Report No. 4686-BEN Benin Country Economic Memorandum (In Four Volumes) Volume IIl: The Public Enterprises Sector March 15, 1984 Western Africa Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distributon 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 EQUTVALENTS Currency Unit = CFAF US$1.00 = CFAF 355-= CFAF 1,000 = US$2.81 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) 2 - 0.62 mile (mi) 1 square kilometer (km ) = 0.386 square mile (sq. mi.) 1 metric ton (m ton) = 2,204 pounds (lb) 1 hectare (ha) 3 2.47 acres 1 cubic meter (m ) = 1.308 cubic yards FISCAL YEAR January 1 - December 31 1/ The CFA Franc (CFAF) is tied to the French Franc (FF) in the ratio of FF 1 to CFAF 50. The French Franc is currently floating. Throughout the text the CFAF/dollar equivalents are established using the rate of CFAF 355/$. FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AGB Socifte d'Alimentation Generale du Benin BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest BBD Banque Beninoise de Developpement BCB Banque Commerciale du Benin BOAD Banque Ouest Africaine de Developpement CAA Caisse Autonome d'Amortissement CARDER Centre d'Action Regionale pour le D6veloppement Rural CATS Cooperative Agricole du Type Socialist CCCE Caisse Centrale de Coop6ration Economique (France) CEB Compagnie Electrique du Benin/Communaute Electrique du Benin CNCA Caisse Nationale de Credit Agricole CPU College Polytechnique Universitaire DEP Direction des Etudes et de la Planification DPE Direction de la Planification d'Etat EC European Communities ECOWAS Economic Community of West African States EDF European Development Fund ENiJ Ecole Normale Superieure FAC Fonds d'Aide et de Cooperation (France) FAS Fonds Autonome de Stabilisation et de Soutien des Prix de Produits Agricoles FED Fonds European de Developpement FLASH Faculte des Lettres, Arts et Sciences Humaines eNI Fonds National d'Investissement FRA/GTZ The German Association for Technical Co-operation FSA Faculte des Sciences Juridiques, Economiques et Politiques FST Faculte des Sciences Techniques GRVC Groupement Revolutionnaire a Vocation Cooperative IBETEX Industrie Beninoise des Textiles IDA International Development Association IFAD International Fund for Agricultural Development INSAE Institut Nationale de la Statistique et de l'Analyse Economique INEEPS Institut National pour l'Enseignement de l'Education Physique et Sportive INSS Institut National des Sciences de la Sante INE Institut National de l'Economie INSJA Institut National des Sciences Juridiques et Administratives MDRAC Ministere du Developpement Rural et de l'Action Cooperative MPSAE MinistereduPlan de la Statistique, et de l'Analyse Economique OBEMAP Office Beninoise des Manutentions Portuaires OCBN Organisation Commune Benin-Niger des Chemins de Fer et des Transports PAC Port Autonome de Cotonou PAM Programme d'Alimentation Mondiale SBEE Soclte BMninoise d'Eau et d'Electricite SCO Societe des Ciments d'Onigbolo SNAFOR Societe Nationale pour le Developpement Forestier 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. ABBREVIATIONS AND ACRONYMS (continued) SOBEPALH Societe Beninoise de Palmiera Huile SOBEMAC Societe Beninoise des Materiaux de Construction SOBETEX Societe Beninoise des Textiles SONACEB Societe Nationale de Commercialisation et d'Exploration du Bgnin SONACI Societe Nationale des Ciments SONACOP Societe Nationale de Commercialisation des Pro4uits Petroliers SONAFEL Societe Nationale des Fruits et Legumes SONAGRI/SONAPRA Societe Nationale pour la Production Agricole SONAPECHE Societe Nationale d'Armement et de Pache VOLUME III BENIN: THE PUBLIC ENTERPRISES SECTOR Table of Contents Summary and Conclusions I. Sector Background ............................................O.1 -Growth of the public enterprise sector. 1 -Economic Functions of Public Enterprises. 3 -Institutional and Regulatory Environment ..........5 -Recent Policy Changes......... 10 II. Public Enterprise Sector Impact on the Economy . . .13 -Impact on Public Finance ................. . 13 -Impact on Banking ....16 -Impact on the economy ... ......... ............. .18 III. Major Problems Affecting the Public Enterprises. 19 -Description of Enterprise Sample ..19 -Major Problem Areas . ........................ .25 IV. Recommende IDA Assistance ..... 36 -Project Objectives......... 36 -Project Design ..37 List of Exhibits ... ........ 39 APPENDIX A: CASE STUDIES........... . 59 Save Sugar Project. 61 Onigbolo Cement Project ...... . .......67 IBETEX ............ 73 SOBETEX........ .... .. ... ........ ... 79 Oil Palm Sector. 83 SONACOP ....... . . .92 AGB . ..98 La Beninoise .........................102 COBENAM ............................106 SONAL .. ....... 113 CIB .B.......116 Trans Benin .......... . ....... 120 SUMMARY AND CONCLUSIONS i. The role of public enterprises in Benin has grown sharply since the mid-seventies, when policy decisions were taken which adopted this organizational form as a key element of economic policy. The objective in some sectors was to place major activities entirely in public hands. In other sectors, public enterprises were created to compete with private firms in order to ensure reasonable service and prices to Beninese consumers. Following a period of up to eight years experience with these enterprises, the Government of Benin determined that the economic performance of the enterprises as a group was not fully up to expectations. In order to remedy the situation the Government set up commissions to study ways of rehabilitating several enterprises and restructuring the sector. At the Government's request, a Bank economic mission visited Benin, including a review of the public enterprise problems and prospects as one of its major goals. This review focuses on the overall performance of the enterprises and their impact on the economy, and on an assessment of major problem areas confronting particular groups of enterprises. Greater detail is provided for a sample of twelve public enterprises in the form of case studies. The report presents preliminary views based on brief visits to Benin, and is designed to serve as a basis for discussion with the authorities and as an aid in developing a useful program of financial and technical assistance. In many ways, the report reinforces and confirms policy decisions taken by the Government in April 1982. Growth of Public Enterprises ii. The Government of Benin adopted policies in 1974 directed at strengthening national control over the economy, providing public sector competition in key sectors, and accelerating economic development. To do so, the Government increased its holdings in certain firms, expropriated certain companies, and created a number of new enterprises from scratch. The establishment of public enterprises was concentrated in 1974 and 1975; altogether, over three-quarters of the public enterprises in existence today were created after 1973. iii. Benin's public enterprises numbered some 60 firms (as of mid-1982) engaged in most economic sectors, particularly in industry and agricultural processing, commerce, transport, and finance. These firms can be categorized as major new projects, other industrial enterprises, import houses, or service enterprises. Briefly, the first category includes three projects currently underway or recently completed: Onigbolo cement and Save sugar, both jointly owned with the Nigerian Government and largely based on the Nigerian market; and Seme petroleum, involving offshore crude production for export. The total investment in these three projects is likely to exceed CFAF 150 billion. Other industrial enterprises include agricultural processing (SOBEPALH and SONICOG oil palm products, SONAFEL fruits and vegetables, SONAGRI cotton), textiles (IBETEX and SOBETEX), cement production from imported clinker (SCB and SONACI), and ceramics (CIB). A large group of import enterprises includes such items as foodstuffs (AGB), petroleum products (SONACOP), books (SONAPAL), and pharmaceuticals (ONP). Finally, the services include many public enterprises such as those in transport (Air Benin, OCBN railway, PAC port, Trans Benin trucking, COBENAM shipping), finance (BCB; BBD and CNCA banks), and hotels (ONATHO). - ii - iv. Complex institutional arrangements govern the activities of the public enterprises. For both state companies (100 percent Government-owned), and mixed economy companies (partially Government owned), guardianship is provided by a Ministry (Ministere de Tutelle). In addition, Accounting Commissioners and Government Commissioners review accounts and decisions, the Planning Ministry draws up investment plans and leads the development of new enterprises, the Ministry of Inspection of Public Enterprises (MIEPSEP) reviews the enterprises' finances and monitors their performance, and a board of directors plays in some cases major administrative roles. The complexity of this institutional network tends to reduce incentives and autonomy for public enterprise decision-makers. v. Institutional and financial problems in the sector prompted a Government commission to recommend policy and operational changes. In April 1982, a broad set of decisions was taken to merge or liquidate certain enterprises and to adopt policy measures aimed at improving productivity and management. These measures address a number of highly important concepts, and several of them have already been implemented. Productivity bonuses, training, accounting standards, financial control and pricing policies are all introduced as means to improve public enterprise performance. The decisions taken are a highly positive step towards sector rehabilitation. Impact on the Economy vi. The public enterprise sector presents a low financial return from the treasury viewpoint, has led to arrears with the banking system, and has had a mediocre impact on the economy overall. vii. At least CFAF 15 billion of public funds have been invested as equity in public enterprises, along with debts guaranteed in excess of CFAF 135 billion. In exchange, the contribution of public enterprises has been limited to taxes collected (CFAF 3 to 6 billion per year). No dividends have been collected from public enterprises during the years 1979-1981, with the exception of one minor account. Increasing public outflows are expected over the next several years, as past losses financed by short-term bank credit are absorbed by the Treasury, rehabilitation investments are undertaken, and cash infusions are required for several major new projects. It is estimated that public funding of at least CFAF 10 billion annually may be required by the public enterprises in the short-term. viii. The banks are heavily exposed to the public enterprises, which account for over 60 percent of all domestic borrowings. Arrears have posed serious problems. Ten public enterprises maintain less-than-satisfactory banking relations with the commercial bank, and these total balances outstanding exceed the bank's reserves. Twelve public enterprises are in arrears to the development bank, on original loan amounts exceeding the bank's reserves. This situation has partially arisen because of the explicit or implicit Government guarantees involved. The Government will be required to intervene in certain cases to protect the soundness of the banks. - iii - ix. Overall, public enterprises represent about 75 percent of modern industrial output in Benin. They employed 28,000 persons in 1980 or 40 percent of the formal sector labor force. There are some indications, however, that employment policies have caused inefficent absorption of manpower by the public enterprises and that consumer prices have not always benefited from public enterprises involvement. The latter problem is related to situations where a public enterprise holds a monopoly on importing a given product, and in some cases also holds a monoploy on the distribution of the goods which are required to be sold at a uniform price throughout the country. Not orgainzed to meet demand, the public enterprise must often sell to distributors who disregard official retail prices and obtain high margins at the public enterprise's expense. Major Problems and Recommendations X. The mission found that two-thirds of the public enterprises studied had major financial problems. A number of firms had also encoutereed major difficulties in initial project design, technical, managerial, and pricing areas. Generally, the poor financial situation of many public enterprises has resulted from misjudgements at the initial stage, from managment and maintenance problems, and from inadequate government pricing policies. The weak international economy and restrictions on imports by Nigeria have also created marketing problems recently. xi. Initial design problems range from confused objectives to weak appraisal and unfortunate choice of technical partners. Projects suffering from over-optimistic assumptions at the design stage are difficult to redress later on. Building up the project analysis capability of the relevant Ministries (Directions d'Etudes et de Planification) is therfore an urgent priority. An IDA project could contribute to that end. xii. Institutional arrangements pose a heavy burden on decision-making at the enterprise level. Not only do bureaucratic controls eliminate the incentive for risk-taking and responsible managment by the enterprise manager, but they are ineffective as presently practiced. The mission recommends simplifying the supervision arrangements and granting operational autonomy to the enterprises within a set of agreed objectives and resource levels. This would set the basis for an objective assessment of performance and could be used as a basis for performance incentives. xiii. Benin's enterprises suffer from a lack of experienced business managers, and from a lack of exposure to practices in similar industries elsewhere. Inadequate planning is one of the consequences of the weak management. The introduction of training schemes, carefully thought-out performance bonuses and greater cooperation with foreign technical partners would greatly improve the performance of the public enterprises. xiv. Delayed maintenance owing to inadequate production planning or pressures on enterprise cash flow has been a major technical problem for the enterprises. Rehabilitation plans should be developed for firms whose equipment has seriously deteriorated. Such rehabilitation, together with training of mechanics, could be financed in part by an IDA project. - iv- xv. Large public enterprises in Benin rely to a considerable extent on unhindered access to the Nigerian market. Complications involving the sale of Save sugar and Onigbolo cement in Nigeria indicate the importance of thorough negotiations early-on in the project design cycle regarding conditions of market entry, quantities and prices. Recent import cutbacks by Nigeria have hurt sales of traditionally successful public enterprises such as negotiations between the Governments concerned, both on specific and general issues. xvi. Low fixed prices for the outputs of several public enterprises have caused very serious problems and distortions. This is particularly true for cement, grain, beverages, transport enterprises and the utilities. The result is consumer subsidies, opportunities for private speculation and excess profits, and a cash drain on the public enterprises. The mission, therefore supports the decision taken in April 1982, to allow higher imported input costs to be passed through on the price side. Monopolies held by public enterprises for the importing or distrubuting of certain commodities have proved inefficient, as noted by the government. Measures to increase competition in those sectors should be taken. xvii. Financial problems arise from cumulative operating losses, inadequate initial equity, excessive debt leveraging, and slow payments by the rest of the public sector. In several cases, equity has clearly been insufficient to permit achieving objectives, and borrowings have been over-utilized to finance expansion. A network of unpaid bills between the enterprises and with Government have exacerbated liquidity problems. Financial re-structuring will be necessary for a number of public enterprises, based on individual rehabilitation plans. For many enterprises, cash injections will need to be in the form of equity or long-term debt. In other cases, debt re-schedulings are being sought as well. An IDA project could assist in making funds available on a flexible basis. For those enterprises which are in serious trouble and have negative prospects, closing should be considered. Recommended IDA Assistance xviii. The actions required at enterprise and policy levels for Benin's public enterprises call for financial and technical assistance which IDA could help provide. At the sector level, a public enterprise project would aim to help bring about appropriate pricing policy and government-enterprise relations; to introduce a multi-year system of agreed objectives and resources; to assist in strengthening the enterprises' financial performance; and to help in reassessing the role of Government involvement in certain economic activities. At the enterprise level, the goals would be to assess the enterprise's viability, help develop a rehabilitation plan, and assist in its implementation. xix. A line of credit could be made available to assist in financing enterprise rehabilitation. Funds would be disbursed against agreed programs in a flexible format. IDA could support increased Government equity in the enterprise, operating subsidies, or loans for equipment, inputs or working capital. The credit would be allocated with a view to assisting only promising enterprises, to spreading the funds over a representative group of firms, and to obtaining Government commitments for necessary policy changes. xx. Technical assistance would include the development of rehabilitation plans, provision of resident managers and technicians, and short-term consultancy services. Management would also be strengthened by a training program building on existing efforts and the technical assistance to be provided. xxi. While detailed project design depends on further discussions with the Government of Benin, the general objectives and main components of an IDA project would be those indicated above. I. SECTOR BACKGROUND 1.01 Public enterprises have become the predominant organizational form for economic activities in Benin, responding to political orientations adopted in 1974. Government policy decisions taken at that time encouraged a leading role in the economy for publicly-controlled commercial, industrial and service organizations as of mid-1982, there were sixty public enterprises operating at the national level. They account for approximately three-quarters of the output of Benin's modern industrial sector, and receive over half of the nation's domestic banking credit. This chapter sketches the expansion of the public enterprise sector in recent years, reviews the economic role of key enterprises, discusses the institutional and regulatory environment, and summarizes recent policy and organizational changes made by the government. GROWTH OF THE PUBLIC ENTERPRISE SECTOR 1.02 The Government of Benin adopted policies in 1974 aimed at transform- ing foreign domination of the modern economy into state leadership and control of key sectors. Although Benin achieved independence in 1960, numerous aspects of its modern sector had remained under the economic control of foreigners, e.g., the petroleum distribution firms, banking, Benin's public utility and the beverage industry. In other key sectors of the economy, such as transit activities, foreign firms existed alongside private Beninese enter- prises. In a small economy like Benin, this meant that considerable economic power -- in some cases virtual monopolies -- resided in the hands of those who were not necessarily directly responsive to Benin's priorities. Thus, the objectives of the change in policy governing the organization of key elements of modern sector activity were to strengthen national control over the eco- nomy, to provide public sector competition to private sector firms, and to help accelerate the economic development of the country in line with planned priorities. 1.03 The Government's objectives in this area were implemented by pur- chasing increased shares in existing enterprises, by expropriating certain firms (against compensation), and by creating a number of new enterprises to compete with existing firms in a given economic activity. For instance, the Government increased its holdings in both SCB (clinker grinding plant) and SOBETEX (textile printing) to 51 and 49 percent respectively in 1975. In the key banking sector, three foreign banks were expropriated and merged into a single, state-owned commercial bank (the BCB) in 1974 and 1975. The interests of six international oil companies operating in Benin were bought out between 1976 and 1978 to form a national petroleum distribution company (SONACOP). Numerous other public enterprises were created in order to provide a public presence in various sectors, without necessarily acquiring monopoly powers. Thus, a wholly state-owned enterprise (SONAFEL) was created in 1975 to grow and market fruits and vegetables, in competition with other domestic producers and canned imports. A shipping company (COBENAM) was established in 1974 which competes with foreign steamship lines on an equal basis for the carriage of Benin's imports and exports. -2- 1.04 The establishment of public enterprises -- created from scratch or obtained by acquiring or increasing the share of Government ownership in an existing firm -- was concentrated in the years 1974 and 1975, declining gradually in subsequent years. Figure 1.1 presents this trend graphically, for a sample of thirty public enterprises. The details of this evolution of the public enterprise sector are given in Exhibit 1.1. Three-fourths of the enterprises created since 1970 were newly-established firms, while the remain- ing quarter represented organizational changes within ongoing activities. Figure 1.1 PACE OF PUBLIC ENTERPRISE CREATION 0) 0 c rS 0 1r te3 7 07 --I-------Ta fcrain U2-4 4-0 0) 4-40 7 0 71. 7Z 73 74. 775 76 77 78 79 80 …-------Year of creatio… -------- 1.05 There were sixty national-level public enterprises in Benin as of mid-1982, and their combined importance to the economy is substantial (see list in Exhibit 1.2). Based on 1979 data (the latest year for which official detailed Government estimates of economic output are available), public enterprises account for 75 percent of modern industrial production. The public enter- prises employ approximately 28,000 persons (1980), or 40 percent of total formal sector employment. The public enterprise sector also absorbs 62 per- cent of the domestic credit available to the Benin economy. The largest development projects presently being undertaken -- the Save sugar project, Onigbolo cement and Seme petroleum -- are all organized as public enterprises. -3 ECONOMIC FUNCTIONS OF PUBLIC ENTERPRISES 1.06 Benin's public enterprises play a major role in most economic sectors, and particularly in industry, agro-industry, commerce, transport, finance and public utilities (see list of major enterprises, Exhibit 1.3). Ranked by magnitude of revenues (see Table 1.1), public enterprises in the commerce sector are the largest; a sample of nine out of twelve firms in the sector recorded Table 1.2: Sector Distribution of Public Enterprises -------Sample of Firms-/------ Total Number of Number of Revenues Sector Firms Firms (billion CFAF) Agro-Industry 10 4 6.0 Industry 9 6 15.4 Construction 5 1 0.7 Transport 9 6 8.3 Public Utilities 1 1 3.6 Information 4 1 0.04 Finance 7 2 10.5 Commerce 12 9 35.0 Other Services 3 2 1.0 TOTAL 60 32 80.5 Source: Mission Estimates 1/ These firms for which data were obtained generally represent the largest public enterprises. revenues of CFAF 35 billion in fiscal year 1981. 1/ Public enterprises share the commerce role in Benin with large foreign trading firms, and with numerous private local traders. Next in importance are the industrial firms (CFAF 15 billion revenues); these firms make up all the largest industrial enterprises in Benin, and account for 100 percent of modern output in many fields. Finance, transport, and agro-industry are other areas in which public enterprises are very prominent. Overall, the sample of 32 public enterprises studied recorded revenues of CFAF 80.5 billion in fiscal year 1981 (or in 1980, when 1981 data not available). 1.07 The analysis of individual enterprises leads to a different catego- rization of firms, combining sector differentiation with economic purpose. This perspective focuses on the sectors and enterprises of primary concern (major firms, and firms with difficulties), rather than on a classification according to the ministry of tutelle. We distinguish primarily between four types of enterprises: (1) major new export-oriented industrial projects, (2) all other industrial enterprises, (3) import enterprises and (4) service 1/ Most public enterprises adhere to a July 1-June 30 fiscal year. When a single year is stated for the fiscal year, the reference is to end-period year. - 4 - enterprises. The following discussion provides a brief review of these categories and the major public enterprises involved. Major New Export-Oriented Industrial Projects 1.08 These comprise three large projects which are in the final stages of construction or initial operation: the Onigbolo cement and Save sugar projects (jointly owned with the Nigerian Government and based largely on exports to Nigeria), and the Seme petroleum project (offshore oil being developed in partnership with SAGA Petroleum of Norway). Production from Onigbolo began officially in July 1982; Save is scheduled to begin sugar production in February 1983; and Seme should also begin producing within the next year. Together, the investment in these three projects totals about CFAF 150 billion, exceeding the investment in all the existing industrial enterprises in Benin. The profitability of these projects will depend on the actual costs of production in relation to price levels on the Nigerian and world markets. Recent estimates (prepared by specialist teams of the economic mission) are that the Save project may operate with negative cash flow through 1990, that Onigbolo may experience a temporary cash flow shortfall in 1983, and that Seme may breakeven until it begins to generate a surplus in 1985. Other Industrial and Agricultural Enterprises 1.09 Traditional exports are essentially limited to vegetable oil process- ing by SOBEPALH and SONICOGI!, and cotton ginning by SONAGRI, all mainly for export to Europe. Output has stagnated in recent years. 1.10 A number of import-substitution industries have been established, producing consumer goods for the local market (Benin and neighboring coun- tries). Two relatively successful examples of this type are SOBETEX, a mixed- economy firm which produces printed cotton fabrics from imported calico, and La Beninoise, the nationalized brewery, soft drink and mineral water enter- prise. Both have expanded sales and operated profitably over the past five years. 1.11 Several import-substitution enterprises have been less successful. IBETEX, a large integrated textile mill originally designed for export but presently producing for the local market, has incurred heavy losses. CIB, a ceramic tile and bathroom appliance manufacturer with private German parti- cipation, is now in liquidation. SONAFEL, a state enterprise aimed at supply- ing tomato sauce, fruit juice, and fruits and vegetables to the local market, is in a difficult financial position as well. 1.12 The two clinker grinding plants, operated by SCB and SONACI, are key examples of import processing industries. Both import clinker and gypsum, and grind it into cement for sale on the local market; imported raw materials account for a high percentage of total costs. The low fixed price for cement 1/ In a reorganization which became effective after this report was written SOBEPALH was dissolved and its industrial activities were transferred to SONICOG, SONAGRI became part of SONAPRA, SONAPAL's activities were taken over by SODIMAS, AIR BENIN became part of Transport A6riens du Benin (TAB) and SONAMEL was taken over by SOGECOB. - 5- has prevented these firms from passing on their costs normally, and has resulted in large losses. Import Enterprises 1.13 A large group of public enterprises imports and distributes various consumer goods: AGB (foodstuffs), SONACOP (petroleum products), ONP (pharma- ceuticals), SOBEMAC (construction materials), SONAPAL (books), SONAMEL (household electrical appliances), etc. Most of these state enterprises operate as importers, wholesalers and retailers. Pricing policy and manage- ment problems have afflicted several enterprises. Service Enterprises 1.14 Services, especially transport, form a major part of Benin's economy and include a number of key public enterprises. In the transport sector, public enterprises run the port (PAC), stevedoring (OBEMAP), transit (SONATRAC, SOTRACOB), ocean shipping (COBENAM), railroad (OCBN), trucking (Trans Benin), and airline (Air Benin). Together, these enterprises make up the key transit role of Benin for landlocked interior nations and neighboring countries. 1.15 A number of other services in banking and finance, tourism and trade have been nationalized or created as public enterprises. Three banks -- the development bank (BBD), commercial bank (BCB), and agricultural credit bank (CNCA) -- now perform all the banking functions of the country as state com- panies. Another public enterprise (ONATHO) is active in hotels and tourism. INSTITUTIONAL AND REGULATORY ENVIRONMENT 1.16 A complex institutional and policy environment has grown up around the public enterprises over the past decade; this environment is discussed in the following paragraphs. Reporting relationships to the supervising ministries are specified, as well as detailed administrative arrangements for enterprise decision-making. The pricing policy practiced by the Government has had a negative impact on a wide variety of public enterprises, in part through the lengthy delays involved in the approval of price increases. The Investment Code does not appear to have imposed major barriers to foreign or domestic investment. In April 1982, major decisions were taken by the Government in an effort to improve the performance of the public enterprise sector; these changes are discussed later in this chapter. Legal Forms of Public Enterprises 1.17 The major forms of public enterprises are the state companies and the mixed-economy companies. In addition, public establishments or "offices" are considered public enterprises. At the provincial level, provincial enterprises are a fourth form of public enterprise. The forms are legal in nature, and have little bearing on the economic substance of the enterprise. "Offices" excepted, accounting and management practices of public entrprises are in accordance with private business methods. - 6 - 1.18 Two-thirds of the national public enterprises are organized as state companies (Societes d'Etat). This includes a number of the basic agro-indus- tries, the banks, and ths commercial enterprises. State companies are 100 percent Government-owned and are created as specific instruments of the nation's economic development program. Their role is either to supplement private initiative where this has been lacking, or to take on economic tasks of general public interest. State companies have a corporate persona, and are financially autonomous, though they may receive funds through the Government's investment budget. The state companies operate under the conditions of private law. 1.19 Mixed-economy companies (Societes d'Economie Mixte) are those in which the Government of Benin has a shareholding of less than 100 percent. These companies include ventures with the Beninese private sector, and with foreign private and public partners. Examples can be found in industry (one of the clinker grinding plants, both textile firms, and the ceramic tile enterprise); the three major industrial development projects now underway are all established as mixed-economy companies with foreign partners. 1.20 Public establishments (Etablissements Publics) are generally desig- nated as "offices," and may be operated as nonprofit institutions. These public enterprises are the closest to being direct entities of Government, and include such services as the post office, radio and television, data process- ing, and social security. 1.21 Provincial companies (Societ6s Provinciales) were authorized in 1978 to assure the control and direction of the economy at the provincial level, to carry out Government economic measures aimed at price stability, and to pro- mote cooperative organizations. While 60 of these provincial companies were organized on paper many of them were never properly established. In April 1982 the government decided to terminate most of the provincial enterprises. This report concentrates on the national-level public enterprises, and does not deal specifically with the six remaining provincial companies which include the provincial bus companies. Administrative Arrangements 1.22 The relationship between the Government and the individual enter- prises is not fully satisfactory at present. These paragraphs describe the various bureaucratic relations; in Chapter III, the section on institutional arrangements presents the problems from the enterprise viewpoint and proposes solutions. 1.23 In Benin, each public enterprise -- state company, mixed-economy com- pany, or office -- is attached to a ministry providing guardianship (Ministere de Tutelle). Most ministries have supervision responsibilities for at least a few public enterprises; some key ministries are the Ministry of Industry, Mines and Energy, the Ministry of Transport, the Ministry of Commerce and the Ministry of Rural Development. This liaison generally takes place through the planning unit of the ministry (Direction d'Etudes et de la Planification). Due to weak staffing of these planning units, supervision by the ministry is not always as well-informed and constructive as it might be. The ministry involved is charged with making recommendations on pricing policy, invest- ments, and other major decision areas. The ministry also reviews annually the -7- company's inventory, balance sheet, income statement, and projected income statement before these are taken up at the Council of Ministers. In addition, the ministry of tutelle can organize a special ad hoc commission to examine the accounts of the company at any time. 1.24 Separate Accounting Commissioners (Commissaires aux Comptes) are appointed by the Council of Ministers upon the joint recommendation of the Finance Ministry, the Ministry of Inspection of Public Enterprises and the Council of Ministers to audit the accounts and cash position annually. 