African Development Fund

Language: English AFRICAN DEVELOPMENT FUND

Original: French

PROJECT: RESOURCE MOBILISATION AND INVESTMENT ATTRACTIVENESS INSTITUTIONAL SUPPORT PROJECT (PAIMRAI)

PROJECT APPRAISAL REPORT

Team Leader : Y. ARVANITIS, Principal Governance Expert ECGF Co-team Leader: M. S. BA, Governance Project Officer/Young professional ECGF

Project Team C. NYIRAHUKU, Chief Gas Sector Regulatory Officer ECNR O. STOULLIG, Principal Industrial Policy Officer PITD.1 W. DAKPO, Chief Regional Procurement Coordinator SNFI.1 Appraisal O. OUATTARA, Principal Financial Management Specialist Team F. FAYE-BA, Principal Disbursement Officer SNFI/COSN C.D. DIOUF, Chief Procurement Specialist COSN N. GAHUNGA, Chief Gender Officer SNFI/COSN S. COULIBALY, Consultant RDGW ECGF Director General : Marie-Laure AKIN-OLUGBADE RDGW Sector Director : Abdoulaye COULIBALY ECGF Country Manager : Adam AMOUMOUN (OIC) COSN Date: June 2019

Loubna BOURKANE, Senior Development Economics Officer, COSN Alain EKPO, Principal Governance Officer, ECGF Peer Robert EGUIDA, Principal Portfolio Officer, RDGW Reviewers Jan LOEPICK, Senior Economist, Global Tax Unit, World Bank Samuel BLAZYK, Principal Results Specialist, SNDR/AHWS.1

AFRICAN DEVELOPMENT FUND

SENEGAL

RESOURCE MOBILISATION AND INVESTMENT ATTRACTIVENESS INSTITUTIONAL SUPPORT PROJECT (PAIMRAI)

Public Disclosure authorized

RDGW/ECGF/COSN

Public Disclosure authorized

July 2019

TABLE OF CONTENTS 1. INTRODUCTION: THE PROPOSAL ...... 1 2. STRATEGIC THRUST AND RATIONALE ...... 1 2.1. Project Linkages with Country Strategy and Objectives ...... 1 2.2. Rationale for Bank Intervention ...... 3 2.3. Coordination of Interventions of Technical and Financial Partners ...... 7 3 PROJECT DESCRIPTION ...... 7 3.1 Project Components ...... 7 3.2 Technical Solutions Adopted and Alternatives Explored ...... 13 3.3 Project Type...... 13 3.4 Project's Target Beneficiaries ...... 13 3.5 Participatory Approach to Project Design and Implementation ...... 14 3.6 Bank Group Experience and Lessons Reflected in Project Design ...... 14 3.7 Performance Indicators ...... 14 4 PROJECT FEASIBILITY ...... 15 4.1 Economic and Financial Performance ...... 15 4.2 Environmental and Social Impact ...... 15 5 PROJECT IMPLEMENTATION ...... 16 5.1 Implementation Arrangements ...... 16 5.2 Monitoring and Evaluation ...... 17 5.3 Project Governance ...... 18 5.4 Sustainability ...... 18 5.5 Risk Management ...... 18 5.6 Knowledge Building ...... 19 6 LEGAL FRAMEWORK AND AUTHORITY...... 19 6.1 Legal Instrument ...... 19 6.2 Conditions for Bank Intervention ...... 19 6.3 Compliance with Bank Policies ...... 19 7 RECOMMENDATION ...... 19 ANNEX I: COUNTRY'S SOCIO-ECONOMIC INDICATORS ...... I ANNEX II: TABLE OF BANK PORTFOLIO IN SENEGAL ...... II ANNEX III: IMF POSITION ON STRUCTURAL REFORMS AND RESOURCE MOBILISATION IN SENEGAL ...... IV

LIST OF TABLES

Table 1 : Description of Components Table 2 : Costs by Expenditure Category Table 3 : Sources of Financing Table 4 : Cost Estimates by Component Table 5 : Cost Estimates by Sub-Component Table 6 : Milestones in Implementing the PAIMRAI Table 7 : Risks and Mitigation Measures

LIST OF FIGURES Figure 1 : Real GDP Growth Rate (%) Figure 2 : Tax Burden (GDP %)

LIST OF BOXES Box 1 : Modernising Tax Administration, Adoption of Online Procedures and Impact on the Informal sector Box 2 : International Taxation and Collection Box 3 : The “Big Fast Results” - a New Approach to Structuring PSE Projects

LIST OF ANNEXES Annex I : The Country’s Comparative Socio-Economic Indicators Annex II : Table of AfDB Portfolio in the Country Annex III : IMF Position on Structural Reforms and Resource Mobilisation

LIST OF TECHNICAL ANNEXES Technical Annex A – Country Development Agenda, Sector Overview and Context for Operation Design A1. – Country Development Agenda A2. – Taxation and Resource Mobilisation in Senegal: Technical Note A3. – Technical Note on Hydrocarbon Taxation A4. – Technical Note on Environmental Taxation A5. – Sector note on competitiveness and industry

Technical Annex B – Support for the Report's Key Arguments B1. – Detailed Project Costs B2. – Implementation Arrangements B3. – Procurement Arrangements B4. – Financial Management Arrangements B5. – Environnemental and Social Analysis

Annex C – Other Technical Annexes C1. – Detailed Description of Project Activities

CURRENCY EQUIVALENTS May 2019

Monetary Unit Senegal = XOF UA 1 = XOF 810.30 UA 1 = USD 1.39 UA 1 = EUR 1.235

WEIGHTS AND MEASURES

1 tonne = 2204 pounds (lbs) 1 kilogramme (kg) = 2.200 lbs 1 metre (m) = 3.28 feet (ft.) 1 millimetre (mm) = 0.03937 inches (“) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.471 acres

FISCAL YEAR January - December

ACRONYMS AND ABBREVIATIONS

ACAB Budget Support Group ADF African Development Fund AEO African Economic Outlook AfDB African Development Bank APIX National Agency for Investment and Major Works Promotion BOS Operations Monitoring Office COSN Senegal Country Office CRM Customer Relationship Management CSP Country Strategy Paper DAIDA Debt Management Platform DGCPT General Directorate of Public Accounting and Treasury DGID General Directorate of Taxes and Estate Management DLCI Legislation and International Cooperation Department DODP Public Expenditure Authorisation Directorate DPEE Planning and Economic Forecasting Department DRSCF Directorate of Intelligence and Tax Audit Strategies DSI DGID Directorate of Information Systems Directorate EITI Extractive Industries Transparency Initiative EU European Union E FAPA Fund for African Private Sector Assistance FDI Foreign Direct Investment GAP II AfDB Governance Action Plan GDP Gross Domestic Product GPCRC Partial Credit Guarantee for Currency Risk Hedging GTC General Tax Code IMF International Monetary Fund INQ National Quality Infrastructure ISPE Economic Policy Support Instrument MEF Ministry of Economy and Finance MIC Middle-Income Income Countries OECD Organisation for Economic Cooperation and Development PAIMRAI Institutional Support Project for Internal Resource Mobilisation and Investment Attractiveness PAMRER Internet Resource Mobilisation and Reform Effectiveness Support Programme PAP Priority Action Plan PAPSP Private Sector Development Support Project PARDL Support to Local Development Reforms Programme PCRA Procurement Capacity Risk Assessment PDCEJ Project to Support Youth Skills Development and Entrepreneurship in Growth Sectors PDD Public Debt Department PEFA Public Expenditure and Financial Accountability PIU Project Implementation Unit PPC Public Procurement Code PPP Public-Private Partnership PSE Emerging Senegal Plan SDG Sustainable Development Goals SEZ Special Economic Zones SIGTAS Integrated Tax Administration System TA Technical Assistance TFP Technical and Financial Partners UA Unit of Account UNCTAD United Nations Conference on Trade and Development UNIDO United Nations Industrial Development Organisation UNWomen United Nations Entity for Gender Equality and the Empowerment of Women VAT Value Added Tax WAEMU West African Economic and Monetary Union XOF Franc of the African Financial Community

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LOAN INFORMATION

Client Information BENEFICIARY : Republic of Senegal SECTOR : Economic and Financial Governance IMPLEMENTATION AGENCY : Project Management Unit (Ministry of Finance and Budget) AMOUNT : UA 12.04 million

Financing Plan

Source Amount Instrument (in UA million) ADF 10.84 ADF Loan Government 1.204 Total Amount 12.04

Key ADF Financial Information * On ADF loans Loan/Grant Currency UA

Interest rate* 1% Commitment fee* 0.5% Other fees* 0.75% (service commission) Maturity 30 years Grace period 5 years VAN (baseline scenario) Not Applicable (NA) ERR (baseline scenario) NA

Timeframe - Key Milestones (indicative) Activities Dates Preparation October 2018 Appraisal January, May 2019 Negotiations June 2019 Project Approval June 2019 Signature/Effectiveness July 2019 First Disbursement July 2019 Midterm Review June 2021 Project Completion June 2023 Last Disbursement June 2023 Completion Report September 2023

PROJECT SUMMARY Project Title: Resource Mobilisation and Investment Attractiveness Institutional Support Project (PAIMRAI) - SAP P-SN-KA0-015 Project Location: Nationwide Overview Timeframe: 1 July 2019 to 30 June 2023 Financing: UA 10.84 million (ADF loan): Counterpart contribution: UA 1.20 million Operational instrument: Institutional support project. PAIMRAI is an institutional support project that will focus on internal resource mobilisation and investment attractiveness in strategic sectors under the Emerging Senegal Plan (PSE). The objective is to mobilise domestic (fiscal) resources without prejudice to the mobilisation of external resources (FDI). To achieve this, the programme will be built on two complementary components. The first will concern improving tax policy and administration to broaden the tax base, reduce tax-related transaction costs, and develop more appropriate tax policies for the country's economic development. This would lead to Project more efficient and relevant taxation and greater revenue mobilisation. The focus will be on strengthening Description the tax information system, building the capacity of the Directorate General for Taxes and Lands (DGID) in international taxation and tax evasion, improving intelligence and broadening the tax base, and enhancing sector-specific tax policies (hydrocarbons, environment, etc.). The second is closely linked to taxation as it aims to support Senegal's attractiveness as an investment destination through structural reforms, notably the improvement of regulatory frameworks, and the development of transformative projects as set out in the Emerging Senegal Plan (PSE). The project will focus on the effective implementation of reforms in special economic zones, the preparation of a new investment code as well as on industrial competitiveness policy. This operation is expected to produce two major outcomes. First, the PAIMRAI will positively impact on tax administration and contribute to broadening the tax base. Improvements are expected through the 10% increase in the number of DGID taxpayers between 2017 and 2022, and by strengthening Senegal’s rating on transparency and information exchange for tax purposes. On the latter point, Senegal was rated Expected as "substantially compliant" in 2017 on the criteria determined by the Global Forum on Transparency and Project Exchange of Information for Tax Purposes. However, this rating does not include the effective beneficiary Outcomes dimension, which is an essential element of fiscal transparency and the fight against illicit financial flows. and Senegal would move to "non-compliant" status if no progress were made on these aspects. By integrating Beneficiaries this dimension, the country should maintain its current rating up to 2022. Secondly, an increase in investments resulting from PSE implementation is expected, measured by a rise in private investments in Special Economic Zones (SEZ) from EUR 57 million in 2017 to EUR 145 million in 2022, but also more generally in foreign direct investment from USD 532 million in 2017 to EUR 1 billion in 2022. Senegal needs to further mobilise its domestic resources to finance PSE implementation. The tax revenue- to-GDP ratio (15.3% in 2017) is below the WAEMU target as stipulated by the community stability criteria. Moreover, the latest study on Senegal’s fiscal potential notes that the margin for increasing Needs and revenue mobilisation for 2019 is about 10.2 percentage points of GDP. To address this pressing need, the Relevance government is focusing on two types of intrinsically linked actions: effective taxation and its relevance in Assessment light of the country's development objectives, and attracting key investments. The first thrust is expected

to broaden the tax base and lower tax-related transaction costs. The second thrust should broaden the tax

base through a growth stimulating effect, particularly by achieving the industrial ambitions set out in the PSE. Combining the fiscal and investment attraction aspects offers a considerable advantage: it favours a coherent and complementary approach where fiscal measures are better adapted to industrial ambitions. The Bank's cumulative experience in Senegal is an important comparative advantage, but the proposed structured approach provides a high value added. PAIMRAI is the institutional component of the PAMRER budget support (Programme to support resource mobilisation and monitor PSE flagship Bank's reforms) developed in parallel, which also focuses on resource mobilisation. These two projects are part Comparative of an integrated approach that includes a partial risk guarantee supporting PSE funding (approved in Advantages September 2018). These are mutually supportive projects that give the Bank a comparative advantage, and Value using a full range of instruments to best support reforms. Furthermore, by incorporating a competitive Added dimension, the Bank continues the work initiated under the Project to Support Skills Development and Youth Entrepreneurship in Key Sectors (PDCEJ) approved in September 2018, and the activities of the Industrial Policy Project recently approved by the Fund for African Private Sector Assistance (FAPA).

