing 1998-2000 equipment.

Privatization of the management of Senegal's airports:
- launching of studies; April 1998
- adoption of legislative framework; June 1999
- implementation. January 2000

Restructure Air-Senegal:
- Develop a business plan for Air-Senegal; Sept. 1998 World Bank
- Privatize the company. Dec. 1999

Letter of Intent and Memorandum of Economic and Financial Policies for 1999 , June 4, 1999

Five enterprises were privatized in 1998,4 out of 13 originally slated for sale or liquidation. The urban transport company (SOTRAC) was liquidated as planned; however, the strategic partner selected to take over the concession and the assets of the former company withdrew in early 1999. The strategic partner for SENELEC was selected in February 1999 and has assumed full management of the company. The buyer of Air Senegal was chosen in March 1999 and will start operating in June 1999. The call for bids for the groundnut company SONACOS was launched in February 1999, and the selection of the strategic partner is scheduled for July 1999. A report on the economic and financial performance during 1997 of the remaining public enterprises was provided to Fund staff as scheduled. Some delays were encountered in the planned improvements in investment programming and implementation of the public expenditure reviews. In the area of good governance, the first phase of the user survey on the quality of public services was completed. The judicial reform is progressing, including efforts to step up the training of magistrates and to modernize the courts.

To complete the reform of the public enterprise sector, the government has selected eighteen enterprises to be privatized in 1999-2000. Thirteen of these will be put up for sale in 19999, including six large enterprises: additional government shares in the electricity company (SENELEC); the groundnut processing company (SONACOS); the urban transport company (SOTRAC); the Méridien Président Hotel; the textile development company (SODEFITEX); and the Dakar-Bamako line of the national railway (SNCS). Concerning SOTRAC, steps are being taken to select a new strategic partner and a new, mostly privately owned operating company will start its activities in November 1999. The hotel Méridien-Président will be sold through international tender in August 1999. Concerning SODEFITEX, the government has submitted the draft law concerning its privatization to Parliament and intends to finalize this transaction by November 30, 1999; when finalized, the government's share of the capital will be lowered from 77.5 to 30 percent through a sale of shares to cotton producers, company employees, and small-holders. A company (SETI) has already been set up for the operation of the Dakar-Bamako line of the National Railways Company (SNCS); it will start operating by end-December 1999. The other companies scheduled to be privatized in 1999 are a tapestry weaving company (MSAD); an industrial promotion and research company (SONEPI); a real estate company (SICAP); and the company to manage the Dakar industrial estate (SODIDA). The status of the equipment research center (CEREEQ) will be reviewed, and the assets of the national drilling company (SONAFOR) will be sold.
27. In 2000, three other companies will be privatized, the film distribution company (SIDEC); the company for development of the Petite Côte (SAPCO); and the reinsurance company (SENRE). The assessment of the national lottery (LONASE) and the international foreign trade center (CICES) will start in 2000 and their privatization could take place only in 2001. After completing these sales, only a very small number of public service companies will remain in the government's portfolio and the Government's share in the combined share capital of public enterprises will have been reduced from 87 percent in 1994 to 43 percent in 2001. The remaining enterprises will continue to be restructured and strengthened. Concerning the National Postal Services, the government will establish a strategy to guarantee its long-term viability. The government will provide Fund staff with the report on the economic and financial performance of public enterprises in 1998, as soon as possible, and in any case before end-December, 1999.
In the energy sector, major reforms have been implemented since April 1998. Privatization of the electricity company (SENELEC) was initiated and the activities of the company were taken over by a private operator in March 1999. In the petroleum products subsector, the stabilization mechanism was abolished so as to allow retail prices to fluctuate in line with international prices. The monthly adjustment of retail prices, originally scheduled for 1999, was introduced already in May 1998. Imports of petroleum products were liberalized. To better secure fiscal revenue, a specific tax on super and regular gasoline, diesel oil, and fuel for fishing boats (pirogues) was introduced in May 1998. To protect the activities of the refinery company (SAR) during the period in which it is undertaking investments to increase competitiveness, a degressive surtax on white products was introduced, to be abolished in May 2002. The government will progressively reduce the subsidy on butane gas and fuel granted to SENELEC in accordance with the agreed schedule. Regarding transport, the program implemented by the government with assistance from the World Bank has begun to reduce the inefficiencies in this sector.

The BCEAO will continue to pursue a prudent monetary policy consistent with the government's growth, inflation, and balance of payments objectives. The government will closely monitor the rate of growth of the money supply and will continue to reduce its indebtedness to the banking system so that adequate credit can be extended to the private sector. Credit to the economy is projected to increase by about 11 percent a year, on average, between 1999 and 2001. The annual growth of the money supply will be moderate during this period. Senegal will support the efforts of the regional monetary authorities to increase recourse to indirect money and credit management instruments, essentially favoring a policy of flexible interest rates associated with the system of required reserves. The WAEMU regional securities exchange, which commenced operations on September 16, 1998, should improve the efficiency of financial intermediation. The Banque Senegalo-Tunisienne has been restructured, recapitalized, and sold to private operators. The government will support the WAMU Banking Commission's efforts to ensure compliance with prudential ratios by banks operating in Senegal. The provisions of the Banking Commission will be implemented to ensure that all banks comply with prudential regulations, particularly those pertaining toinsider lending ratios. The development and solvency of mutual institutions or savings and loan cooperatives and other financial organizations will also be closely monitored.