1.25 The Planning Ministry is also involved with the public enterprises, both in the determination of investment plans and in the implementation of major new enterprises. Working through the ministries of tutelle, the Plan sets priorities and aggregates the projected investments of the various public enterprises. During the current planning exercise, some enterprises did not seem to feel that their input was solicited at the proper stage in the pro- cess. The Planning Ministry has taken a leadership role in organizing such major new public enterprises as the Onigbolo cement plant. 1.26 The Ministry of Inspection of Public Enterprises (MIEPSEP -- Minis- tere de l'Inspection des Entreprises Publiques et Semi-Publiques) was created in 1980, with the decree defining its purpose, organization and functions issued in December 1981, to centralize control within the Government over the public enterprises, to serve as an independent reviewing and data collection agency, and to provide technical assistance to the enterprises themselves. It is not successfully playing its intended role. This ministry has only recent- ly become operational and still operates with a very small staff. Despite an ongoing ILO program to train MIEPSEP staff in the techniques of external audit, the MIEPSEP staff are just beginning their first external audits of public enterprises, and the data available at MIEPSEP on the enterprises remains limited and often out-of-date. 1.27 Each state company is run by a Board of Directors (providing policy guidance) and is managed by a General Manager assisted by a Management Committee. The make-up of these groups is determined by the Council of Ministers. The relative responsibilities of the Board and the Management, and the composition of the Board, are currently under revision. As of mid-1982, the Board of Directors was generally composed as followsl/: 1/ The Annex to Law 82-008 of December 30, 1982 changed the membership composition somewhat. The number of members cannot now exceed 14. -8- President: The minister of tutelle Vice President: The Director-General of the ministry of tutelle Members: One representative of the national legislative or consultative body One represertative of the Ministry of Industry or Commerce One representative of the Minister of Planning O:, representative of the Minister of Finance One representative of the Minister of Labor Five representatives of the staff Two other representatives of the Services or Bodies interested in the company's social goals The Governmaent Commissioner 1.28 A Government Commissioner was in the past appointed to each state company, generally attached to the Presidency and retaining his normal duties in addition to this special assignment. He was a member of the Board of Directors and of the Management Committee, and was charged with ensuring that Government policies are carried out by the enterprise and with providing day- to-day surveillance of operations. The Commissioner appeared to exercise a decision-making role in certain state companies. In certain cases, the Commissioner's role appeared to constrain the manager's autonomy. This position was recently eliminated in most state companies. 1.29 The ministry of tutelle receives all the minutes from meetings of the Board of Directors and may require, within 15 days of a meeting, a reconsider- ation of any issue. The ministry can also suspend any decisions with which it disagrees. These prerogatives would seem to injure the autonomy of the enter- prise and its board even if infrequently exercised. 1.30 The allocation of net profits (after payment of taxes) earned by state companies is fixed by law. Prior to December 30, 1982, fifteen percent of the profit (not to exceed certain proportions of original equity or sales) was retained as reserves by the enterprise. Of the remaining 85 percent, 80 percent were to be contributed to the investment budget and 20 percent to the current budget.1/ In fact, no dividend contributions to the budget have been made by the public enterprises in the past several years (see Chapter II). 1.31 Similar administrative arrangements apply to mixed-economy com- panies. These are defined as companies in which the state controls at least 51 percent of the stock, or is a minority shareholder but decides to treat generally the enterprise as a mixed-economy company. In particular, such companies have a Government Commissioner who performed the same role as in a state company. The Government reserves for its representatives a minimum of two positions on the Board of Directors, in all mixed-economy companies where 1/ Law 82-008 of December 30, 1982 changed these proportions. Five percent (5%) is now to be allocated to legal reserve; ten percent (10%) to extraordinary reserve; fifteen percent (15%) to a reserve for renewal of productive equipment; and the remaining seventy percent (70%) is to go to the national budget in the following proportions: 60% to investment budget, 20% to operation budget and 20% as state contribution to FNI. -9- the state has contributed at least 10 percent of the initial capitalization. Following the allocation of 15 percent of net profits to reserves, the portion of remaining profit accruing to the states' participation is remitted (in theory) 60 percent to the investment budget and 40 percent to the current budget. Investment Code 1.32 Benin's Investment Code contemplates various options for new invest- ments, and does not appear to have hindered investment in the past. The Code establishes various preferential taxation regimes for different categories of projects. Investments in the manufacturing, agricultural, energy, hotel and infrastructure sectors are eligible; trading companies are not. Freedom to transfer capital and to receive fair compensation in case of expropriation are guaranteed. In granting preferential regimes under the Investment Code, the Government considers the degree to which the investment coincides with objec- tives set under the Plan, and the size of the investment, number of jobs created, use of local materials, and incorporation of modern technology. 1.33 At the time of the mission's visit to Benin (June 1982), a new Investment Code had been approved by the National Assembly and was being finalized, but was not available for review. Based on documentation received after the mission, 1/ Exhibit 14 highlights the main differences between the Investment Code of T972 and the new one. The major innovation concerns public enterprises which now enjoy a special regime: the new regime A. Under this regime for which only public enterprises are eligible, substantial advantages are granted including exemption from the turn-over tax, profit tax (for two years), and 50% of profit tax (the three years following the two years of total exemption). Unlike the 1972 Code which granted advantages on the basis of total investment costs and regardless of the enterprise ownership, the new Code grants specific advantages to public enterprises that no other private enterprise can enjoy. Although the impact of the new Investment Code is yet to be seen, there is a risk of discouraging private initiatives (national as well as foreign) in activities in which public enterprises are involved because of the unfair competition that the new code tends to create. 1.34 The investment code does not appear to have been a constraint to foreign investment in Benin. The government has shown flexibility in nego- tiating contracts and preferential treatment with investors. Pricing Policies 1.35 In Benin, certain basic imported commodities are price controlled, the margins on other consumer goods are fixed, and agricultural exports are handled by a marketing board with administratively-fixed prices. Three different price regimes can be distinguished: 1/ Loi No. 82-005 du 20 Mai 1982 portant Code des Investissements. - 10 - 1. Maximum margins are fixed for most imported foodstuffs, such as rice, powdered milk and sugar. 2. The Council of Ministers sets the prices of certain materials on a national basis -- for petroleum products, cement, water, electricity, and beverages. 3. Agricultural export commodity prices are fixed according to annually-published baremes. 1.36 While many local products are not controlled, imported goods are con- trolled with respect to margins if not price. Lengthy delays can occur, as a Government commission is set up to review each request for a price increase. In the case of the SBEE, it apparently took a year to develop a proposal for a price increase, and 18 months for the Council of Ministers to act. The pro- fitability of the clinker grinding companies (SCB and SONACI) and the petro- leum products distribution firm (SONACOP) is thus directly linked to the prices fixed by the Government. Some officials believe that the process is speeding up, and state that the Government is now more conscious of the prob- lems caused to the public enterprise by delays in granting price increases. RECENT POLICY CHANGES 1.37 Important changes in Government policy toward the public enterprise sector have recently been made. Despite the positive original intentions of strengthening Beninese control over the economy, public enterprises have in practice encountered difficulties which have led to unsatisfactory performance in some cases (see Chapter III for a discussion of major problems). Particu- larly, the inefficiency of many public enterprises is costing the Government money, has not always brought about lower consumer prices, and in some cases has encouraged speculation and excess profits in the private sector. 1.38 A Commission Nationale des Bilans was established in 1979 with the purpose of reviewing all public enterprises and suggesting measures for improved management. A second commission continued this work in 1980, and a Special Commission reviewed the work over the period December 1980 to April 1982. Decisions were taken by the Central Committee and the National Execu- tive Council in meetings from April 19-22, 1982, to dissolve or liquidate certain enterprises, to merge others, to end the operations of most of the provincial enterprises, and to adopt policy measures aimed at improving enter- prise management and productivity. Concrete actions to implement these decisions have now begun. 1.39 The general policy meausres adopted are of particular interest, as they will influence the functioning of all public enterprises. Major measures taken include: - 11 - a. Establishment of a new relationship between the public enterprises and the Government. This includes changes in the make-up of the Board of Directors, greater emphasis on collegical management of the enterprise through the Management Committee, revised allocation of enterprise profits, and the termination of the post of Government Commissioner. Status: On December 30, 1982, a revised statute governing public enterprises promulgated. The new statute apparently specifies the division of responsibilities between the Board and the director of the enterprise. The Board is no longer necessarily chaired by the Minister of Tutelle, and the legislative representatives have been dropped from the Board. Government Commissioners have now been eliminated in all but two state-owned companies. b. Productivity measures, to be determined in detail by a Technical Committee chaired by the Minister of Labor. The measures generally include the institution of a physical productivity bonus, the payment of a profit-based bonus in place of the traditional "13th month" bonus, and the payment of authorized overtime. Status: Existing incentives--the 13th month and the production bonus--have been eliminated. New measures have not yet been decided, so at present managers have no production incentives available. C. Prices are to be set in relation to costs, having regard to the preservation of purchasing power by a proper phasing-in of price increases. Status: This policy change is very widely quoted throughout Government, though it is difficult to determine its practical application. Also, a revised procedure requires the public enterprises to alert the Government to any likely price increases prior to the finalization of the national budget in December of each year. There have not yet been any instances, however, of price subsidies being directly incorporated in the budget, with the exception of the fertilizer case. d. Monopolies of distribution are to be reconsidered except for the case of petroleum products. Status: The Ministry of Commerce is presently considering what modifications should take place. Generally, the decision appears to be that the terms of distribution in the past have unfairly discreminated against production-based enterprises; the role of marketing organizations may well be revised. e. Improved training for managers of public enterprises, through night school and other courses. Status: This is viewed as a long-term goal. One seminar for public enterprise managers was conducted in November 1982, under an ongoing ILO project. - 12 - f. Improved public enterprise accounting standards, through the implementation of the National Accounting Plan. Status: The new accounting standards were introduced on January 1, 1983, and all companies except banks have changes their fiscal years to a calendar year basis. The new system introduced flow-of-funds concepts which will enhance the analytical usefulness of the accounts. g. More rigorous control of the management of public enterprises, by establishing internal audit capabilities and strengthening external control. Centralized monitoring of accounts (a Centrale des Bilans) is to be established at the Central Bank (BCEAO). Status: Both internal and external audit capabilities remain weak but are being strengthened. The staff of MIEPSEP continue to receive training in the field of external audit, and have begun the practical stage of their training by auditing three public enterprises. Both MIEPSEP and the Ministere de Tutelle have the authority to seek data directly from the public enterprises. In practice, obtaining these data has been a very slow process. A law was recently passed-- text not yet available--specifying fines and imprisonment if the enterprises do no promptly submit their end-of-period accounts and their proposed budgets. MIEPSEP has already noticed an improvement in the timely submission of financial documents. The Centrale des Bilans has, in principle, been established at the Central Bank in order to assemble performance data on industrial firms in other countries as a standard of reference. h. Tighter control over cash funds, debts and accounts payable. Debts beetween enterprises are to be settled, and schedules are to be established for payment of moneyt owed to the enterprises by the Government. Status: The Ministry of the Interior and the banks have begun a process of sorting out inter-enterprise and enterprise-Government debts. Public enterprises generally have been found to have owed more to the Government than vice versa. i. Standards for the appointment of enterprise managers have been established, emphasizing technical competence. Status: Discussions indicate that these standards have not altered the essentially political dimensions of key enterprise appointments. j. Contributions to the National Investment Fund (FNI) by state companies and offices are to be eliminated as of January 1983. Status: This change has been implemented. It will result in reduced payments by the public enterprises, saving them up to CFAF 1.6 billion per year (1981 level). - 13 - k. Incentives for Beninese nationals to invest in the industrial sector are to be established. Status: Long-term objective. 1.40 In the mission's opinion, the measures adopted are a step in the right direction. However, the cumulative effect of years of inefficiency, financial difficulties, postponed maintenance, and inadequate personnel and pricing policies indicate the need for major efforts to implement the revised approach to public enterprises evidenced in the April 1982 decisions. Chapter III of this report explores several of these same issues, and attepts to indicate alternative options and concrete actions which might be of assistance in achieving the Government's objectives. II. PUBLIC ENTERPRISE SECTOR IMPACT ON THE ECONOMY 2.01 This chapter addresses the overall impact of public enterprises on the economy, measured primarily in financial terms. It summarizes the macro- economic situation which has spurred the present search for measures to improve the performance of the public enterprise sector. The first section discusses the flow of funds between the public enterprise sector and the Government. Next, the relations between public enterprises and the banking system are assessed. The third section summarizes the general impact of public enter- prises on Benin's economy. Prospects are addressed in each section as well as past performance, although the future is likely to be strongly influenced by public policy decisions. IMPACT ON PUBLIC FINANCE 2.02 The Government is either the sole or a major shareholder in all public enterprises, and the fortunes of the firms thus have immediate implications for the country's public finance situation. Conceptually, the financial relations may be viewed as inflows from the public enterprises and outflows to them (Exhibit 2.1). 1/ The inflows most clearly attributable to the enter- prises themselves are business taxes, dividends, and contributions to the FNI investment fund. Businesses also collect and pay to the Treasury certain payroll and excise taxes; these taxes are considered here although they could well be attributed elsewhere in the economy. Finally, import duties are paid by enterprises as well. As this tax is really borne by consumers, and since data are not available on the proportion of total duties paid by public enter- prises, we have not included it in our analysis. 2.03 Outflows of funds to the public enterprises consist of initial capital costs and recurrent items. The Government generally commits funds for the 1/ For purposes of analysis, "Government" is considered to be the consolidation of Treasury, CAA, FNI and3. Special Accounts. - 14 - start-up of a public enterprise either in the form of a capital subscription or in order to buy out existing owners. Other initial financing consists of FNI project financing, direct overseas borrowing by the Government for onlend- ing purposes, and guarantees of foreign and domestic borrowings by enter- prises. The Government's initial costs also often include infrastructure costs which, though not quantified in this study, do increase the public finance burden. On a recurrent basis, the Treasury and the CAA sometimes pro- vide both direct subsidies to the public enterprises and transfers (termed "net lending" in the public finance accounts). 2.04 Inflows to the Government from the public enterprises have totalled approximately CFAF 2.8 to 5.5 billion annually in recent years (see Table 2.1). These data are compiled from Treasury and FNI accounts (Exhibits 2.2 and 2.3), and represent totals for all public enterprises and the major cate- gories of income noted in Exhibit 2.1 (with the exception of import/export duties). Total inflows from the public enterprises amount to between 8 and 15 percent of Government revenues during the years 1979 through 1981. Particu- larly striking is the fact that virtually no dividends have been paid into the Treasury at all by public enterprises in the last two years. It is also interesting that "business taxes," that is, taxes on business profits and turnover, make up only about one-third of total taxes paid by the public enterprises. The contributions to the FNI -- which included a major effort to collect arrears in 1981 -- are substantial; these are scheduled to cease at the end of 1982 for state companies and offices. Table 2.1: Public Finance Inflows from Public Enterprises (million CFAF) Year Business Taxes Dividends Payroll Taxes Excise Taxes FNI TOTAL 1979 1,527 15 368 1,989 462 4,361 1980 1.004 0 476 779 550 2,809 1981 1,880 0 685 1,278 1,636 5,479 Source: Exhibits 2.2, 2.3 2.05 Government financing of the public enterprise sector has amounted to between CFAF 1 and 7 billion annually in equity funds in recent years, plus net lending of CFAF 3 to 5 billion and Government guarantees and onlending up to CFAF 71 billion (see Table 2.2). These amounts include financing for the three major projects now underway (Save sugar, Onigbolo cement, and Seme petroleum), which accounts for a large share of the total. Approximately 85 percent of the Government guarantees and foreign borrowings onlent to public enterprises shown in Table 2.2 are for the three large projects. It is thus unfair to set these outflows directly against the inflows previously calculated. Nevertheless, the public enterprise sector has been costly from a public finance viewpoint. At least CFAF 15 billion has been invested in the form of equity in the public enterprises, and debts have been contracted or guaranteed in amounts exceeding CFAF 135 billion. On the inflow side, no dividends have been received. However, taxes of CFAF 3 to 6 billion per year have been collected from the public enterprises. - 15 - Table 2.2: Government Financing of Public Enterprises (million CFAF) CAA CAA Equity a FNI Projeited Net c Government Year Expropriations Contributions Finance Lending Guarantee Re-Lending 1979 356 3,948 2,642 4,860 70,518 2,363 1980 196 268 838 4,090 2,154 26,967 1981 42 592 1,382 2,770 not avail. 4,252 cumulative thru 1981 1,981 3,832d 9,261 n.a. 83,775 52,214 Source: Exhibits 2.4, 2.8 a/ Total CAA equity contributions, from CAA accounts, includes CARDERs b/ Includes Onigbolo and Benin Sheraton Hotel c/ From public finance accounts; may not be exclusively to public enterprises d/ Excluding CARDERs (see Exhibit 2.5) e/ Through 1980 2.06 All the amounts shown except net lending are associated with investments; whereas net lending includes advances that can be considered as current transfers. Data were not obtained from the Government on possible subsidies paid directly from the Treasury; however, these amounts are not believed to be large. 2.07 The financial return must be considered low, because the correct measurement criterion would compare the incremental returns to the Government versus its incremental costs. If one assumes that the private sector could have generated equivalent levels of revenue and employment (hence taxes), the return is zero, as the enterprises have yielded no dividends to the Govern- ment. While recurrent costs incurred by the Government have been small so far, this reflects the fact that enterprise losses have been covered by short- term bank credits; this may change in the future. 2.08 The outlook for the impact of public enterprises on public finance is for increased Government outflows over the next several years (see Exhibit 2.9). This negative picture incorporates several elements: o Ongoing losses of public enterprises (which were CFAF 3.8 billion in 1981 for a sample of 30 enterprises) are assumed to be reduced to CFAF 2 billion per year. O Cumulative losses over past years, partly financed by bank credit, have amounted to CFAF 7 to 10 billion. It is assumed that the Government will absorb these losses over a five-year period. O Rehabilitation investments required by existing indus- trial and agro-industrial enterprises alone are estimated at CFAF 6 to 10 billion. It is assumed that Government would fund 20 percent of this cost over three years. 16 o Additional counterpart funds required for the major pro- jects now underway are assumed to total CFAF 10 billion. This includes urgent infrastructure requirements for the Save and Onigbolo projects, and cost overruns on several projects. It is assumed that Government would fund half of this amount over a two-year period. o Subsidies to major projects are estimated to total CFAF 4 to 9 billion per year, based on the cash flow projections prepared by Bank consultants. The bulk of this will be required by the Save sugar project, essentially in the form of repayment of foreign debts. 2.09 Based on these assumptions and estimates, which can only be termed highly approximate, the outlook is for a negative impact by the public enter- prises on the Government amounting to at least CFAF 10 billion annually over the next several years. The factors underlying this forecast are discussed in Chapter III. This amount cou'ld vary substantially, however, depending upon price movements for sugar and cement, and would also be reduced to the extent that Nigeria might be willing to help cover the losses on the Save and Onigbolo joint ventures. The projected burden on public finances can be compared with 1981 total public revenues of CFAF 53 billion. hIIACT ON BANKING 2.10 Public enterprises as a group claim a major share of the credit extended by Benin's banking system. As of June 1981, public enterprises had borrowed CFAF 38 billion, accounting for 62 percent of all domestic credit (see Table 2.3 below). Much of this borrowing carries an explicit Government guarantee, and the portion that does not still benefits implicitly from the creditworthiness of the state as owner of the enterprise. The fact that the public enterprises' share of credit is higher for medium and long-term credit than for short-term funds, reflects the concentration of private sector activities in the trading sector, which has a relatively low requirement for longer-term financing. Table 2.3 PUBLIC ENTERPRISE ACCESS TO DOMESTIC CREDIT (billion CFAF, as of June 1981) Short-Term Medium-Term Long-Term Total Credit to Public Enterprises 25.9 9.6 3.0 38.5 As Percent of Total Credit 56.8 72.2 100.0 62.3 Source: BCEAO - 17 - 2.11 Benin's banking operations are in the hands of three banks, each of which is heavily exposed to public enterprises. Due to financial problems experienced by the enterprises, arrears in payment to the banks are common and the accounts of several public enterprises are rated as less-than-satisfactory by the banks. The mission obtained limited information from the two largest banks (BCB and BBD), but none from the third bank (CNCA); the data obtained are presented in Exhibits 2.10 and 2.11. As of September 1981, these data paint the following picture: BCB -- Ten public enterprises were judged by the BCB to be maintain- ing less-than-satisfactory banking relations. Credit outstanding to these enterprises totaled CFAF 13.0 billion, or 58 percent of the bank's lending to all public enterprises. BCB's reserves amounted to CFAF 5.7 billion in September 1980. BBD -- Twelve public enterprises are in arrears to the BBD for a total amount of CFAF 2.3 billion (principal and interest), on original loan amounts of CFAF 3.8 billion. Five of these firms maintain less than satisfac- tory relations. BBD's reserves and provisions amount to CFAF 3.4 billion. 2.12 The exposure of these two banks to public enterprises is thus consid- erable. In the unlikely event of complete nonrecovery of these loans, both banks would be bankrupt. In any case, however, the banks would likely expect the Government to make good on public enterprise debts. 2.13 The banks' problem lies partly in the special nature of public enter- prises. Because they are owned by the Government, it is difficult for the banks -- also owned by the Government -- to refuse credit in some cases. Also, when losses are incurred by the enterprises (for reasons discussed in the next chapter), the only option available is often short-term credit. The government's unwillingness to provide subsidies, or in some cases to approve realistic pricing or personnel policies, leave the enterprises with little choice. As losses build up and an enterprise's net worth diminishes, banks would call the loans to a private enterprise. Yet with public enterprises -- backed by the Government -- the banks continue to lend even to firms with negative net worth. The result is an untenable situation for the banks and heavy financial charges for the enterprises. 2.14 Government intervention is clearly called for in this situation. The Government will need, over the next few years, to assume the debts of several enterprises that are likely to be closed or reorganized. The estimate pre- sented earlier of CFAF 7 to 10 billion for cumulative losses is seen to re- flect about half of the existing debt by the public enterprise sector to the banking system. The actual amount will depend on the final liquidation value of enterprise assets, and will reflect the rehabilitation plans developed for each enterprise in need. Assuming that the Government assumes this burden, the remaining problem is to try to guard against a repeat of the same occur- rence. Stricter reviews by the banks themselves should be implemented to avoid a recurrence, coupled with more realistic financing plans and pricing policies for the enterprises. - 18 - INPACT ON THE ECONOMY 2.15 The overall economic performance of the public enterprise sector has been mediocre. While investments have been made and employment expanded, the poor financial results of certain enterprises have placed an increasing burden on Benin's public finances and banking system. 2.16 In output terms, public enterprises represent about 75 percent of the industrial sector. The public enterprises have absorbed a substantial share of the labor employed in the formal sector. Employment by public enterprises has increased from 17,600 in 1977 to 28,100 in 1980. This represents an aver- age annual growth rate of 17 percent yearly, and public enterprises employed 40 percent of the formal sector workers in 1980. On the one hand, this absorp- tion of labor must be viewed as a positive economic contribution in a country with considerable underemployment. On the other hand, the evidence gleaned in interviews with enterprise managers suggests possible inefficiencies in labor practices. Pressure is placed to hire school graduates whether they are needed or not; and in several firms, the difficulty of firing individuals or reducing the labor force in response to plant closings was mentioned. 2.17 The impact on domestic prices may well have been favorable to consumers, but there are hidden costs as well. Discussions with Government officials and enterprise managers suggest that public enterprises are more strictly constrained to respect official prices than are some private enter- prises. In this sense, the public enterprises are more effective agents of public policy. On the other hand, the several instances of severely inade- quate prices imposed by the Government on public enterprises (e.g., for cement and grain) place an unfair burden on the firms which can only be lifted in the end through Government subsidies to the firms or higher prices. There are also instances where inefficiencies in public enterprises and low prices may have actually created an umbrella protecting high actual prices and providing opportunities for private speculation. This occurs when a public enterprise is unable, for instance, to supply the country's demand at a low fixed price. Wholesalers make large purchases from the public enterprise, and then add large margins, related to the scarcity value, in selling at the retail level. 2.18 The major balance of payments impact of public enterprises has been through the rising external debt. Backed by Government guarantees or benefit- ing from onlending of direct foreign public borrowings, the public enterprises have enjoyed broad access to overseas credit sources. The public enterprises' external debt stood at US$360 million in 1981, reaching 47 percent of Benin's total public external debt. Public enterprises have so far contributed little to exports, though the three large projects now underway are all export- oriented and should provide a quantum increase in Benin's export proceeds and a major shift in the composition of exports. The anticipated low levels of profitability of these projects over the next several years will hinder the balance of payments impact, however. It is also certain that the public enterprises will continue to require considerable imports of intermediate goods. - 19 - 2.19 The outlook for the impact of public enterprises on the economy depends in part on the implementation of corrective actions by the Govern- ment. It will also reflect developments on the world market, particularly as they affect the earnings of export projects. The financial performance of the public enterprises can certainly be improved, and this would form the basis of a much more sound contribution to the national economy. However, necessary rehabilitation measures are likely to lead in the short-run to higher prices for certain commodities and reduced employment levels in certain enterprises. The uncertainties concerning the Save sugar project are likely to strain the public finance and external debt situation over the next five years, though a substantial number of jobs will be created (about 3,500). The difficulties encountered in absorbing the three large projects (total investment of CFAF 150 billion) may well limit further public investment in the eighties. Benin's creditworthiness and fiscal soundness will probably be severely tested as a result of counterpart financing, rehabilitation and debt servicing obligations on behalf of the public enterprises. III. MAJOR PROBLEMS AFFECTING THE PUBLIC ENTERPRISES 3.01 Benin's public enterprises are experiencing considerable difficul- ties, as noted in several recent Government reports. Many of these problems stem from common environmental roots. The mission gathered data and conducted interviews with a sample of public enterprises in order to assess the par- ticular situations affecting individual enterprises, and to serve as a basis for distilling problems common to groups of enterprises. Case studies have been prepared for eleven firms, believed to be representative of the range of public enterprises, and are presented in Appendix A. Drawing from the case studies, from the discussions with some 21 enterprises and with officials in several ministries, and from financial data assembled on over 30 enterprises, the mission has summarized the major problems which appear to confront the public enterprises in Benin. This chapter begins by describing the major enterprises included in the study and by arranging them in a matrix format according to their major problems. Problem area are then discussed by the following categories: initial design and set-up, institutional arrangements, management and staffing, technical, marketing, pricing, and financial aspects. DESCRIPTION OF ENTERPRISE SAMPLE 3.02 This report deals only with a sample of Benin's public enterprises. Out of a total of 60 firms (mid-1982), financial data were obtained (though often incomplete) on 39 enterprises. These likely include Benin's major public enterprises, but in the absence of data, it is not possible to be certain. For instance, some minor enterprises in terms of sales volume have operated at substantial losses in the face of difficult problems; thus, the picture presented is by no means complete. The mission did not obtain sub- stantial information on the provincial enterprises, of which there were at one point 60 in theory; most of these have recently been discontinued. - 20 - 3.03 This section provides brief descriptions of the sample of enterprises considered (Exhibit 3.1), in order to give the reader a general idea of the type of enterprises reviewed. Greater detail was available to the mission in cases where interviews were conducted; for most of these 21 firms, data at the level of detail presented in the case studies were available. Enterprises not mentioned here are those for which the mission did not obtain any significant information. Major problem areas are identified and discussed following this section of descriptive material. Major New Projects 3.04 Three major investment projects organized as public enterprises are included in this category. These are the Save sugar complex, the Onigbolo cement factory, and the Seme petroleum project. A fourth new project -- the Benin Sheraton Hotel -- is not included due to unavailability of data to the mission. The three projects are currently either completing their construc- tion phase, or have very recently (in the case of Onigbolo) been placed in service. Consequently, their problems are not typical of the operational difficulties confronting the rest of the public enterprise sector. These projects generally exemplify the difficulties associated with project design and start-up. 3-05 The Save sugar project is being managed by the Societe Sucriere de Save (SSS),a joint venture between the Benin and Nigerian Governments and Lonrho Limited as technial partner. Irrigated cane fields have been estab- lished to supply a mill capable of producing 47,000 tons of refined sugar per year; initial operation is scheduled for early 1983. Investment cost is estimated at CFAF 69 billion. Low cane yields combined with current very low world sugar prices are likely to cause substantial financial losses over a period of years (see case study). 