PAIMRAI will contribute to knowledge building in Senegal, particularly in taxation (including environmental taxation), and in some industrial fields. The project will facilitate the assessment of the Skills impacts of oil and gas resources on the Senegalese economy, as well as environmental taxation, among Management others. It will help Senegal to better structure its approach (including taxation) in certain key sectors such and as mining or leather/hides. Knowledge building on these issues will then improve understanding of the tax Knowledge policy dialogue to enhance fairness, certainty, savings and convenience. Similarly, the project will strive Building for greater clarity in fiscal expenditures, especially with a gender dimension. Moreover, knowledge and skills acquisition will be facilitated through training and technical assistance provided under PAIMRAI. To ensure sustainability, a continuous training system will be developed within DGID.

Results-Based Logical Framework

Country and Project Title: RESOURCE MOBILISATION AND INVESTMENT ATTRACTIVENESS INSTITUTIONAL SUPPORT PROJECT (PAIMRAI) Project Goal: Build domestic resource mobilisation capacity as well as investment competitiveness and attractiveness in strategic sectors MEANS OF RISKS/MITIGATION PERFORMANCE INDICATORS VERIFICATION MEASURES RESULTS CHAIN Indicator Baseline Target (including ISC) Improve fiscal efficiency and Private investment /GDP 16.70% 20% IMF - Article 4

Senegal'sT attractiveness as an Tax burden (tax ratio / % GDP) 15.3% (2017) 18% (2023) IMF Risk 1: Both the

IMPAC investment destination. Government and the Trends in the number of DGID taxpayers 80 482 (2018) 100 000 (2023) DGID Bank have

Outcome I: Improve fiscal Rating by the Global Forum on Transparency and implementation Basically compliant with the administration and broaden the Exchange of Information for Tax Purposes capacity constraints Basically compliant (2017) inclusion of the new effective Global Forum tax base (lack of required skills beneficiary standards (2023) could delay Outcome II: Senegal's Private investments in the SEZ EUR 57 million (2017) EUR 145 million (2023) APIX/MEPC implementation) OUTCOMES attractiveness as a major Mitigation Measure Foreign direct investments USD 532 million 2017 USD 1 billion in 2023 UNCTAD investment destination 1: Senegalese Component I: Strengthen fiscal policy and financial regulation administration for revenue mobilisation authorities give priority to resource Sub-component 1.1: Strengthen the fiscal information system and combat tax evasion mobilisation and have Functional platform and updated Functional financial statement reporting platform an experienced team. Non-functional platform (2018) data from the three (3) previous MFB (DGID) and updated data for the previous three (3) years Collaboration with the years (2022) Output I.1: Software applications Global Forum on for taxation purposes developed Taxpayer geo-localisation Development of the taxpayer geo-localisation Geo-localisation ineffective (2018) Transparency and application available and in the MFB (DGID) application Exchange of pilot phase (2022) Information for Tax No master plan, business continuity Approved IT master plan (2020) Purposes will also Development of an IT security policy and plan or functional back-up system in and business continuity plan Output I.2: Enhanced IT security MFB (DGID) help to address any installation of a backup software system place (2018) (2020), functional and up-to-date skills gaps on

backup software (2021) international taxation. Technical assistance provided and: Risk 2: Fiduciary No technical assistance on: (i) the (i) the regulatory framework for Risk. Senegal has regulatory framework for registering registering effective beneficiaries Output I.3: Technical assistance made significant

OUTPUTS effective beneficiaries, and (ii) the prepared, (ii) recommendations DGID, Global to improve legal and regulatory Special technical assistance provided progress in institution legal, operational and technical made via the TA with a view to Forum frameworks. building and the fight framework ensuring data establishing the legal and against corruption, but confidentiality and protection operational framework on data weaknesses remain, protection available (2021) which will continue to Servers and software for the Output I.4: Installation of an IT pose a threat. Servers and software to receive, process, transmit Non-functional IT and organisational collection of information from DGID, Global system to receive, process, Mitigation Measure and use information saved infrastructure (2018) declaring parties installed and Forum transmit and use information 2: The project will functional (2021) improve the fiduciary Sub-component 1.2: Support fiscal policy improvement environment through 15 staff trained (including 6 close monitoring by Output I.5: Capacity building of Training on fiscal issues (fiscal expenditure, No training (2018) or software women) and dedicated software MEPC the Country Office the Directorate of Fiscal Studies environmental tax and hydrocarbon tax) available (2018) procured (2021) (COSN).

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Risk-based tax control system piloted in large and Functionalities updated and the Risk 3: Lack of Output I.6: Development of a System in the pilot phase in the major medium-sized tax centres, and improved system deployed in the major and MFB (DGID) commitment to risk-based fiscal audit system centres (2018) functionalities following the first pilot phase secondary tax centres (2022) reforms - Support at Full census of the entire real estate sector in Dakar Full census in Dakar region and the highest level of Output I.7: Real estate sector region and establishment of a baseline for real Partial or incomplete census (2018) real estate transaction baseline MFB (DGID) Government is census estate transactions finalised (2022) required for Sub-component 1.3: Online tax collection and debt management implementing reforms Output I.8: Access to databases Access to specialised data terminals for debt Access to terminals for 70% of the in the domestic No access (2018) Debt Directorate for improved debt management management team (2020) resource mobilisation Output I.9:"DAIDA" platform "DAIDA" Public Debt Management Software Platform not updated and defective Platform updated and functional sector. Mitigation Debt Directorate updated Updated (2018) (2021) Measure 3: A constant dialogue Component II: Competitiveness and structuring of PSE strategic projects between the Sub-component 2.1: Support for establishing special economic zones and competitiveness Senegalese Code not revised since 2004, in spite Output II.1: Evaluation and Government, the Bank of several changed occurring at Investment Code evaluated and renovation of the Investment Investment Code APIX and development international and national levels renovated (2020) Code partners should ensure (2018) continued Output II.2: Toolbox and SEZ Sample forms and working documents for Toolbox and procedures manual Toolbox and procedures manual BOS/APIX commitment to these Procedures Manual operating the SEZ unavailable (2018) available important reforms Output II.3: Socio-economic Study of the financial, economic and social impact assessment for Study unavailable (2018) Study available (2021) BOS/APIX impacts of the SEZ . implementing the SEZ reform Output II.4: Feasibility studies in Feasibility studies on the hides and leather Studies unavailable (2018) Studies available (2021) BOS/MIPMI specific sectors sectors, and the automobile industry Output II.5: Technical assistance TA for standardisation, technical Technical assistance unavailable for implementing the national Special technical assistance granted regulations and conformity BOS/MIPMI (2018) quality policy assessment in progress (2022) Sub-component 2.2: Structuring PSE strategic projects and attracting investment to key sectors Organising a "laboratory" for the regional mining Laboratory report not available Laboratory report and detailed Output II.6: Participatory BOS hub project (2018) roadmap available (2021) structuring of two strategic Interested civil society organisations that attended 20 (including 10 women) per JPO projects 0 (2018) BOS the Open Days (2021) Output II.7: Technical assistance for preparing, structuring and Technical assistance unavailable At least one legal TA and two Special technical assistance granted MEPC negotiating complex (2018) technical TA staff deployed (2022) projects/PPPs Component III: Project Management Output III.1: Project Quarterly monitoring reports submitted 0 15 (2023) DGID management Audits submitted and approved 0 4 DGID COMPONENTS RESOURCES Component I: Strengthen fiscal policy and administration of financial authorities for revenue mobilisation ADF loan: UA 10 840 000 million

Component II: Competitiveness and structuring of PSE strategic projects Gov.: UA 1 204 000 million (10%)

Component III: Project management Total: UA 12 044 000 million

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Provisional Project Implementation Schedule

Year 2019 2020 2021 2022 2023 Activity/Month M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J Prior to start-up Board Presentation Effectiveness Launch Mission

Equipement and Supplies Bid invitation for IT equipment Bid invitation for other equipments Delivery and installation of goods

Consultancy services Preparation of bidding documents, agreements and establishment of SLs Bid invitation, analyses and award of contracts Consultants' presentations and deliverables

Training and miscellaneous Preparation of bidding documents and constitution of SLs Bid invitation, analyses and award of contracts Consultants' presentations and deliverables Operating expenses Mid-term review Monitoring and evaluation eeports

Audit Annual audit of accounts Final project audit

1. INTRODUCTION: THE PROPOSAL

1.1.1. Management is hereby submitting the proposal and recommendation for a loan of Ten Million Eight Hundred and Forty Thousand Units of Account (UA 10.84 million) from the resources of the African Development Fund (ADF) to the Republic of Senegal to finance the Resource Mobilisation and Investment Attractiveness Support Project (PAIMRAI). PAIMRAI is an institutional support programme designed to assist Senegal in its efforts to foster strong, sustainable and job-creating economic growth. Specifically, it involves building resource mobilisation capacity to promote competitiveness in the direction set out in the Emerging Senegal Plan (PSE).

2. STRATEGIC THRUST AND RATIONALE

2.1. Project Linkages with Country Strategy and Objectives

2.1.1. Adopted in 2014, the Emerging Senegal Plan is the country's development strategy and economic policy framework aimed at driving Senegal’s path towards achieving an emerging economy status by 2035. The PSE has three strategic thrusts that, through their synergies, converging and cumulative effects, will create the necessary conditions for emergence. These are: (i) structural economic transformation, (ii) promoting human capital development, and (iii) good governance. The first phase under PSE 2014-2018 aimed at economic take-off. The second phase (2019-2023) is described in detail in a Priority Action Plan (PAP II) presented at the meeting of the consultative group of the country's partners in Paris on 17 and 18 December 2018 (Technical Annex A.1). PAP II seeks to promote a better articulation between sustainable development goals (SDGs) and PSE objectives. It places particular emphasis on enhancing project structuring and maturation, and accelerating reforms.