Following the sale in March 1999 of one third of SENELEC's capital, the authorities will complete the company's privatization by November 1999, by putting up for sale another 26 percent of share capital, which will reduce the state's share in the company to 41 percent. A buyer has been selected for Air Senegal and will take over the enterprise in June 1999. For the rest of the year, the program provides for the privatization of about 10 other enterprises for which preparatory work is well advanced. The requirements for privatizing the Hôtel Méridien-Président have been established and publication of the international call for bids will be launched by end-August 1999. Regarding the urban transport company (the former SOTRAC), liquidated in November 1998, a new company with private majority shareholding will commence activities in November 1999. The call for bids for the choice of a strategic partner for the groundnut company (SONACOS) has been launched and the offers will be assessed in July 1999. The provisions for the institutional reform of the cotton company (SODEFITEX) have been prepared for implementation by November 30, 1999. Four other companies will be privatized in 1999: the company to manage the Dakar industrial estate (SODIDA), a tapestry weaving company (MSAD), an industrial promotion and research company (SONEPI), and a real estate company (SICAP). The Dakar-Bamako international railway will be under private management beginning in December 1999 with the establishment of a new private company (SETI). A second group of enterprises featured in the 1999-2000 restructuring program includes the Société d'importation et d'exploitation cinématographique (SIDEC), the Société d'aménagement de la petite côte (SAPCO), the centre d'étude et de recherche pour l'équipement (CEREEQ) and the reinsurance company(SENRE). The needed feasibility studies will be conducted in 1999, while those related to CICES and LONASE will be launched in 2000. The sale of the assets of the national drilling company (SONAFOR) should commence, once the cross-debts with the private enterprise that took over its management in 1984 have been settled. In 2000, the government will implement the recommendations of the recent feasibility study on the privatization of Senegal's airports. At the end of the privatization process, only utilities, industrial promotion, or social service companies will continue to be publicly owned.

In the rail transport area, international traffic will, as of December 1999, be exclusively handled by a company created jointly by Senegal and Mali (SETI), the majority of whose capital will be held by private shareholders. The operation of the Petit Train Bleu will be entirely in the hands of a subsidiary of the Senegalese National Railways (SNCS), which will be restructured.

The urban transport subsector is covered by a separate policy and is now managed in Dakar by the Dakar Urban Transport Executive Board(CETUD). To handle traffic in downtown Dakar, an operator will join Senegalese nationals from the private sector to operate the downtown busing system, while public transport in the suburbs will be serviced by Senegalese nationals from the private sector.

Regarding air transport, the new owner of Air Senegal will take control in June 1999. The other activities involve the construction of an airport at Ziguinchor, the rehabilitation, modernization and expansion of current airport infrastructure. Furthermore, the privatization of management of the airports and the restructuring of the Civil Aviation and National Meteorology Directorates will start by June 2000

The government's objective in this sector is to increase livestock production on a sustainable basis, to provide food security, to raise producers' income and to preserve natural resources. One of the priorities is to reinforce the capacities of the socio-professional organizations, in order to increase their participation in the production and management of the various subsectors. Veterinarian medicine is already in the hands of the private sector. State intervention will focus on executing programs to remove the constraints to the overall development of the sector, including: (i) by effectively improving the data collection system; (ii) by increasing productivity in the various animal industries through genetic improvements of the species by artificial insemination, finding high quality cattle feed, and the operational rehabilitation of the Doli Ranch, the management of which will be progressively privatized; and (iii) by promoting the export of products from this sector.

The aim of the new fisheries code, which was introduced in June 1998, is to safeguard fishing resources. This code will make it possible also to institutionalize coordination with the professionals by establishing the National Fisheries Advisory Board, with local branches, to manage fishing resources sustainably and rationally. The overall fisheries plan is a comprehensive indicative program of actions, and it includes all the priority actions in the areas of infrastructure, rehabilitation and modernization of the sector. It will be supported by a sectoral policy which, by bringing together all those involved into a cooperative effort, will facilitate the search for, and mobilization of, additional financing under the investment program included in the overall plan. The process of privatizing fisheries equipment will be completed by end-2000.

Pursue a policy of controlling current expenditure by improving its structure.
o Limit the number of civil servants to 1999-2001 67,000, excluding volunteers and contractual teachers.
o Implement the new salary adjustment December 1999 system, that is partly automatic and partly merit based.

Finalize the transfer of the former SOTRAC November 1999 to the private buyers.
o Privatization of SICAP, the Méridien- December 1999 Président hotel, MSAD, SONEPI, operation of the Dakar-Bamako railway, SONACOS, SODIDA, SODEFITEX, and CEREEQ
o Restructure CEREEQ and SONAFOR December 1999
o Privatization of SIDEC, SENRE, and December 2000 SAPCO.

Sale of shares to SENELEC workers November 1999 (maximum 10 percent) and to the strategic partner or other private sector operators; reduction of state ownership to no more than 41 percent.

Finalize the rehabilitation and privatization November 1999 of SODEFITEX.

Pursue privatization of SODESP and 1999 veterinary medicine.

Complete the privatization of fishing 1999-2000 equipment.

Privatization of the management of Senegal's airports:
- adoption of legislative framework; October 1999
- implementation. January 2000