3.06 The Onigbolo cement project began production in the third quarter of 1982 as the Societe Cementiere d'Onigbolo (SCO). The enterprise is designed to produce 500,000 tons of cement per year for the Nigeria and Benin markets. SCO is owned by the two governments and by the technical partner, F.L. Smidth & Co. Total cost is estimated at CFAF 32 billion. Onigbolo's major problems concern the level of market demand in Benin, the conditions of access to the Nigerian market, and the low world cement prices. Losses are likely over the short- to medium- term (see case study). 3.07 The Seme oil production project is being developed by SAGA Petroleum of Norway under a service contract with the Benin Government. Production of offshore wells is expected to begin in 1983. The crude will be sold on the export market (initial estimates of recoverable reserves approximately 22 million barrels), and the rate of return will thus depend critically on world oil prices. Present projections indicate that the Seme project may break even until it begins to generate a surplus in 1985. First-phase costs are estimated at CFAF 45 billion; a second phase costing a further CFAF 16 billion is envisaged. There are no plans to install refinery capacity in Benin. - 21 - Other Industrial Enterprises 3.08 Existing industrial public enterprises in Benin have mainly been established on an import-substitution basis. A few are large by Benin stand- ards. The manufacturing processes involved are generally not complex. Results have been mixed, with a wide variety of problems encountered. The Societe Cimentiere du Benin (SCB) is a mixed-economy clinker- grinding company in which the state has a 51 percent holding. Its sales in FY 1982 were CFAF 3.0 billion, with losses of CFAF 272 million. SCB's profit- ability has suffered in recent years due to low, fixed prices for cement in Benin. The Societe Nationale des Ciments (SONACI) is a wholly owned government clinker-grinding plant established more recently. With FY 1982 losses of CFAF 179 million on sales of CFAF 3.1 billion, SONACI suffers from similar pricing problems. The Industrie Beninoise des Textiles (IBETEX) is an integrated cotton spinning, weaving and garment-making factory located in Parakou. The mixed- economy company has had numerous problems with foreign partners, with its European market, and with cotton quality. IBETEX has accumulated a negative net cashflow of CFAF 3.2 billion over the past three years (see case study). The Societe Beninoise des Textiles (SOBETEX) is a joint venture between French textile interests and the Benin Government (holding 49 percent of the shares). SOBETEX has consistently been a well-managed and profitable enterprise, based on printing imported calico for sale to local merchants. Profits were CFAF 240 million on sales of CFAF 6.5 billion in FY 1981. Re- strictions on access to the Nigerian market have recently hurt SOBETEX. sales (see case study). La Beninoise is Benin's brewery and soft drink bottler. It is a state-owned enterprise with FY 1981 profits of CFAF 20 million on sales of CFAF 3.9 billion. The enterprise has rapidly expanded its capacity in recent years, though operating problems have kept the output of beer from rising. Profitability has been eroded in part due to financing charges on investments overly-financed by borrowings (see case study). The Ceramique Industrielle du Benin (CIB) is a small manufacturer of ceramic tiles and bathroom appliances, with 80 percent Government ownership. Inadequate equipment, disagreements with the foreign technical partner, and product design and marketing flaws have caused poor results. The firm is now in judicial liquidation (see case study). SOBEPALH is the state company responsible for industrial production of palm oil. It manages three palm oil mills and collects oil palm from the growers' cooperatives. The oil palm sector has performed poorly due to inade- quate rainfall conditions in Benin; plantation maintenance and collection of fresh fruit bunches has also been a problem. SOBEPALH lost CFAF 370 million in FY 1981 on sales of CFAF 2.1 billion; it is due to be merged into SONICOG (see case study). - 22 - SONICOG processes palm kernels into oil and cake, produces soap, processes other edible oils, and handles the exports of all Benin's industrial vegetable oil products. SONICOG's palm kernel oil output has been limited due to low supplies of kernels from the traditional oil palm sector. Neverthe- less, it has remained profitable (see case study). SONAGRI is the state enterprise responsible for cotton ginning (now transformed into SONAPRA). SONAGRI has reached a very bad financial position due to numerous technical problems discussed in the economic report. SONAFEL produces fresh fruits and vegetables, as well as tomato paste and fruit juice. It has turned in a negative financial performance due to inappropriate project design, inadequate equity, and organizational problems. SABLI a livestock enterprise owned jointly with Libya, is just starting operations and had no revenues in FY 1981. It is to take over the operations of SODERA, another livestock firm. SONIAH is a rice-growing and irrigation agency which has performed very poorly. The rice perimeters have deteriorated, and it lost CFAF 150 million on sales of CFAF 110 million in FY 1980. SONIAH is to be discontinued under the April 1982 changes regarding public enterprises. SONAPECHE is a fisheries production and distribution enterprise (accounts not available). It has encountered severe equipment and other difficulties, and is in arrears with the banking system. It is to be absorbed by BELIPECHE, a joint Benin/Libya fishing firm. SNAFOR, the forestry enterprise, which was also in arrears to the bank has been dissolved. Import Enterprises 3.09 A large number of public enterprises have been created in the past five years to handle the importing and distribution of a wide range of consumer goods. These firms have had mixed results. Some have suffered from pricing regimes which did not allow import costs to be translated into adequate prices on the domestic market. Some of these enterprises were created with inadequate capital and limited business knowledge. Others have been granted monopolies which have led to inefficiencies, higher prices, and incentives for speculation by the private sector. AGB is the state agency which imports and distributes foodstuffs and general consumer goods. It lost CFAF 240 million on sales of CFAF 5.3 billion in FY 1981. These losses have been due in part to low fixed prices on food- grains enforced by the Government. Equal prices throughout Benin seem to foster inefficiencies in the distribution system. SOBEMAC is a construction materials importer and distributor, selling largely to individuals who are building houses. SOBENAC has the monopoly in cement distribution, and receives a margin on all cement sold even though it provides no services for much of the cement, which is sold directly by the - 23 - clinker grinding plants. The constant price throughout the territory also leads to shortages, and to opportunities for private profit at public expense. SOBEMAC achieved a CFAF 80 million profit on sales of CFAF 4.6 billion in FY 1981. SONACOP imports and distributes petroleum products, for which it holds the monopoly in Benin. It is a relatively well-managed enterprise with FY 1981 profits of CFAF 240 million on sales of CFAF 14.8 billion. SONACOP needs to strengthen its planning process, however; it has not paid sufficient attention to matching investment needs with available resources (see case study). SONAE imports vehicles and earth-moving equipment (see case study). SONAPAL (books), CNPB (drugs), SONAMEL (household appliances), and STC (shoes) are all import and distribution agencies with negative or low profitability. CNPB has been restructured and no longer has monopoly on the import of pharmaceuticals. SONAMEL and STC have been merged to form SOGECOB. They appear to suffer from organizational and financial difficulties (not interviewed by the mission). Service Enterprises 3.10 There are a number of public enterprises in the service sector, par- ticularly in transport. Some serve functions which are typically in public hands in most countries, whereas others have been created more recently to develop a public presence in a key activity. Tariffs are a key issue for many of these enterprises, and Government pricing policies have generally caused net losses among these firms. The initial capitalization of several of the service enterprises was very low. On the other hand, the larger and more mature firms have recently taken steps to improve their organizational effec- tiveness and some progress has been noted. The railway (OCBN) is owned jointly by Benin and Niger. It operates primarily from Cotonou to Parakou, where goods are transshipped to trucks for the remaining journey north to Niamey and other points. Branch lines run to Pobe and Ouidah. The OCBN has not been profitable recently it lost CFAF 590 million on sales of CFAF 3.2 billion in FY 1980 -- but it has made great efforts to improve its organization. The OCBN's situation and outlook are discussed in more detail elsewhere in the economic report. The port of Cotonou (PAC) is losing money as well (lossesof CFAF 570 million on revenues of CFAF 1.4 billion in FY 1981), largely because of low utilization relative to greatly expanded capacity recently installed. With heavy fixed charges and traffic considerably lower than originally projected, this is almost inevitable over an interim period if tariffs are to be kept in line with those of neighboring ports. The organization of the port and of the stevedoring agency (OBEMAP) have been strengthened recently (see further dis- cussion in the economic report). - 24 - COBENAM is the Benin-flag ocean carrier serving the liner shipping route to Europe. Formed in partnership with the Government of Algeria, this enterprise has grown and maintained profitable operations until recently, with net income of CFAF 55 million in FY 1981 on revenues of CFAF 2.9 billion. The sharp downturn in imports via Cotonou destined for the Nigerian market, due to Nigerian restrictions imposed in spring of 1982, has greatly reduced COBENAM's cargoes. Combined with the introduction of additional tonnage, heavy finan- cial losses have been sustained in 1982. A business planning study could assist COBENAM's managemnt to be followed by technical assistance in dealing with containerization, chartering and financial control issues (see case study). Air Benin is a local and regional airline formed recently with an inadequate experience and financial base. Aircraft which were not well-suited to its operations are now being sold, and a more modest profile adopted. Losses of CFAF 370 million were recorded in FY 1981 on sales of CFAF 180 million. Trans Benin is a trucking firm owned jointly by the Government and a group of private truckers. The firm was established with inadequate capi- tal. The private shareholders were apparently compelled to subscribe its initial capital, and have provided no assistance to the firm since. The operation has lost money heavily, recording a loss of CFAF 150 million on sales of CFAF 100 million in FY 1982 (see case study). SONATRAC is a state-owned transit company, originally formed in 1974 to handle Government-generated cargoes on a monopoly basis. It has not been effective in its role, and lost CFAF 440 million on revenues of CFAF 510 million in FY 1980. A second transit firm -- SOTRACOB -- was created as a mixed enterprise with private Benin interests in 1980; data were not available to the mission. The SBEE is Benin's state-owned power and water utility. It i-s a profitable enterprise, and is discussed elsewhere in the economic report. The banking sector is a Government monopoly served by a commercial bank (BCB), development bank (BBD), and agricultural credit institution (CNCA). As indicated in the previous chapter, these institutions have lent heavily to the public enterprise sector, and could not withstand the bank- ruptcies of several large borrowers without Government assistance. ONATHO is the Government-owned hotel and tourism enterprise which controls most of the hotels in Benin. Competition from remaining private hotels imposes a certain efficiency on ONATHO. The big, new Benin Sheraton does not appear on the books of ONATHO, though it is a Government-owned hotel. There are, finally, several public enterprises in the information field. These include ORTB (radio, television), OBI (data processing) and OBECI (movie theaters), and ONEPI (printing). The ORTB resembles a Government agency more than a public enterprise. OBI and OBECI are in arrears to the banks, although financial data were not available. - 25 - MAJOR PROBLEM AREAS 3.11 The mission assessed the major problem areas affecting selected enterprises in order to generalize the situation of the public enterprises. The problems highlighted are similar in many respects to those determined by the Government in the studies which culminated in the April 1982 decisions discribed in Chapter I. In summary form, the review of selected firms appears as a matrix (Exhibit 3.2) which relates problem areas to selected enter- prises. This format reflects the judgment of the mission, based on the often incomplete information obtained, and should be viewed as a preliminary approximation. The matrix also emphasizes financial problems more than others, since financial data were available for almost the entire sample of firms whereas information on other problem areas was mainly available only for the 21 enterprises interviewed. 3.12 The matrix shows 22 out of 34 enterprises judged to have major finan- cial problems. A number of firms (from seven to nine) have encountered major difficulties in the areas of initial design and set-up, technical, management and staffing, and pricing. Fewer major enterprise-specific problems were recorded in the areas of marketing and institutional arrangements. Patterns emerge within each of these problem areas, and these are discussed in the following paragraphs. Initial Design and Implementation 3.13 The original objectives established for public enterprises have often been unclear or contradictory. As in many other countries, Benin's public enterprises have difficulty in reconciling commercial and non-commercial objectives. Without a clear statement of these objectives, and without appropriate financial and human resources, it becomes very difficult for enterprises to perform satisfactorily. Certain enterprises created with implicit social, regional or sectoral objectives were hindered by a lack of sound business planning. As an example, the provincial enterprises which are now being closed down illustrate confused objectives. They were often involved in the production and distribution of goods in competition with the private sector. However, they were placed under the management or control of Administrative District Heads, reflecting social and political objectives at variance with commercial goals. 3.14 In some cases the decision to establish a new enterprise or to nationalize privately owned corporations was not taken in light of a compre- hensive appraisal of the project or the corporation. Weak appraisals bear a large responsibility in public enterprise failures, especially in achieving market objectives and in anticipating technical problems. The IBETEX textile operation does not appear to have been adequately appraised with respect to the market, the required quality and hence technical and skilled labor requirements, and the working capital needs of the enterprise. It has had to virtually abandon the originally planned European market in favor of the local market, entailing totally different machinery and product. Three agro- industrial firms -- Save Sugar, SONAFEL, and SOBEPALH -- all apparently based their investments on exaggerated yield estimates at appraisal. For instance, - 26 - the tomato paste factory at Natitingou, operated by SONAFEL, was ill- conceived. Transport costs for the imported cans and the finished product are high, the plant location is unfavorable, and tomato supplies have not been adequate. This sort of technical misjudgment makes it impossible later on for the project to achieve planned levels of economic and financial return. In the case of La Beninoise (brewery and soft drink bottling), it seems that an inadequate analysis was made of the condition of the fermentation unit and bottling line at the time of the purchase from foreign investors. 3.15 Foreign technical partners often seem to be suppliers who arrive in Benin and promote a project involving their equipment. This is a worldwide problem, but it has had unfortunate consequences for several enterprises. The continuous disagreements with the foreign partners engaged in the IBETEX textile and CIB ceramics projects contributed directly to their inadequate performance. 3.16 Time and cost overruns are a consequence of weak appraisals. The Save Sugar and Onigbolo cement projects will probably cost 25 to 30 percent more than originally planned. In the case of Save, lower-than-planned yields will result in less than full factory utilization based on existing acreage. 3.17 Recommendations. Project appraisal and start-up is always diffi- cult. A careful appraisal of all the economic, financial, technical, man- agerial, marketing, and organizational factors is essential. Greater capa- bility in project analysis is needed within the Benin government, particularly within the Directions d'Etudes et de Planification (DEPs) of the major mini- stries. Meanwhile, independent consultants should be retained more frequently to review projects submitted by foreign partners to verify the critical assumptions involved. Brief missions by consultants during the construction and early implementation stage could also pay large dividends. Institutional Arrangements 3.18 The public enterprises are subjected to oversight by a variety of government agencies. Each enterprise comes under the authority of a Ministere de Tutelle (e.g., the Ministry of Industry, Energy and Mines for an enterprise engaged in industrial activities). In addition, the Ministry of Finance and the Caisse Autonome d'Amortissement review and clear external borrowings; the Ministry of Labor supervises recruitment; the MIEPSEP reviews enterprise financial data; the Ministry of Planning requests performance data and invest- ment plans; and the Council of Ministers must approve the accounts and pro forma statements annually, and makes all management appointments. This type of multiple supervision is, of course, not unique to Benin. 3.19 The constraints placed on decision-making at the enterprise level are excessive, however. The mission was told of difficulties in hiring and firing in many enterprises. One firm, for instance, mentioned the struggle to limit the intake of new personnel in the face of general pressures to use the public enterprises as a form of employment creation. Another enterprise mentioned the complexity of hiring new staff, and the inability of the enterprise's general manager to make hiring decisions even for support staff; this author- ity seems to lie with the Ministry of Labor. A third public enterprise - 27 - stressed that reductions in staff were regarded as political decisions taken at a level well above the enterprise. 3.20 Excessive supervision often acts as a disincentive to enterprise management and leads to a tremendous waste of time. Initiatives are frequent- ly stalled by the numerous clearances necessary, for instance, for business travel. The few senior staff members of most public enterprises are also required to attend an inordinate number of meetings, conferences, and commit- tees outside their own enterprise. Ministries utilize public enterprise staff members routinely without compensating the firm for the services rendered. 3.21 The sophisticated procedures often are of no real benefit in monitor- ing, controlling or even understanding the performance of the enterprises. No broad objectives, approaches and resource levels are agreed between government and enterprise. The enterprises complain that they recieve very little feed- back from the ministers in response to the frequent documentation requested and submitted. The only ex-ante documents produced by the enterprises for government review are the forthcoming year's provisional accounts, which go all the way to the Council of Ministers, with an analysis attached by MIEPSEP. Several of the provisional accounts reviewed by the mission were totally unrealistic (though others are more substantive). A firm whose sales had never exceeded CFAF 30 million projected revenues of CFAF 150 million, without any supporting rationale or request for additional resources. Important government officials' time is wasted in reviewing unrealistic plans. MIEPSEP's analyses so far (the ministry is very new) have been superficial, without proposing pragmatic solutions or alternatives. 3.22 Recommendations. The mission recommends a streamlining of super- vision functions and a more positive government-enterprise relationship. The problem is not so much control of the enterprises as it is proper management by the enterprises themselves. Each supervising Ministry should have a per- formance evaluation system which enables it to follow how enterprises' objectives are being achieved, while leaving room for initiative and proper management. Management and Staffing 3.23 Benin is very short of experienced business managers, particularly in sectors other than trading. Despite the country's reputation for a high standard of education in the past, many trained Beninese work in neighboring countries where compensation is higher. The shortage of modern sector managers affects both the public and private sector, and results in low efficiency of the enterprises. 3.24 The circumstances under which many public enterprises were created have contributed to the poor performance of managers. The enterprises were largely staffed with civil servants without expertise in the enterprise' proposed activities, and often without any previous business experience. Several managers were appointed to head up new enterprises before the precise role of their organization, the work program or the resource requirements had been established. These problems were found in Trans Benin and SONAPAL, for instance. - 28 - 3.25 The managers of Benin's public enterprises are offered no incentives to perform well. The institutional arrangements tend to encourage conformity and to penalize risk-taking. There is no performance bonus -- partly because there is no standard for measurement of performance -- so that the mianager has no personal incentive for efficient management. The April 1982 decisions recongize the need for performance incentives, but these have not yet been developed. Salaries are so low (presently about CFAF 100,000 per month maximum for a general manager; this level was fixed by a 1974 decree) that many managers devote considerable portions of their time to private activities that are more remunerative. The very cautious approach to management taken in the central government, often involving management-by-committee, is often noticed in public enterprises as well. 3.26 The Benin private sector also is short of experienced managers capable of running a modern industrial or service firm, so that it is ques- tionable how much reinforcement can be obtained locally. Discussions with local bankers indicated a group of 25 to 30 small private industrial and service firms operating in the modern sector. However, their managers are not professionals or technicians, and it is not certain that they could be of service to the public enterprises. Benin counts less than a handful of business managers trained by foreign corporations. 3.27 The managers of Benin's public enterprises seem to have few oppor- tunities to learn from colleagues in similar industries elsewhere. Often, a small public enterprise shares the local market with one or two private traders and is not exposed to modern operational techniques. Apparently contracts with foreign suppliers are often made on unfavorable terms because of lack of knowledge concerning alternatives, and because Benin represents only a small market to overseas suppliers. Even among public enterprises, there has been too little cooperation in foreign purchases in the past. For instance, SONACI and SCB have only recently begun to coordinate their pur- chases of clinker. 3.28 The lack of adequate planning in the public enterprises is one of the consequences of weak management. Orders for equipment and supplies seem to be placed with little planning as to the implementation of the investment. For instance, the petroleum distribution firm SONACOP is now building storage tanks with medium-term credit on the expectation that National Investment Fund (FNI) money would be available as permanent financing. However, it appears that these funds are not likely to be available. Meanwhile, SONACOP's managers have planned additional investments (CFAF 1.1 billion) including an equity participation in a plastics factory. 3.29 Conclusion. The mission agrees with the April 1982 decision to institute performance incentives for public enterprise managers. This could also extend to key staff. Agreed-upon objectives and resource levels will have to be set, bearing in mind institutional and economic constraints. 3.30 To strengthen the level of management, greater cooperation with foreign technical partners is recommended. Technical assistance from con- sultants or firms in the same industry abroad could help improve the effi- ciency of numerous enterprises in Benin. For instance, La Beninoise could - 29 - benefit from closer relations with a welloperated brewery overseas; and COBENAM is seeking help in adjusting to new technology. 3.31 Strategic planning should be introduced in selected enterprises. This should be closely linked with the establishment of multi-year objectives and resource needs with the government. The document resulting from a peri- odic planning process would form a basis for discussions with the Ministere de Tutelle. Large enterprises (e.g., SONACOP, SONICOG, La Beninoise, COBENAM and AGB) should be the first to apply strategic planning. The process would greatly aid in raising management's understanding of resource needs based on enterprise objectives and requirements. 3.32 Coupled with the establishment of agreed objectives and an internal planning capability, public enterprises should be allowed greater operating autonomy. Enterprise managers must have the authority in practice to hire and fire staff, to authorize business travel, and to train staff. This requires a change in perceptions and expectations, over a period of time, as well as formal changes in administrative procedures. While further detailed analysis is required, the mission suggests that consideration be given to affirming the general manager's responsibility for enterprise performance. The role of committees should be reduced. Technical Aspects 3.33 The most widespread technical problem encountered in the public enterprises is maintenance. Breakdowns have resulted in substantial downtime and consequent higher production costs in such enterprises as La Beninoise, CIB, SCB, SONACI and Trans-Benin. Poor maintenance is partly a function of the shortage of well-trained mechanics. It also reflects inadequate funding of the enterprise; Trans-Benin, for instance, never had enough money to estab- lish a modern workshop for its trucks, with the result that repairs must stop when it rains. In another case, a single broken piece kept a plant out of operation for months while bureaucratic disagreements and possibly lack of funds delayed obtaining a replacement. Unavailability of spare parts seems mainly the result of poor planning by the enterprise; there are no restric- tions on foreign exchange as in other countries of the region. 3.34 As a contrast, the SOBETEX textile factory has been running at or above its design capacity for many years, until a recent downturn in demand. This is due in part to a very well-organized maintenance system. Beninese mechanics are trained by the machinery manufacturers in Europe, and are fully conversant with the equipment. The company maintains close contact with the manufacturers and is able to quickly resolve any serious equipment problems. 3.35 A few enterprises have wound up with inadequate machinery, due to weak initial appraisals and insufficient supervision during the installation period. The kiln equipment of CIB is perhaps the clearest example. Apparent- ly, the foreign partner did not install the tunnel kiln called for in the contract. The kiln installed has never functioned properly. In other cases, equipment is simply beyond the limit of its economic life; this is reportedly the case with SONACOTRAP's road-building equipment, purchased second-hand from foreign contractors. Benin's public enterprises do not include any obvious examples of inappropriate choice of technology. - 30 - 3.36 Conclusion. Thorough maintenance planning and training of mechanics is essential. In the start-up phases of new projects such as Save sugar and Onigbolo cement, training is of great importance. 3.37 Planned maintenance programs are also essential. This requires leadership by engineers trained in maintenance procedures. Adequate spare parts inventories are needed, and procedures must be available to procure parts from overseas quickly when key unstocked items fail. The cost of downtime must be properly weighed against the cost of rapid parts procurement. 3.38 Postponed maintenance has by now led to major rehabilitation needs for numerous enterprises. Several of the enterprises have already developed rehabilitation plans-SOBEPALH, SCB, AGB, and La Beninoise. These plans should be reviewed by industry specialists. Marketing 3.39 Distribution channels for goods sold domestically, market access to Nigeria, and overseas marketing are major issues for Benin's public enter- prises. Within Benin, the marketing of certain key commodities is handled on a monopoly basis by the appropriate public enterprise. This creates problems when the enterprise is not fully equipped to carry out the required distri- bution, and may diminish the incentive to provide good customer service. For instance, SOBEMAC holds the monopoly on cement distribution, and collects a fixed margin on all cement sold in the country. However, much of the cement is purchased directly at the clinker grinding plants, so that SOBEMAC is collecting revenue without providing corresponding service. 3.40 The market within Benin is relatively small, but the proximity to Nigeria offers a much larger, though fluctuating, market. Many public enter- prises rely to a considerable extent on direct and indirect access to the Nigerian market. These include the textile producers (IBETEX and SOBETEX), La Beninoise brewery, and the consumer goods importer, AGB. Therefore, Nigerian import restrictions, even when they are temporary, affect the sales and profits of Beninese public enterprises. SOBETEX, for instance, has generally not had marketing problems in the past, selling for cash on the local market. However, a large percentage of SOBETEX fabrics are resold to Nigerian buyers, who sharply reduced their purchases in mid-1982 due to official restrictions on imports. Production has had to be substantially cut back. 3.41 The Trans-Benin trucking company provides another example of critical dependency on the Nigerian market. Trans-Benin was originally established to take advantage of the excessive unloading delays in the port of Lagos during the late seventies. The Beninese expected to capture a large share of the Lagos traffic in Cotonou and to deliver the goods to Nigeria by road. By the time Trans-Benin had commenced operations, improvements in the operation of Lagos and other Nigerian ports had substantially reduced the volume of freight transshipped at Cotonou. Trans-Benin's anticipated market niche disappeared, and the firm had to place its trucks on the highly competitive routes to Niger and other Sahel countries. 3.42 Most of Benin's substantial enterprises rely to a considerable extent on unhindered access to the Nigerian market. Two large recent projects -- Onigbolo cement and Save sugar-were both planned with the Nigerian market in - 31 - mind, and are owned jointly with the Nigerian government. However, the terms and conditions of access to the Nigerian market were apparently not finalized during the early phases of the projects. At present, Nigeria has raised the prospect of imposing an import duty on Onigbolo's cement, which would render the delivered price non-competitive on the Nigerian market and result in heavy losses for the company. For Save, which will sell 80-90 percent of its sugar to Nigeria, the price eventually paid by the Nigerian Supply Company will determine the enterprise's financial viability; if currently low world prices prevail, the firm will require some form of cash infusions or may be forced to seek debt relief. 