2.1.2. While the first phase of the PSE has been successful in terms of economic growth (6%+ since 2015 - Figure 1: Real GDP Growth Rate see Figure 1), largely due to significant public investment, (%) the second phase requires strong government leadership 10 and positioning of the private sector as the main growth 8 driver. In this context, Senegal has embarked on a series of key reforms at two levels. Firstly, significant efforts have 6 been made to modernise the administration, improve the 4 business environment and mobilise resources needed to 2 finance the PSE. This should create an incentive framework 0 for investment. At the same time, Senegal is striving to 201020112012201320142015201620172018 Sénégal Afrique de l'Ouest improve the competitiveness of production factors and implement targeted industrial strategies. These efforts should focus investmentSource: on AEO key (AfDB sectors) identified by the PSE - industry, mining or agriculture.

2.1.3. At the fiscal level, the period 2016-2018 was marked by the implementation of the first PAP (2014-2018) under PSE. The IMF has been assisting Senegal through its Policy Support Instrument (PSI) since 2015 and the last review of the PSI by the IMF in January 2019 was deemed satisfactory. Government's policy was geared towards mobilising tax revenue, controlling operating expenditures and encouraging investments. However, given the pressures on the budget, such as financing the Postal Department (“La Poste”) or maintaining fuel and electricity prices despite the rise in world oil prices, the budget deficit is expected to reach 3.7% of GDP in 2018, down slightly by 0.1 percentage points compared to 2017. With the heightened

1 fiscal pressures exacerbated by the electoral context , Figure 2: Fiscal Pressure (GDP the 2019 budgetary policy is likely to be expansionary. %): The 2019 Finance Bill has been approved at XOF 30 4,071.8 billion, up 8% compared to the 2018 Amended Finance Bill. As per the same bill, the deficit is expected 20 to stand at 3% of GDP in 2019. 10

2.1.4. Phase II of the PSE is essentially based on Pression fiscale % 0 Senegal's ability to mobilise domestic resources. To successfully implement PAP II, the Government is Burkina Faso Cote d'Ivoire seeking to mobilise substantial financial resources. The Plan's financingSource strategy : FMI is based on optimal mobilisation of domestic resources (public and private) and recourse to external funding (public/private, the Diaspora). As regards domestic financing, the tax revenue-to-GDP ratio (15.3% in 2017 - IMF) following the re-basing of the GDP, is below the WAEMU target as specified in the community stability criteria. This provides a significant margin for growth, which the authorities estimate to be at least 10.2 percentage points of GDP in 20192. Regarding external financing, the IMF's latest external debt sustainability analysis (January 2019) concludes that Senegal remains at low risk of debt distress. However, with the increase of its vulnerability with regard to indebtedness, the IMF recommends that the focus should be placed on good management and domestic resource mobilisation.

2.1.5. Resource mobilisation also requires an increase in the taxable base through increased attractiveness of investments. Senegal's ambition under the PSE is to increase the level and efficiency of investment in the economy (PSE Strategic Goal 6 - axis 1) and to promote inclusive and sustainable industrialisation (PSE Strategic Goal 8 – axis 1), which would expand both the tax base and create jobs. In this regard, the fiscal aspect is particularly important: if it is inadequate, it could hinder investments, or conversely encourage them without positive spinoffs for the taxpayer if the incentive schemes are poorly calibrated. Therefore, the government's objective is to adapt taxation and regulations to industrial challenges in coherence with the Industrial Development Sector Policy Letter 2017/2023, and therefore the dual objective of promoting industrialisation and increasing tax revenue.

2.1.6. PAIMRAI is consistent with the Bank's strategy for Senegal (CSP) for the period 2016-2020. Through its interventions, the Bank aims to strengthen its contribution to achieving the PSE objectives by 2035. The CSP pillars include: (i) Support for agricultural transformation; and (ii) Strengthening production and competitiveness support infrastructure, especially energy and transport. Following Senegal's transition from the concessional ADF window to "Blend ADF/ADB" status, AfDB Management highlighted three focus areas: (a) support domestic resource mobilisation to increase the country's capacity to implement the PSE with own resources, (b) support national capacity building in natural resource management, with a view to oil and gas extraction in the medium term, and (c) debt control. PAIMRAI is based on these orientations and it is the institutional arm of the PAMRER budget support project which is prepared concurrently. These two projects also relate to the Partial Credit Guarantee to Hedge Currency Risks (GPCRC) approved in September 2018. Furthermore, PAIMRAI includes a component for monitoring and evaluating PSE reforms and projects (necessary for the efficient use of domestic resources and borrowing contracted).

1 For instance, the accumulation of unfulfilled obligations to the energy sector and unpaid debts to the private sector, or the acceleration of the implementation of some PSE flagship projects such as the Regional Express Train. 2 Arona BA and Youssoupha S. DIAGNE (2019). Evaluation of tax potential in Senegal, General Directorate of Economic Planning and Studies, Ministries of Finance and Budget. 2

2.1.7. The project is fully aligned with two of the five main operational priorities of the Bank's 10-year Strategy 2013 - 2022: private sector development support, and enhanced governance. The effective implementation of the support measures under PAIMRAI will help to create the necessary conditions for achieving several of the objectives of the Bank's High 5s, namely: “Industrialise Africa ", and “Improve the quality of life for the people of Africa." The improved fiscal framework promoted by PAIMRAI focuses on achieving greater efficiency and coherence in fiscal policy and administration necessary for private sector development. With regard to investment, the programme should accelerate the maturation and implementation of strategic projects, in line with the country's industrialisation ambitions, notably by operationalising the Special Economic Zones (SEZ), undertaking a comprehensive review of the Investment Code and meeting the industrial challenge under the PSE. PAIMRAI is also consistent with the Bank's Strategic Framework and Action Plan for Governance (GAP II) 2014-2018, in particular Pillar 3 thereof: "Investment and Business Climate". Furthermore, the project complies with the Bank's Gender Strategy 2014-2018, particularly Pillar 2 thereof on women's economic empowerment through improved fiscal equity.

2.2. Rationale for Bank Intervention

2.2.1. Senegal is seeking to position itself on a new growth path since the launching of the PSE in 2014. The GDP growth rate has risen from an average 3.3% in 2009-2013 to above 6% since 2015, and was estimated at 7% in 2018 (AEO–AfDB). This growth was mainly driven by public investment (7.2% in 2017, and 9.5% in 2018) linked to the first phase of the PSE, and also by the dynamism of private investment (12% in 2017, and 21.2% in 2018-ANSD).

2.2.2. In view of the proportion of public investments under PSE’s first "take-off" phase, Senegal has increased its borrowing, particularly on bond markets. The IMF's external debt sustainability analysis conducted in December 2017 concluded that Senegal remains at low risk of debt distress. However, the country significantly increased its debt stock over the period 2016-2018. Public debt stock, which stood at 57% of GDP in 2015, rose to 61.4% in 2017. Following the recent Eurobond issued in March 20183, the debt ratio has reached 65% of GDP (AEO-AfDB). Although lower than the WAEMU community convergence threshold of 70% of GDP, this high level reflects a sustained increase in debt and underscores the need for sound debt management and efficient use of borrowed resources if the country is to maintain its debt sustainability.

2.2.3. Against this backdrop, the Senegalese authorities have opted to strengthen mechanisms for domestic resource mobilisation and expenditure effectiveness, while promoting policies for external private resource mobilisation (FDI attraction). Domestic resources could eventually reduce the need for external financing. They could also be used to repay debts and finance future State expenditure for maintaining major PSE infrastructure and social programmes. However, these resources should be derived from appropriate fiscal measures that are supportive of the policy to attract investments, especially in the industrial or hydrocarbon sectors.

2.2.4. The tax burden is below the country’s tax potential and is a source of macroeconomic risk. From 2005 to 2017, it ranged between 18% of GDP and 20% of GDP, with some upward trends. However, the GDP re-basing reduced the tax burden to 15.3% of GDP in 2017 (IMF), below the minimum community standard of 17%. The low tax burden is a

3 Senegal successfully completed a two-tier Eurobond issue on 13 March 2018: (i) a 10-year tranche in Euros at an interest rate of 4.75% for EUR 1 billion, the first of Senegal; and (ii) a 30-year tranche in US dollars at an interest rate of 6.75% for an amount of USD 1 billion. 3

major source of macroeconomic risk4. It does not help finance the budget, limits fiscal policy, and maintains debt dependency, which has increased considerably during the PSE take-off phase. With the discovery of oil off the Senegalese coast, it is becoming necessary to focus on strengthening tax administration in light of the experience of other countries. International experience shows a tendency to neglect overall fiscal reforms, and fiscal administration improvements in particular. Instead, focus shifts largely to the extractive industries sector5. This should be avoided for two reasons: first, oil and gas are non-renewable resources by nature; and second, it is important to ensure that the country's sources of revenue are not prone to volatility (e.g. price fluctuations) and risk (e.g. stopping extraction). The neglect of tax reforms not related to extractive resources is generally accompanied by the adoption of ad hoc measures such as exemptions (often generating opportunity costs in the form of uncollected revenue, and opportunities for corruption6).

2.2.5. The low level of tax burden is explained by weak mobilization of actual tax potential. Indeed, it is estimated at 25.3% of GDP, which is 10 percentage points above current tax revenue levels. The main sources of inefficiency in tax revenue mobilization have been found in the areas of collection of personal income tax (forgone revenues of 7.1% of GDP) and corporate tax (forgone revenue of 1.29% of GDP). These inefficiencies are explained by three key factors: i) fiscal exemptions granted in terms of both personal income and corporate taxes, which jointly represent 1.9% of GDP, ii) the breadth of the informal sector which accounts for about 40% of GDP, and iii) fraud and tax evasion. Removing the constraints that are currently limiting the mobilization of this unexploited potential will require sustained efforts in modernizing tax administration to reduce compliance costs and limiting fraud as well as tax evasion opportunities. It will also require rationalizing fiscal expenditures through an overhaul of the fiscal incentive system and a better consideration of the informal and hydrocarbon sectors in taxation.

2.2.6. Significant efforts are still needed despite noted improvements in tax administration. For instance, although the timeliness of tax payments has improved (7-day reduction), the number of hours and payments to meet tax obligations remains very high (441 hours and 58 payments - Doing Business 2019). This performance is poor compared to other WAEMU countries and improvements are necessary, which presupposes good administrative organisation that will serve as a basis for an efficient application of the legislative framework7. It is within this perspective that Senegal has undertaken to modernise its fiscal administration. DGID's organisational reform has facilitated the restructuring of certain tax offices, the creation of the Medium Business Centre, the Centre for Regulated Professions and the conversion of the Large Business Centre into a directorate. This wave of reforms was followed by the implementation of an integrated tax administration management system (SIGTAS) and the facilitation of procedures for users. In concrete terms, this involves making online VAT return forms available, and efforts to dematerialise procedures to facilitate online reporting, online payment, online consultation of the taxpayer's history, and claims management, particularly via e-tax applications and "my personal space". However, the dematerialisation of procedures initiated since 2010 has been slow and still not completed, which explains the delays mentioned in the Doing Business report and more generally in broadening the tax base. These reforms have recently been accelerated, particularly with support from development partners (Box 1). PAIMRAI intends to support their effective implementation in conjunction with the Digital

4 See Bank of France, (2017), Annual Report of the Franc Zone: The Economic and Financial Situation in WAEMU. "The economic outlook could be challenged by the materialisation of downside risks, such as higher external financing costs, a persistent low tax burden rate (...). » 5 Dabán T. and J-L. Hélis, (2009). A Public Financial Management Framework for Resource-Producing Countries, Working Paper WP/10/72, International Monetary Fund: Washington D.C. 6 See Crivelli and Gupta (2014) and Zolt (2014), as well as Arvanitis Y. and Weigert M. (2017), Turning resource curse into development dividends in Guinea-Bissau, Resources Policy, 53 (2017) 226-237. 7 Diagne Souhaïbou (2004), Elargissement et maîtrise de l’assiette fiscale au Sénégal: études et propositions (Broadening and Mastering the Fiscal Base in Senegal: Studies and Proposals, Ecole Normale d’Administration, Dakar 4

Senegal Strategy, which advocates automated processes.