3.43 The overseas market has so far only been of interest in the case of Benin's commodity exports such as vegetable oil, cotton, and now,petroleum. IBETEX is the only firm that has recently been established with a view toward exporting to Europe. The results illustrated the serious difficulties involved. Certain European partners involved in the marketing end were apparently unreliable. Other purchasers in Europe were slow to pay or went bankrupt. The firm also had trouble meeting European quality standards. IBETEX has had to re-orient its marketing efforts and product lines to local demand. 3.44 Conclusion. The Government has stated that it will review the basis for monopolies by certain public enterprises on the distribution of key com- modities. Customer service may be improved, in some circumstances, by permitting a more competitive marketing system. 3.45 The present restrictions on imports to Nigeria are seriously affect- ing a number of the Beninese public enterprises, and would justify government- to-government discussions to obtain exemptions for certain Beninese goods. Benin is a valuable low-cost producer for Nigeria, and benefits in turn from economies of scale based on the larger market. This special relationship should be more fully recognized on both sides of the border. Pricing Policy 3.46 Prices which are fixed at low levels have caused problems for public enterprises that import their inputs and sell their output on the local market, or which distribute imported commodities. These problems have been recognized by the Government commission which reviewed the situation of the public enterprises. The National Price Commission must approve requests for price increases on controlled commodities such as cement, imported foodgrains, and beer. Through lengthy delays during times of inflation, this policy subsidizes consumers at the expense of the public enterprises, which are forced to carry out public policy without receiving subsidy. 3.47 The two clinker grinding plants are clear examples of inadequate price levels maintained by the National Price Commission. Despite what appears to be reasonably efficient operations at the two plants, and declining operating costs for at least one of the plants, price increases for cement have lagged so far behind the imported clinker costs that SONACI is losing about CFAF 600 million per year and the SCB some CFAF 300 million per year (34 percent and 13 percent of sales respectively). This amounts to a subsidy on cement consumption -- widely used by individuals for house construction, and hence a politically-sensitive commodity -- borne by the two enterprises rather - 32 - than directly by the Government. On the other hand, a price increase of some 40 percent granted in late-1982 appears to have exceeded the level of demand, and may not reflect current low world prices. The lack of flexibility may be as much a problem as the price level itself. 3.48 The AGB lost so much money on wheat imports -- due to the Government- set sales price which did not reflect rising wheat import costs -- that the firm refused to continue its involvement in wheat. The privately-owned flour mill (GMB) now imports wheat directly, and is presumably able to pass its costs through to the bakeries. AGB is still losing money on rice, and handled 5,000 tons of corn imports in March 1982 at a loss. AGB's profits on other food imports (for which the margin is regulated, rather than the price level itself) have not offset these losses in recent years. 3.49 The slow pace adopted by the Government in considering price revi- sions is frustrating to many public enterprise managers. La Beninoise, for instance, was notified in May 1981 of Government authorization to increase the price of beer twenty months after it submitted its request. These delays weaken management's interest in striving toward profitable operations, as it is possible to blame the overall pricing policy for any financial difficul- ties. 3.50 Inadequate pricing policies lead to serious economic distortions. While both clinker grinding companies are losing money on every bag of cement sold, considerable profit opportunities have been created for traders and middlemen. Fixed prices throughout the country exacerbate cement shortages in the north, so private traders purchase cement in Cotonou and sell it in the northern provinces far above the official price and also substantially above the actual costs, transportation included. 3.51 Other controlled commodities are also the targets of speculators. Beer and rice are sold by public enterprises at low official prices to whole- salers and retailers who profit by reselling the goods above the authorized margins. The end result is that the pricing policy is not fully effective from a consumer viewpoint, and that profits are siphoned from public enterprises to private traders. 3.52 Recommendations. Government pricing policy, particularly the fixed prices for certain commodities should be reviewed. In cases where public enterprises import most inputs, price increases should be permitted to reflect actual costs more accurately. This could be achieved by setting margins instead of prices, by indexing prices to import costs by more timely approval of price increase requests or by reducing the list of controlled commodities. The Government should explicitly adopt a policy that public enterprises will not be made the de facto agents of price-subsidy policies. Any subsidies deemed necessary should be identified in the current expenditure budget, transferred to the enterprise, and given a specific sunset date. Financial Problems 3.53 Two-thirds of Benin's public enterprises are believed by the mission to be suffering from major financial problems. These problems arise from cumulative operating losses due to the difficulties already discussed. They also reflect inadequate initial equity bases, excessive debt leveraging to - 33 - finance investment programs, and high receivables from the public sector. - 34 - 3.54 Several enterprises were initially undercapitalized in relation to their planned tasks and working capital needs. IBETEX had insufficient funds to finance its export sales. Enterprises such as SONIAH, SONAPECHE and SONAFEL were established with capital of CFAF 50 million each, very small sums. Most of the ill-fated Provincial enterprises did not receive any equity from the Government, and their bank debts have nearly all gone bad. Under- capitalization was due both to weak or nonexistent project appraisals and to the limited Government resources provided. 3.55 Even when initial equity was satisfactory, some public enterprises have had to carry out large investment programs without obtaining correspond- ing increases in their equity base. In the absence of capital increases, these investments have been financed by medium- and short-term borrowing, leading to excessive debt-to-equity ratios for most of the public enterprises and increasing vulnerability in case of a business downturn. Out of a sample of 30 enterprises, only 20 percent have debt-equity ratios below two to one, while 50 percent have ratios that are above ten to one. For instance, La Beninoise has invested CFAF 6.2 billion between 1977 and 1982, without any equity contribution by the Government. Its debt-equity ratio stood at 7.6 to one in 1981. 3.56 Public enterprises also suffer from an inability to collect debts from other public entities. The banks (BCB and BBD) are a special case, with at least 60 percent of their arrears related to loans to public enterprises. In the case of the book distributor, SONAPAL, it seems that the company's financial problems resulted partly from outstanding bills for books and other school supplies delivered to various administrative districts. SONAE, which imports and distributes cars, trucks and civil works equipment, also has to cope with long payment delays from its major client, the Benin Government. IBETEX, which is in arrears to numerous banks and suppliers, encounters long delays in being paid for army uniforms it sells to the Government. 3.57 The pattern of interlocking arrears in the public sector has created a vicious circle of insufficient liquidity among the enterprises, as noted in a recent Government report. Enterprises do not receive sufficient equity contributions or subsidies needed from the government, and suffer from growing receivables. The enterprises then defend their liquidity by building up arrears in payments to the banks and other enterprises, and by not paying dividends and other taxes demanded by the Government. Sometimes when public funds are required for a particular purpose, a special drive is undertaken to collect the money from the most prosperous public enterprises. A completely ad hoc payment system tends to develop, marked by a lack of liquidity. 3.58 Causes such as poor initial project design, weak management and inadequate pricing policies have combined to create operating losses for many of the public enterprises. Thirteen enterprises out of a sample of 29 recorded net negative cash flow in their most recent financial statements. Eleven out of 21 firms are operating with negative net working capital. Ten out of 30 firms are technically bankrupt -- their liabilities exceed assets. These and other financial indicators (see Exhibit 3.1) portray the weak con- ditions of the public enterprise sector. 1/ - 35 - 3.59 In general, enterprises created from scratch in the midseventies appear to be more prone to financial difficulties than those which had existed previously as state-owned utilities or as private operations. The most solid enterprises financially are the larger, older organizations such as SBEE, PAC, and SONACOP and a few other firms such as SOBETEX and COBENAM. The technical- ly bankrupt firms -- SONIAH, SCB, SONACI, IBETEX, CIB, Air Benin, Trans-Benin, SONATRAC, SONAPAL and AGB -- were all created in the mid-seventies, and only SCB had existed earlier (as a private venture). As shown in Exhibits 3.2 and 3.3, 75 percent of the sample of public enterprises have some degree of finan- cial difficulty. Approximately 60 percent of the sample can be considered to have serious financial problems such as net losses, arrears to banks, and negative net working capital. 3.60 Recommendations. The financial problems noted here generally stem from a variety of causes addressed in earlier sections. Resolving the financial difficulties therefore requires action aimed at ameliorating the fundamental conditions involved. Curing these deep-seated problems will re- quire more than just infusions of money or superficial organizational changes. 3.61 In the current situation, those enterprises deemed to be worth saving -- as most are -- need to be financially restructured. This will require additional equity and long-term debt to handle accumulated deficits financed with short-term borrowings. The amount of the injection required depends on the working capital situation, the equity base, and the prospects for improve- ments through pricing policy or other changes. Funds will also need to be made available for rehabilitation investments (see Exhibit 2.9). An IDA project should include funds for the preparation of individual rehabilitation plans, and funds for the implementation of such plans. 3.62 Enterprises with poor performance in the past and meager future pros- pects need to be eliminated. The funds required for the public enterprises are substantial--estimated in Chapter II at CFAF 7-10 billion for past losses and CFAF 6-10 billion for rehabilitation investments, without considering the particular problems associated with the three major new projects. This means that difficult choices must be made. While decision criteria should remain flexible, viable public enterprises will generally be those which can generate enough cash to cover their out-of-pocket operating costs, including proper maintenance. This break-even cash flow should be achievable at prices which are reasonable in relation to those offered by private sector competitors or available on imported goods. 3.63 Closing certain non-viable firms could prevent cash flow losses of between CFAF 1.5 and 2.0 billion per year, a considerable sum in the context of the country's public finances. In a pure market economy, inefficient firms are generally eliminated. In a planned economy, the firms and banks are Government-owned, and financial difficulties tend to continue too long without correction. Only Government action can reverse this trend, by setting criteria and taking action at the appropriate time. Jettisoning some of the sector's excess baggage will also enable the authorities to concentrate on the numerous other enterprises in need of--and deserving--financial and technical support. - 36 - IV. RECOMMENDED IDA ASSISTANCE 4.01 The problems and recommendations noted in the preceding chapters require action at the enterprise and at the central government levels. Policy changes are clearly called for. External resources, in the form of technical and financial assistance, can play a constructive role in supporting Benin's willingness to address the problems at hand. 4.02 The Government is clearly concerned with the situation of public enterprises. Several commissions have analyzed their problems, resulting in a set of decisions taken in April 1982, as reviewed in Chapter I. A number of positive decisions were taken, involving re-structuring of entersprises, the elimination of Government commissioners, and recognition of the importance of adequate pricing policies and distribution systems. On the other hand, much remains to be done. Production incentives and management bonuses have not yet been introduced, and much of the pricing and distribution policy has yet to be put into practice. Nor has the commission apparently adopted a medium-term (five to seven year) strategy designed to place the public enterprises on a sound footing, and recognizing a realistic timeframe for such a substantial accomplishment. Nevertheless, the measures adopted are a step in the right direction and should be encouraged. 4.03 The mission believes that IDA assistance can make a useful contri- bution toward resolving some of the problems faced by Benin's public enter- prises and clearly recognized by the Government. Discussion of the present report with the authorities can serve as a basis for agreement on desirable policy measures, technical assistance, and financial support for individual enterprises. The objectives and design of an IDA project should reflect the reactions of Beninese officials to this report. Despite their tentative nature, the following paragraphs broadly present the key elements of a possible IDA Public Enterprise Sector Project (PESP) in Benin. PROJECT OBJECTIVES 4.04 The wide range of public enterprise problems and issues presented in earlier chapters suggests tackling them at both the sectoral and enterprise levels. IDA assistance should acknowledge this double approach and set its objectives accordingly. The proposed PESP would have the following sector-wide objectives: 1. Help to bring about appropriate pricing policy, surveillance regulations, and business practices in dealing with the central government and other public entities. 2. Introduce a multi-year system of agreed objectives and resource availability levels for the enterprises. This system would contain performance evaluation criteria. 3. Assist in reversing the negative impact of public enterprises on Benin's public finances and banking institutions. - 37 - 4. Assist the Government in reassessing the desirability and the nature of its involvement in certain economic activities. At the enterprise level, IDA assistance would endeavor to: 1. Assess the enterprise's viability and economic outlook, and recommend either its rehabilitation, merger, sale to private interests or closing down. 2. Provide non-viable enterprises with a program for merging or closing down. 3. Develop rehabilitation plan for the viable enterprises and assistance in their implementation. PROJECT DESIGN 4.05 IDA could support these objectives by financing studies, rehabilita- tion and investment programs, technical assistance at the enterprise level, and management training. Studies 4.06 The project would finance studies to be carried out by local and foreign experts on both the sectoral and individual enterprise levels. The sector-wide studies could assess options on such key policy issues as pricing policy, personnel management, and greater autonomy for managers. At the enterprise level, studies would assess viability and develop rehabilitation or closing-down plans for specific firms. Assistance would also be made avail- able to help major enterprises develop strategic plans. 4.07 In deciding whether an enterprise should continue or not, the analysis should consider whether the firm can genrate enough cash to meet its operating costs (including adequate maintenance) while charging prices that are reasonable in terms of import-parity prices. If an enterprise cannot be expected to reach such a position, it should be phased out, absent overriding public interest considerations. The attractiveness of viable commercial and industrial enterprises to private sector investors should be assessed. Finally, viable enterprises which are to remain as state-owned or mixed- economy companies should be provided with assistance in preparing a sound rehabilitation plan. Line of Credit 4.08 Direct assistance to selected enterprises would be accomplished by making available a line of credit to be disbursed in accordance with the enterprise rehabilitation programs agreed upon. Flexibility in addressing the enterprises' financial needs would be provided. The IDA funds could be dis- bursed in the form of Government equity, operating subsidies, or loans to the enterprises for the purpose of providing equipment (modernization or expan- sion), importing raw materials or spare parts, and providing working capital. - 38 - 4.09 The funds available under a possible IDA line of credit would clearly be limited. Criteria are therefore necessary to determine which enterprises would be assisted under the project. The mission's general view is that enterprises assisted should have a reasonable chance of profitable operation with financial re-structuring; that the Government should be willing to consider any policy changes deemed essential for efficient operations; and that the funds should be spread over a representative group of enterprises. The choice of enterprises to be assisted, would be determined on the basis of these criteria and in conjunction with Government priorities. Operations requiring potentially large cash infusions, such as Save sugar or Onigbolo cement, would be reviewed closely to determine the suitability for possible IDA Assistance. Technical Assistance 4.10 Funds should be earmarked within the proposed PESP for technical assistance needed by several enterprises. This would include resident tech- nical assistance (mostly managers, engineers and technicians) and short-term consultancy services especially in the fields of planning, personnel, main- tenance, accounting and auditing. The assistance under the PESP would be directed to the enterprise level, and would thus be complementary to a general technical assistance project being considered by IDA. Management Training 4.11 IDA support for improved management of public enterprises could also include financing training programs required by the rehabilitation plans. 4.12 These views on a possible IDA project are based on the mission's findings, and will require full discussion with the Benin authorities in order to define the content more precisely. - 39 - LIST OF EXHIBITS 1.1 Evolution of Public Enterprises 1.2 Benin's Public Enterprises by Sector of Activity 1.3 Major Public Enterprises 1.4 Major Provisions of Benin's Investment Code 2.1 Analytical Framework for Public Enterprise Impact on Public Finance 2.2 Taxes Received by the Treasury from Public Enterprises 2.3 Public Enterprise Contributions to FNI 2.4 Expropriation Payments Made by CAA to Previous Shareholders 2.5 Equity Funds Provided to Public Enterprises by the CAA 2.6 FNI Project Financing for Public Enterprises, 1978-1981 2.7 Government Guarantees Accorded to Public Enterprises 2.8 External Debt of Public Enterprises Handled by CAA 2.9 Estimated Future Public Finance Impact of Public Enterprises 2.10 Credit Extended to Public Enterprises by the BCB 2.11 Public Enterprise Debts in Arrears to the BBD 3.1 Public Enterprise Financial Indicators 3.2 Major Problems Facing Selected Public Enterprises 3.3 Enterprises with Financial Problems - 40 - Exhibit 1.1 EVOLUTION OF PUBLIC ENTERPRISES Government Year Public Year Ownership Year Owership Operations Public Enterprises (percent) Created Increased Began Comments Aqro- Industry SONAFEL 100 1975e 1976e SABLI 51 1980 1980 Government of Libya 49S SOBEPALH 100 1975 1976 Continuation of previous entity SONICOG 100 1961 1963 SONIAH 100 1975 1975 555 49 1975 1983e Nigeria 46S, Lonrho 5S Industry sc8 50 1967 1975 1968 Government holding increased from 25S in 1975 SONACI 100 1976 1978 IBETEX 48 1971 1975 Private French Firms 52^ SOBETEX 49 1975 1968 Government holding increased in 1975 La Beninoise 100 1975 1950s Government obtained 100S control CIB 80 1974 1976 Private German firm 20S SCo 49 1977 1982 Nigeria 41%, F.L. Seidth 10S Sags Petroleum-Benin Mixed 1979e 1982e Ownership details not available Construct ion SOBEMAC 100 1975 Transport OCBN 50 1959 Jointly owned with Niger PAC 100 1960s Air Benin 100 1977e 1978 Trans Benin 49 1977 1979 Private Benin truckers 51% COBENAM 51 1974 1975 Algeria 49^ Ptblic Utilities 5BEE 100 1973 old Nationalized in 1973 Comerce SONAPAL 100 1975 ONP 100 1964 AGB 100 1978 Took over operations of SONIB OAE 100 1975 SONAE 100 1975 STC 100 1978 SONACOP 100 1974 Took over operations of 6 oil companies Other Services ONATHO 100 1974 Acquisition of existing hotels SEMAC 100 1976 e = estimated. *Source: Dats furnished by pLblic enterprises nd Government of Benin. -41 - Exhibit 1.2 BENIN'S PUBLIC ENTERPRISES BY SECTOR OF ACTIVITY Acronym Activity Enterprise Name …-----------------------------------------------…Agro-Industry…------------------------------------------------ SONAGRI Cotton Societe Nationale pour le Developpement Agricole SNAFOR Forestry Societe Nationale pour le Developpement Forestier SODERA Livestock Societe Nationale pour le Developpement des Ressources Animales SONAPECHE Fisheries Societe Nationale d'Armement de Peche SOBEPALH Palm Products Societe Beninoise de Palmier a Huile SONIAH Rice Irrigation Societe Nationale d'Irrigation et d'Amenagement Hydro-Agricole SONAFEL Fruits and Vegetables Societe Nationale des Fruits et Legumes BELIPECHE Fisheries Societe Benino-Arabe Libyenne de Peche SABLI Livestock Societe Agro-Animale Benino-Arabe SSS Sugar Societe Sucriere de Save -----------------------------------------------------Industry--------------------------------------------- ----- IBETEX Integrated Textiles Industrie Beninoise des Textiles CIB Ceramic Tiles Ceramique Industrielle du Benin SONACI Clinker Grinding Societe Nationale des Ciments SONICOG Vegetable Oil Societe Nationale pur l'Industrie des Corps Gras SBEE Public Utility Societe Beninoise d'Electricite et d'Eau SCB Clinker Grinding Societe des Ciments du Benin La Beninoise Brewery Societe Nationale de Brasserie SOBETEX Textile Printing Societe Beninoise des Textiles SCO Cement Societe des Ciments d'Onigbolo OBEMINES Minerals, Petroleum Office Beninois des Mines SAGA Petroleum SAGA Petroleum-Benin ---------------------------------------------------Construction------------------------------------------------- SONACOTRAP Public Works Societe Nationale de Construction et des Travaux Publics CNER-TP Sails Laboratory Centre National d'Essais et de Recherches des %ravaux Publics INC Cartography Institut National de Cartographie SONAGIM Real Estate Societe Nationale de Gestion Immobiliere STEA Rural Electrification Societe des Travaux d'Electrification et d'Adduction -------------------------------------------Transport and Communications------------------------------------------ Air-Benin Airline Societe Nationale des Transports Aeriens COBENAM Shipping Compagnie Beninoise de Navigation Maritime OCBN Railway Organisation Commune Benin-Niger PAC Port Port Autonome de Cotonou Trans-Benin Trucking Societe des Transports du Benin OPT Post Office Office des Postes et Telecommunications - 42 - Exhibit 1.2 Page 2 Acronym Activity Enterprise Name ---------------------------------------------------…Information…------------------------------------------------- ORTB Radio and TV Office de Radio-Diffusion et Television du Benin OBECI Movie Theatres Office Beninois de Cinema ONEPI Printing Office National d'Edition de Presse et d'Imprimerie -----------------------------------------------------Commerce-------------------------------------------------- SONAPAL Book Distributors Societe Nationale de Papeterie et de Librairie ONP Pharmaceuticals Office National de Pharmacie SONAMEL Household Appliances Societe Nationale de Materiel Electrique et Electro Menager STC Shoe Imports Societe des Textiles et Chaussures RAVINAR Ship Chandler Regie de Ravitaillement des Navires AGB Food/Supermarket Imports Societe d'Alimentation Generale du Benin OAE Supplies Office d'Approvisionnement d'Ecat SOBEMAC Construction Materials Societe Beninoise de Materiaux de Construction SONAE Equipment Societe Nationale d'Equipement SONACEB Agricultural Exports Societe Nationale de Commercialisation et d'Exportation du Benin SONACOP Petroleum Products Societe Nationale de Commercialisation des Produits Petroliers …-----------------------------------------------------Finance-------- - - - - - - - - - - - - - - - SONAR Insurance Societe Nationale d'Assurances et de Reassurances CNCA Agricultural Credit Caisse Nationale de Credit Agricole LNB Lottery Loterie Nationale du Benin BBD Development Bank Banque Beninoise pour le Developpement FAS Agricultural Stabilization Fund Fonds Autonome de Stabilisation et de Soutien des Prix des Produits Agricoles BC8 Commercial Bank Banque Commerciale du Benin CAA Debt Management Caisse Autonome d'Amortissement ------------------------------------------------ Other Services ------------------------…---------___________ OBI Data Processing Office Beninois d'Information SEMAC Cotonou Market Societe d'Exploitation des Marches de Cotonou ONATHO Hotels, Tourism Office National du Tourisme et de i'Hotellerie SONATRAC Transit Societe Nationale de Transit et de Consignation SOTRACOB Iransit Societe de Transit et de Consignation du Benin OBEMAP Stevedoring Office Beninois de Manutention Portuaire OBSS Social Security Office Beninois de Securite Sociale Notes: 1. List of public enterprises furnished by the Ministry of Inspection of Public Enterprises, March 1982. 2. In addition to these national public enterprises, there were formerly 60 Provincial enterprises. This number has been reduced to six (one public bus company in each province) by the decisions taken in April 1982. Source: Government of Benin. - 43 - Exhibit 1.3 MAJOR PUBLIC ENTERPRISES Sector Activity Public Enterprise Agro-Industry Palm oil SOBEPALH Vegetable oil processing SONICOG Cotton SONAGRI Fruits and vegetables SONAFEL Fisheries SONAPECHE, BELIPECHE Livestock SODERA, SABLI Forestry SNAFOR Rice irrigation SONIAH Sugar (new project) SSS (SAVE) Industry Clinker grinding SCB, SONACI Textiles IBETEX, SOBETEX Brewery La Beninoise Ceramic tiles CIB Cement (new project) SCO (Onigbolo) Petroleum (new project) SAGA Petroleum-Benin Construction Public works SONACOTRAP Transport Railway OCBN Port, Stevedoring PAC, OBEMAP Airline Air Benin Trucking Trans Benin Shipping COBENAM Transit SONATRAC, SOTRACOB Public Utilities Utility SBEE Information Radio, TV ORTB Finaince Banks 8CB, BBD, CNCA Comrierce Petroleum distribution SONACOP Food imports AGB Construction materials SOBEMAC Pharmaceuticals ONP Vehicles and Equipment SONAE Other Services Hotels ONATHO Source: Exhibit 1.2. Exhibit 1.4 MAJOR PROVISIONS OF BENIN'S INVESTMENT COOE Regime Eligibilitys Advantages General Provisions All new enterprises Equitable compensation in case of expropriation; freedom to transfer capital within framework of existing exchange regulations; benefit of other generally available advantages. Preferential System Common Conditions Enterprises in agriculture, industry, Start-up time can be added to the accord; accord can be energy, hotels, or infrastructure extended up to five years if beneficial to regional sectors balance; an arbitration procedure is allowed. Regime A Investments between CFAF 25-100 million For 5-7 years: exemption from import duties on capital equipment; reduction in duties on other inputs and on exports; exemption of duty on raw materials for goods manufactured for export; exemption from turnover tax. Regime 8 Investments between 100-500 million For 8-10 Years, Regime A advantages plus: undistributed profits exempt from tax for first two years; for three subsequent years, profits taxable at 2/3 current rate. Regime C Priority projects requiring investment A convention is signed with the Government for a period of over CFAF 500 million of 15-17 years, granting advantages of Regimes A and B plus: guarantees on stability of legal, economic and financial conditions, freedom of management, free travel of foreign personnel; freedom of financial transfers; and administrative guarantees on occupancy of land. Regime D (Special Regime for Minimum investment of CFAF 10 million Exemption from import duties for capital equipment, and Small-Scale Beninese Enterprises) and employment for more than 10 workers (for five yeara) for other raw materials; reduction in export duties; exemption from turnover tax for five years; exemption from profite tax for two years, provided that 50 percent of profits are reinvested. 5Required investment amounts are only half as much for agricultural enterprises. Source: Mission analysis of Ordonnance No. 72-1 of 8 January 1972. - 45 - Exhibit 2.1 ANALYTICAL FRAMEWORK FOR PUBLIC ENTERPRISE IMPACT ON PUBLIC FINANCE INFLOWS FROM PUBLIC ENTERPRISES Business Taxes BIC Corporate income tax levied on net profits of enterprises; minimum taxable profits are calculated on basis of turnover. ICAI Turnover tax. Levied on gross receipts from sales of goods and services. Dividends 85 percent of net profit to be contributed to national budget. Payroll Taxes VP Employer's payroll tax. Levied on employers on total wages and benefits paid. IPTS Progressive tax on salaries and wages. Individual income tax, withheld at source. Excise Taxes Taxes remitted by enterprises on sales of cement, beverages, textiles, petroleum, and interest payments. Import/Export Duties Duties paid by enterprises on import and export of goods. Investment Fund FNI Contributions to National Investment Fund, levied on sales. OUTFLOWS TO PUBLIC ENTERPRISES Equity Contribution Contributions to equity, from the Treasury or CAA. Indemnization Expropriation payments made by the CAA to previous firm owners. Project Financing FNI financing of investment projects. Loan Guarantees Government guarantees of foreign or dtmestic borrowings by public enterprises. Infrastructural Costs Government pays counterpart costs for infrastructure requirements. Re-Lending Foreign borrowing by the Government, onlent to public enterprises. Subsidies Operating subsidies paid by the Treasury or CAA. Net Lending Both the Treasury and CAA make advances to public enterprises. Source: Mission analysis. -46 - Exhibit 2.2 TAXES RECEIYED BY THE TREASURY FROM PUBLIC ENTERPRISES (million CFAF) Corporate Turnover Dividends Employer's Individual Total Income Tax Tex Paid to Payroll Taxf Incoue Taxf Excise and Payments Year (SIC) (ICAI) Tresaury (VP) (IPTS) Other Taxes Received _____________________________________- --- --- -All Public Enterprises---------…-------------------------------- 1979 866 661 15 123 245 1,989 3,899 1980 823 181 0 184 292 779 2,259 1981 956 924 0 255 430 1,278 3,843 -…S----------------------------------------------------Selected Public Enterprises----------------------------------------------- SOBETEX' 1979 155 71 0 3 22 971 1,222 1980 40 13 0 2 12 50 117 1981 35 125 0 5 26 160 351 SONACOPb 1979 220 207 0 6 8 598 1,038 1980 0 54 0 5 7 556 623 1981 93 137 0 12 19 523 78a SONICOOc 1979 153 41 0 10 15 12 233 1980 2 0 0 0 0 0 2 1981 0 156 0 11 16 138 321 BC8d 1979 7 119 0 17 31 10 183 1980 500 0 0 6 15 0 521 1981 639 108 0 23 47 59 876 980 1979 26 15 2 2 6 0 52 1980 89 33 a 3 6 0 131 1981 90 29 0 3 8 0 130 La Beninoisee 1979 0 161 0 8 13 350 532 1980 0 0 0 0 0 146 146 1981 0 273 0 22 29 303 628 'The tax on textile production accounts for the excise taxes shown. bThe petroleum products tax accounts for the excise taxes shown. cthe tax on soap accounts for the excise taxes ahown. dThe tax on interest paid to COmpanies and individuals, withheld at the aource, accounts for the sounts shown under 'excise and other taxes.' eThe beverage tax on beer and soda accounts for the excise taxes shown. fTheae taxes are levied on employees' wages, rather then on corporate incomse or revenues, but are reaitted to the Treasury by the enterprise. Source: Oirection du Tresor et de Is Coeptabilite Publique, 1982. - 47 - Exhibit 2.3 PUBLIC ENTERPRISE CONTRIBUTIONS TO FNI (millions of CFAF) A. Normal Contribution Paid In Year Amount 1974 23.2 1975 383.3 1976 470.6 1977 609.3 1978 451.7 1979 188.2 1980 275.8 1981 1,636.2 1974-1981 4,038.3 B. Contributions to Creation of New Enterprises Decree 79-204 of 1979 Total owed 727.5 Paied in, as of 31 July 1980 410.0 C. Contributions to 1979 Tranche of the State Plan1 Total owed 264.6 Paid in, as of 30 June 1980 138.1 D. Total Amount Paid in, 1974 to 1981 4,586.4 Year Amount 1974 23.2 1975 383.3 1976 470.6 1977 609.3 1978 451.7 1979 (including 1/2 of B and C) 462.2 1980 (including 1/2 of 8 and C) 549.9 1981 1,636.2 1974-1981 4,586.4 1Excludes contribution of Commission Cerealier Nationale, whic his not considered to be a public enterprise. Source: Caisse Autonome d'Amortissement. - 48 - Exhibit 2.4 EXPROPRIATION PAYMENTS MADE BY CAA TO PREVIOUS SHAREHOLDERS 1975-1980 (million CFAF) ---…------Name of State Company Created----------------- Year 8C8 BBD La Beninoise SONACOP OBECI Total 1975 170 -- -- -- -- 170 1976 41 -- -- 216 40 297 1977 240 18 216 95 -- 569 197B 134 17 163 79 -- 393 1979 184 16 156 -- -- 356 1980 48 -- 148 -- -- 196 Total 817 51 683 390 40 1,981 Source: Caisse Autoname d'Amortissement, 1982. - 49 - Exhibit 2.5 EQUITY FUNDS PROVIDED TO PUBLIC ENTERPRISES BY THE CAA as of December 31, 1981 (millions of CFAF) Remaining Forecast Enterprise Funds Provided To Be Paid In 1982 SONACI 445 55 15 STEf, -- 20 10 CIB 118 -- -- OBEMINES 25 25 10 I8ETEX 864 -- -- SONIAH 50 __ __ SONAPECHE 50 -- -- SONAFEL 50 -- -- SOBEPALH 98 52 26 SODERA 194 6 -- SNAFOR 13 -- BELIPECHE 55 166 -- SABLI 55 166 -- AGB 25 275 25 ONP 250 -- -- SOTRACOB 49 SOBEMAC 100 -- -- SONAE 300 __ __ ONATHO 24 1 -- STC 50 -- -- SONAMEL 25 50 25 SONAPAL 72 -- AIR BENIN 268 232 75 SONAGIM 75 25 10 SONACOTRAP 120 -- -- CNCA 100 -- -- SONAR 52 50 -- ORTB 75 -- __ OBECI 100 -- -- ONEPI 52 -- -- 081 78 22 11 TOTAL 3,832 1,145 207 NOTE: Excludes CARDERs, Inc and CNERTP, not considered as public enterprises. Source: Caisse Autonome d'Amortissement, 1982. Exhibit 2.6 FNI PROJECT FINANCING FOR PLBLIC ENTERPRISES 1978-1981 (millions of CFAF) ----------- Actual Expenditures --------------- Total Prior Planned Project Enterprise Project to 1978 1978 1979 1980 1981 1982 Costa ONATHIO hotel 534 355 786 516 1,257 1,034 4,500 0BEMINES Seme oil 110 44 73 8 -- -- 21,000 SSS Save sugar 3,000 -- -- 300 125 1,700 57,000 La Beninoise Parakou brewery -- -- 268 -- -- -- 2,500 SOBEPALH Ouidah irrig. _- -- 184 4 _- -- 575 SBEE/SONIAH Save Beterou Dam -- -- 150 -- -- -- 1,188 SONAGRI Advance -- 100 -- -- -- 100 SCO Onigbolo Cement 41 -- 1,181 -- -- -- 25,000 SONACOTRAP Advance -- 215 -- -- -- -- 215 IBETEX Advance -- -- -- 10 -- -- -- New Enterprise Fertils/pesticides -- -- -- -_ -- 120 -- Not Given Selected palm -- -_ -- -- -- 150 -- SONAFEL Re-Start -- -- -- -- -- 300 -- Not Given Abomey Brewery __ __ __ __ 434 __ Total 3,685 714 2,642 838 1,382 3,738 112,078 Total Spent through 1981: 9,261 Planned for 1982: 3,738 aCAA data for total project costs presented here appear to be out of date. Latest estimates are CFAF 69 billion for SSS, CFAF 34 billion for SCO, and CFAF 45 billion for the first phase of the seme petroleum project. Source: Caisse Autonome d'Amortissement. Taken from a larger table which included public administrative services as well as public enterprises. - 51 - Exhibit 2.7 GOVERNMENT GUARANTEES ACCORDED TO PUBLIC ENTERPRISES 1973-1980 Amount of Guarantees Enterprise Purpose Lender Date (CFAF millions) Agro-Industry SONICOG Equipment BCB 1973 300.0 SONiCOG Equipment BD 1973 80.0 SONICOG Porto Novo Soap Factory BBD 1974 170.0 SONICOG Edible Oils Refinery BBD 1978 173.0 SONICOG New Oil Mill BBD 1980 350.0 1,073.0 SONAFEL Irrig. Equip. for Za-Zoume CNCA 1978 47.0 47.0 Save Sugar Equipment BBD-BCB 1979 43,732.3 43,732.3 Industry IBETEX Spinning & Weaving Equipment B8D 1973 568.0 IBETEX Spinning & Weaving Equipment B8D 1973 26.4 IBETEX Spinning & Weaving Equipment BBD 1974 15.7 IBETEX Spinning & Weaving Equipment 86D 1974 89.2 IBETEX Spinning & Weaving Equipment BBD 1974 63.0 IBETEX Spinning & Weaving Equipment BBD 1974 36.0 IBETEX Spinning & Weaving Equipment B8D 1974 23.9 IBETEX Spinning & Weaving Equipment BBD 1974 164.1 IBETEX Spinning & Weaving Equipment BBD 1974 14.4 IBETEX Spinning & Weaving Equipment BBD 1974 160.9 IBETEX Spinning & Weaving Equipment BBD 1974 19.0 IBETEX Spinning & Weaving Equipment B8D 1974 75.7 1,256.3 SOBETEX1 Vaporizer B8D 1978 70.0 70.0 CIB Industrial Ceramic Plant BBD-BDB 1974 284.5 CIB Industrial Ceramic Plant 880 1978 135.0 419.5 La Beninoise Modernization Project B80 1978 500.0 La Beninoise 2nd Tranche of Project BBD 1979 230.0 730.0 Onigbolo Cement Equipment BBD-BCB 1979 20,768.0 20,768.0 -52- Exhibit 2.7 Page 2 Amount of Guarantees Enterprise Purpose Lender Date (CFAF millions) Transport OBCN 1st Tranche Equipment COFACE 1977 750.0 OCBN Equipment Program CCCE 1977 800.0 OC8N_ 2nd Tranche Equipment CCCE 1978 1,000.0 OCBN 2nd Tranche Equipment Suppliers Credit 1979 890.0 OC8N Equipment Program CCCE 1979 1,250.0 OCBN Equipment Program BBD 1980 500.0 5,190.0 PAC Tugboat Purchase CCCF 1973 200..0 Equipment Program BBD-CCCE 1974 80.0 Port Productivity Improvement BOAD 1978 1,000.0 Port Extension CCCE 1979 900.0 2,180.0 COBENAM Freighter Purchase BBD 1978 450.0 450.0 Public Utilities SBEE Elec. Network Extension BAD 1974 444.8 Elec. Network Extension BAD 1977 444.82 Upgrading Akpakpa Diesel BOAD 1978 575.0 1,464.6 Other Trans-Oueme Vehicles Acquis. BBD 1976 100.0 RETRAZ Vehicles, Garage, Offices BBD 1978 100.0 SONACOP 15 Tank trucks BBD 1978 150.0 OBECI New Cinema 8BD 1978 125.0 OBECI Extension Program 8BD 1978 70.0 OBECI Equipment Program B8D 1890 100.0 297.5 OBI New Installations BBD 1979 148.0 ONATHO New Hotel Construc. Work B8D-8CB 1979 2,100.0 SONACOTRAP Equipment Program BBD-BCB 1979 500.0 SONAGIM Building Plot Program BBD 1980 37.0 SECS/Atlantique New Cotonou Stadium BCB 1977 150.0 - 53 - Exhibit 2.7 Page 3 Amount of Guarantees Enterprise Purpose Lender Date (CFAF millions) Banks B8D African Enterprises USAID 1973 250.03 New City CCCE 1975 244.2 African Enterprises USAID 1976 250.03 Mineral Water, Tomato Paste, and Fruit Juice Projects Alger. Dev. Bk. 1976 250.03 Finance for Bohicon Maize Mill CCCE 1977 250.0 Finance for Indust. Projs. CCCE 1977 278.0 Finance for Housing Construc. CCCE 1980 200.0 Credit Line OPEC 1980 967.5 2,689.7 BCB Film Abiscal Films 1976 5.0 CNCA Finance for COBEMAC BOAD 1977 100.0 Total 83,775 NOTE: This table excludes guarantees accorded to ASECNA, Air Afrique, OPT, certain secondary schools (CEMGs), the CNHIU and the CNERTP, which are not considered public enterprises for purposes of this study. 1Identical amounts lead to question whether perhaps first guarantee never used. 2Listed as "OBETEX"; not clear whether SOBETEX or IBETEX. 3U.S. $1.0 million. Source: Caisse Autonome d'Amortissement. Exhibit 2.8 -v EXTERNAL DEBT OF PUBLIC ENTERPRISES HANDLED BY CAA (million CFAF except as noted) Arrears Debt Service------- of Enterprise Enterprise Project Lender Date Amount 1981 19H2 1983 as of 12/31/81 SODEPALH Agonvy oil mill EI[ 1970 910 -- -- -- 314 SOUEPALH Grand Hinvi IDA 1969 1,300 -- -- -- 534 SONICOG Bohicon oil mill KFW 1,955 -- -- -- 278 SONAFEL Allahe frt. juice CCCE 50 6 6 7 19 PAC Port extension IDA 1978 5,404 15 29 103 8 PAC Port extension IDA 1979 840 2 4 33 1 PAC Port extensiotn AFDB 1978 692 30 44 44 8 PAC Port extension BADEA 1978 1,150 82 173 173 128 SODERA Livestock AFDF 1978 1,148 2 24 29 1 SODERA Slaughterhouse Entente 1973 239 15 24 32 SONACI Clinker grinding EADEA 1976 2,000 67 212 200 513 SONIAH Oneme Valley II AFDF 1975 896 6 13 13 37 SONIA11 Oueme Valley I AFDB 1973 86 15 16 16 36 AIR BENIN Corvette Cr. Lyoniais 1979 263 77 72 34 -- AIR BENIN Fokker Citibank 1978 1,120 357 180 -- -- SBEE Parakou W.S. Denmark 1969 557 -- -- -- -- SBEE Cot. Par. Water Denmark 1974 800 -- -- -- -- SBEE Boh. Abo. Water KFW 1974/76 850 -- -- -- -- SLEE Lokossa Water KFW 1977 160 -- -- -- -- S8EE Onigbolo Elect. AFDB 1978 1,429 49 61 212 -- PAC Port extension CCCE 1978 900 -- -- -- -- SBEE Porto Novo Water KFW 1970 410 -- B8D -- OPEC 1979 1,260 -- -- -- -- SONAGRI Hagoume Cotton Gin Zaire 1968 100 -- -- -- 115 ASECNA Cot. Airport CCCE 1980 900 16 54 54 -- SONAGRI Tech. Assist. IDA 1977 476 3 4 2 -- Seme Oil Seme Oil Ekaport Fin 1980 14,124 -- -- -- -- Seme Oil Seme Oil Den Norsk Kredit 1980 9,143 11 26 30 -- IBETEX Tex. Factory Various n.a. -- 166 215 __ AIR BENIN Twin Otter SEE 1981 433 -- 141 141 -- Seine Oil Seme Oil Midland 1981 3,036 -- 117 118 BOD Ind. Dev. IDA 1980 2,800 -- -- -- PAC Port extension BADEA 1981 783 -- -- -- -- TOTAL 52,214 - 55 - Exhibit 2.9 ESTIMATED FUTURE PUBLIC FINANCE IMPACT OF PUBLIC ENTERPRISES Billion CFAF --…- Total Per Year Ongoing Losses 1981 level, approximately 4 Projected future levels, approximately 2 Past Cumulative Losses Estimated losses 7-10 Paid off over five years, annually 1-2 Rehabilitation Investments Estimated cost 6-10 Government funds required 1-2 Annual funds requirement, 3 years 0.3-0.7 Additional Counterpart Funds for Large Proj.ects Infrastructure and cost overruns, assume 10 Assume 50' financed abroad, rest over 2 years 2.5 Subsidies to Major Projects Save (per consultants) 4-8 Onigbolo (per consultants) 0-0.7 Seme (assume no impact until positive results in 1985) 0 Total Government Funds Resuired 9.8-15.9 Source: Mission estimates. *REDI,. -.ENDU . PUIBI-t LNE IERi. Rb i;.. BCB (million CFAF) Public Enterprises with Credit Outstanding Credit Outstanding Credit Outstanding Less-Than-Satisfactory -- September 1979 ------- -------September 1980 -------- -------September 1981-------- Banking Relationsa Short-Term Medium-Term Short-Term Medium-Term Short-Term Medium-Term SONAFEL 47 68 78 SONIAII 549 451 645 SONAPECHIE 20( 829 857 SONAGRI 2,877 4,270 2,051 IBETEX 3,507 4,219 3,676 CIB 31 249 68 178 100 OCON 1,314 1,760 1,916 SONATRAC 270 15 588 372 SONAPAL 938 1,123 946 AG8 100 2,377 140 2,404 _ Subtotal 9,833 264 15,753 318 13,045 0 All Public Enterprisesb 20,227 557 24,160 331 22,395 0 Subtotal as X of all P.E.s 48.6% 65.2% 58.2% 'As defined by the BCB, June 1982. bincludes 41 enterprises as of September 1981. 1 Source: Banque Commerciale du Benin, 1982. Exhjhit I.1 PUBLIC EN1tRPRISE FINANCIAL INDICAIORS (selected enterprises onlyl dats In million CFAF) _ _ _ j Unatihfactory Bank Accounts& Credit Latest Cumulative wet Debt/ Outsanding Dte Net Cash Cah Flow Working Total Fixed Equity Public Enterprises Activity fY Sales Profit Flow (3-years) Cspit.l Equity Debt Assets Ratio mC8 se0 Aaro-Industry * SoNAFEL Fruits ard vegetables __ _ _ _ __ _ _ _ 78 548 SABLI Livestock e1 __ -30 -26 -41. 366 38 5 22 0.01 * StBEPALH Palo Oil e1 2144" -370 -60 582 234 2.037 4,106 3,391 2.02 * SONICOC Vegetable oil 8D 3,724 79 lea 7040 S60 1,049 5,066 2,712 4.83 SONIAN Rice irrigetion sO 115 -154 -39 40e -719 103 1,937 1,564 1.881 645 __ SOHAPECI( Fisheries __ 857 - S8NAGRI Cotton __ 2,051 1,654 SNAFOR Forestry _ 579 - Industry * SC0 Clinker grinding SI 2,376 -309 -282 -398 -511 -434 693 77 neg. * SONACI Clinker grinding 61 1,743 -592 -347 -711 __ -817 3,118 463 nag. * IDETEX Textile mill 31 838 -1,324 -1,002 -3,225 -1,953 -7,016 11,366 1,621 neg. 3,676 990 * SCE1TEX Textile printing 61 6,522 244 362 932 776 1,516 1,763 738 1.18 • Lo Usninoise Urewery 81 5S934 21 236 736 -941 1,033 7,619 6,01 7.57 * C1I Ceraeic tiles s0 29 -167 -95 -295e -244 -324 805 418 ng. 100 - Construction SONACOTRAP Public works 80 632 -17 69 0S. 432 184 1323 457 7.19 145 320 S* 0EI"C Sales construc. mt. ei 4,615 77 111 291 93 220 1,457 126 6.62 Transport ^ OCBN Railway so J,228 -588 -131 -120. 1,273 7,170 7,171 9,121 1.00 1,916 2,034 U' * PAC Port SI 1,449 -570 123 __ __ 17,296 10,612 25,126 0.61 * Air Benin Airilnr 31 160 -370 128 -111 -736 -701 2,768 1,772 neg. * Trnns Benin trucking s0 61 -121 -63 -155. __ -21. 2506 261 neg. * CEENAM Shipping a1 2,906 55 138 443 __ 649 1,684 611 2.65 SWIATRAC Transit 60 514 -437 -342 -424e -523 -116 4,690 406 n. 572 Public Utilities 5BEE Utility 81 3,600 101 951 __ - 4,969 4,610 6,705 0.93 Infor_stion OR10 Radio, TV s0 40 -177 -J3 23e -237 7 525 1,049 46.43 C01 Dats processing __ _ __ __ __ __ __ __ __ __ __ 125 IBECI bv4i theatres __ _ _ __ __ _ _ __ -_ 10 356 Co_erce SONAPALb Bookstore e1 543 -182 -172 -879 __ -201 1,558 93 n 946 - 09P Pharmaceuticals 60 3,236 loss __ -123. __ 385 4,235 429 11.00 IOO 14Z SONAffL Household appliances 31 624 7 28 46 22 107 1,047 45 9.79 * AGO Food imports 61 5,511 -240 -90 -72 -416 -53 5,673 705 nag. 2,404 164 O*E Supplies el 601 22 31 105 125 202 1,140 77 5.64 * SONAE Equipmnt 81 3,029 46 74 207 _ 580 3,090 111 5.33 SIC Shoe imports 31 1,850 7 30 60 -23 65 1,257 63 19.34 * S5WACOP Petrolem products e1 14,765 239 421 890 -179 1,341 6,632 2,027 4.95 SO18 Oefnct Import Firs 59 Other Services O ATHIIO Hotel. e1 602 32 8 263 96 54 39 276 1.15 5EF"C Cotonou _rket S1 155 9 32 29 -_ 29 676 562 23.3 *Enterpriee vilsited by mission. O eatietml. *Net profit plue depreciation. bealenc eheet date FY 1980. - 58 - Exhibit 3.2 MAJOR PROBLEMS FACING SELECTED PLBLIC ENTERPRISES Initial Management Design Administrative & Staffing Technical Marketing Pricing Financial Public Enterprise Maior New Proiects Save Sugar 40 0 Onigbolo Cement o 4 Sene Petroleum 0 o Other Industrial Enterprises SCB Clinker Grinding * 0 SONACI Clinker Grinding 0 o IBETEX Textiles 0 o 0 4 SOBETEX Textiles 4 La Beninoise Brewery o o o CIB Ceramics 4 4 SONACOTRAP Public Works1 o o 4 SOEPALH Palm Oil o o 4 SDNICOG Vegetable Oil o SONAGRI Cotton Ginning1 4 4 4 * SONAFEL Fruits and Vegetables * 0 SONIAH Rice, Irrigation 0 0 a SONAPECHE Fisheriesl o SNAFOR Forestryl Imoort Enterprises AGB Food Imports a o a 4 SOEMAC Construction Materials o o s SONACOP Petroleum o SONAE Equipment a o o SONAPAL Booksl * o 0 ONP DrLigS Service Enterprises OCBN Railway 0 4 PAC Port 0 COBENAM Shipping a AIR Benin Airline * 4 o Trans-Benin Trucking * o 4 SONATRAC Transit1 o o o a SBEE Utilityl o o 88D Bank o o o BCB Bank o o o ONATHD Hotels ORTB Radio, TV1 o o o p { Note: m a ijor problem; o = minor problem lEnterprises not visited by the piblic enterprise miasion. Source: Miasion analysis of public enterprises. - 59 - Exhibit 3.3 ENTERPRISES WITH FINANCIAL PROBLEMS (only negative indicators checked) Negative Negative High.or Arrears Negative Net Cash Working Negative b to Local Enterprise Equity Loss Flow Capital Debt/Equity Banks SONAFELa x SOBEPALH* x x SONIAH* x x x x x x SONAPECHEa x SONAGRIa x SNAFORa x StB* x x x x x SONACI* x x x x IBETEX* x x x x x x La Beninoise x CIB* x x x x x x SONACOTRAP* x x OCBN* x x x PAC x Air Benin* x x x x Trans-Benin* x x x x x SONATRAC* x x x x x x ORTB* x x x x a3 Ia x tlECIa x StlNAPAL* x x x x x ONP* x x x x SONAMEL x AG8* x x x x x x SiC* x x SONACOP x SE.MAC x * Enterprises with more than one negative financial indicator. aComplete financial data not obtained by public enterprise mission. bCut-off point of 9 to one. COnly those with problems shown (27) out of a sample of 36 (75 percent). Source: Mission analysis of enterprise data. - 60 - Appendix A CASE STUDIES - 61 - SAVE SUGAR PROJECT 1. This project consists of an irrigated cane plantation and factory designed to produce 47,000 tons per year of refined sugar. A special company, the Societe Sucriere de Save (SSS), has been established to manage the project, Jointly owned by the Governments of Benin and Nigeria with a small shareholding by the technical partner, Lonrho Limited. The development phase is nearly completed, and the first production of refined sugar is scheduled for February 1983. Summary Assessment 2. The! Save project presents serious potential financial losses for the Governments of Benin and Nigeria. The very high investment cost--currently estimated to total approximately CFAF 69 billion--has been heavily financed by foreign borrowings. Production cost estimates recently prepared by consultants Booker Agriculture International Limited are relatively high, due to low cane yields from poor soils. The consultants estimate direct production costs of CFAF 116/kg, against current cif sugar prices of CFAF 160- 200/kg in Benin, and CFAF 144/kg ex-factory in Nigeria (at official exchange rates; less than half this level at parallel rates). Despite projections of increasing world sugar prices in the future, it appears that the project is unlikely to be able to cover much of the debt service payments unless substantial subsidies are accorded by the Governments of Benin and Nigeria. As no pricing arrangements have yet been made with Nigeria, which is expected to absorb about 80 to 90 percent of the output, it is impossible to quantify the extent of SSS's losses. However, the consultants estimate negative cash flows of approximately CFAF 2 to 10 billion annually from 1984 through 1991, on the assumption of a CFAF 250/kg sugar price in 1983 terms. 3. The critical issues to be addressed are as follows: - Technical aspects--How is project performance likely to be affected by technical factors and by decisions taken at the design stage? - Marketing aspects--What are the expected levels of market demand, ease of market access and potential prices? - Management aspects--What arrangements have been made to assure adequate transition of management responsibilities to national staff? - Financial aspects--What are the current and potential financial results of the project and what effect would they have on B6nin's public finance situation? These issues are addressed in the following sections, concluded by our recommendations. The analysis is largely based upon the Booker Agriculture International report, Benin: Review of Save Sugar Project, dated July 1982. - 62 - Technical Aspects 4. The major technical problems are related to the agricultural conditions. While the project feasibility study (completed in 1973 by Lonrho Limited) is based on cane yields of 100 tons/ha/year, the consultants estimate a yield of only 75 tons/ha/year. The lower estimate is primarily because of the high proportion of poor land(about 70 percent is classed as marginal or worse). Due to the great variability of soil classes in the area, it will be difficult fo find sufficiently large contiguous blocks of good land on which to plan a field layout. The absence of low night temperatures during the harvest period of November to March also indicates that natural ripening conditions for the cane will not be good. Another agricultural factor of concern is that the most sandy soils are high risk areas for nematode damage to cane. 5. The lower yeild estimates imply that steady-state sugar production of some 37,300 tons per year could be achieved utilizing the 5,200 ha of irrigated land (supported by a dam built for the project). Increasing the output to the design level of 47,000 tons per year (in order to fully utilize the installed factory capacity) would require developing an additional 2,000 ha of rainfed cane land (if an area of suitable soils can be located) at an initial cost of CFAF 1.3 billion and correspondingly higher operating costs compared to the initial feasibility study. The desirability of increasing the cane production will depend on the success achieved in marketing the present level of output. 6. The physical development of the project and its plant and equipment are all of a high standard. The factory is of fairly conventional design. In general, the factory appears unlikely to be the major constraint on the project's productivity and viability. Marketing Aspects 7. The key marketing issue is pricing, and this is particularly complex since some 80 to 90 percent of Save's output will likely be exported to Nigeria. Nigerian demand is strong, and should not be a constraint: its imports range between 500,000 and 700,000 tons/year of sugar (mostly refined sugar). Save's entire output would thus represent less than 10 percent of the Nigerian import market. Beninese demand, on the other hand, appears currently to be considerably lower than earlier estimates. Benin's official food import agency (AGB) has recorded sugar imports of 1,000 to 4,000 tons annually over the past four years. The International Sugar Organization estimates Benin's consumption as remaining static at about 7,000 tons/yiar. The difference is apparently imported illicitly, particularly from Nigeria, due to lower prices and the use of sugar as a barter comodity for Beninese goods and re-exports sold to Nigeria. Total consumption is thus about half of the 15,000 ton/year estimate in the feasibility study. 8. World sugar prices are currently low, and this poses severe problems for the marketing of Sav'e's production. From an average level of US$630 per ton in 1980 (for bulk raw sugar, stowed, at Caribbean ports), the price has dropped to about US$270 per ton in 1982. The World Bank's long-term projections show increases to US$379 per ton by 1985 (in 1982 prices), and constant thereafter. - 63 - 9. Imported sugar prices in Benin and Nigeria are currently substantially lower than the price level assumed in the project feasibility study. In Benin, the cif price is CFAF 200/kg for cubes (which represent the major output of Save) and CFAF 160/kg for granulated sugar. In Nigeria, similar cif refined sugar prices likely apply. The consultants believe that the current ex-factory price charged in Nigeria for refined granulated sugar is about Naira 300/ton, or CFAF 144/kg at the official exchange rate and CFAF 65/kg at the parallel rate. These lower prices in Nigeria would tend to explain the present illicit imports of Nigerian sugar into Benin. 10. There have so far been no negotiations on sugar prices between SSS and the Nigerian Supply Company (counterpart to the AGB). It is thus not possible to state what price the SSS can expect for the 80-90 percent of its output destiLned for Nigeria. The commencement of discussions on this point is urgently required. 11. In estimating the likely future price for Save sugar, import parity prices must be used. Even though the Benin Government levies import duties on sugar, these duties are revenues which will be lost when Save production is substituted for imports. The same concept applies to Nigeria. Therefore, the most likely price scenario appears to be a gradual increase from the present import parity price of CFAF 180/ton (average of cube and granulated sugar) to the level of CFAF 250/ton (in 1982 prices) representing the cif Cotonou equivalent cif the World Bank long-range price forecast. Although the 1973 feasibility study utilized a price level of CFAF 300/ton, this no longer reflects the latest projections. Management Aspects 12. This section focuses on the structure of project organization and management, and the adequacy of arrangements made for training and housing of staff. 13. Shareholdings in SSS comprise the Governments of Benin (49 percent) and Nigeria (46 percent), and Lonrho Limited (5 percent). The Governments nominate the Chairman and Vice-Chairman of SSS, and Lonrho nominates the General Manager. 14. Lonrho has been contracted to provide management and technical assistance to the project during the design and construction phase and during the initial five years of operation. 15. Management effectiveness has been hindered by SSS Board over- involvement in the company's day-to-day activities, and by some dissension between expatriate Lonrho staff and national staff. The existence of three important committees of the Board, given the reported difficulty in convening Board meetings, tends to slow the decision-making process. The expatriate staff, recruited by Lonrho for SSS, appear to continue to identify themselves with Lonrho. Differences in salary scales contribute to divergences between foreign and local staff. - 64 - 16. The lack of adequate training to date is likely to hinder the proper operation of the factory and the project. Recruitment and training do not appear to be proceeding satisfactorily, despite the fact that trained key workers in the factory and field sections are essential to project start-up. Due to disagreements between Lonrho and SSS regarding the training scheme, no training has been arranged at sugar factories outside Benin, and training at the Save plant will now have to proceed in parallel with commissioning of the new factory. Agreement on a training policy is urgently required to permit start-up with a maximum number of trained local employees, and to achieve the fastest replacement of expatriates by local staff, consistent with the maintenance of standards. 17. Housing is another key management concern at present. Although the original feasibility study included the cost of housing and other infrastructure for all of the 3,500 permanent and seasonal workers, only the management housing (34 units) was actually included in the project contract. Estimates recently received indicate that housing for 1.000 permanent staff would cost about CFAF 3.3 billion. While contingency plans involving dormitory space and camping equipment have been prepared, there is as yet no agreed program to construct workers' housing. This issue must be resolved as soon as possible, as even initial operation of the factory will require a full complement of employees for efficient operation. Financial Aspects 18. The current financial position of SSS is not good. As of June 1982 the bank overdraft was at its limit and cash on hand was insufficient to pay outstanding invoices and the June payroll. Cash contributions were expected from the Nigerian and Beninese Governments in July (CFAF 1,400 and 662 million, respectively), but no confirmation was available from either side. This cash shortage could have serious implications on the progress of the project. 19. Medium-term liquidity is likely to pose a problem, owing to cost overruns that are projected at 21 percent over the 1979 estimates. Additional funds will be required as soon as late 1982. Additional credits and postponement of principal repayments totaling CFAF 6 billion are being sought from the British, French and Belgian banks which have financed the project. (All the loans carry export credit guarantees from the respective European governments, and the debts of SSS are jointly and severally guaranteed by the Governments of Benin and Nigeria.) It is not certain, however, that these credits will be granted, particularly not at the assumed interest rate of 7.5 percent per annum. The local management staff of SSS appears to prefer obtaining the needed funds from the shareholders, though the availability of funding from this source is uncertain. 20. The long-run financial viability of the project is marginal. The four scenarios presented in Exhibit I indicate that net cash flow is not expected to turn positive until 1989 to 1994, depending upon the assumptions made. Using a price of CFAF 250/kg for 1983 (increasing only with inflation in future years), a peak cash deficit of either CFAF 34 billion or 47 billion (depending upon the output level) is reached in the year 1991. Additional contributions by the shareholders of roughly this amount over the 1985-1990 period would be required. If a price of CFAF 300/kg can be obtained, the - 65 required shareholders' advance would be lower (still at least CFAF 15 billion). 'If full sugar production could be achieved in year 3 (instead of in year 5 as assumed here), and a price of CFAF 300/kg could be achieved, then government advances of only CFAF 8 billion (or equivalent debt postponement) would be required. 21. The best estimate of sugar prices (CFAF 250/kg) thus gives annual cash losses of between CFAF 2 and 10 billion during the 1984-89 period. The repayments on foreign debt account for CFAF 6.8 billion per year from 1985 through 1991. Thus, the main financial problem is the repayment of this debt, unless higher world sugar prices are reached. 22. The Save sugar project currently faces a number of urgent problems-- agricultural, marketing, managerial, training, and financial. Given the latest estimates of cane yields and development costs, the project yields an inadequate economic return of about 5 percent. However, operating costs are estimated at roughly half the economic sales price, so completion and operation of the project is now the best alternative. Closing the plant would be more costly than continuing in operation. Recommendations 23. Agriculture--Efforts to improve production efficiency should be undertaken. This includes conservation of cane trash at harvest, exploratory surveys of the nematode population, and field trials to assess the yield response to irrigation. In the longer term, detailed mapping of the whole estate and soil surveys outside the area of existing development may be useful if the level of demand appears to support increased production. 24. Marketing--SSS should immediately begin negotiations with AGB and the Nigerian Supply Company on the price structure and volume of SSS sugar to be supplied, including the currency to be used for sales to Nigeria. SSS should request that the Benin Government clarify whether Save sugar is liable to a duty or not. 25. Management--Unified policies between the Board of SSS, its senior management and Lonrho are urgently required to accelerate necessary actions. The issues which must be acted upon promptly include cash shortages, sugar pricing, housing, recruitment and training. The decision-making process should be streamlined by having the Board focus on policy guidance and leaving implementation to SSS management. 26. Finance--Discussions between SSS and the two Governments should seek to confirm a plan for medium and long-term support for the project, and to obtain any cash contributions presently owing. Based on consultants' recent projections, the two Governments should plan on continuing contributions to SSS, particularly in relation to debt-servicing obligations. It is understood that negotiations are underway with the lenders regarding postponement of principal and interest payments. - 66 - Exhibit 1 SAVE PROJECT CASH FLOW PROJECTIONS Major Assumptions Sugar price, CFAF/kg 250 250 300 300 Sugar production, tons/year 37,300 47,000 37,300 47,0 Year …------------------…Net Cash Flows (million CFAF)--------------------- 1983 4,008 4,008 4,307 4,307 1984 -5,551 -5,551 -4,621 -4,621 1985 -8,243 -8,375 -6,437 -6,570 1986 -6,416 -7,048 -3,967 -4,599 1987 -5,392 -3,312 -2,483 235 1988 -10,113 -7,732 -6,814 -3,703 1989 -4,800 -2,084 -1,070 2,477 1990 -4,215 -1,127 -8 4,022 1991 -3,551 -53 1,181 5,746 1992 920 4,871 6,232 11,388 1993 -1,809 2,644 4,143 9,952 1994 5,552 10,558 12,208 18,738 -----------------End-year Cash Position (Million CFAF)---------------- 1983 1,848 1,848 2,147 2,147 1985 -12,055 -12,187 -9,020 -9,153 1987 -23,985 -22,670 -15,592 -13,639 1989 -39,288 -32,874 -23,865 -15,254 1991 -47,207 -34,208 -22,846 -5,640 1994 -42,811 -16,402 -530 34,170 Assumptions Common to All Four Alternatives 1. Sugar production--full production is reached in year 5 2. Production costs-estimated at CFAF 116/kg. 3. Additional financing--interest at 9.5 percent. 4. Postponement of debt service--one year. 5. Inflation--6 percent per year. 6. Interest on bank overdraft--8 percent per year. 7. Increased production--based on increased capital and current costs of rainfed cultivation needed to raise sugar output from 37,300 tons to 47,000 tons. Source: Booker Agriculture International Limited, Benin: Review of Save Sugar Project, July 1982. - 67 - ONIGBOLO CEMENT PROJECT Background 27. The Onigbolo cement project is designed to produce 500,000 tons/year of cement for the Benin and Nigerian markets. It is based on extensive limestone and shale deposits at Onigbolo, in southeastern Benin about 130 km from Cotonou and very close to the Nigerian border. The public enterprise which has been developing and will operate the project is the Societe des Ciments d'Onigbolo (SCO), owned 51 percent by the Government of Benin, 43 percent by the Government of Nigeria, and 6 percent by the technical partner, F. L. Smidth & Co. A/S of Denmark. The feasibility study was carried out in 1976-1977, and a contract was signed with F. L. Smidth in 1979 to supply the cement plant; on a turnkey basis. The first clinker was produced at Onigbolo in June 1982, and cement production is scheduled to begin in July 1982. 28. The analysis present here is largely based on a report prepared by the consultants SNC Services Ltd. (Montreal), Onigbolo Cement Plant: Preliminary Evaluation Report, dated July 1982. Summary Evaluation 29. The project has been launched based on too optimistic assumptions concerning sales and production build-up and, on an ex-post analysis, appears to have at best a marginal rate of return. Cash flow deficits are projected to prevail until 1987 in the most likely case and even 1989, under more pessimistic assumptions. However, the plant is technically sound and, providing a market can be captured at a reasonable selling price, it will probably be more economical to continue operations than to close the plant. The major market for Onigbolo cement is in Nigeria, and so far no negotiations have been undertaken concerning price or supply arrangements. While the Nigerian market can likely absorb its planned share of Onigbolo output, the pricing arrangements will affect the extent of any cash flow shortfalls. Collaboration of both governments is required to waive Nigerian import duties, to acquire fuel oil at Nigerian domestic prices, to facilitate border crossing procedures, and to construct new road links to the Nigerian consumption centers. Certain infrastructure is urgently required in Benin to support the project, including construction of workers' housing, paving of the access road, installation of a telephone connection, and completion of oil storage tanks at the port of Cotonou. Major Project Aspects 30. This section addresses the major aspects of the project as follows: technical aspects, marketing, management, and financial aspects. The marketing arrangements and certain financial aspects are the main areas that appear problematic. Technical Aspects 31. The plant is technically appropriate to Benin's needs. The design is not too sophisticated, and each section has its own control panel. Manufacturing standards have been met, and proper pollution controls and energy-savingt measures have been incorporated. Maintenance so far appears to - 68 - be good. The design of the plant will not, unfortunately, permit easy expansion or the handling of cement with admixtures, due to the layout and choice of equipment. 32. The main technical problems concern uncompleted infrastructure required for the smooth operation of the plant. These infrastructure problems could limit the volume of production. The needed infrastructure includes a telephone exchange at Pobe, the paving of 14 km of the road from Pobe to Onigbolo, the Pobe to Ilaro road for shipments to Nigeria, housing accommodation for workers, completion of heavy oil storage tanks at the port of Cotonou, and possible rail links from Pobe to the plant and between Benin and Nigeria. Marketing Aspects 33. The marketing plan calls for 60 percent of SCO's output to be sold in Nigeria, with the remaining 40 percent sold in Benin. However, recent estimates by consultants indicate that Benin will not likely be able to absorb this amount in the short-term. Cement consumption was 270,000 tons in 1981, supplied by the two clinker grinding plants using imported clinker. Additional unsatisfied demand is hard to estimate, but is believed to be approximately 30,000 tons in 1982, making total demand approximately 300,000 tons. Thus, in the short-term, only 10-20 percent of SCO's output could be sold in Benin, unless the clinker grinding plants were to reduce their output. 