Box 1: Modernisation of Tax Administration and Online Procedures adoption and its impact on informal sector The adoption of a new general tax code in 2012 already made provision for online tax declaration and payment. However, the organisational arrangements only began in 2017 with the restructuring of the Information Systems Directorate and the strengthening of the large Businesses Directorate. As a result, online declarations became mandatory for companies covered by the DGE. In 2016, the DGID updated the SIGTAS platform from which the "e-tax" tele-declaration system operates, extending it to all the regions and gradually ensuring its interconnection with other databases (Banks, Customs, etc.). In 2016, DGID, in collaboration with the IMF, launched a "Hackathon" on taxation in Senegal. The event was organised to discuss with all stakeholders to find innovative solutions for strengthening existing systems. Ultimately, 3 innovative projects stood out: (i) "My personal space", a simplified platform enabling taxpayers to have a reader-friendly account for their returns and payments, and to make the online return followed by online payment. This platform is almost ready for deployment; (ii) "M-Tax" (mobile tax), a solution allowing users to make their tax returns by SMS (via a voice server) and make payments via mobile phones (Coulibaly (2019) shows that the implementation of a tax payment system via mobile phones promotes a better tax revenue collection); and (iii) Mass digitalisation (also called "batch scanning"), enabling the DGID to digitalise files from 8 to 10 million physical persons. These three projects, together with the continuous deployment of e-tax, are DGID's digitalisation projects, which ultimately reduce fraud, tax payment transaction costs and provide a solution to some types of business informalities. According to Senegal's 2016 General Business Census, 97% of business units are informal. Informality and formality are, however, multidimensional, and a formal enterprise may have a degree of informality. Thus, a company duly registered with the Commercial Registry may not hold a land title relating to its activity, or a necessary permit/patent. Similarly, employee returns are not systematic, nor is the payment of taxes. The adoption of online tax filing systems has a significant impact on lowering these transaction costs and promotes formalisation. Kochova et al (2018) studied this process and noted not only a reduction in compliance costs for companies, but also a decrease in the frequency of tax adjustments. Similarly, the IMF (2018) suggested that digitalisation could increase indirect tax revenue by more than 2% of GDP. It is within this context that PAIMRAI is supporting the digitalisation reform.

2.2.7. Authorities have committed to updating the legal framework related to international taxation and must be supported in the effective implementation of adopted international standards. This commitment is important given the objectives of attracting foreign direct investment in the hydrocarbon sectors or, for instance within SEZs. The outcomes of reforms aimed at greater control over international taxation (in terms of recovered taxes) are potentially important (Box 2). In Senegal, the General Tax Code (CGI) of 2012 had included a subsection on transfer pricing by broadening the scope and enshrining the arm’s length principle. In addition, the 2018 Law on Money Laundering and Terrorist Financing provides for the mandatory identification of beneficial owners involved in financial transactions before entering into business relations with a client, as well as the verification of their identification for risky transactions to be carried out. Finally, the 2018 version of the General Tax Code took into account Senegal's commitments under the BEPS project with the Global Forum, by materializing the four minimum standards related to harmful tax practices, misuse of tax treaties, country by country declaration and the improvement of dispute settlement. PAIMRAI will support the continuation of these efforts by providing technical and material assistance for the operationalization of these measures.

Box 2: International Taxation and tax collection The role of the Global Forum on Transparency and Information Exchange for Tax Purposes (the Global Forum) is to promote the implementation of international standards in all its 153 member jurisdictions, including ensuring that there are no barriers to information exchange in their legal systems, administrative organisation and operations. The international organisation hosted by the OECD is the multilateral forum in which work on tax transparency and information exchange is conducted. Brazil recovered USD 12 billion from previously undeclared amounts held abroad during the fiscal year following the introduction of automatic information exchange standards for tax purposes. In India, the launch of the programme convinced 65,000 taxpayers to come forward and report amounts held abroad, resulting in the recovery of nearly USD 1 billion. In Burkina Faso, the first seven (7) information exchanges resulted in the recovery of nearly USD 2.4 million in 7 months. Given its mission, status and unique expertise, the Global Forum is piloting a partnership with the Bank in Senegal through PAIMRAI. In the past, Senegal has successfully benefited from the technical assistance of the World Forum and must now move on to a new phase in implementing tax transparency standards involving a significant level of technical assistance. Hence, the Bank and the World Forum are working through PAIMRAI to strengthen the tax environment and mobilise resources in Senegal by implementing international standards for transparency and information exchange for tax purposes in two main areas: (i) promoting legislation and regulations on information exchange and effective beneficiaries, and (ii) technical assistance for the effective implementation of such legislative and regulatory standards, as well as empowering the authorities to implement them.

2.2.8. The plethora of tax incentive regimes, coupled with the large amount of tax expenditures, raises questions over the real impact of such mechanisms in attracting private investment. Though competitiveness can be enhanced through taxation, the effects of such policies are difficult to measure and their impact is not systematically assessed. In Senegal, tax expenditures amount to 7.8% of GDP (IMF), with no assurance that the various exemptions granted have a positive impact on private sector development. Tax incentive measures are not compiled in a single document and can be found in several schemes. The investment code is a central lever of the investment promotion strategy in Senegal and it is administered by the Investment Promotion Agency (APIX). However, this code dates from 2004 and its adoption has been followed by several other exemptions and incentive measures recorded in various legal documents. For example, although the General Tax Code contains a number of fiscal incentives referred to as advantages under the term "incentivizing common law (droit commun incitatif)”, other regimes are also put in place. Those include the Free Exporter Enterprise status, the incentive package for companies located in the Special Economic Zones, and several other fiscal incentives included in the new Mining, Oil, Telecom and Customs codes. This multiplicity of schemes reduces the clarity of the tax system. It also favours the multiplication of tax expenditures without any guarantee of their real impact on attracting private sector investments that would serve the country's industrialization objectives. The project will support Senegal in redesigning its incentives scheme to sustain its investment attraction objectives in line with the PSE.

2.2.9. Beyond taxation, other constraints to competitiveness must be removed for attracting foreign investment, especially in the industrial sector. The business environment as a whole matters: firms in the manufacturing sector cite competition from the informal sector, access to energy and land, and taxation as the main obstacles to their operations. As it cannot yet offer access to an attractive land regime and a world-class business environment at the national level in the short to medium term, Senegal is committed to offer pockets of competitiveness through the establishment of Special Economic Zones, while continuing its efforts improvement of the nationwide investment climate. Such zones should boost industrial development in the short term by offering a ready to use industrial land, reliable sources of energy as well as administrative facilitation and investor aftercare services. A clear and ambitious industrial strategy, a national quality infrastructure as well as an institutional set-up for concerted management of the industry sector should also complement this attractive framework within SEZs. It is within this context that the PAIMRAI intends to support the implementation of SEZs and the National Quality Policy, but also the development of promising industrial value chains. Some sectors such as leather and skins can provide "quick wins"

because a solid production base is already present, while others such as the automotive sector display higher technological requirements. PAIMRAI activities in this area will be complemented by support from the African Fund for Private Sector Assistance (FAPA) through a project to support the definition of an industrial policy and strategy.

2.3. Coordination of Interventions of Technical and Financial Partners

2.3.1 Through the Senegal Country Office (COSN), the Bank is playing an important role in coordinating the activities of the Technical and Financial Partners (TFPs) and has used co- financing as an instrument for its operations. To enhance the effective implementation of the Paris and Busan Declarations and deepen the dialogue with the authorities, the TFPs have improved their consultation mechanisms in Senegal. This has been achieved by setting up a process based on three levels of consultation: Group-50 (G50) with all the country's TFPs, Group-12 (G12) with 12 of the most active TFPs, and thematic groups. The Bank, through COSN, is an active member of the G50 and G12. It is also a member of several thematic groups. It currently leaders the Budget Support Group and co-chairs the Statistics Group with the United Nations Population Fund.

2.3.2 PAIMRAI was prepared in close collaboration with the TFPs working in similar areas, in particular the World Bank, Canada and the European Union. An informal working group has been set up among these partners to strengthen the mechanism, while remaining flexible. The group meets quarterly and discusses the progress made by each partner on resource mobilisation and investment promotion, regardless of the tool used (budget support or technical assistance). Lastly, PAIMRAI’s preparation tapped from frequent consultations with the IMF representative office in Dakar and other partners such as UNIDO, the EITI Secretariat in Senegal and the Global Forum hosted by the OECD.

3 PROJECT DESCRIPTION

3.1 Project Components

3.1.1 The project's overarching objective is to strengthen the capacity to mobilise domestic resources for PSE financing, and to enhance investment competitiveness and attractiveness in key sectors. The dual fiscal challenge is to improve revenue while promoting investments. Hence, the project has three (3) complementary components: (i) strengthen tax policy and administration of financial authorities for revenue mobilisation (ii) competitiveness and structuring of PSE strategic projects, and (iii) project management.

3.1.2 Component I – Strengthen fiscal policy and the administration of financial authorities for revenue mobilisation. The objective of this component is to contribute to improving revenue mobilization. To this end, the project will focus on three complementary areas: (i) strengthening the tax information system, (ii) improving tax policy, and (iii) improving revenue collection and data sharing systems between the various authorities involved in revenue collection (tax, customs and treasury departments). The first sub-component will contribute to reducing compliance costs, improving tax compliance, and putting in place an IT environment that supports international taxation. The second sub-component will allow fiscal policy to take better account of the country's economic developments, including the forthcoming production of oil and gas, and promote equitable taxation that promotes sustainable economic development. Finally, the third sub-component will ensure the establishment of infrastructure facilitating effective revenue collection by the Treasury, and will contribute to curbing corruption and fraud in tax payment processes through crosschecking of data produced by different authorities.

Sub-component 1.1: Strengthen the fiscal information system and combat tax evasion.

3.1.3 Strengthening the tax information system. The goal here is to promote the coherent use of digital technologies as recommended by the Digital Senegal Strategy, which advocates the dematerialisation of administrative procedures and greater productivity associated with reduction in costs, transaction time and administrative operations. The first objective will be to support the digitisation reforms, which include strengthening SIGTAS to support the extension of several platforms (e-tax, m-tax, my personal space). This should help to facilitate procedures for user by allowing online declaration and online payment. Initiated with the support of the IMF, the EU and the World Bank, these reforms require additional resources to succeed, which for instance explains the delays noted by the IMF (Annex 3). The IT system will be strengthened by securing data and related infrastructure.

3.1.4 Tax administration strengthening to fight tax evasion. With the development of activities by multinational companies in Senegal (particularly oil, gas and industrial companies), it is becoming necessary to consider imposing taxes on their operations. Indeed, these companies may resort to strategies aimed at minimising their taxable income in the country by using incorrect transfer prices in transactions between subsidiaries of a multinational, or between the subsidiary and the parent company, with the objective of artificially transferring profits to the entity under a more advantageous tax jurisdiction. Furthermore, international companies can artificially inflate project costs and underestimate profits in their reports to avoid taxes. These issues are particularly acute in the oil and mining sectors where many multinationals operate. However, the situation is not specific to developing countries. Hence, the G20 and OECD were assigned the task of developing a multilateral tax programme in response to the 2008 global financial crisis, which resulted in the adoption of best practice and international standards such as the "automatic exchange of information" between tax authorities promoted by the Global Forum on Transparency and Information Exchange for Tax Purposes (Technical Annex A.2). The project will assist the tax administration in setting up the regulatory and functional framework to support automatic data exchange between competent authorities, transfer pricing analysis and the establishment of a register of beneficial owners.

Sub-component 1.2: Strengthen fiscal policy.

3.1.5 Impact of tax expenditures. Estimated at 7.8% of GDP (IMF 2018), these constitute a real loss in terms of revenue mobilisation. The real impact of such expenditures should be assessed from the viewpoint of efficiency and equity, to guide the granting of such benefits to specific sectors either in the form of social measures or as tools to attract investment. The project will support reflection on the impact of fiscal expenditures on gender8 and on attraction of domestic and foreign private investment. The results of these analyses will be used to update the Investment Code (planned under component 2).

3.1.6 Taxation of hydrocarbons. To move the tax agenda forward for greater equity, efficiency in tax administration and a broadening of the tax base, it is necessary to build the analytical capacity of the relevant departments across government. First, with regard to hydrocarbons, particular emphasis should be placed on harnessing tax instruments for revenue collection in the sector, including royalties, rent sharing and the appropriate determination of the corporate tax base for oil companies (Box 1).

8 Tax expenditures are often revenue-based and tend to take a gender-neutral approach. See, for example, Barnett, Kathleen and Careen Grown (2004). Gender Impacts of Government Revenue Collection: The Case of Taxation, Commonwealth Secretariat, or Lahey, K. (2015). "Uncovering Women in Taxation: The Gender Impact of Taxation, Tax Expenditures, and Joint Tax/Benefit Units." Osgoode Hall Law Journal 52 (2): 427-459. 8

3.1.7 Environmental taxation. The development of oil and gas deposits whose production is announced for 2021-2023 could pose environmental challenges that should be carefully examined (Technical Annex A.4). Environmental taxation aims to impose additional costs on any economic agent behind environmentally damaging actions in accordance with the "polluter pays" principle and the "precautionary principle9 ". To that effect, Senegal has already laid the foundations for environmental taxation through two main provisions: (i) a tax on classified installations (understood as polluting / harmful to the environment) as defined by the Environment Code, and (ii) benefits in terms of tax reductions. Senegal joined the EITI in 2013 and currently has the "satisfactory progress" status, which indicates that all aspects of each requirement have been implemented and the overall objectives achieved. A study should be conducted to inform Senegalese policymakers and national opinion on the advisability of an environmental tax for the entire economy. The background to this study is the new context of oil and gas extraction, and industrial challenges with their associated pollution and greenhouse gas emissions. In this regard, the study will look at existing policy instruments for addressing environmental issues in Senegal. Furthermore, the study will discuss the distributive impact as well as the double dividend of the environmental tax, with a view to formulating policy recommendations.

3.1.8 Improving tax auditing. Tax auditing is an essential instrument to reduce fraud and optimise revenue collection. Ultimately, a tax system's effectiveness depends on the ability of the control system to detect fraud, and its potential to limit fraud. In such a context, the choice of taxpayers to be audited and the efficiency of control are the two most important factors. While the first is a matter of policy/tax option, the second is a matter of capacity and accountability. To date, the choice of tax audit is based on a number of criteria reviewed by an internal commission that decides on the relevance of a tax audit. Although this system provides some transparency, it does not objectively highlight the risks of potential fraud, and may be prone to subjective interventions from different departments. Therefore, PAIMRAI will support DGID, in collaboration with the World Bank, in setting up a selection system (algorithm) to highlight taxpayers' risk profiles using various databases. Moreover, support will be provided to the intelligence bureau through the real estate sector census and the construction of a transaction baseline. The contribution of the real estate sector is still weak despite the sector's strong dynamism. Data collection and exploitation work is necessary to improve revenue for the benefit of the State budget and local authorities.

Sub-component 1.3: Online revenue collection and debt management.

3.1.9 This sub-component will focus on treasury activities related to revenue mobilisation. The first step will consist in interconnecting the Senegal Integrated Tax Management System (SIGTAS) with the accounting software of the General Directorate of Public Accounting and Treasury (DGCPT). This activity aims to identify taxpayers using data collected during the payment of money orders. This link will facilitate the collection of a significant amount of data on taxpayers and to make the most thereof through business intelligence tools to broaden the tax base. The project will also support the Directorate General of the Treasury to find solutions via the use of mobile-based public revenue collection systems. This should facilitate tax payments and reduce the risk of fraud and corruption induced by contact between the taxpayer and public officials. Lastly, in addition to this revenue collection component, support will be provided to DGCPT to improve debt management. This activity is complementary to the partial risk guarantee for exchange rate hedging granted by the Bank.

3.1.10 Component II – Competitiveness and structuring of PSE strategic projects. The objective of this component is to support the attractiveness of Senegal as an investment destination by promoting the improvement of the country's competitiveness as well as the development of its industrial sector. The first sub-component acts horizontally to create a competitive framework for attracting private investment by supporting the overhaul of the framework for investment, Special Economic Zones implementation and National Quality Infrastructure strengthening. The second component operates vertically by supporting the revival of the industrial sector and attracting private investment in specific projects and sectors (Regional Mining Hub, Automotive Industrial Project, leather and skins sector).

Sub-component 2.1: Support the development of special economic zones and competitiveness.

3.1.11 Redesign of the incentives framework for the private sector. The various revisions and changes to the tax systems and the investment code have made it possible to positively develop Senegal's incentives scheme. Consequently, it is imperative to renew the investment code to give investors more clarity, and to integrate PSE priorities and orientations. This reform is retained as one of the key measures under the country's Business Environment and Competitiveness Reform Programme. PAIMRAI's support will help to foster a new investment code in 2020 that takes account of the guidelines for developing strategic investments in the private sector. It should also provide an automated system for filing and managing the benefits granted within a competitive timeframe, with the required security and transparency. The monitoring and evaluation of the impacts of private investments can be conducted to better inform national accounts. It will also be possible to have an intelligent map of private sector contribution in terms of job and wealth creation, revenue mobilisation and sustainable development.

3.1.12 Special Economic Zones implementation. At the same time, the aim of the "Special Economic Zones and Investor Package" flagship reform is to create the conditions for a significant increase in national and international private investment by setting up a sufficiently attractive incentive framework, with a view to doubling foreign direct investment (FDI) between 2018 and 2020. The key achievements of the previously supported UNIDO reform include the adoption of the two laws providing guidance on the governance of SEZ and providing an incentive regime for them. Provisions in the laws include appointing APIX as the administrator of the SEZ, and setting up a public-private joint committee whose role will be to issue opinions, proposals or recommendations within the SEZ. PAIMRAI acts to support Senegal in the next steps of the reform, namely the clarification of the roles and actions of the various SEZ stakeholders at the highest operational level, the production of a toolbox and a procedures manual to standardise such interactions and quantification of the outcomes and impacts (FDI, jobs, etc.) following the commissioning of previous SEZ. This last initiative will help to establish real monitoring of public policies and will provide a baseline for a rigorous ex-post impact assessment of SEZ, while strengthening the Operational Monitoring Office (BOS) to evaluate the impact of other PSE projects.

3.1.13 National Quality Policy implementation. The national quality policy is an integral part of strengthening the competitiveness of Senegal's economy under the PSE, which includes a number of priority projects such as the development of industrial parks and agropoles (supported by the Bank). These projects would not thrive without developing National Quality Infrastructure (NQI). It is a prerequisite for protecting the health and safety of consumers, improving business productivity and competitiveness, facilitating access to international markets and protecting the environment. Senegal has recently adopted a national quality policy with the objective to "establish a world-class National Quality Infrastructure to support the

competitiveness of the country's economy and sustainable development by 203510".The project aims to support the Government in implementing the National Quality Policy Action Plan.

Sub-component 2.2: Structure PSE strategic projects and attracting investment in key sectors.

3.1.14 "Regional Mining Hub" strategic project. This project aims to place Senegal as a leading mining services centre in West Africa, should be structured using this method. Under the supervision of the Ministry of Economy, the objective will be to set up an ecosystem that will attract leading mining service providers to Senegal. In terms of impact, estimates in the PSE suggest that such a project could attract more foreign direct investment, generate nearly 19,000 jobs and contribute to exports worth above XOF 250 billion. Despite this strong potential, this project, like other flagship PES projects, has not been designed past its initial concept stage until the lapse of the first phase of the PSE. Although it has generated many expressions of interest from the private sector, the project has not made any significant progress, due to a lack of knowledge of the private sector's needs for mining services and technical capacity weaknesses of stakeholders in the structuring of complex projects. The PAIMRAI aims to support Senegal in the structuring of this project using the "Big Fast Results" approach. This methodology was inspired by Malaysia and has already applied partially for the structuring of the Agropole Sud project, with Bank staff participation. The PAIMRAI project will provide technical assistance on complex project structuring and negotiations, including public-private partnerships (PPPs), as needed.

Box 3: The "Big Fast Results" Method - a New Approach to Structuring PSE Projects The "BFR" methodology was developed by PEMANDU in Malaysia as part of implementation of the country's economic and governmental transformation programme. Created in 2009, PEMANDU is the equivalent of BOS in Malaysia and is placed under the authority of the Prime Minister. The methodology is structured in eight parts: (1) strategic orientation (the course), 2) Labs to engage the different stakeholders in the reflection, (3) Open Days to collect feedback from the public, (4) dissemination of roadmaps, (5) endorsement of KPIs, (6) project implementation, (7) audit and results validation/KPI, (8) annual report. The Lab is the main step and involves bringing together private companies, financing institutions, research centres and administrative structures in intensive workshops lasting at least five consecutive weeks, to agree on partnership modalities for the successful implementation of the project. It is a laboratory for formulating and testing innovative ideas, a kind of "hackathon" aimed at maximising the socio-economic impacts of a complex project or reform, and encouraging its ownership by the various stakeholders. NB: "Hackathons" (contraction of the English word "hack" and "marathon") are events initially used in the digital field where computer developers meet for a short time and engage in collaborative computer programming.

3.1.15 Technical studies for the development of the manufacturing sector. In order to relaunch the development of this sector, the project intends to support the Ministry in the conduct of technical feasibility, financial and socio-economic studies on specific sector identified with UNIDO support: automotive and leather & skins sectors. The studies will have as an objective to highlight potential in terms of industrial competitiveness; conduct a cartography of stakeholders and their needs; define the current state and future of their markets; the assets and competitive constraints of production units; the profile and organisational dynamics of sector stakeholders and proposals for improvements, preliminary social and environmental analysis; most adapted fiscal measures and action plans with figures.