34. An adequate market is available in Nigeria, provided market price levels can be met. Nigerian cement consumption amounted to 6.8 million tons in 1981, of which 4.0 million tons were imported. Import levels are estimated to range between two and five million tons over the 1982-1985 period, greatly exceeding Onigbolo's output. In order to compete with Nigerian domestic cement producers, the SCO cement would have to carry an ex-factory price of no more than CFAF 23,000 to 25,000/ton. 35. Several administrative problems must be overcome to ensure competitive access for Onigbolo cement to the Nigerian market. First, an exemption must be obtained from the 20 percent duty normally levied on cement imported into Nigeria; the basis for this exemption would be the joint Nigerian ownership of SCO. This exemption is essential to the success of the project. Second, arrangements must be formalized to permit fuel oil to be imported from Nigeria for Onigbolo at Nigerian domestic prices, plus shipping charges. The fuel oil price would thus be substantially lower (CFAF 60,000/m3 as opposed to CFAF 88,000/m3) than if imported from overseas, and is essential to achieving a competitive production cost. Third, priority will be needed to obtain Nigerian import permits for Onigbolo cement, given Nigeria's current severe import restrictions. Fourth, both Governments will need to cooperate to facilitate border formalities for the cement trucks. Management Aspects 36. Although marketing and financial management have not received adequate attention, the implementation of the project has proceeded satisfactorily. - 69 - 37. The main scope for improved management is believed to lie in the possibility of greater integration between SCO and the two clinker grinding plants (SCB and SONACI). Combined purchases of imported gypsum, bags, and spare parts (plus clinker for the two grinding plants), fuel oil, and domestic supplies could result in lower unit costs, reduction in transport costs, reduced personnel and standardized equipment. Production planning should also consider the possibility of Onigbolo providing clinker to the grinding plants, if not all the output can be marketed, or of Onigbolo selling cement in place of SCB and SONACI production to allow these plants to be rehabilitated. Financial Aspects 38. Onigbolo is quite profitable on an operating cost basis, but only marginally so on a full-cost basis. At full capacity (producing 500,000 tons of cement), operating costs are estimated at roughly CFAF 14,600 per ton of cement, against a likely sales price of around CFAF 25,000 (all figures are in 1982 prices). If fixed costs are considered, however, the degree of profitability varies according to the specific sales and price assumptions utilized, and temporary cash flow short-falls are likely for the next five years. 39. Financial rates of return range from low to moderate depending on sales and price assumptions. The consultants (SNC) prepared financial forecasts on the basis of two sales scenarios and a range of cement prices. The "most likely" marketing forecast involves reaching full output in 1984 (year 3), but composed partly of clinker to be sold to the Benin grinding plants (during 1982 to 1987) until the Benin market is projected to be able to absorb the full increment of 200,000 tons of cement (see Exhibit 1). (The forecast growth of Benin cement demand is 6 percent/year through 1985, and then 12 percent/year through 1990; this must be considered optimistic.) For prices ranging from CFAF 24,000 to 27,000 per ton, this sales forecast yields financial rates of return varying from 5.8 to 11.0 percent. With a price of CFAF 25,000 which is representative of an economic price, the economic rate of return would be about 7.5%. If Onigbolo's output could be sold entirely as cement, whether in Benin or Nigeria, the financial rate of return would range from 8 to 12 percent (for prices of CFAF 24,000 to 26,000 respectively ) and the economic rate of return would be 10%. 40. The lower profitability of clinker sales (at the assumed CFAF 14,000 per ton price) causes negative cash flows over the short-run for the "most likely" scenario. Additional cash injections of CFAF 4.3 billion over the 1983-1987 period would be required in the base case (corresponding to a 6.0 percent financial rate of return). 41. The actual level of additional equity required will depend upon market and price factors, and could be greater or smaller. The projections all assume that concessions with regard to import duties and fuel oil costs are fully obtained, and that the design capacity is reached by 1984. In light of the absence (as of June 1982) of any conclusive discussions between the two governments and the SCO regarding conditions of market access and prices, and in view of the remaining infrastructure problems, there is a considerable downside risk that the cash shortfalls may exceed those projected as the most likely case. On the other hand, the existance of a market in Niger (until at least 1986 when a new 250,000 ton/year plant at Malbaza is scheduled to start - 70 - up) which is presently importing 190,000 tons/year provides some upside potential. Niger is presently paying about CFAF 27,500/ton for the portion of its cement imports (about 10 percent) brought in via the port of Cotonou. 42. Alternative projections prepared by Bank cement sector specialists assume both a longer period for production build-up (reaching 95 percent of capacity in year 5) and a slower growth in cement sales in Benin. Using these sales forecasts and a price of CFAF 24,000 per ton, the alternative estimates show a cash shortfall of CFAF 8.1 billion over the 1983 to 1989 period. Outlook 43. The Onigbolo project is technically a well-designed operation. In the long run, it will prove a valuable asset to Benin's economy (including the provision of 500 jobs). Short and medium-run concerns arise mainly from the marketing and pricing questions which had not been answered as of June 1982. While the Nigerian market can absorb large quantities of cement, the necessary favorable conditions of access (exemption from import duties and granting of domestic fuel oil prices) for Onigbolo's output have not yet been negotiated. The ability of the Benin market to absorb cement beyond the present capacity of the two clinker grinding plants is an unknown factor, but best estimates are that it will take some years before Onigbolo can sell the planned 200,000 tons of cement on the local market. The learning curve for production may also be slower than presently anticipated. Further equity contributions of about CFAF 4 to 8 billion will probably be required by Onigbolo over the next five years, though the magnitude of the cash flow shortfall will be quite sensitive to marketing, pricing, and production variables. Recommendations 44. The following recommendations are presented with a view to resolving the major problems currently foreseen: - Agreement with Nigeria should be sought on the issues of import license priority, exoneration from import duties, and granting of domestic fuel oil prices to Onigbolo. - Market studies should immediately be undertaken in some detail for the Nigerian and Niger cement markets. - Essential infrastructure, such as telephone links, road links within Benin and to Nigeria, completion of oil storage tanks at Cotonou, and construction of workers' housing, should be undertaken on a priority basis. - The economic viability of other infrastructure projects, such as possible rail links, should be studied. - Sector improvements to increase integration and reduce costs, through joint purchasing arrangements, etc., should be addressed (see also case study on cement sector companies). - 71 - - Technical and financial assistance to support necessary complementary investments, technical and organizational studies, and interim financing needs should be sought from concessionary sources. Support to the Onigbolo project could be included in a possible IDA credit to strengthen Benin's public enterprise sector. - 72 - Exhibit 1 SALES, FINANCIAL, AND ECONOMIC FORECASTS FOR THE ONIGOBOLO PROJECT A. Sales Forecast (thousands of tons) Nominal Most Likely -- optimistic--- Year Output Benin Nigeria Clinker1 Benin Nigeria 1982 150 30 30 90 120 30 1983 400 50 175 175 225 175 1984 500 70 300 130 200 300 1985 500 90 300 110 200 300 1986 500 130 300 70 200 300 1987 500 180 300 20 200 300 1988 500 200 300 0 200 300 1989 500 200 300 0 200 300 1990 500 200 300 0 200 300 B. Financial and Economic Rates of Return (percent per year) …____-__Financial------ ---Economic - Price (thousands of Price (thousands of …--------CFAF/ton)------- --------CFAF/ton)------- Sales Scenario 24 25 26 27 24 25 26 27 Most Likely 2.0 6.0 9.2 12.3 5.8 7.6 9.3 11.0 Optimistic 6.4 10.7 15.1 - 7.9 10.1 12.2 - Note: Other assumptions per SNC. 1Stated in equivalent tonnage of cement. Source: Analysis of SNC, Onigbolo Cement Plant: Preliminary Evaluation Report, July 1982. - 73 - IBETEX Background 45. I:BETEX (Industrie Beninoise des Textiles) is an integrated textile and garment-making operation located in Parakou. It is a mixed-economy company, with the State holding 48% of the stock and private French, German and Swiss :Lnvestors holding the majority. The VOYER group of Tours (France) was one of the main suppliers of equipment, the promoter and one of the owners. The company was created in 1971, and production began in October 1975. IBETEX comes under the authority of the Ministry of Industry. Business Lines 46. The original concept was to create an integrated operation which would add (lown-stream value-added to Benin's production of cotton, which was running at about 50,000 tons in 1970. The plant was aimed exclusively at the European market, and was designed on the basis of 3,000 tons of cotton per year with 2,600 employees. 47. The complex includes spinning (17,000 spindles), weaving, finishing and garment-making. There are four product lines: - Knitwear--T shirts, underwear, pyjamas; - Fabric--exported to Europe to make workelothes; - Garments--workelothes, casual shirts and jeans; - Towelling--towels, washcloths and bathrobes. Problems General 48. From the start, IBETEX encountered a host of problems linked to the initial project conception, equipment and marketing difficulties, poor cotton quality, low productivity, and disagreements with the foreign partners. IBETEX has struggled along during the past seven years by modifying its product mix and markets, running up its debts and running down fixed assets, and laying off excess staff. Financial 49. The foreign partner's financial problems in France caused its plans for British financing of IBETEX to fall through. Therefore, suppliers' credits (mostly medium-term, with a maximum of 7 years' maturity) had to be sought, and Government guarantees were required. The Government is currently trying to re-negotiate the foreign debts. The CAA indicates foreign debt service of CFAF 166 million and 215 million due in 1982 and 1983, respective:Ly, on behalf of IBETEX (the company is not contributing toward these payments). Some CFAF 600 million of BBD loans to IBETEX in 1973 and 1974 were guaranteed by the Government. - 74 - 50. Initial capital was set at CFAF 600 million, and later raised to CFAF 2.4 billion. Management is not certain how much of this was paid in, particularly as some was certainly provided in kind. The CAA records contributions to IBETEX equity of CFAF 864 million. 51. IBETEX's financial situation, never on a solid basis, has continued to deteriorate (see Table 1). Although the accounts are laced with unorthodox entries, it is clear that the firm is bankrupt by any normal standards. The accounts show a negative net worth of CFAF 7 billion at June 1981, and a negative cash flow (excluding financial charges which are not paid) of CFAF 500-600 million per year. Some relief was provided in 1981 when the BCB, major financer of IBETEX (CFAF 4.7 billion in loans outstanding), agreed to consolidate short-term credit of CFAF 4.2 billion into a medium-term loan. It is not clear from the balance sheet whether the additional short-term debt to BCB in 1981 represents unpaid interest or a new injection of cash. IBETEX management has stated that the firm has had no access to bank credit since 1978. 52. In January 1981, the IBETEX board decided to place the enterprise in liquidation. The Government is the major creditor, through the banks, SONAGRI, SONACEB, SBEE, the Treasury (taxes), the OBSS (employer's payroll taxes). In the interim, IBETEX has continued its normal operations. Production 53. Production problems have contributed to IBETEX's difficulties. Certain equipment was never delivered or installed. There are transport problems from Parakou to Cotonou. 54. The local cotton is of poor quality, and appears to have deteriorated since project start-up. Better varieties are needed, and more attention to the crop. Cotton picked too early does not take dye well, and picked too late contains too many parasites. Inadequate SONAGRI cotton storage facilities result in bales of ginned cotton rotting in the rain. In the past, cotton was graded into three categories; now there is no grading process. 55. IBETEX management also believes that the productivity of its workers is low enough to offset wage advantages compared to Far East producers such as Hong Kong. Average wages of CFAF 20,000 per month (about US$3.00 per day) for workers and CFAF 50-60,000 for foremen do not compensate for the low output. Marketing 56. Marketing of IBETEX's output in Europe encountered numerous problems. Low quality and production delays (partly because inadequate working capital hindered the purchase of materials) prevented IBETEX from fulfilling its contracts. Clients were lost. Other European customers had financial problems and never paid. The lengthy delay between shipment of goods to Europe and receipt of payment caused further working capital difficulties for IBETEX. 57. The product mix and market orientation was changed a few years ago to concentrate on local mass-market items. IBETEX makes uniforms for the Benin Army, towelling sold on the local market (essentially re-sold to Nigerian - 75 - traders), sheets and clothing. The goods are sold for cash at the factory, or at IBETEX's Cotonou outlet. Pricing 58. In practice, IBETEX's sales prices are market-determined, and have not generally been a problem. They are allowed, under Ministry of Commerce rules, a 10% production margin above their costs. Since this includes financial charges and other costs which are not actually paid, the margin is sufficient. Management 59. Management was initially provided by the foreign technical partners. When the bank overdraft reached CFAF 2.5 billion, the Government conducted an investigation of the IBETEX situation, and in 1977 installed a Beninese general manager and Beninese deputies to the foreign production and marketing managers. The last foreign technicians left IBETEX at end 1981. The firm considers that it has built up its human capital; it now has 8 Beninese textile engineers and sufficient foremen and mechanics. Potential Losses 60. Although the present IBETEX management has been remarkably adept at staying afloal financially, the cumulative cost to the Government has increased with every additional month of operations. Using the June 1981 accounts, and roughly estimating the liquidation value of fixed assets at 40% of book value and inventory at 70%, the mission estimates the net cash loss at liquidation (disregarding the Government's equity investment) would be about CFAF 8.3 bi:llion. If a new operator cannot be found to make some use of the existing equipment and building, the loss could go as high as CFAF 9.2 billion. Estimates of the results of the 1982 fiscal year (about CFAF 450 million in sales with a net loss of at least CFAF 1 billion) the liquidation loss as of June 1982 might be around CFAF 9 billion. About half of this amount would initially be borne by the BCB, though presumably the Government would compensate the bank. Restructuring 61. The Government has taken the decision to wind down IBETEX and form a new joint venture with foreign partners to produce textiles for the local and possibly foreign markets. The Belgian textile firm UCO (Union Cotoniere de Belgique) has been carrying out feasibility studies over the past year for the re-structuring of IBETEX. The initial view seems to be that the existing buildings are alright, but that certain additional equipment would be needed. IBETEX management favors avoiding heavy new investments at this stage and wants to focus on the local market. 62. The IBETEX view of product lines which should be promoted in the future includes: - Towelling. These products are successful and should be continued. - Clothing. Cotton/polyester blends are popular in Africa, and :[BETEX wants to try to blend the cotton and polyester fibers at the - 76 - - Sheets and tablecloths. There is a good local demand for these products, but wider looms would be needed to manufacture sheets for double beds. - Face flannel and baby garments. Outlook 63. IBETEX management and the Ministry of Industry are currently awaiting the results of the UCO rehabilitation study, due shortly. The immediate outlook, therefore, is for continued losses of around CFAF 1 billion per year, followed in the next year or two by a liquidation resulting in costs as high as CFAF 9 billion to the kGovernment. 64. The future profitability of any textile operations using IBETEX's present facilities will depend upon a successful restructuring of the business, with new injections of capital by the Government and by a foreign partner. The current cost structure is not encouraging: Sales = CFAF 450 million Operating Costs of which: Cotton: 500T CFAF 300/kg = 150 million Wages: 600 people (incl. social charges) = 216 million Fuel: for generators = 150 million CFAF 516 million These costs indicate losses of CFAF 66 million when only the most basic operating items are included. Therefore, sales must be raised (probably through price/quality increases) and costs must be brought down substantially. These are the issues which must be successfully resolved by the UCO feasibility study before either the Government or a foreign partner should consider any further investment. Recommendations 65. The Government's decision to bring in a foreign firm experienced in spinning and weaving appears sound. However, the decision to continue textile operations should be based on an objective assessment of the feasibility study results, particularly in light of the very poor past performance. The mission recommends: - Careful review of the UCO study, employing specialized textile consultants if required to give an independent opinion. - Maximization of the foreign partner's equity involvement in any textile operation involving significant new investments to ensure adequate incentives for efficient cooperation. - 77 - - Consideration of an alternative strategy of producing second- quality goods for the local market utilizing existing equipment, a smaller work force, and minimum new investments. Such a strategy might minimize further Government financial risks and achieve a quicker break-even than a more elaborate rehabilitation. - Cotton quality problems should be fully discussed with SONAGRI and a realistic assessment of future quality should underlie the selection of product and market mix prior to embarking on new textile investments. - The Government should develop a financial plan for the liquidation of IBETEX and the allocation of losses among the various creditors. The bulk of the losses will have to be covered, over a multi-year period, by the Government. BCB, the major creditor, will not likely be able to absorb more than a portion of its share of the losses involved, over a period of several years. - Subject to a positive re-structuring plan, Government contributions might be partially financed from IDA funds. - 78 - Table 1 IBETEX Summary of Financial Data (in millions of CFA francs) -Fiscal Year (July 1-June 30)- 1979 1980 1981 ------- ----------…Income Statement - ----------------- - Sales 1,010 974 847 Purchases 577 613 494 Change in Stocks -298 -21 -199 Gross Margin 135 340 154 Operating Costs, of Which: 1,819 1,953 1,462 personnel 658 570 510 financiala 508 560 450 depreciation 479 531 322 duties and taxes 14 9 38 Operating Profits -1,684 -1,613 -1,308 Exceptional Profits/Losses 21 45 -14 Taxes (BIC and FNI) 0 2 2 Net Profits -1,663 -1,570 -1,324 …------- --- - - - - ----dalanceSheet…----------- ----- Liquid Assets b 256 435 374 Accounts Receivable 1,714 1,707 1,623 Inventory 752 731 532 Fixed Assets 2,473 2,086 1,21 Total Assets 5,195 4,959 4,350 Short-Term Debt 4,127 5,709 1,826 Other Short-Term Liabilities 2,354 2,296 2,688 Long-Term Debt 2,881 2,690 6,852 Capital & Reserves -2,504 -4,166 -5,692 Results of Current Period -1,663 -1,570 -1,324 Total 5,195 4,959 4,350 - -- - - - ------- ---Financial Indicators …------------- Cash Flow -1,184 -1,039 -1,002 Cash Flow net of -676 -479 -552 financial charges Net Working Capital -3,759 -5,132 -1,985 Profit Margin, % -164.7 -161.2 -156.3 Return on Equity, -c __ _ Purchases/Sales, %d 86.6 65.1 81.8 Personnel/Sales, % 65.1 58.5 60.2 Accts. Rec./Sales, months 20.4 21.0 23.0 Inventory/Sales, months 8.9 9.0 7.5 Current Ratio 0.42 0.36 0.56 Acid Test Ratio 0.30 0.27 0.44 Notes: a99Z of the financial charge is a provision; only 1% actually paid. Foreign debt not included. blncludes CFAF 880 million in share capital due from stockholders. cNot meaningful since equity is negative. dPurchases less change in stocks. Source: IBETEX Annual Reports, fiscal years 1979, 1980, 1981. - 79 - SOBETEX Background 66. SOBETEX (Societe Beninoise des Textiles) is a mixed-economy company which bleaches and prints fabrics for the local market using imported cotton cloth. The firm was established in 1968 as ICODA, in which the state has a small holding. In 1975-76, the government increased its holding to 49 percent. The other eleven shareholders are mainly large French trading and textile firms (CFAO, CNF, SCOA, ICODI, Schaeffer). Technical expertise is provided by the Schaeffer Group (of Alsace), which prints fabric in Europe. SOBETEX is under the authority of the Ministry of Industry. Business Lines 67. SOBETEX engages in a single product line, the production of printed rolls of cloth to order. Each production run is in accordance with a design specified by the buyer or created by SOBETEX's own design department. The company's factory in Akpakpa (Cotonou) includes a complete graphic design unit and all the requirements for modern film transfer of the design to the rollers. Major Aspects 68. SOBETEX serves as a useful model of a successful public enterprise. It is well-managed, operates profitably, has generally enjoyed a strong local demand, is well-maintained, and has pursued conservative financial policies. The present economic situation, particularly Nigeria's import restrictions, has caused some slowdown in recent months. Management 69. The management team of SOBETEX appears to be particularly competent and hard-driving. The 12 higher and mid-level cadres include only one European; the Beninese deputy general manager is a textile engineer with years of experience in the textile industry of Europe. The managers appear to keep a very close eye on the textile operations, with frequent inspections of activities and insistence on very high maintenance standards. Production 70. In contrast with other public enterprises in Benin, SOBETEX does not seem to encounter production difficulties. The factory has a capacity of 20 million meters of printed fabric; the actual figures have exceeded this level in three of the past four years, reaching about 22 million meters in 1981- 82. First-rate maintenance by SOBETEX's own mechanics is certainly one reason for this success. Mid-level cadres are normally sent to Europe for extended training periods with the machinery manufacturers. SOBETEX also ensures continuity of production by stocking about two months of raw materials. - 80 - Marketing 71. Until recently, there has been no difficulty in selling SOBETEX's output. Orders are obtained from the large trading firms in Cotonou (CFAO, SCOA, John Walkden, etc.) and from many other wholesalers. The goods are then sold on the Cotonou market, and much of the production finds its way to Nigeria. This has resulted in problems beginning in June 1982, as Nigeria is strictly prohibiting imports. The Benin Government is investigating the possibility of obtaining a special license to supply SOBETEX fabric to Nigeria. 72. The SOBETEX sales price level, set by the Ministry of Commerce, has been sufficient to ensure an adequate margin. SOBETEX is generally paid cash on delivery. SOBETEX fabrics are among the cheapest for equal quality in Africa. Financial 73. SOBETEX's sound management, stable and well-trained labor force, and high-demand product have predictably brought reasonable financial returns. Positive net profits have been achieved and return on equity was 17.5 percent in 1981. Personnel costs have been held to a declining percentage of sales. The company has no long- or medium-term debt, and only reasonable short-term credit (equal to three months' sales) and for working capital requirement. Cash flow has ranged between CFAF 150 and 420 million in recent years. SOBETEX has contributed CFAF 1,613 million in income taxes and over CFAF 100 million to FNI in contributions to the Government during the calendar years 1979-81. Outlook 74. When interviewed in March 1982, SOBETEX management had no plans for expansion. However a CFAF 300 millions credit application has been submitted to the BBD to finance three-fourths of a modernization program. The projected investment will not increase the SOBETEX's production capacity but it will substantially improve the quality of output. Conclusion 75. SOBETEX is well-managed and well-structured financially and will be able to survive any temporary downturn in its sales. 76. For other public enterprises in Benin, a few lessons may perhaps be drawn from the SOBETEX experience. - SOBETEX demonstrates the possibility for success in a Benin manufacturing industry, where the plant's output is in strong demand. - Strong management is required. This involves direct, personal supervision of the work and a sense of accountability for the firm's results. - 81 - - Attention to training of staff, particularly in areas such as maintenance and repair, is essential. Training is facilitated by the involvement in the enterprise of a technical partner with similar installations located elsewhere. - 82 - Table 1 SOBETEX SUM4ARY FINANCIAL DATA (in millions of CFA frsncs) Fiscal Year (July 1-June 30) 1979 1980 1981 ------------------lncome Statement-------------------- Sales 5,707 4,635 6,522 Purchases n.a. n.*. n.s. Change in Stocks n.a. 38 58 Gross Margin n.a. n.a. n.a. Operating Costs Personnel 329 324 360 Financial 87 118 129 Depreciation 107 B8 118 Duties and Taxes na. n.e. n.e. Operating Profits 685 141 53B Exceptional Profits/Losses Taxes (BIC and FNI) 1 375 76 294 Net Profit 310 65 244 --------------------Balance Sheet_---------------------- Liquid Assets 1 1 1 Accounts Receivable 1,821 1,294 1,411 Inventory 1,053 1,091 1,149 Fixed Assets 584 579 738 Total 3,460 2,966 3,300 Short-Term Liabilities 2,083 1,742 1,783 Long-Term Debt 52 Capital and Reserves 1,008 1,158 1,272 Results of Current Period 310 65 244 Total 3,460 2,966 3,300 ---------------------.Finance Indices-------------------- Cash Flow 417 153 362 Cash Flow net of 504 271 491 financial charges Net Working Capital 792 644 77B Profit Margin, S 5.4 1.4 3.7 Return on Equity, S 26.7 5.5 17.5 Purchases/Sales, v n.a. n.e. n.a. Personnel/Sales, S 5.8 7.0 5.5 Accts. Receivable/Sales, months 3.8 3.4 2.6 lnventory/Sales, months 2.2 2.8 2.1 Current Ratio 1.38 1.37 1.44 Acid Test Ratio 0.88 0.74 0.79 Note: SOBETEX furnished summary financial deta but not its annual reports, so certain figures were not available to the mission. Source: SOBETEX data and mission calculations. - 83 - OIL PALM SECTOR Background 77. The oil palm sector is a major element of Benin's export performance and an important wage employer. Two state enterprises (100 percent Government owned) conduct the agroindustrial operations: SOBEPALH (Societe Beninoise de Palmier a Huile)1/ is responsible for collection, processing and local sales of palm oil and kernels from selected palms; SONICOG (Societe Nationale pour l'Industrie des Corps Gras) processes palm kernels, exports all palm products, manufactures soap, and processes other vegetable oils. Production of the fresh fruit bunches (ffb) is in the hands of individual farmers for the natural palms, and cooperatives for the selected palms. 78. The oil palm sector comprises some 400,000 ha of natural palms and 29,000 ha of selected palms planted mainly between the mid-1950s and the mid- 1970s. The industrial palm oil mills operated by SOBEPALH utilize exclusively the selected palm ffb; of six mills, three are inoperative and the other three operate at well below capacity. SOBEPALH's output of about 15,000 tons per year of palm oil is sold either on the local market, to SONICOG for soap manufacturing, or exported. SONICOG operates in the same sector as SOBEPALH, but its operations are largely independent since it relies on natural palm products for its input rather than on selected palm. Its main business is the processing of palm kernels-(80-90 percent from natural palms and the balance from SOBEPA],H)-into palm kernel oil and palm kernel cake for export. Summary Assesment 79. Benin's oil palm sector has not performed well, due primarily to inadequate rainfall conditions, but also to labor shortages and transport difficulties. Oil palm yields have been very low, resulting in negative rates of return for investments in selected oil palm production and processing. The two public enterprises, though only marginally profitable, are quite viable on an operating cost basis, that is, ignoring sunk costs. Improvements could be made which would raise the oil palm yields per ha and hence profitability of SOBEPALH, SONICOG, and the growers' cooperatives. No new planting of oil palm is envisaged, however, owing to insufficient rainfall. 80. This case study is based upon a report prepared by Booker Agriculture International Limited, Benin: Review of the Oil Palm Sector, dated July 1982; and upon interviews conducted by the mission. Present Situation 81. This section addresses the major aspects of the sector and its two public enterprises under the headings of technical, marketing, management, and financial aspects. 1/ The description of the activities pertain to the period before its dissolution in 1982 and the transfer of its industrial activities to SONICOG. - 84 - Technical 82. The single most important factor influencing the low productivity of Benin's oil palm sector is rainfall. The moisture deficit at the Pobe research station has averaged 530 mm over the past 32 years; in the Atlantique and Mono regions, deficits of over 600 mm have occurred in at least 45 percent of recent years. The IRHO (French oil palm research organization) qualifies a water deficit of 400-500 mm as "marginal" for oil palm, and over 500 mm as "clearly unfavorable," the lowest classification. 83. The inadequate rainfall causes low yields for selected palms. Mean yields over a twelve-year period were 3.4 tons/ha in Oueme, 2.3 tons/ha in the Atlantique and 2.8 tons/ha in the Mono Province. These yields are poor compared to the 8.0 tons/ha initial projections of the IDA-financed Grand Hinvi project (1969) which established many of the plantations. The yields are worse when compared against yields of about 16 tons/ha elsewhere in West Africa, and over 20 tons/ha in Asia. 84. Another problem affecting yield is poor maintenance of the plantation. A recent change to paying labor on a piecework basis has had little effect. Urgent action is needed to improve access, to clean the palm circle and clear inter row vegetation, and to prune the fronds properly. 85. A proportion of the production is lost at the collection stage. Lack of transport equipment for collection is the most important problem under the control of SOBEPALH and should be remedied. A high proportion of trucks are inoperable, with the result that only 60 percent of harvested crop reaches the factory at times. Approximately 20 new 10-ton trucks are required. Procedures could be improved with greater coordination between factory and field as regards the timing and location of fruit to be collected. Bad road conditions to Ouidah-Nord (the irrigated plantation) need to be urgently corrected. 86. The three SOBEPALH mills currently operating are all fairly new and are running well, though underutilized. The major technical problems noted were in the areas of nut cracking at Grand Hinvi (hydrocyclone repair urgently needed), kernel drying (new facilities required), and empty bunch disposal (incinerator repair needed). Routine maintenance should be strengthened in all the factories. 87. The consultants also note that the three closed factories (at Avrankou, Ahozon, the Gbada) would be extremely expensive if not imposssible to bring back into production. If additional capacity were ever required, it would be preferable to add production lines to the modern mills. Therefore, the old mills should either be sold or scrapped. Marketing 88. SOBEPALH sells its palm oil on the local market, to SONICOG as an input to the soap factory, or through SONICOG for export. SONICOG purchases palm kernels from small farmers (mainly) and from SOBEPALH which it processes into palm kernel oil and cake. These products are all exported. In addition, SONICOG manufactures soap and processes other mixed edible vegetable oils (mainly groundnut and cottonseed). - 85 - 89. SOBEPALH's palm oil is sold first to SONICOG's soap factory, which has generally purchased 3-4,000 tons of palm oil per year out of SOBEPALH's 15,000 tons produced (see Exhibit 1). The remaining palm oil production is either sold locally (both to Beninese and Nigerian traders), or for export. The Beninese apparently prefer the higher fatty acid content of artisanally produced palm oil, and much of the local sales is believed to go to Nigeria. Prices for palm oil (Exhibit 2) have declined over the past few years on the world market, though strong Nigerian demand in 1981 accounted for a high local sales price. 90. SOBEPALH generally supplies about 10-15 percent (3-4,000 tons) of SONICOG's total purchases of palm kernels. The remainder are purchased from farmers at collection points in the growing areas, or from middlemen who deliver the kernels to the factory. SONICOG is thus heavily dependent upon production from natural oil palms. The price paid for kernels is set by the Inter-Ministerial Price Commission each September for the year. The producer price has increased at an average annual rate of 6 percent over the past three years. Apparently, this price level no longer presents sufficient inducement to small farmers, because SONICOG's purchases from them have dropped from a steady 40,000 tons through 1976-77 to 20-25,000 tons in recent years. 91. SONICOG has no particular marketing problems, except for the low palm kernel oil prices currently quoted on the world market. Overall, Benin's income (fob) from official exports of all palm products has declined by 24 percent form 1976-77 to 1980-81 (CFAF 2.7 billion). The soap factory, on the other hand, has done very well, and its capacity of 5-6,000 tons has been reached. The laundry soap produced enjoys a strong market, and a second production line is planned. The luxury soap ("Cob") did not sell well, and has been discontinued, as the local market seems to prefer imported toilet soap. Management 92. There are several managerial problems, involving agricultural production labor, factory labor, and organizational problems of SOBEPALH and SONICOG. 93. Fruit production is in the hands of over 20,000 small farmers organized into 40 cooperatives. There is no direct involvement of SOBEPALH in the management of production (although this was originally planned), except in the case of the irrigated area at Ouidah Nord. Within the cooperatives, a sharp distinction is made between proprietors and non-proprietors. Proprietors are guaranteed a return, but non-proprietors are paid essentially for their labor, at a rate of CFAF 200 per day for upkeep and CFAF 15/ffb cut and carried to roadside collection points. However, these labor rates are not attractive compared to the CFAF 1,000 per day (at unofficial exchange rates) that Beninese workers can obtain in Nigeria. As a result, a labor shortage has occurred which has exacerbated the poor maintenance and low yields of the oil palm plantation. 