Table 1: Description of Components Components Costs Description of Components Component I. Strengthen Fiscal Policy and Financial Systems Management for Revenue Mobilisation - Upgrade shared infrastructure for online procedures and training: interconnection of the various applications and systems for online declaration, online payment and related training. A continuous training programme will be developed. - Financial Statement Reporting Platform (Online Financial Statement Filing System - ETAFI): development of the platform and acquisition of data from previous years. - Taxpayer geo-localisation: to better coordinate the tax audit, the project will finance the development Enhanced Tax UA 3.8 1.1 of a taxpayer geo-localisation application. Information million - Technical assistance for the development of legal and regulatory frameworks: TA for the review of System the legal framework, the drafting of a report with concrete proposals, and the follow-up implementation works; TA for the development of transfer pricing regulations. Establishment of the IT infrastructure and administrative organisation to receive, process, transmit and use the information: purchase of goods and services for the collection of third-party reporting information, and TA for the implementation of the common transmission system. - Interconnection for an efficient data exchange between customs and taxes. - Training at the DPEE on study techniques related to hydrocarbon and environmental taxation and tax expenditures. - Acquisition of databases and subscriptions to specialised transfer pricing sites: The internationalisation of the activities of companies poses the urgent problem of profit transfer. Support for Tax UA 2.3 However, control and recovery procedures are often hampered by the lack of comparable data - its 1.2 Policy million acquisition will be financed by the project Improvement - Complete census of the entire real estate sector in the Dakar region and creation of a real estate transactions baseline: to improve the revenue of State and local authorities. - Improvement of the risk analysis system (algorithm) for tax audit: based on work previously carried out by the World Bank, the project will support the DGID in the deployment of new functionalities and the calibration of the variables and data. - Completion of the interconnection of E-TAX and the DGCTP IT system: to collect a significant amount of data on taxpayers and broaden the tax base. - Study "mobile payment solution" for public revenue collection and development of a module for Online Tax local online payment. 1.3 UA 0.7 Collection and - Access to information terminals for debt management and training: for debt monitoring analysis. million Debt Management Training in (i) structuring external financing, and (ii) financial derivatives. - Currency hedging: technical assistance will be provided for the design of a valuation model for currency hedging. - Update of the DAIDA debt management platform. Subtotal UA 6.8 million Component II: Competitiveness and Structuring of PSE Strategic Projects - Review of the 2004 investment code and development of a new code; establishment of a digital platform for deposits and management of investment and export incentives - Technical assistance for the operationalisation of the physical one-stop shop to facilitate SEZ procedures and standardise roles between the various stakeholders in SEZ. Support the - Technical assistance for the SEZ regulatory and operational framework: preparation of SEZ Establishment of UA 1.1 reference texts, toolbox and procedures manual 2.1 Special Economic million - Studies - in particular on import substitution in SEZ to clarify the scope of import substitution and Zones and enable authorities to take an informed decision on establishing companies targeting the local market Competitiveness for products that have been predominantly imported to date. - Strengthening of the BOS monitoring and evaluation unit: in particular monitoring the socio- economic impact of SEZ. - TA and training for national quality policy: standardisation, technical regulation, conformity assessment, accreditation, and quality promotion. - Structuring of the "Regional Mining Hub" project according to the BFR methodology: organising UA 2.6 intensive workshops for at least 5 consecutive weeks to structure the project with all stakeholders. Structuring of PSE Financing of needs mapping and technical and financial study. 2.2 million Strategic Projects - Technical assistance to structure complex projects and PPPs: mobilisation of external expertise to better evaluate strategic and PPP projects. - Feasibility studies on the leather/skin and automotive industry sectors. Subtotal UA 3.7 million Component III: Project Management UA 0.9 - Project management and audits million UA 0.6 - - Risks (5%) million Total Cost UA 12.04 million

3.2 Technical Solutions Adopted and Alternatives Explored

3.2.1 Institutional support was retained for this project because it provides the best conditions for direct support to the structures involved in resource mobilisation. Moreover, such an operation complements the budget support currently being prepared. A summary analysis of the strengths and weaknesses was conducted for the project's institutional anchoring, and the DGID was selected. Specifically, the DGID covers almost half of the activities and has extensive experience in procurement.

3.3 Project Type

3.3.1 PAIMRAI is an institutional support project financed by an ADF loan, with focus on improving domestic resource mobilisation and attracting private investment. This form of assistance will enable the Bank to support the Government in financing the PSE.

3.3.2 The project is estimated to cost UA 12.04 million, net of taxes and customs duties. The Bank will contribute Ten Million Eight Hundred and Forty Thousand Units of Account (UA 10.84 million) in the form of an ADF loan. The Senegalese Government will provide, as counterpart contribution, One Million Two Hundred and Four Units of Account (UA 1.204 million, or 10% of the total project funding). Provisions of about 5% for price escalation and physical contingencies are included in the project cost. Tables 2 to 5 provide the project cost estimates by component and sub-component, source of financing, expenditure category and year. A detailed cost table is given in Technical Annex B.1.

Table 2: Cost by Expenditure Category Table 3: Sources of Financing Cost in UA Thousand Cost in UA Thousand Category For. Exc. Loc. Currency Total Source Loc. % For. Exc. Total A. Goods 97 2 760 2 857 Currency B. Services 1 987 5 354 7 341 ADF Loan 2133 8706 10840 90% Counterpart C. Operation 49 1 192 1 240 0 1204 1204 10% Subtotal 2 133 9 305 11 438 Contrib. Total Cost 2133 9910 12044 D. Contingencies (~5%) 0 605 605 TOTAL 2 133 9 910 12 044

Table 5: Estimated Cost by Sub-component Table 4: Estimated Cost by Component Component Total Percentage Component 1 6 755 56,1% Costs in UA million % in Sub-component 1.1 3 966 32,9% Component Foreign Foreign Local Sub-component 1.2 2 068 17,2% Total Exchange Exchange Currency Sub-component 1.3 721 6,0% Component 1 745 6 010 6 755 11,0% Component 2 3 635 30,2% Component 2 1 388 2 246 3 635 38,2% Sub-component 2.1 1 088 9,0% Component 3 0 1 049 1 049 0,0% Sub-component 2.2 2 547 21,1% Subtotal 2 133 9 305 11 438 18,6% Component 3 1 049 8,7% Contingencies 0 605 605 0,0% Sub-component 3.1 1 049 8,7% (~5%) TOTAL 11 438 95,0% TOTAL 2 133 9 910 12 044 17,7% Contingencies (~5%) 605 5,0% TOTAL 12 044 100,0%

3.4 Project's Target Beneficiaries

3.4.1 The project's main direct beneficiaries are the State structures that will be provided with institutional capacity building, including DGID, DGPPE, DGCPT, DODP, BOS, APIX, the Senegalese Standards Association, the Ministry of Industry and the Ministry of Economy. The indirect beneficiaries will be taxpayers, whose tax transaction costs will be reduced, and the Senegalese people through the jobs created by investments attracted.

3.5 Participatory Approach to Project Design and Implementation

3.5.1 The project was identified and designed through a participatory process. First, the Bank initiated discussions with partners in the various thematic groups to explore ways in which the activities proposed in the document could be complementary to those carried out by other partners. Subsequently, the Bank engaged in a dialogue with the authorities to determine the project outline. The participatory process for the appraisal was strengthened and expanded through consultations with private sector and civil society representatives such as EITI Senegal or the Civil Forum. The Bank also had exchanges with technical and financial partners working in the same areas as PAIMRAI, including the European Union, the World Bank, the French Development Agency, the International Monetary Fund, UNWomen, UNIDO, the Global Forum on Transparency and Information Exchange for Tax Purposes, and Canada.

3.6 Bank Group Experience and Lessons Reflected in Project Design

3.6.1 Bank portfolio: The total outstanding commitments as at 30 April 2019 amounted to about UA 1.02 billion or XOF 828 billion, and consisted of national public sector projects, regional projects and private sector operations. The list of ongoing projects is given in Annex 2. The portfolio of active national projects includes 20 operations with a total net volume of commitments of UA 772.4 million or XOF 626 billion, representing 76% of the total. The sector breakdown of national projects is as follows: transport (58.2%); water and sanitation (16.4%); agriculture/rural (9.7%); ICT (6.4%); social (5%); energy (3.8%) and governance (0.5%). The Bank supports regional integration efforts and Senegal has benefited from four (4) multinational operations for a cumulative UA 83.5 million or XOF 67.6 billion. The sector distribution of regional operations is as follows: energy (50.9%); agriculture/rural (26.6%) and transport (22.5%). With regard to private sector window operations, the Bank Group has committed a total of UA 166.5 million or approximately XOF 135 billion, and includes 5 operations in Senegal. The latest portfolio review conducted as part of the mid-term review of the Country Strategy Paper (2016-2020) indicated that the performance of the active national public sector portfolio remains satisfactory. The supervision of none of the projects in the portfolio had been delayed for more than 6 months.

3.6.2 Lessons from previous operations: The project completion report of the latest budget support project in Senegal, the “Local Development Reforms Support Programme” (PARDL), concluded that the programme could have benefited from greater alignment with the Bank's projects for greater efficiency. This lesson has been taken into account to the extent that PAIMRAI is the institutional component of budget support developed in parallel, and which also focuses on resource mobilisation. Furthermore, the Bank is also involved in the Private Sector Promotion Support Project (PAPSP), with the overall aim of contributing to improving financial governance and the business climate. The project is expected to close on September 2019. PAIMRAI builds on the PAPSP considering its focus on competitiveness. However, PAPSP has faced some delays, partly due to slow procurement. To address this problem, the Senegal Country Office (COSN) has undertaken to increase training for executing agencies and proposes to introduce "performance bonuses" for PMU members11.

3.7 Performance Indicators

3.7.1 This operation is expected to produce two main outcomes. First, it is anticipated that PAIMRAI will have a positive impact on tax administration and contribute to broadening the tax base. Improvements are expected through the 10% increase in the number of DGID

11 Performance contracts will be negotiated on a case-by-case basis for PMU members and bonuses defined according to objective criteria. For example, a pre-defined execution rate of X% of the procurement plan could qualify the disbursement officer for such a bonus. 14

taxpayers between 2017 and 2022, in addition to an advancement in Senegal's rating by the Global Forum on Transparency and Information Exchange for Tax Purposes. On the latter indicator, Senegal was rated as "mostly compliant" in 2017. However, this rating does not include the effective beneficiary dimension, which is an essential element of tax transparency and the fight against illicit financial flows. Senegal should be able to maintain its rating by 2022 by integrating this dimension. Secondly, an increase in private investment resulting from PSE implementation is expected, measured through the rise in private investment, especially in Special Economic Zones (SEZ) from EUR 57 million in 2017 to EUR 145 million in 2022 but also in foreign direct investment from USD 532 million in 2017 to USD 1 billion in 2022. The Project Implementation Unit will be responsible for collecting and analysing the data needed to verify these indicators. They will be regularly monitored in the half-yearly and annual activity reports, validated by the Steering Committee and the Bank.

4 PROJECT FEASIBILITY

4.1 Economic and Financial Performance

4.1.1 Since the project is an institutional support operation, the cost-benefit analysis does not apply. However, improving the institutional framework for tax collection and enhancing competitiveness will increase the country's tax revenue.

4.2 Environmental and Social Impact

4.2.1 From the environmental viewpoint, PAIMRAI should make a positive contribution. The PSE implementation, the industrialisation process as well as oil and gas development would increase the pressure on the environment. Therefore, PAIMRAI proposes a study on the taxation of negative environmental externalities. This study will have a twofold objective: first, ensure that externalities are corrected by promoting cleaner investment, and second, reinforce the “polluter pays” principle. Furthermore, the study will discuss the distributive impact, neutrality and double dividend of the environmental tax to formulate policy recommendations for Senegal. Lastly, PAIMRAI is classified under Category III.

4.2.2 From the social perspective, the project's focus on tax equity will have a positive impact. Fiscal policy can reduce inequalities, such as through progressive taxation, reduction of tax exemptions for the highest income earners or gender-responsive tax adjustment. Therefore, attracting investment in strategic PSE sectors is expected to have a positive impact on employment. Furthermore, the strengthening of BOS monitoring and evaluation capacity, including monitoring the socio-economic impact of SEZ, should lead to a baseline situation study. This should allow for a rigorous ex-post impact assessment of the reform.

4.2.3 Senegal has made significant progress in mainstreaming gender. However, the World Economic Forum ranks Senegal 94th out of 149 countries in the Gender Gap Report in 2018; which reflects the persistence of large social disparities between men and women in the country. The incidence of tax expenditures is considered a major problem in terms of efficiency, tax opportunity cost and gender equity. As such, the project will ensure that the fiscal proposals on this issue are fair from a gender perspective. The Bank will support the preparation of a baseline gender impact study, which will examine the effects of the existing tax system on levels of gender equality, poverty and development opportunities. The project will also promote other economic studies that are gender-informed. Training on gender equality is also planned for staff in the departments targeted by the project. In addition, the project will develop a plan for gender mainstreaming in socio-economic studies and fostering women's access to technical positions in DPEE. The budget dedicated to these activities is 136 000 UA.

5 PROJECT IMPLEMENTATION

5.1 Implementation Arrangements

5.1.1 Executing Agency: Project activities will last 48 months, from the date of the ADF loan effectiveness scheduled for July 2019. The implementation arrangement comprises a Steering Committee and a Project Management Unit (PMU).

5.1.2 Steering Committee: The Steering Committee will guide and monitor the project. It will be the decision-making body of the project, chaired by a representative of the Ministry of Finance and Budget. The Steering Committee will comprise the representatives of the projects beneficiary institutions and a focal point of the Ministry of Economy, Planning and Cooperation. The Committee will meet quarterly and as the need arises, and will approve the annual work programme, the budget and the annual progress reports.

5.1.3 PAIMRAI Implementation Unit: The institutional anchoring of the project will be at DGID. The head of the project unit will be a state agent reporting to the Ministry of Finance and Budget. His/her appointment shall be submitted to the Bank for prior approval. The project will recruit an assistant coordinator to assist the designated officer in managing the project. The unit will also include three experts (accountant, procurement, monitoring/evaluation) to be recruited according to Bank procedures, and an IT specialist appointed by DGID. The Government shall provide adequate and appropriate premises for the PMU. The appointment of the project manager and the recruitment of the accountant are conditions precedent to first disbursement of the ADF loan. Lastly, it is proposed to introduce "performance bonuses" for project unit members to serve as incentives for the timely completion of the project as scheduled. The bonuses will be included in the performance contracts.

5.1.4 Financial Management: Established within DGID, the PMU will be in charge of all technical, administrative, financial and accounting aspects of PAIMRAI, in close collaboration with the beneficiary entities. The PMU Head will be responsible for project management, and will be assisted by the accountant. An administrative, financial and accounting procedures manual will outline the responsibilities of PMU members and set out the procedures governing PAIMRAI's financial management tasks. The accountant will keep the accounts in accordance with OHADA standards and will produce the interim financial management statements. In particular, he/she will provide the quarterly budget execution status and statements on quarterly project disbursements, annual budget execution and annual financial reports. The PMU shall have an accounting software package with integrated budget accounting, cost accounting and general accounting modules. The annual project accounts will be audited by chartered independent audit firms, based on terms of reference approved by the Bank. PAIMRAI will be required to submit the financial audit reports to the Bank latest by 30 June of the year following the financial year under review.

5.1.5 Disbursement: Disbursements shall be in accordance with Bank rules and procedures. A special account will be opened in a bank acceptable to the ADF to receive a portion of the loan resources. Three disbursement methods have been retained: (i) the special account method for operating, training and other minor project expenses; (ii) the direct payment method for contract and related expenses; and (iii) the reimbursement method for expenses chargeable to ADF but paid from the resources of the counterpart contribution, with the Bank's prior approval.

5.1.6 Audit: The PMU will prepare the project's financial statements and forward them to the Bank in accordance with the relevant guidelines latest six months following the end of the financial year. The project's annual accounts will be audited by a chartered independent audit firm in accordance with terms of reference and guidelines approved by the Bank, and IFAC’s

International Standards on Auditing (ISA). The DGID will be required to send the audit report on the annual accounts to the Bank, latest within six months following the end of each financial year. These audits will be funded from ADF resources.

5.1.7 Procurement Arrangements: Procurement of goods and consultancy services financed by Bank resources will be in accordance with the Procurement Policy for Bank Group- financed Operations ("AfDB Procurement Policy"), October 2015 edition, and the provisions of the Financing Agreement. Pursuant to this policy and following the various assessments conducted, it was agreed that all procurement listed in paragraph B.3.2.2.1(a) of Technical Annex B.3 will be carried out in compliance with the national procurement system ("National System") as set out in Decree No. 2014-1212 of 22 September 2014 on the Public Procurement Code (CMP), while all other procurement, listed in paragraph B.3.2.1 (b) of the same Annex, will be made in accordance with the Bank's procurement methods and procedures, using the Bank's bidding documents.

5.1.8 Using the National System helps to improve efficiency thanks to the following, among others: (i) better ownership of the procurement system to be used by the executing agency; (ii) time saved by the absence of a second review of the procurement (after that of the national entities), which the Bank’s prior review represents. However, the Bank reserves the right to request the Borrower to revert to the Bank's System if: (a) the legal public procurement framework were to change to a system not satisfactory to the Bank; (b) the provisions in place were not respected by the executing agency, or (c) the appropriate risk mitigation measures contained in the risk assessment action plan were not observed.

5.1.9 Procurement Risks and Capacity Assessment (PRCA): Taking the programme’s specificities into consideration, the Bank assessed: (i) risks at the national, sector and project level, and (ii) the capacity of executing agencies. The ensuing conclusions were that the procurement risk was moderate and that, subject to the application of mitigation measures proposed in paragraph 5.9 of Annex B.3, the batch of procurement to be concluded under the Bank's system and another lot that could be implemented under the National System without major risk would be identified. Details of the arrangements are provided in Technical Annex B.3.

5.2 Monitoring and Evaluation

5.2.1 The monitoring and evaluation system will be based on an indicator monitoring mechanism to be set up within PAIMRAI in collaboration with the beneficiaries. The system will collect all the information on the project's logical framework, as well as additional data and information on direct and indirect beneficiaries for analysis and study on PAIMRAI's impact. Monitoring and evaluation will also be carried out through periodic supervision missions (twice yearly), in collaboration with COSN, and a mid-term review to assess project implementation performance. The Bank and the Ministry of Finance will prepare a completion report at the end of the project. A project launch mission will be organised as soon as the loan is effective. A small project unit should, if necessary, manage the day-to-day activities of the project after the date of the last project disbursement. The main indicative steps for monitoring are presented in the table below:

Table 6: Main Stages of PAIMRAI Implementation Timeframe Main Stages Monitoring Process July 2019 Board Approval Notification to the Government August 2019 Effectiveness Government/Bank August 2019 Project Start-up / Launch Mission Bank/Government Finalizing the Recruitment of the Additional August 2019 Government Specialist August 2019 – June 2023 AGPM/Procurement of Goods and Services PAIMRAI 2019 - 2023 Project Supervision (twice a year) Bank / PAIMRAI 2019 - 2023 Quarterly Progress Reports PAIMRAI 2019 - 2023 Annual Audits of Projects PAIMRAI 2nd Quarter 2021 Midterm Review Bank / Government / PAIMRAI September 2023 Project Completion Report Bank / Government / PAIMRAI

5.3 Project Governance

5.3.1 The Bank's experience in Senegal has shown that current project governance practices and control systems are satisfactory, despite the fact that they are still fragile. Moreover, the Ministry of Finance is already conversant with TFP procurement, disbursement and financial management rules and procedures. However, the capacity of the project team will be strengthened through fiduciary clinics. Moreover, the risk related to the project's fiduciary framework will be mitigated by the Bank's control over the procurement process through the issue of no objection notices on bidding documents, contract award proposals, contracts and procurement as well as by the project procurement supervision and audit. The project accounts will be audited annually by a firm hired for the purpose. Financial and audit reports will be submitted to the Bank within six months following the end of the accounting period.

5.4 Sustainability

5.4.1 PAIMRAI's sustainability is based on both the Government's commitment to the project themes and the participatory approach built into its design. The approach offers a guarantee of sustainability of expected institution building outcomes. Particular emphasis will be placed on the training of trainers for knowledge transfer. Furthermore, the main beneficiaries assumed ownership of project's objectives and activities through their active participation in its design.

5.5 Risk Management

5.5.1 Risk is moderate overall. The table below summarises the risks and mitigation measures.

Table 7: Risk and Mitigation Measures Risks Probability Mitigation Measures The Government will give priority to resource mobilisation and will have an experienced Both the Government and the Bank have implementation team. Collaboration with the Global Forum will also help to address any shortage of capacity constraints (lack of required skills could slow Average expertise in international taxation. The ECNR department has been mobilised for the down the implementation pace). hydrocarbon and mining hub component. The same applies to the industrial component, for which PITD has been mobilised. Fiduciary risk: although Senegal has made significant progress in institution building and the fight against The project will improve the fiduciary environment, with close monitoring by the Average corruption, weaknesses that will continue to pose a risk Country Office (COSN). persist. Lack of commitment to reform - support at the highest level A constant dialogue between the Senegalese Government, the Bank and development of government is needed for successful reforms in domestic Average partners should secure a continued commitment to these critical reforms. resource mobilisation.

5.6 Knowledge Building

5.6.1 New skills will be acquired through training, studies and technical assistance provided under PAIMRAI.

6 LEGAL FRAMEWORK

6.1 Legal Instrument

6.1.1 A Loan Agreement will be signed between the Republic of Senegal and the African Development Fund.

6.2 Conditions for Bank Intervention

6.2.1 Conditions precedent to loan effectiveness: Loan effectiveness shall be subject to the Borrower meeting the conditions set out in Section 12.01 of the General Conditions Applicable to Loan Agreements and Guarantee Agreements of the Fund.

6.2.2 Conditions precedent to first loan disbursement: Besides the effectiveness of the loan, the first disbursement of ADF loan resources will be subject to the Borrower's fulfilment of the following conditions:

i. Provide the Fund with evidence of the establishment of the Project Steering Committee and the appointment of its members, as well as evidence of the establishment of the Project Management Unit; and ii. Provide the Fund with evidence of the appointment of the Project Coordinator and the hiring of the accountant within the PMU whose qualifications and experience have previously been acceptable to the Fund;

6.3 Compliance with Bank Policies

6.3.1 The project complies with all applicable Bank policies.

7 RECOMMENDATION

7.1.1 Management recommends that the Board of Directors of the Fund approve the proposal to grant an ADF loan of UA 10.84 million to the Republic of Senegal to finance the Resource Mobilisation and Investment Attractiveness Support Project (PAIMRAI), under the terms and conditions set out in this report.