94. Another problem involves the structure of SOBEPALH's labor force. The work force was originally built up in the 1960s and 1970s when SOBEPALH's predecessor (SONADER) employed large numbers of laborers to clear the land and - 86 - establish the plantations. It appears that these personnel were not let go when their tasks were finished, but were employed in work at the palm oil factories. Now that three of the mills have permanently closed, there appears to be surplus labor in the SOBEPALH organization (totalling 1,254 permanent staff). How many laborers are surplus is difficult to tell, though there are 178 workers carried on the books as employed at the closed mills. Personnel costs average about one-third of SOBEPALH's total expenditures. 95. Adequate cost control is a problem for both SOBEPALH and SONICOG. At SOBEPALH, annual accounts are available within three months of the end of the fiscal year. But no attempt is made to prepare monthly or quarterly accounts as a basis for budgetary control and there is no systematic cost accounting procedure. At SONICOG as well, though most financial accounts are prepared on a monthly basis, there is no full periodic expenditure and profit statement preparation and no systematic cost accounting. Costing and budgetary control systems should be introduced at both SOBEPALH and SONICOG so that costs and revenues can be monitored and compared to budget estimates. 96. A major organizational issue at present concerns the future of SOBEPALH. The Government announced in April 1982 that SOBEPALH would be merged into SONICOG. However, the detailed implementation aspects are not yet clear. It was only in 1976 that the palm oil mills were transferred to SOBEPALH from SONICOG. Thus, it would not seem overly difficult to move the mills back under SONICOG's control. However, SONICOG officials express interest in the mills but not in the plantations. Their view appears to be that the plantations are unprofitable, employ excessive numbers of people, and are subject to agricultural and organizational problems which SONICOG is not ideally equipped to deal with. Since the critical aspects of SOBEPALH's present operation seem to lie at the plantation and fruit collection levels, it is not clear how these problems would be resolved simply by folding SOBEPALH into SONICOG. This means that considerable planning is required to define how SOBEPALH's agricultural aspects (including the whole cooperative set-up) can be improved, in addition to the implementation of the SOBEPALH- SONICOG merger. Financial Aspects 97. Declining world market prices and inflexible cost structures have resulted in unprofitable operations recently for the oil palm cooperatives and for SOBEPALH. SONICOG's profits have been reduced as well, in part due to lower output volume. 98. The price paid to the cooperatives has not been sufficient in light of poor productivity, and the cooperatives as a group have lost CFAF 400 million over the five years to 1981. This has caused financial difficulties for SOBEPALH, which has pre-financed the cooperatives and is now unable to recover the funds. 99. SOBEPALH has recorded losses in four out of the past five years. On a cash flow basis, results have been negative only in FY 1981. This poor performance is due to falling export prices and rising costs, particularly financial charges (Exhibit 3). Working capital has diminished, but still amounts to CFAF 233 million. SOBEPALH has not made any payments on loans onlent by Government from IDA and FED. 87 - 100. SONICOG has been profitable in three out of four years (to FY 1980), and cash f:Low has generally been strongly positive. On the other hand, assets have increased recently with construction of the Bohicon Mill (with a German concessionary loan), and the results cannot be considered healthy given the level of investment (Exhibit 4). Growing financial costs and lower sales volume have combined to reduce profitability. Soap has been SONICOG's strongest product financially. Recommendations 101. The oil palm sector is never likely to provide more than marginal returns to Benin, because of inadequate rainfall conditions. There is no economic justification for expansion of oil palm acreage. However, the two enterprises already established are viable on an operating basis, and provide considerable foreign exchange earnings. Rehabilitation investments are justified, on an incremental basis, to improve productivity. 102. Alternative organizational systems for the plantations should be considered. The cooperatives do not appear to be functioning properly. If SOBEPALH's oil mills are taken over by SONICOG, the coordination with producers may become even more difficult. 103. The major investment required is for vehicles, machinery and equipment at SOBEPALH. An estimated CFAF 950 million are needed, particularly to ensure adequate transport of ffb to the mills. 104. Better maintenance procedures are urgently required in order to achieve yields of 5 tons/ha. Upkeep, harvesting and collection must all be improved. Visits by SOBEPALH staff to neighboring countries might help to introduce better practices. 105. SOBEPALH and SONICOG should establish cost accounting and budgetary control systems. SOBEPALH should monitor the financial position of cooperatives closely. 106. A possible IDA assistance project should finance a rehabilitation plan for SOBEPALH, based largely on re-equipping the necessary vehicle fleet. - 88 - Exhibit 1 PRODUCTION VOLUME OF PALM PRODUCTS A. Production and Sales of SO8EPALH Palm Oil (tons). ---… Sales ---- Production SONICOG soap Local Market Export via factory SONICOG 1976/77 13 464 1 354 5 177 4 200 1977/78 19 524 4 433 4 974 361 1978/79 11 854 5 160 1 682 1 023 1979/80 13 337 552 2 243 8 004 1980/81 14 849 2 833 12 487 3 816 B. Purchases of Palm Kernels by SONICOG (tons). - ------Suppliers - ----- … SOBEPALH CARDER IRHO Small Farmers Total SCBEPALH 1976/77 5 002 821 219 35 382 41 424 12 1977/78 2 673 216 88 8 840 11 817 23 1978/79 3 271 64 58 17 037 20 430 16 1979/80 3 025 113 6 25 892 29 036 10 1980/81 3 293 182 - 26 132 29 607 11 1981/82 (provisional) 3 740 327 _ 19 054 23 121 16 C. Production of Palm Kernel Oil and Palm Kernel Cake by SONICOG. Palm kernel Palm kernel oil, tons cake, tons 1976/77 22 189 22 907 1977/78 5 337 5 707 1978/79 10 745 11 153 1979/80 12 217 13 216 1980/81 12 380 13 683 Source: SOBEPALH and SONICOG. '8g - Exhibit 2 PRICES OF PALM PRODUCTS A. Palm Oil (CFAF/kg) Year Local Sales Export, fob Soap Factory 1976/77 108 139 n.a. 1977/78 116 132 n.a. 1978/79 126 137 n.a. 1979/80 95 110 n.a. 1980/81 101 100 n.a. 1981/82 175 n.a. 120 B. Palm Kernels (purchased by SONICG, CFAF/kg) Delivered to Year Producer Price Factory 1978/79 33.5 39.6 1979/80 35.0 41.6 1980/81 37.5 45.4 1981/82 40.0 48.7 C. Palm Kernel Oil and Palm Kernel Cake (fob, CFAF/kg) Year Oil Cake 1976/77 10X.4 30.3 1977/78 152.6 30.3 1978/79 193.3 24.5 1979/80 179.3 25.5 1980/81 119.5 27.2 Source: SOBEPALH, SONICG. - 90 - Exhibit 3 SOBEPALH INCOME STATEMENTS 1976/77-1980/81 (million CFAF) Year ending 30 June 1977 1978 1979 1980 1981 Iran Sales after stock adjustments: Palm oil 1 793 1 090 1 290 1 367 1 583 Xsrnels 184 98 124 133 151 Other 96 344 (79) 46 44 Total sales 2 073 1 532 1 335 1 546 1 778 Services 2t 23 13 94 27 Operating subsidies and grants S0 280 128 - - tber income - 106 348 140 8 Total incoe 2 181 1 941 1 824 1 780 1 813 Expenditure Purchases: Fruit bunrhes 450 283 261 339 349 Materials 525 421 449 253 S1l Total ogrchases 975 704 710 592 860 Personnel costs 627 649 703 665 678 Taxes a-rT dties 27 100 35 5 25 External services 67 73 46 62 67 Transport and general 24 19 16 20 20 Financial costs 7 84 55 177 168 Depreciation 392 366 403 324 310 Total expenditure 2 119 1 995 1 968 1 845 2 128 Net ire 62 (54) (144) (65) (315) Profits (losses) previous years (54) (94) 127 (120) (26) rxcptional profits (losses) 2 (10) 78 74 49 Protits taxes - - (35) - (78) Surplus/ (deficit) (20) (158) 26 (111) (370) Source: SOBEPALH - 91 - Exhibit 4 SONICOG INCOME STATEMENTS 1976/77-1979/80 (million CFAF) Year ending 30 June 1977 1978 1979 1980 Sales after stock adjustments Kernel oil 2 324 1 073 1 772 1 593 Kernel cake 964 151 495 388 Soap 423 820 642 934 Other products 453 1 151 470 809 Total sales 4 164 3 195 3 379 3 724 Stock adjustments 191 17 687 96 Other revenue 139 25 43 273 Total income 4 494 3 237 4 109 4 093 Purchases Fresh fruit 11 2 - - Kernels 1 582 457 947 1 244 Other materials 1 347 1 622 1 549 1 193 Total purchases 2 940 2 081 2 496 2 437 Personnel costs 328 304 301 341 Taxes and duties 129 164 98 263 External services 127 113 116 124 Transport and general 453 245 278 397 Financial costs 71 90 244 298 Depreciation 219 283 226 103 Total expenditure 4 267 3 280 3 759 3 963 Net income 227 (43) 350 130 Profits (losses) previous years 76 (242) (30) 187 Exceptional profits (losses) (56) 41 (2) (3) Profits taxes - (93) (136) (152) Contributioni to national investment fund - (47) (84) (83) Surplus/ (deficit) 247 (384) 98 79 Source: SONICOG 92 - SONACOP Background 107. SONACOP (Societe Nationale de Commercialisation de Produits Petroliers) was founded as a state-owned company in 1974. It took over the petroleum product import and distribution networks which had belonged to Texaco, TOTAL, BP, Shell, AGIP and Mobil. During the years 1976-78, expropriation payments of CFAF 390 million were made by the CAA to these foreign firms. SONACOP holds the monopoly for petroleum product imports and marketing, under the authority of the Ministry of Commerce. It sits on the Commission for the Seme offshore petroleum project, but is not directly involved. Business Lines 108. SONACOP imports a range of petroleum products from overseas for the domestic market and re-export. There is no refinery in Benin. The main source of supply was switched from Italy (71 percent of imports in 1979) to Algeria (60 percent in 1981); there have been no supply problems, but a conscious policy of diversification of sources is being pursued. 109. Sales were CFAF 15.5 billion in 1981 (fiscal year July to June), making SONACOP number one among Benin's enterprises in terms of business volume (see Table 1). The domestic market accounts for 94 percent of total sales. The major products are diesel fuel, gasoline, lamp kerosene, jet fuel, heavy fuel oil, bitumen, and lube oil, in decreasing order (see Table 2). 110. Domestic sales volume in 1981 was at the same level as in 1977. Net profits dropped sharply in 1979 when the fixed local prices seriously lagged behind import cost increases. Though profits have increased in the past two years, they are still far below the 1977-78 levels. Problems Pricing 111. Fixed sales prices have been a major cause of financial difficulty for SONACOP. Petroleum products are sold at fixed prices, revised periodically by the National Pricing Commission. Prices were raised in February or March 1980 and again in January 1982 (by 25 percent), but each time only after lengthy delays which weakened the company's financial structure. There were no price increases between 1976 and 1980. The ability to raise prices is also constrained by unofficial imports of gasoline from Nigeria; the price there is roughly one-third the Benin price. Management does not anticipate further pricing problems in 1982. Finance 112. SONACOP is profitable, and is currently yielding an acceptable return on equity. But its profit margin has not been sufficient to provide adequate liquidity in recent years. The gross margin per liter on major products has generally been rising since 1979 (see Table 3), but not enough. Cash flow in the last three years has been much lower than in the 1977-78 period, and net 93 - working capital, which was negative through 1980, was only marginally positive at end-June 1981. SONACOP has no foreign debt and only modest domestic debts. The current investment program of CFAF 1.8 billion for storage facilities in Cotonou and Bohicon is being financed 45 percent by a long-term BBD credit with Government guarantee. For the remaining 55 percent, SONACOP is counting on a reimbursement of its FNI contributions. This will not be possible, according to FNI officials (no reimbursements have been made to any firms in the past two years). SONACOP may therefore have to finance this amount from its own resources, and working capital will be reduced. In order to maintain liquidity, SONACOP has paid out only CFAF 90 million of the CFAF 600 million owed in income taxes over the past two years and has not paid any dividends. Management 113. SONACOP is well-managed, relative to other Benin public enterprises. For instance, personnel cost increases have been held down to 6 percent annually in the past two years; inventories have been kept at about one month's sales, and the collection period for accounts receivable was sharply reduced in 1981. 114. The mission sensed a problem in the planning area, however. The current investment in storage capacity based on government financing which is not liekly to be forthcoming exemplifies poor financial planning. There is no systematized strategic planning process at SONACOP. Nor has SONACOP established cost standards for the various stages of the business, such as storage, transport, and retail sales. Weak planning in a firm as large as this contributes to its financial problems. Marketing 115. SONACOP owns all the gas stations in Benin. Most are managed by private ind:ividuals. Starting two years ago, SONACOP has also been managing some stations directly, and has taken over the stations previously run by provincial agencies. Competition from Nigerian supplies imported unofficially is a major marketing problem in the Cotonou/Porto Novo area. Technical 116. No particular technical problems were noted by management. Outlook 117. The considerable price increase granted in early 1982 should certainly lead to better profitability in FY82. The only negative aspects are the increased incentive to import Nigerian gasoline, which will cut into SONACOP's market, and the strength of the US dollar relative to the French franc, which could have some effect on oil product costs. A considerable share of SONFACOP's 1982 cash flow is likely to be required to finance the CFAF 1.8 billion storage tank program. This will likely require some additional bank borrowing, but should not require any direct funding from the Treasury. - 94 - Recommendations 118. First, cost standards should be introduced for the various operations: storage, transport, retail sales, etc. This would provide the basis for cost control and performance measurement. Second, a strategic planning process should be undertaken to prepare a 5-year plan of investments, operations, financial results, and resource requirements. The process itself would enhance management's understanding of objectives and resource needs, and the document would provide a useful basis for discussions with the Ministries of Commerce and Planning. Third, SONACOP may wish to consider selling some of its gas stations to private operators. These stations represent businesses of a size that could be attractive to the Benin private sector, stimulating entrepreneurship and hopefully leading to efficient operations. SONACOP could provide technical assistance on a fee basis. Finally, the general recommendations elsewhere in the report on pricing policy and management policy apply to SONACOP. - 95 - Table 1 SDNACOP SuLaary Financial Data (in millions of CFA fracs) ----ia---- Fiscal Year (July 1-3une 30)----------- 1977 1978 1979 1980 19B1 - --____-___-----------------Income Statrnts- n- ------------- Sales 11,105 12,525 16,409 16,009 15,546 Purchases 6,222 6,575 11,152 11,535 9,576 Change in Stocks 182 -105 572 574 -528 Gross Margin 5,065 5,845 5,829 5,048 5,442 Operating Costs, of which: 4,093 4,652 5,588 4,698 4,830 personnel 225 239 267 291 343 financial 115 144 164 154 152 depreciation 129 143 151 149 182 duties and taxes 2,344 2,550 3,290 2,904 2,626 Operating Profits 972 1,193 241 350 612 Exceptional Profits/Losses -62 -26 -12 114 -14 Taxes (BIC and FNI) 364 467 200 324 359 Net Profits 546 700 29 140 239 ------------------------ alance Sheets ------------------------ Liquid Assets 598 529 1,866 Accounts Receivable 3,251 5,220 2,605 Inventory 1,429 2,002 1,475 Fixed Assets 1,638 1,589 2,027 Total Assets 6,916 9,340 7,973 Short-Term Liabilities 5,861 8,069 5,768 Long-Term Debt 0 104 864 Capital and Reserves 1,026 1,207 1,102 Results of Current Period 29 140 239 Equity and Liabilities 6,916 9,340 7,973 ____________-_---------------Finwncial Indicators---------- … - Cash Floa 675 843 180 289 421 Cash Flow net of 790 987 344 443 573 financial charges Net Working Capital -583 -318 178 Investments 165 290 231 160 328 Profit Margin, S 4.9 5.6 0.2 0.9 1.5 Return on Equity, S 2.8 12.8 19.6 Purchases/sales, 2t 54.4 53.3 64.5 68.5 65.0 Personnel/Sales, S 2.0 1.9 1.6 1.8 2.2 Accts. Rec./Sales, monthe 2.4 3.9 2.0 Inventory/Sales, months 1.0 1.5 1.1 Current Ratio 0.90 0.96 1.03 Acid Test Ratio 0.66 0.71 0.78 Cash Flow/Investents, 2 409.1 290.7 77.9 180.6 128.4 D'ats not obtained for 1977 and 1978. bPurchases less change in stocks. Source: SONACOP Annual Reports, fiacal years 1979, 1980, 1981. - 96 - Table 2 SONACOP Product Volume by Market, 1977-1981 (sales in metric tons) Fiscal Year 1977 1978 1979 1980 1981 Domestic Market Gasoline - Super 6,243 7,083 9,434 9,102 6,612 Gasoline - Regular 22,799 25,568 31,661 24,267 17,000 Lamp Kerosene 22,801 27,257 19,653 18,413 Jet Fuel f 27,379 9,447 12,302 8,544 10,736 Gas Oil (diesel fuel) 41,370 39,077 40,107 37,425 38,255 Lubes 2,017 1,949 2,123 2,367 2,767 Bottled Gas 335 396 452 500 552 Bitumen 4,303 305 3,800 1,552 4,790 Fuel Oil 8,510 7,609 6,836 7,943 8,099 Aviation Gas 148 145 128 131 29 Subtotal 113,104 114,380 134,100 111,484 107,253 Re-Exports SONACOP Re-Exports 66,038 84,306 90,676 29,335 10,946 Niger Products in Transit - - - 74,272 78,104 Subtotal 66,038 84,306 90,676 103,602 89,050 Total Sales 179,142 198,686 224,776 215,091 196,303 Source: SONACOP Annual Reports, fiscal years 1979, 1980 and 1981. - 97 Table 3 SONACOP Calculation of Margins for Selected Products 1979-1981 1979 1980 1981 A. Gasoline Import: Q 771.80 455.60 263.60 V 3,019.60 2,611.70 1,783.10 Unit Cost, CFAF/l 39.10 57.30 67.60 Domestic Sales: Q 446.00 341.80 239.50 V 3,068.70 3,410.30 2,925.10 Unit Price, CFAF/l 68.80 99.80 122.10 Margin, CFAF/l 29.70 42.50 54.50 B. Kerosene/Jet Fuel Import: Q 759.90 429.40 331.70 V 2,934.30 2,848.00 2,400.40 Unit Cost, CFAF/l 38.60 66.30 72.40 Domestic Sales: Q 506.30 360.90 373.10 V 2,243.10 2,613.80 2,879.20 Unit Cost, CFAF/l 44.30 72.40 77.20 Margin, CFAF/I 5.70 6.30 4.80 C. Diesel Fuel Import: Q 952.90 579.70 431.60 V 3,546.70 3,691.90 2,841.10 Unit Cost, CFAF/l 37.20 63.70 65.80 Domestic Sales: Q 488.10 455.50 465.60 V 2,688.00 3,829.00 4,419.10 Unit Cost, CFAF/l 55.10 84.10 94.90 Margin, CFAF/l 17.90 20.40 29.10 Q = quantity, in thousand hectoliters. V = value, in million CFAF Source: SONACOP Annual Reports, fiscal years 1979, 1980 and 1981. - 98 - AGB Background 119. AGB (Societe d'Alimentation Generale) is a 100 percent state-owned enterprise which imports and distributes consumer goods. It was created in 1978 to carry out the supermarket import activities of an earlier state enterprise (SONIB). AGB maintains a nationwide wholesale and retail network, and it operates under the aegis of the Ministry of Commerce. Business Lines 120. AGB's business is dominated by four products for which it has been granted a state monopoly: wheat, rice, sugar, and milk. For these products, AGB is charged with importing the quantities needed and selling at official fixed prices. For three other major consumption items cigarettes, tobacco and alcoholic beverages AGB has the legal right to import, but in fact allows private trading firms to handle most of the imports against payment of a commission. AGB also imports, in competition with other trading firms, a full range of food and other supermarket items. AGB has its own warehouses in Cotonou, Bohicon and Parakou, maintains a fleet of twelve trucks (10-25 tons) and a dozen vans, and operates ten wholesale outlets and 17 retail stores. Present Situation 121. AGB's operating profits are strongly influenced by the official Government pricing system, particularly on basic foodstuffs. As a result of rising import costs and higher AGB operating costs, net profits have turned negative and a negative cash flow has been recorded in the past two years. Nevertheless, a new management team is making changes and planning on a bold expansion. Pricing 122. ABG operates under three different pricing regimes for the products it handles: - Wheat, rice, suagr and milk. AGB holds the state monopoly on these goods, and must sell at prices fixed by the Commission Nationale des Prix or the Commerce Ministry's Service des Prix. Wheat and rice caused heavy losses to AGB in the past two years because prices were not raised by the Government to reflect import costs. AGB estimates tha CFAF 450 million were lost on wheat imports, and somewhat more on rice, over the fiscal years 1980 and 1981. These losses represent a subsidy to consumers paid for by AGB. AGB sold the wheat at a low fixed price to GMB, a private flour mill; due to continued losses, AGB ceased importing wheat in December 1981, and GMB now imports its own wheat and passes the price through to consumers. AGB management claims it is losing roughly 15% and 5% or sales respectively on rice and sugar imports. - Cigarettes, tobacco and liquor. On these commodities, AGB receives a commission from the private importers who handle these items. For cigarettes, for instance, AGB receives CFAF 700 per carton, or - 99 - about 1.75% of the retail price. (This commission has not been raised since 1978). Commissions appear to represent about 6% of AGB's sales. AGB also imports some cigarettes directly, but this requires the agreement of the private concession-holders in Benin, of the quantity is quite limited; profits are high, however, on :Liquor and cigarettes. Other supermarket items. AGB also sells numerous supermarket products through its retail outlets, at prices based on margins approved by the Service des Prix. The Government so far has not allowed AGB to include transport costs to interior points in the calculation of final sales price; since the company has a number of sales points outside Cotonou, it has to absorb transport costs which do not accrue to private trading firms selling primarily in Cotonou. Markets 123. The subsidized mass-consumption goods such as wheat (previously), rice and sugar are mostly sold at AGB's rice is eventually sold to Nigerian consumers, representing a serious leakage of the public subsidy. For cigarettes and liquor, AGB supplies less tha 10% of the local wholesale market, but estimates that 80-90% of these goods are sold to Nigerian buyers, directly or indirectly. Sales of cigarettes, previously a very fast-moving item, slowed dramatically in May-June 1982 due to vigorous enforcement of Nigerian import restrictions. AGB does not control a large share of the total supermarket sales in Benin, though it is often the only modern retailer in the interior towns where it has outlets. Management 124. A new management team was brought in to AGB in June 1981. A campaign was undertaken to reduce operating costs by addressing personnel and transport expenditures. Some surplus employees were fired, and the organization structure was streamlined to eliminate administrative layers. These changes were apparently needed, as personnel costs had been rising sharply as a proportion of sales. Nevertheless, AGB management generally feels that it is very difficult to fire employees and that there is considerable pressure to hire new workers. Transportation costs are being reduced by using the train line to Parakou to move goods north. Finance 125. AGB's implicit subsidization of certain foodstuffs in the past two years has greatly weakened its financial structure. Overall, AGB has recorded net losses of some CFAF 250 million each in 1979-80 and 1980-81 (see Table 1). AGB has negative net working capital, and its net worth was negative in June 1981. 126. Without more detailed financial data by product line, it is not possible to analyze in detail the company's profitability. The balance sheet indicates that assets (particularly liquid assets) have been built up. This increase along with the two years of losses, have been financed by sharp increases in short-term debt from banks. Bank debt rose from CFAF 200 million - 1 00 - at June 1979 to CFAF 3.2 billion at June 1981. The corresponding increase in interest charges has represented a substantial financial burden. Expansion Plans 127. AGB has ambitious plans for expansion, and has presented a CFAF 1.5 billion 3-year plan to the Government. This expansion would include transportation equipment, the construction of new warehouses, and the establishment of new sales outlets. AGB would like to build six retail stores in Atacora and Borgou Provinces, which it sees as fulfilling social objectives. The management would also like to install computerized inventory control systems. 128. AGB envisages a transition over time to a cooperative structure for consumer goods distribution. The AGB would serve as the central purchasing and distribution organization, dealing with local consumer coops which would sell at the retail level. Some consumer coops already exist in Zou and Borgou Provinces. AGB presently receives training assistance from the Coop Suisse, which trained a dozen AGB distribution agents in a six-week course. Discussions are also underway with Coop France to receive similar assistance. Recommendations 129. The mission believes that there is a positive economic role to be played by the Government in the consumer goods importing and distribution business in Benin, where a handful of private enterprises would otherwise control the market. However, AGB's profitability is so strongly influenced by Government pricing policy at present that it is hard to tell how efficiently AGB is performing its economic role. 130. The mission recommends, therefore, that AGB be allowed adequate margins on urban food commodities. Transport costs should also be incorporated into the prices to permit rational allocation of costs. If the Government wishes to phase in a realistic pricing policy over time, the diminishing subsidies could be reimbursed to AGB by the Treasury. Possibly foreign aid could contribute to the financing of this dwindling subsidy. 131. The mission recommends also that prior to expanding its retail outlets at interior points, AGB or consultants (including cooperative organizations) should assess the potential for AGB or a local coop to provide cheaper goods while retaining viable margins. - 101 - Table 1 AGB SUMMARY FINANCIAL DATA (in millions of CFA francs) -Fiscal Year (July 1-June 30)-- 1978/1979 1979/1980 1980/1981 -Income Statement---------------------- Sales 5,383 8,250 5,682 Purchases 4,166 6,725 4,199 Change in Stocks -464 -492 -163 Gross Margin 753 1,033 1,320 Operating Costs of which: 356 869 1,231 Personnel 102 224 284 Financial 60 339 594 Depreciation 54 93 150 Duties and Taxes 12 20 31 Operating Profits 397 164 89 Exceptional Profits/Losses 0 -203 -1B5 Taxes 236 217 144 Net Profit 161 -256 -240 --------------------…Balance Sheet----------------------- Liquid Assets 1,209 1,611 2,611 Accounts Receivable 1,160 1,365 1,358 Inventory 1,620 1,126 946 Fixed Assets 532 702 705 Total 4,521 4,804 5,620 Short-Term Debt 253 2,297 3,261 Other Short-Term Liabilities 3,531 1,979 2,071 Long-Term Debt 198 357 341 Capital and Reserves 378 427 187 Results of Current Period 161 -256 -240 Total 4,521 4,804 5,620 -________-__---_--Finance Indices-------------------- Cash Flow 215 -163 -90 Cash Flow net of financial charges 275 176 504 Net Working Capital 205 -174 -417 Profit Margin, % 3.0 -3.1 -4.2 Return on Equity, Z 35.2 -85.6 - Purchases/Sales, Z 86.0 87.5 76.8 Personnel/Sales, % 1.9 2.7 5.0 Accts. Receivable/Sales, months 2.6 2.0 2.9 Inventory/Sales, months 3.6 1.6 2.0 Current Ratio 1.05 0.96 0.92 Acid Test Ratio 0.63 0.70 0.74 Source: Analysis of AGB accounts, 1978/1979 to 1980/1981. - 102 - LA BENINOISE 132. In 1975 the Benin Government bought the Cotonou brewery soft drink plant from the French group Brasseries et Glacieres d'Indochine (BGI). Since then, two other plants have been built (a brewery at Parakou, and a soft drink and mineral water plant at Possotome), and a third one is under construction (Abomey). La Beninoise's capital stands at CFAF 637.5 million totaly paid in, and it is completely state-owned. The company employs 400-500 staff. Performance and present situation 133. La Beninoise has been profitable every year since 1975, but profits have been declining for the last three years. Unlike net profits, earnings before interest, taxes and depreciation (EBITD) have remained at the same level. The burden of interest and depreciation has been growing. This increasing trend of interest and depreciation results from the sustained investments that the company has made in recent years. These investments totalled CFAF 6.2 billion between 1977 and 1982. Without any additional cash outlay from the shareholder, the investment program was financed up to 24% by cash from operations, and the company had recourse to medium-term loans and suppliers credits for the remainder (CFAF 4.7 billion). 134. The company is presently very undercapitalized. Its ratio of equity to fixed assets dropped from 1.12 to 0.29 between 1977 and 1980. The debt/equity ratio is 7.6. To maintain a certain liquidity, La Beninoise has systematically deferred various payments due to the Government and other public entities (income tax, contribution to FNI, district and county taxes). The total deferred payments were estimated at CFAF 750 million as at May 1982. Main Problems 135. The declining financial results of La Beninoise's activities reflect increasing difficulties which can be summarized as follows. Technical Problems 136. It seems that several technical problems were not anticipated at the time La Beninoise was taken over by the Beninese government. Having lost the assistance of parent companies in Europe and in the region, La Beninoise suffered from long delays in spare parts delivery. Furthermore, since the expatriate maintenance specialist's departure in 1976, the machinery has not been overhauled. Poor maintenance has tended to downgrade the quality of the company's production which does not exceed 60% of the installed capacity in the Cotonou plant (450,000 hl of beer, 150,000 hl of soft drinks). 137. Partly as a result of poor maintenance, the fermentation unit installed in 1958 and the bottling line installed in 1962 (both for the Cotonou plant) are no longer in good condition. They should be replaced to enable La Beninoise to meet quality and quantity standards dictated by the market. - 103 - Pricing 138. Pricing is another issue which causes La Beninoise some problems although the company has made profits every year. The last price increase authorized by the Government took place in May 1981, twenty months after La Beninoise submitted its request. These long delays in revising sales prices adversely affect the company's profitability given the continued increase of production costs. Between January 1980 and May 1981 sales prices were raised by 50% on average while malt, maize and sugar cost La Beninoise respectively 78%, 105% and 133% more. These delays tend also to encourage speculators who take advantage of a relatively low price of beer in Cotonou and sell it at higher prices in other Beninese towns and even sometimes in Nigeria. Recently, the government instructed La Beninoise to stop selling to wholesalers and to supply the retailers directly. However, the effectiveness of this measure in reducing speculation is not yet known. Management and Staffing 139. Despite the ongoing recruitment and training program, La Beninoise may increasingly suffer from a lack of experienced technicians given the needs of the most recent plant at Possotome. Besides additional requirements at the level of production lines and maintenance, the company suffers from the general Beninese shortage of middle managers in the fields of accounting, financial management, and administrative services. Prospects 140. According to estimates prepared by UNIDO/BCP (Bureau Central des Projets--Ministere du Plan, de la Statistique, et de l'Analyse Economique) team, the market prospects seem favorable. La Beninoise' s installed capacity represents only 40% of the market and despite imports, the demand remains substantially unsatisfied. The company's profitability has been constrained by production problems. Thus, appropriate investments and technical assistance should be able to make it considerably more profitable. 141. Rehabilitating the Cotonou plant would cost approximately CFAF 3 billion, including new fermentation and bottling lines, and new administrative offices. In addition to this program of CFAF 3 billion considered for Cotonou, La Beninoise has begun construction of a brewery in Abomey which is expected to cost CFAF 6.2 billion. La Beninoise's management requested a capital increase of CFAF 15. billion. Even if the Government agrees to such a cash outlay, the debt service would substantially increase, calling for unrealistically high sales price increases. Recommendations 142. Given the relatively good performance of La Beninoise and its favorable outlook, it deserves support from its shareholder. The mission recommends that IDA assistance to the Beninese public sector include financial and technical assistance to La Beninoise, subject to a careful review of the market situation and projected operating costs. 143- While reviewing in detail the company's rehabilitation program (preparation of which could be financed under PPF), IDA should raise the _ 104 - following issue in addition to the company's major problems stated above. La Beninoise's aggressive expansion tends to exacerbate management problems. If the country is to comprise other breweries or soft drink plants, management of all plants within a single corporation may not be the most efficient setting. The Beninese Government may be better off establishing separate companies and, eventually, in joint ventures with private investors. - 105 - LA BENINOISE SUMMARY FINANCIAL DATA (in million of CFAF) Fiscal year July 1 - June 30 1977/78 1978/79 1979/80 From Income Statement Sales 3 062 3 202 3 379 EBITD 519 467 524 Financial charges 74 83 215 Depreciation 128 198 196 Net profit 85 73 31 From Balance Sheet Fixed assets (gross) 2 235 2 284 4 704 Equity as % of Net fixed assets 74.8 70.4 29.6 Inventory 956 1 423 1 834 Accounts receivable 291 244 354 Short term liabilities 1 316 1 619 2 188 Long term liabilities 364 571 2 506 Net working capital 38 134 143 - 106 - COBENAM Background 144. COBENAM (Compagnie Beninoise de Navigation Maritime) was created in 1974, following a determination by the Government that maritime transport was a key sector. The company was established as a mixed economy enterprise with an equity base of CFAF 500 million, 49 percent subscribed by the Algerian Government and 51 percent contributed by Benin. The company began operations in February 1975, chartering vessels to serve Benin's trade with Europe. Algeria provided initial technical assistance to the venture, but is no longer directly involved in COBENAM management. The company also performs steamship agency and travel agency activities in Cotonou. At present, COBENAM operates three small general cargo vessels (one owned, two time-chartered) in the trade to northern Europe, and participates in the relevant liner shipping conference. 