ANNEX I: COUNTRY'S SOCIO-ECONOMIC INDICATORS

ANNEX II: TABLE OF BANK PORTFOLIO IN SENEGAL Senegal: Active National Projects Approval Amount Amount Disb. Disb. Sector / Operation Date Approved Disb. Rate Deadline. (UA million) (UA million) (%) RURAL Community Roads Project in Support of the PNDL 1 (PPC/PNDL) - ADF 17-July-13 7.22 6.38 88.5 31-Dec.-19

- OPEC 2 Project to Restore the Ecological and Economic Functions of Lac de Guiers (PREFELAG)- ADF 4-Sept.-13 15.00 14.14 94.2 30-June-19 - GEF 4-Sept.-13 0.95 0.52 54.7 30-June-19 3 Food Security Support Project in Louga, Matam and Kaffrine Regions - ADF 26-April-13 2.00 1,45 72,37 31-Dec.-19 - GAFSP 26-April-13 28.93 21,50 74,30 31-Dec.-19 4 Project to Open up Production Areas in Support of the 22-June-18 20.00 0 0 30-Sept.-23 National Local Development Programme (PDZP/PNDL) 5 Climate Information Quality Improvement Project for 17-March-17 0.83 0.01 1.6 31-Dec.-19 Building Community Resilience in Senegal (FSCD)

Sub-Total 74.93 44.00 58.7 TRANSPORT 6 Dinguiraye-Nioro-Keur-Ayib Road Rehabilitation Project (DNKA) - ADF 28-May-14 23.77 16.88 71,0 31-Dec.-19 Project to Rehabilitate National Road 2 and Open up 7 Morphil Island - AfDB 16-Dec.-15 97.44 33.68 34,6 31-Dec.-20 Project to Rehabilitate Senoba-Ziguinchor-Mpack Road 27-June-18 68.56 0.04 0.07 31-Dec.-22 8 and Open up the Southern Regions - AfDB 20.16 0 0 9 Towns Modernisation Programme (PROMOVILLES) – AfDB 29-March-17 92.22 15.63 16.95 31-Dec.-20 10 Regional Express Train Project (TER) - BAD 21-June-17 147.55 49.53 33.57 31-Dec.-20 Sub-Total 449.70 115.76 25.7 TIC 11 Digital Technologies Pool Project - AfDB 21-Oct.-15 49.17 2.97 6.04 31-Dec.-20 ENERGY 12 Project to Improve Access to Power in Peri-Urban and 03-Oct.-18 29.29 0 0 31-Dec.-22 Rural Areas (PAMACEL) – AfDB WATER AND SANITATION Multiple Use Water Supply Strengthening Project on the 13 Louga - Thiès – Dakar Highway from Keur Momar Station 18-Nov.-16 52.43 10.00 19.1 30-June-21

SARR - AfDB 14 Water and Sanitation Sector Project (PSEA) - ADF 23-April-14 20.00 8.75 43.8 30-June-20 - RWSSI 23-April-14 4.84 2.85 58.9 30-June-20 Sewage Sludge Management and Recycling Improvement 15 23-April-13 1.01 1.01 100 30-June-19 Project in Ziguinchor 16 Emergency Community Development Programme Support 27-Sept.-18 48.39 0 0 31-Dec.-22 Project (EP-CDSP) - AfDB Sub-Total 126.67 22.61 17.8 SOCIAL 17 Youth and Women's Employment Promotion Support Project 23-Oct.-13 21.19 4.60 21.71 30-June.-19 (PAPEJF) - ADF Support Project for the Virtual University of Senegal 18 18-Dec.-13 3.38 2.05 60.63 30-June-19 (PAUVS) - ADF 19 Project to Support Skills Development and Youth 17-Sept.-18 14.00 0 0 31-Dec.-23 Entrepreneurship in Growth Sectors (PDCEJ) Sub-Total 38.57 6.65 17.2 GOVERNANCE. 20 Private Sector Promotion Support Project (PAPSP) 10-Sept.-12 4.04 3.02 74.8 30-sept.-19

TOTAL 772.37 195.01 25.2% * Source: SAP-PS April 2019 Sector Breakdown: Transport (58.2%); Water and Sanitation (16.4%); Rural (9.7%); TIC (6.4%); Social (5%); Energy (3.8%) and Governance (0.5%)

Senegal: Active Private Sector Window Projects Amount Disb. Closing Sector / Operation Approval Date Approved Amount Rate Date (UA million) Disb. (%) 1 Blaise Diagne International Airport (AIBD) 17-Dec.-10 56,46 56.46 100 5-March-29 2 Dakar Toll Motorway Project - Privileged loan 19-July-10 7.64 7.64 100 31-Dec.-25 3 Sendou Power Plant Project - Privileged loan 25-Nov. -09 44.36 44.36 100 31-Dec.-24 - Supplementary loan 30-Oct.-15 4.03 4.03 100 4 Malicounda Power Plant Project 27-Nov.-18 41.34 0 0 31-Dec.36 5 Rice Project of Compagnie Agricole de 23-March- 22-June-16 12.66 11.01 86.9 Saint Louis du Sénégal (CASL) 22

TOTAL 166.49 123.50 74.2%

Active Multinational Projects Concerning Senegal Approval Disb. Date Amount Amount Disb. Deadline Sector / Operation Approved Disb. Rate. (UA million) (UA million) (%) RURAL 1 Programme to Build Resilience in the Sahel (P2RS) 16-March -15 22.25 14.44 64.89 30-June-20

TRANSPORT Trans-Gambian Bridge Construction and Cross- 2 Border Crossing Improvement Project (Senegal loan) 16-Dec.-11 3.18 0.04 1.2 31-Dec.-19

Rosso Bridge Construction Project 3 - ADF Loan Senegal - AfIF Grant 09-Dec.-16 7.50 0.06 0.8 31-Dec.-20 (PAGoDA) 29-June -18 8.09 0 0 Sub-Total 18.77 0.10 0.5 ENERGY 4 OMVG Energy Project 30-Sept .-15 42.50 11.59 27.3 31-Dec.-20

TOTAL 83.52 26.13 31.3% * Source: SAP-PS April 2019 Sector Breakdown: Energy (50.9%), Rural Sector (26.6%) and Transport (22.5%)

ANNEX III: IMF POSITION ON STRUCTURAL REFORMS AND RESOURCE MOBILISATION IN SENEGAL PRESS RELEASE

IMF staff concludes discussions on the Article IV Consultation and the 7th Review of the Economic Policy Support Instrument

31October 2018

The End-of-Mission Press Releases contain statements from IMF staff teams reporting on their preliminary findings. The views expressed in this statement are those of staff and do not necessarily reflect those of the IMF Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to Management approval, will be presented to the Executive Board for consideration and decision.

 Growth is expected to remain above 6 percent in 2018 for the fifth consecutive year while inflation remains low.  Program implementation in the first half of 2018 was broadly satisfactory, but meeting the fiscal targets by end-December will require significant efforts given the large shortfall in domestic revenue at end September 2018.

 The 2019 budget is consistent with the WAEMU fiscal deficit target of 3 percent of GDP, but achieving this target will be a challenge.

An International Monetary Fund (IMF) staff team, led by Michel Lazare, visited Dakar from 18 to 31 October 2018 to conduct discussions on the 2018 Article IV Consultation and the seventh review of the programme supported by the Economic Policy Support Instrument (PSI), approved in June 2015.

At the conclusion of the visit, Mr. Lazare issued the following statement:

“Growth is expected to stay strong in 2018. It is projected to exceed 6 % for the fifth consecutive year, driven by both public and private investment. Growth is supported by strong performances in the construction and services sectors, but was hindered in the agricultural sector by late and insufficient rainfall. Inflation over the twelve months through September was below 1% and is projected to remain low for the rest of 2018.

“Program implementation in the first half of 2018 was broadly satisfactory. While most quantitative targets were met at end-June, the fiscal deficit target was met partly through a slower-than-expected execution of public spending to compensate for the large shortfall in domestic revenue. Furthermore, the ceiling on the share of the value of public sector contracts subject to single sourcing has not been respected since December 2017 mainly due to spontaneous offers.

“However, pressures have been rapidly building in the fiscal sector over the last few months. Revenue are now projected to fall short of the December 2018 target by 0.9 % of GDP. Rising global oil prices, coupled with stable retail energy prices, continued pressure on current expenditures, and substantial treasury financing of SN La Poste has further contributed to a very challenging budget situation. This led to an accumulation of unmet obligations to the energy sector and payment delays to other suppliers and economic operators. Meeting the end-December fiscal targets for 2018 under the PSI will require major efforts. The authorities have agreed to cut substantially non-urgent domestically-financed capital expenditure and non-wage current spending to stay within the agreed fiscal envelope.

“To help contain fiscal pressures and risks to completion of the review, the authorities have agreed to significantly strengthen public financial management through: (i) permanently limiting Treasury financing of SN La Poste, and (ii) ceasing use of various budgetary letters that commit central government for expenditure beyond the current financial year or expenditure executed outside the budget.

“Most of the structural reforms for the seventh review have been implemented. But there have been delays in the operationalization of the payment of taxes via mobile phones, and limited progress has been made in implementing the action plan for reducing tax expenditures.

“The 2019 draft finance legislation is consistent with the WAEMU fiscal deficit target of 3% of GDP. However, achieving this target will prove challenging given the recent weakness of revenue collection and the adverse fiscal impact on public finance of persistently high global oil prices.

“In the medium term, the authorities need to develop a tax policy and revenue administration strategy to reach the WAEMU tax revenue to GDP target of 20% over the medium term. They also need to set up a fiscal framework to manage the oil and gas wealth in line with international best practices that should aim at limiting the procyclicality of fiscal policy. The debt management strategy should aim to increase the share of domestic debt in total debt and rely on concessional debt whenever possible.

“The second phase of the Plan Senegal Emergent (PSE) aims to address the structural challenges to prolong recent strong growth performance. The authorities are implementing measures to reinforce the implementation of key reforms in the PSE, including to further develop the financial sector and improve the flow of credit to small and medium size enterprises, reduce energy costs, and simplify tax administration to improve the business environment and allow the private sector to drive sustainable growth.

“The seventh review under the PSI is scheduled to be taken up by the IMF Executive Board in January 2019.”

The team met with H.E. the President of the Republic, Macky Sall, the Ministers for the economy, finance and planning, Amadou Ba, petroleum and energy, Mansour Elimane Kane, the BCEAO National Director, Ahmadou Lo, and other senior government officials as well as development partners and civil society. The team wishes to thank the authorities for the close working relationship and climate of openness in evidence throughout the discussions.

AFRICAN DEVELOPMENT FUND

BOARD OF DIRECTORS

Resolution N° F/SN/2019/45

Adopted by the Board of Directors on a lapse-of-time basis, on 17 July 2019

Loan to the Republic of Senegal to finance part of the costs of the Resource Mobilization and Investment Attractiveness Institutional Support Project (PAIMRAI)

THE BOARD OF DIRECTORS,

HAVING REGARD TO: (i) Articles 1, 2, 11, 12, 14, 15, 16, 26 and 30 of the Agreement Establishing the African Development Fund (the “Fund” or “ADF”); (ii) the Report on the Fourteenth General Replenishment of the Resources of the Fund (the “ADF-14”); (iii) the applicable ADF -14 Country Resource Allocation; and (iv) the appraisal report contained in document ADF/BD/WP/2019/110/Approval (the “Appraisal Report”);

NOTING the availability of sufficient resources to enable the Fund to commit the amount of the loan;

DECIDES as follows:

1. To award to the Republic of Senegal (the “Borrower”), from the resources of the Fund, a loan of an amount not exceeding the equivalent of Ten Million, Eight Hundred and Forty Thousand Units of Account (UA 10,840,000 (the “Loan”) to finance part of the costs of the Resource Mobilization and Investment Attractiveness Institutional Support Project (PAIMRAI);

2. To authorize the President to conclude a loan agreement between the Fund and the Borrower (the “Loan Agreement”) on the terms and conditions specified in the General Conditions Applicable to the African Development Fund Loan Agreements and Guarantee Agreements (Sovereign Entities), in the Appraisal Report and, in particular:

(i) The ADF-14 Loan Financing Terms applicable to Blend, Gap and Graduating ADF Countries; and

(ii) The Loan will be amortized in equal and consecutive semi-annual instalments payable on 15 April and 15 October of each year;

3. The President may cancel the Loan if the Loan Agreement is not signed within ninety (90) days from the date of approval of the Loan by this Board; and

4. This Resolution shall become effective on the date above-mentioned.