145. COBENAM's strategy of moderate growth based mainly on chartered (rented) vessels resulted in substantial financial success through early 1982. At that time, the introduction of additional capacity by COBENAM coincided with a sharp reduction in cargo destined to Nigeria via Cotonou and resulted in very low utilization levels. COBENAM has consequently suffered heavy losses over the past year (early 1982 to early 1983). Growth of Operations 146. The company's growth has been characterized by a gradual but steady approach to business. Algeria initially provided assistance in COBENAM's management, and also placed Beninese merchant seamen aboard its vessels for training (until 1978). The company began operations by chartering small vessels (each of about 4,000 deadweight tons) for periods of six to twelve months. In 1978, a second-hand vessel of 4,400 deadweight tons (DWT) was purchased. This vessel and two other vessels of about 5,400 DWT each have been operated since 1978. A third vessel was chartered-in, as an experiment, in May 1982, but wasredelivered in November 1982. 147. This growth pattern is reflected in COBENAM's rising traffic figures (Table 1). Initial traffic of 12,000 metric tons in 1975 rose to 40,000 tons per year during the 1976-78 period when two chartered vessels were being operated. From 1979 through 1981, a traffic level of approximately 60,000 town has been achieved. The most recent data (July 1981 to June 1982) indicate 53,000 tons carried. Current Situation Recent Trade Developments 148. The Nigerian measures taken in the spring of 1982 to reduce imports have had a substantial effect on the volume of import cargos through Cotonou. Traffic dropped precipitously in May 1982 and has been low throughout 1982. Benin's exports of cotton, cocoa, and palm cake were also very low in the second half of 1982, and Niger's exports dropped as well. The reduction in cargo to Nigeria not only reduced COBENAM's traditional southbound volume, but also caused more direct competition. Non conference - 107 - lines such a Medafrica which had been heavily dedicated to the Nigerian trade found themselves with excess capacity and began to compete with COBENAM for Cotonou cargo. These outsiders undercut COBENAM's rates and reduced COBENAM's market share. Market Position 149. Historically, COBENAM has obtained a market share of 20 to 30 percent of the COWAC (Continent-West Africe Conference) trade to and from Benin (Table 1). 150. This represents a 20 percent share of Benin's import traffic from northern Europe and a 50 percent share of the export trade. COBENAM has captured this share with a three-vessel fleet offering a sailing every two or three weeks (seven rotations per year per vessel, giving 21 sailings annually). 151. COBENAM management is fully aware that service levels are not of the highest quality. The vessels are small tween deckers without refrigerated container capacity or deeptank capability. COBENAM does not yet own any containers, although it carries about 100 per trip southbound and recently leased 300 containers for a two-year period. The COBENAM fleet does not begin to compare with the sophisticated container ship tonnage recently introduced by carriers such as the French line Delmas-Vieljeux. 152. COBENAM's market can be segmented into distinct groups. On the export side, COBENAM handles about 90 percent of Benin's produce since the carrier is specified by the two state enterprises (SONACEB and SONICOG) handling agricultural shipments. COBENAM's export traffic thus consists largely of palm products (cake only, since the vessels have no deeptank capability to carry vegetable oil), cotton, coffee and cocoa. 153. On the import side, the market can be segmented between imports purchased by Benin public enterprises, Benin private firms, and parties in adjacent (especially landlocked) countries. COBENAM has not carried out market research in these areas, but it is believed that state enterprises give some priority to COBENAM in terms of recommending that some portion of their purchases be shipped by the Benin-flag carrier. Malt imports for the La Beninoise brewery (state-owned), for instance, are a large import cargo for COBENAM. Since most goods are ordered on c.i.f. terms, the shipping decision is generally made in Europe, and COBENAM depends upon its overseas agents to secure freight bookings. For private Beninese buyers and others (importing cigarettes, for example), COBENAM has no specially privileged position, and must rely on its service and reputation to attract customers. 154. With reference tothe UNCTAD Liner Shipping Code, which has introduced a concept of 40:40:20 cargo reservation (40 percent for the vessels of each trading nation partner, with 20 percent for third-flag "cross/traders"), COBENAM exceeds its share of Benin's exports. It carries only about half of its theoretical 40 percent share of imports, which is the heavy leg of the trade. COBENAM does not directly participate in any cross/trading activities. That is, it does not call at any other African ports, with the exception of occasional cocoa loadings at Lome and Abidjan northbound. - 108 - 155. COBENAM has recently entered into a slot charter arrangement with the private Ivorian shipping line, SIVOMAR. This agreement extends COBENAM's reach to the Mediterranean, which it does not serve directly, via SIVOMAR's vessels. This type of arrangement provides COBENAM with a portion of the revenue from freight which it cannot carry presently itself, and gives the partner a preferred position in handling some of Benin's imports. COBENAM is seeking similar slot charter arrangements with lines serving the Far East, the U.K., and the U.S./Canada. Management and Personnel Situation 156. COBENAM's management has been quite successful (until the recent worldwide downturn) in the complex world of liner shipping. This is particularly remarkable given the absence of any technical assistance since 1976. However, current porblems have prompted the general manager of the firm to request management strengthening in several areas. These include: - Assistance to develop a chartering capability and to investigate other shipping services that might be offered; - Assistance in developing a management information system to track lhe containers that are increasingly being carried; - Assistance in strengthening the voyage accounting system; and - A marine superintendent to provide technical oversight of vessel maintenance and crew training activities. 157. Training of merchant seamen has progressed well. Out of the crew of 25 persons aboard the M/S Ganvie (the only Benin-flag vessel), 23 are Beninese. A Benin national will soon be qualified as chief engineer, and eventually the master will be a Beninese as well. The seamen were initially trained at the merchant marine school in Abidjan, and afterwards at sea on Algerian ships. Financial Situation 158. COBENAM's financial situation was quite positive through fiscal year 1980-81. At that time, the company was profitable, enjoyed strong cash flow, a substantial net working capital, and new worth of over CFAF 600 million (see Table 2). Revenues had reached CFAF 2.9 billion in 1980-81, reflecting a ten percent volume increase over the previous year and higher freight rates as well (see Table 1D). Return on equity had ranged between 5 and 15 percent. Personnel costs as a proportion of sales were falling, as were accounts receivable over sales. This indicated good cost control and collection efforts. 159. The past year has witnessed developments which reversed COBENAM's financial fortunes. The untimely addition of a third chartered vessel to the fleet in May 1982 coincided with a sharp drop in southbound tonnage, resulting in the additional vessel sailing almost empty. Northbound cargos were very low as well. In the fall of 1982, the owned vessel was drydocked in Antwerp and repair costs of over CFAF 100 million were incurred. Exchange rate fluctuations also hurt, as dollar and deutschmark-denominated costs increased - 1 09 - without compensating revenue increases. While sales totaled CFAF 4 billion in 1981-82, a loss after tax of CFAF 250 million was recorded. Results for the interim fiscal period (July-December 1981) are expected to be even worse. Thus, the net worth of the company may have bee almost entirely eliminated. COBENAM has so far had sufficient cash flow, however, and has not had recourse to short/term bank borrowing. Commentary 160. Th-Ls rapid change in COBENAM's fortunes indicates the need for a very strong equity base in shipping. COBENAM's initial equity of CFAF 500 million was substantial compared to many of the public enterprises, but shipping is a risky and highly cyclical business. Further equity contributions may be needed. 161. The importance of timing is also noted. Despite the flexibility inherent in operating chartered tonnage, the decision to add a vessel for six months in 1982 probably had a negative impact of several hundred million CFAF on the financial results. 162. The downturn in southbound traffic also provides evidence of the importance of Nigeria-destined cargo; market research would enable this cargo to be identified and assigned a higher degree of risk than, say government- generated cargos. Plans for Expansion 163. COBENAM has been planning for some time the purchase of a new vessel of approximately 6,000 DWT. Technical specifications were drawn up with Algerian assistance, and bids have been received from shipyards and evaluated. A feasibility study has been prepared by COBENAM and revised in conjunction with the BBD. 164. Preliminary review of the feasibility study indicates that purchase of a new vesisel might not be as attractive financially as maintaining the existing chartered tonnage. The timing is questionable given the current weakness in the marketplace and COBENAM's current lack of financial resources. Ideally, investment decisions of this magnitude (CFAF 4 to 5 billion) should be based on a thorough business strategy analysis. Recommendations 165. COBENAM has suffered a recent downturn in its fortunes. However, it is a relatively well-managed public enterprise that has enjoyed a reasonable market share and is continuing to generate cash flow even in a very difficult environment. Technical assistance would be useful at present to strengthen managment capability in the face of a demanding economic situation and new technology (containerization). Both technical assistance and eventually financial support for new investments could be provided under a possible IDA- financed public enterprises project. 166. It is recommended that the precise rehabilitation and assistance needs of COBENAM be developed in the context of an overall business strategy study. Such a study should include an analysis of the external environment - l1 0 - (regulatory situation, economic conditions, market reserach and competitive analysis), the internal capabilities of COBENAM (objectives, organization, personnel, operations, marketing, cost analysis, finance and accounting), and the development of a rehabilitation plan. The rehabilitation plan should assess both the Government's and COBENAM's strategic objectives, analyze the options available, and recommend preferred options. Necessary resources and conditions should be specified as well. - ill - Table 1 COBENAM TRAFFIC, MARKET SHARE AND FREIGHT RATES 1975-1981 A. COBENAM Traffic (cargo carried in metric tons) Year Import Export Total 1975 4,094 8,247 12,341 1976 17,831 24,702 42,533 1977 20,185 20,586 40,771 1978 28,974 10,739 39,713 1979 38,429 21,617 60,046 1980 35,979 25,703 61,682 1981 49,122 17,054 66,176 B. Total Liner Traffic North Continent/Benin (COWAC) (metric tons) Year Import Export Total 1977 210,399 1978 171,174 22,306 193,480 1979 154,364 35,006 189,370 1980 177,982 55,126 233,108 C. COBENAM Share of COWAC Traffic, % Year Import Export Total 1977 - - 19.4 1978 16.9 48.1 20.5 1979 24.9 61.8 31.7 1980 20.2 46.6 26.5 D. Average Freight Rates Obtained by COBENAM Average Freight -Revenues (million CFAF)- ----Tonnage Carried---- Revenue Obtained CFAF per Fiscal Year per Year per Vessel per Year per Vessel metric ton 1977-1978 894.7 298.2 41,000 13,666 21,820 1978-1979 1,223.9 408.0 58,000 19,333 21,100 1979-1980 2,012.2 670.7 50,000 16,666 40,240 1980-1981 2,485.0 828.3 55,000 18,333 45,180 Source: COBENAM, Dossier Acquisition d'un Navire, February-March 1982. - 112 - Table 2 COBENAM SUMMARY FINANCIAL DATA (in millions of CFA francs) 1978/79 1979/80 1980/81 -------------------------------------- Income Statement ------------------------------------- Sales 1,538 2,397 2,908 Purchases n.a. n.a. n.a. Change in Stocks n.a. n.a. n.a. uross Margin n.a. n.a. n.a. Operating Costs, of which: n.a. n.a. n.a. Personnel 148 163 187 Financial 54 48 40 Depreciation 90 91 83 Duties and Taxes 46 133 110 Uperating Profits n.a. n.a. n.a. Exceptional Profits/Losses n.a. n.a. n.a. Taxes n.a. n.a. n.m. Net Profit 31 93 55 ---------------------------------------- Balance Sheet -------------------------------------- Liquid Assets 190 196 363 Accounts Receivable 1,209 1,492 1,450 Inventory 5 1 1 Fixed Assets 720 647 111 Other 64 104 572 Total 2,188 2,440 2,497 Short-Term Debt/Liabilities 1,178 1,319 1,400 Long-Term Debt a/ 394 338 281 Capital and Reserves 542 586 594 Results of Current Period 31 93 55 Total b/ 2,079 2,347 2,442 …____--------------------------- Financial Indicators ----------------------------------- Cash Flow 121 184 13B Cash Flow net of Financial Charges 175 232 178 Net Working Capital 226 370 414 Profit Margin, $ 2.0 3.9 1.9 Return on Equity, % 5.6 14.7 8.8 Purchases/Sales, % n.a. n.a. n.a. Personnel/Sales, % 9.6 6.8 6.4 Acets. Receivable/Sales, months 9.4 7.5 6.0 Inventory/Sales, months 0.0 0.0 0.0 Current Ratio 1.19 1.28 1.30 Acid Test Ratio 1.19 1.28 1.30 a/ Computed from terms of BBD credit. b/ Figures supplied by COBENAM do not match total assets. Source: Analysis of COENAM data. - 113 - SONAE Background 167. The Societe Nationale d'Equipement (SONAE), which presently employs 150 people, was founded as a state-owned company in 1975 to enable the government to better control the importation and distribution of capital goods, vehicles and civil work equipment. However, the Beninese Government did not grant SONAE any monopoly privilege. Business Lines and Performance 168. SONAE imports and distributes cars and trucks from Renault-Saviem and Nissan, and civil work equipment manufactured by Komatsu. Cars and trucks amount to 6C)% of total sales, with the balance resulting from spare parts and service charges. 169. SONAE has managed to control about 35% of the small car market, but has to contend with very keen competition from private companies (which distribute Peugeot, Mercedes, Caterpillar, Massey/Ferguson, etc.) in the large car, truck, and heavy equipment product lines. 170. With a turnover of CFAF 3 billion, SONAE has had an average net profit of CFAF 50 million in the last three years. This is a mediocre performance (profit equals 1.6% of sales) given the free price policy under which SONAE operates. Main Problems 171. One of SONAE's major problems is the absence of modern garage. Negotiations have been going on for quite some time to buy the garage of SGACI, a bankrupt private company which closed in 1976. The cost would be around CFAF 200 million (equipment excluded) while construction of new premises would cost more than CFAF 400 million 172. Staffing has also been an issue for SONAE. The company is short of qualified sales managers. For the technical department, an expatriate mechanic was recruited two years ago. He has strengthened the maintenance division but problems remain in the workshop as well as at the customers' level. 173. Finance charges paid by SONAE have been too high (9.2% and 6.3% of sales in 1980 and 1981 respectively) and are largely responsible for the company's lolw profitability. These financial charges result mostly from short term borrowing (suppliers' credit to a large extent) necessary to finance CFAF 1.0 and 2.5 billion of stocks and receivables respectively. The receivables, which amount to 83% of annual sales, reflect the long delays of payment from central government and other public entities. Prospects and Recommendations 174. SONAE's prospects will depend on its capability to provide good back- up services in a modern garage and to reduce the level of credit it extends to its customers. For the time being, SONAE's performance is too mediocre to be satisfactory. - 114 - 175. The mission believes that IDA financial assistance to SONAE is not advisable nor necessary. Nevertheless, SONAE should be listed among public enterprises to be formally reviewed. SONAE's original purpose of establishing government control over capital goods imports is highly questionable. On the other hand, the company could be maintained if its performance can be improved. This could be achieved by opening the company's capital to one or two suppliers who could bring their expertise for better back-up services, finance part of a modern garage, and eventually offer better credit conditions to SONAE. - 115 - SONAE Summary financial Data (in millions of CFAF) Fiscal year July 1 - June 30 1978/79 1979/80 1980/81 From Income statement Sales 2.876 3.587 3.029 Financial charges 58 387 191 Operating Profit 121 97 122 Net profit 62 35 46 From Balance sheet Accouni: receivable 2.044 2.889 2.494 Inventory 443 505 1.036 Short-term liabilities 2.144 2.973 2.979 Long-term liabilities 99 111 Fixed assets (net) 99 112 111 Capital and Reserves 405 *478 534 Net working capital>- 306 465 534 - 116 - CIB Background 176. CIB (Ceramique Industrielle du Benin) is a mixed-economy firm that produces tiles, sanitary fixtures, and decorative ceramic items. The enterprise was created in 1974 as the successor to the Societe Nationale de Ceramique formed in 1969. Stock is held 80 percent by the government and 20 percent by a West German company, AGROB Anlagembau GMBH. CIB is supervised by the Ministry of Industry. Business Lines 177. CIB's factory is located in Cotonou's industrial area near the port. Production began in mid-1976. Originally, imported clay and other materials were used, but at present virtually all the clay is supplied domestically. There are two separate production lines, one for tiles and the other for sanitary fixtures (sinks and toilets). The factory also produces small ceramic items such as ashtrays, vases, beer mugs, etc. Problems 178. CIB has experienced numerous difficulties over the past six years which have led to a recent decision to liquidate the company. Production problems, linked to deficient equipment, have continually affected the volume and quality of output. Despite the fact that local demand for wall tiles has been very strong, inadequate production has led to negative financial results. Technical 179. A major technical problem has been that the kiln heats unevenly, resulting in warped tiles of varying color, and often requiring a second firing for a portion of the tiles. This is partly due to the problems with the electric resistor elements (heating coils), which break frequently. The electric kiln is also very expensive to operate, and was originally supposed to have been an oil-fired tunnel kiln. The original tile presses did not develop enough pressure to product floor tiles, so that a new press had to be installed. The sanitary items, built to a German design, did not always match the plumbing hardware available on the local market. Finally, the production line moves very slowly due to deficient equipment at various stages. Relationship with the Foreign Partner 180. CIB sells its output at the factory and enjoys an excess demand for its wall and floor tiles. The Benin market for tiles is estimated at 250,000 m2/year for wall tiles and 60,000 m2/year for floor tiles. CIB's production in 1980 was only 10,000 m2 of wall tiles, or 4 percent of the market segment. Though the quality is not high, the prices appear to be attractive. Imports from overseas meet the remaining demand; no imports from Nigeria have been noted. The market for sanitary items does not appear as robust, and CIB had to lower its prices in 1979 to meet competition from imports. - 117 - Management 181. Production management and planning have been weak. The CIB workforce of 60 persons is drawn from ceramic artisans, who have not been molded into an industrial production team. This lack of a suitable production-line pace of activity and of adequate production planning has hindered CIB's operations. The staff has been kept on even though production has never exceeded 10 to 20 percent of capacity. The most recent three-year financial forecast, which is sent to the Council of Ministers, indicates plans for CFAF 210 million in sales when the latest accounts show sales of CFAF 29 million. This sort of unrealistic planning cannot assist a rational management of the enterprise. Financial 182. CIB is financially insolvent, with negative cash flow, negative working capital, and a negative net worth (see Table 1). Although the latest financial statement available is for fiscal year 1980, even by that point cumulative losses had reached CFAF 470 million, considerably more than the original equity (CFAF 118 million) contributed by the government. CIB has defaulted on loans from BBD and BCB, and has paid no dividends or income taxes in recent years (it was exonerated from taxes during 1977-79 under Regime B of the Investment Code). Preliminary results for the 1981 fiscal year suggest another loEIs of some CFAF 160 million, despite increased sales. Rehabilitation 183. The CIB is in judicial liquidation and the Government plans to restart operations in a different manner. The market value of fixed assets (using a recent government assessment of current equipment value) was about CFAF 230 million as of June 1980, or about 56% of book value. Assuming continued losses since then, the firm's liquidation value might stand at about negative CFAF 750 million in June 1982. This is the most approximate loss to be taken into account in designing a rehabilitation program. 184. New investments would then be required to make CIB operational on a sound basis. A mission by the German ceramic company ENCON of Hamburg (who are suppliers themselves) in late 1981 estimated total investments necessary at CFAF 750 million. Recommendations 185. The government has properly recognized CIB's problems and is taking steps to restructure the operation on a firmer footing. The mission offers the following observations: - By all indications, a large local market for tiles exists. Given that the clay and other materials (nine minerals in all) exist in good quality in Benin, it makes sense to operate a ceramic factory of some sort. - A consultant should be sought to provide an independent assessment of several rehabilitation options. Specifically, the viability of a low-cost rehabilitation should be compared with the expected benefit/cost relationship of a major investment program. - 118 - - Some management assistance appears to be needed in the organizing of the factory's plans and procedures. Ideally, a foreign partner with directly relevant experience can be found who will participate in the management and financing of the new enterprise. -s 119 - Table I CIB SUW4ARY FINANCIAL DATA (in millions of CFA frwcs) Fiscal Year (July 1-Jue 30) 1980 - -- -----------Income Statement--------- …-_-_----- Sales 29.1 Purchases 24.5 Chwnqe in Stocks -2.1 Gross argin 2.5 Operating Costs, of aiich: 167.2 Personnel 26.8 Financial 44.2 Depreciation 71.7 Duties & Taxes 1.8 Operating Profits -164.7 Exceptionel Profits/Loose -1.5 Taxes 0.6 Net Profit -166.9 --------------------B lace Sh t---- ---------- Liquid Assets 0.5 Accounts Receivable 11.0 Inventory 52.7 Fixed Assets 417.5 Total 418.7 Short-Term Bonk Debt 51.3 Other Short-Term Liabilities 256.7 Long Term Debt 497.3 Capital and Reserves -156.7 Results of Current Period -166.9 Total 481.7 -…-----------------Finaicial Indices…---------------- Cash Flow -95.2 Cash Flow net of Finwncial Charges -51.0 Net Working Capital -245.8 Profit Margin, t -5?3.5 Return on Equity, S __ Purchases/Sales, % 91.4 Personnel/Sales, S 92.1 AcCts. Receivable/Sales, months 4.5 Inventory/Saies, months 21.7 Current Ratio 0.21 Acid Test Ratio 0.04 - 120 - TRANS-BENIN 186. Trans-Benin is a mixed-economy trucking company created in 1977, which began operations in September 1979. Initial capital was fixed at CFAF 300 million, to be subscribed 49% by the state and 51% by a group of private Beninese truckers. To date, only CFAF 103 million have been paid in, as the private truckers declined to contribute their full share. The objective of the company is to haul freight by road, particularly between Benin and neighboring countries. This objective is to be extended to passenger transportation as well. Early Development 187. Trans-Benin was planned to take advantage of the considerable truck traffic to Nigeria from the port of Cotonou. This Nigerian traffic, which had formed the basis for the initial feasibility study, dropped sharply just after the company's creation. According to Trans-Benin, this traffic fell from 213,000 tons in 1977 to only 6,000 tons by 1979. This occurrence severely damaged Trans Benin's prospects. 188. An unusual aspect of the company's formation is the reliance on a large group of private truckers to provide a majority of the equity required. It is not clear how this was arranged, but Trans-Benin managers have explained that this participation was reticent at best, and that the private shareholders have not taken any interest in Trans-Benin's fortunes since its establishment. Present Situation and Ma.jor Problems 189. Trans-Benin is in a deplorable situation, with negative cash flow, negative net working capital, and negative net worth. Many of its vehicles are inoperative, it has no workshop facilities, and its revenues do not come close to meeting expenses. Trans-Benin operates in a highly competitive environment dominated by small, entrepreneurial private truckers whose capital and operating costs are much lower. The management's proposals to help the firm survive appear to be based upon the introduction of non-competitive measures which would reserve certain freight for Trans-Benin at remunerative rates. These measures are not necessarily in the best interest of Beninese consumers of trucking services. Technical Problems 190. The initial fleet deployed in 1979 was as follows: - 10 Berliet tractors, 30 ton load - 10 Berliet trucks, 19 ton load - 5 Umberto semi-trailers, 25 ton load - 8 Fruehauf semi-trailers, 30 ton load At present, the fleet condition is as follows; - 4 out of 10 tractors operating - 5 out of 10 trucks operating - 6 out of 13 semi-trailers operating. - 121 - 191. This situation is due to a lack of maintenance, aggravated by the lack of a Berliet service agent in Cotonou which entails trips to Nigeria or Togo for any purchase of spare parts. In addition, Trans-Benin does not have a workshop cf its own, and all repairs are conducted in the open air which renders maintenance activities inefficient. The inability to establish a workshop is in turn largely the result of initial financial difficulties with equipment financing, which did not leave sufficient funds available. Financial Difficulties 192. Trans-Benin's financial problems surfaced very early on. The shareholders were apparently unwilling to contribute more than about a third of the agreed-upon equity. Once the Nigerian traffic plummeted, the planned suppliers credit fell through as well. However, the company purchased its equipment through a three-year bridge loan of CFAF 250 million from one of the Benin state-owned banks. Only the first principal repayment (May 1980) of CFAF 42 million has been met. This first repayment exhausted the company's working capital. 193. The company has never enjoyed a profitable year, and this reflects a fundamental imbalance between revenues and costs. Table 1 presents summary financial data, and indicates that operating suppliers (fuel, tires, and spare parts) plus personnel costs have ranged from 60 to 130 percent of sales. Thus, aside from the capital cost elements of depreciation and financing charges, there appears to be little potential for profitability from the operations as presently structured. 194. Trans-Benin recorded a current ratio of 0.2 as of June 1982, and net working capital of negative CFAF 124 million. A negative cash flow of CFAF 48 million was reported for the 1981-82 year. Net worth stood at negative CFAF 263 million. Pricing Problems 195. Pricing is characterized by intense competition by numerous small and large operators. Although trucking tariffs are officially set at a level of CFAF 31 per ton-km, these rates are not respected and private truckers often accept 15 francs. The public enterprises take the lowest-price transport with no preference for Trans-Benin. For instance, the official cement price structure is based on a 31 franc transport cost, but Trans-Benin is actually receiving only 17 francs to haul cement to the northern part of the country. This freight was obtained partly because the private truckers do not care to transit the rough roads to Natitingou. At present, Trans-Benin does not have difficulty in securing freights, although the rates are low. 196. The cost structure of private truckers is undoubtedly lower than that of Trans-Benin. Private truckers may obtain their vehicles on the unofficial market, do not pay social charges for their employees, and do not necessarily pay any taxes. There are also under-the-table rebates paid to obtain freight. Trans Benin, as a public enterprise, is constrained to operate above-board and hence with higher costs and more difficult marketing. - 122 - 197. Trans-Benin's management suggests that a possible solution is the establishment of a freight bureau which would allocate freight to registered, regulated carriers. The concept of a national freight bureau has apparently been accepted in principle, but the government has not yet found an appropriate agency to manage the bureau, having rejected the proposals of the OCBN and Trans-Benin to fulfill this role. Such freight bureaus apparently exist in Ivory Coast and elsewhere. Management Problems 198. Trans-Benin's managers encountered in the mission's 1982 and 1983 visits do not appear to have had any commercial experience in trucking. They have come from backgrounds in the civil service, either in Public Works or elsewhere. They do not appear to have been well-prepared to deal with the harsh competitive realities of the trucking world. The managers' key effort at present appears to be toward obtaining some protection from the competition through the establishment of a freight bureau which would favor Trans-Benin. However, it should be noted that Trans-Benin prepared a cogent summary of their present difficulties for the mission and that up-to-date accounts were made available. Recommendations 199. The government's Commission des Bilans apparently recommended that Trans-Benin be closed. However, this recommendation was overturned and the chosen solution appears so far to lie with regulatory protection of Trans Benin and its expansion into long-distance passenger transport which might be more lucrative than the present freight operations. 200. In the mission's opinion, it would not be advisable to create any regulatory structure which would result in less competition and potentially higher rates. Our experience is that trucking is a highly competitive industry in most developing countries, and that rates have fallen in developed countries (such as the United States) which have dismantled their regulatory frameworks. The preservation of a high-cost operator, even if it has benefited from government equity, should not dictate the policy approach toward the subsector. 201. The continued existence of Trans-Benin deserves a thorough review. Its operations have been quite unprofitable, and it is questionable whether further investments would improve the situation. To this end, the mission recommends that a study be conducted of Trans-Benin with a view toward making recommendations as to its future. This study should include the following elements: - Review of equipment suitability, condition, and maintenance; - Analysis of utilization, rates obtained, and cost structure; - Analysis of the trucking market, both national and regional; - Review of Trans-Benin's competitors in the trucking subsector; - Review of alternative opportunities for Trans-Benin; - Recommendation of a rehabilitation, reorganization or closing plan for Trans-Benin; - Recommendations concerning appropriate national policy for the trucking subsector. - 123 - Table 1 T'RANS BENIN SllMhAkY FINANCIAL DATA (in millions of CFA francs) 1979/80 1980/81 1981/82 - - - - - - - - - - - - - - - Income Statement - - - - - - - - - - - - - - - Sales 67 145 102 Purchases (fuel, tires, spare parts) 34 52 56 Changes in Stocks 5 1 1 Gross Margin 38 94 45 Operating Costs, of which: 169 193 184 Personnel 53 34 41 Financial 15 12 17 Depreciation 58 134 104 Dutie3 and Taxes 10 5 3 Other 33 35 19 Operating Profit -131 - 96 -139 Exceptional Profit/LoS3 0 0 -13 Taxes 0 1 0 Net Profit -131 - 97 -152 - - - - - - - - - - - - - - - - Balance Sheet - - - - - - - - - - - - - _ Liquid Assetsl 4 4 7 Accounts Receivable 7 35 19 Inventory 5 6 7 Fixed Assets 262 173 69 Total 27B 218 102 Short-Term Debt 91 124 157 Long-Term Debt 203 238 208 Capital and Reserveal la - 17 -111 Results of Current Period -131 - 97 -152 Total 278 218 102 - - - - - - - - - - - - - - - Financial Indices - - - - - - - - - - - - - Cash Flow - 73 7 - 48 Cash Flow net of financial charges - 58 19 - 31 Net Working Capital - 75 - 79 -124 Net Worth - 21 -114 -263 Profit Margin, X (loss) (loss) (loss) Return on Equity, X n.a. n.a. n.a. Purchase/Sales, X 50.7 35.9 54.9 Personnel/Sales, X 79.1 23.4 40.2 Accounts Receivable/Sales, months 1.3 2.9 2.2 Inventory/Sales, months 0.1 0.5 0.8 Current Ratio 0.18 0.36 0.21 Acid Test Ratio 0.12 0.31 0.17 lExcludes CFAF 197.5 million of "non-called shareholder capital." Source: Analysis of TRANS BENIN accounts, 1979/80 to 1981/82.