Language: English Original: French

BENIN

GROWTH AND POVERTY REDUCTION STRATEGY

SUPPORT PROGRAMME (GPRSSP III)

APPRAISAL REPORT

March 2009

Team

Programme Officer: Mr. Mohamed Ben Ismail BOUABDALLI, Principal Economist, OSGE.2 Team Members: Mr. Fabrice Alain EKPO, Senior Country Economist, ORWA. Sector Division Manager: Mrs. Marlène KANGA, OSGE.2 Sector Director: Mr. Gabriel NEGATU, OSGE Regional Director: Mr. January Kpourou LITSE, ORWA.

Peer Reviewers

- Mr. Ahmed ZEJLY, Lead Economist, OSGE - Mr. Issa KOUSSOUBE, Lead Economist, ORWB - Mrs. Béatrice ALPERTE, Technical Assistant, OSGE

TABLE OF CONTENTS

LIST OF TABLES –LIST OF BOXES –LIST OF BOXES i LIST OF ANNEXES – LIST OF TECHNICAL ANNEXES i FISCAL YEAR – CURRENCY EQUIVALENTS i ACRONYMS AND ABBREVIATIONS ii

LOAN AND GRANT INFORMATION................................................................................................ iii EXECUTIVE SUMMARY.................................................................................................................... iv PRSSP III LOGICAL FRAMEWORK MATRIX ................................................................................. vi I. PROPOSAL ............................................................................................................................... 1 II. COUNTRY AND PROGRAMME CONTEXT......................................................................... 1 2.1 Government Development Strategy and Medium-Term Reform Priorities ............................... 1 2.2 Economic Development and Medium-Term Prospects.............................................................. 3 2.3 Bank Portfolio Status.................................................................................................................. 4 III. PROGRAMME KEY DESIGN ELEMENTS............................................................................ 4 3.1 Links with CSP, Analytical Work underpinning Programme Preparation and Country

Eligibility for Budget Support .................................................................................................... 4 3.2 Collaboration with other Donors ................................................................................................ 7 3.3 Outcomes and Lessons from Similar Previous Operations ........................................................ 7 3.4 The Bank’s Comparative Advantages ........................................................................................ 8 3.5 Relationship with Other Bank Operations.................................................................................. 8 3.6 Application of Good Practice Principles on Conditionalities..................................................... 9 3.7 Application of Bank Policy on Non-Concessional Loans ........................................................ 10 IV. PROPOSED PROGRAMME................................................................................................... 10 4.1 Programme Goal and Objectives.............................................................................................. 10 4.2 Programme Pillars, Components and Expected Results........................................................... 10 4.3 Financing Requirements and Sources of Finance .................................................................... 15 4.4 Programme Beneficiaries ......................................................................................................... 16 4.5 Macro-Economic Impact .......................................................................................................... 16 4.6 Impact on Gender ..................................................................................................................... 17 4.7 Environmental Impact .............................................................................................................. 17 4.8 Other Programme Impacts........................................................................................................ 17 V. IMPLEMENTATION, MONITORING AND EVALUATION .............................................. 18 5.1 Programme Implementation ..................................................................................................... 18 5.2 Monitoring and Evaluation....................................................................................................... 18 VI. LEGAL DOCUMENTS AND AUTHORITY ......................................................................... 19 VII. RISK MANAGEMENT ........................................................................................................... 20 VIII. RECOMMENDATION............................................................................................................ 21

CURRENCY EQUIVALENTS

March 2009

Unit of Account = CFA Francs 761.251 Euro = CFA Francs 655.957 US Dollar = CFA Francs 518.790

FISCAL YEAR

1 January to 31 December

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 inch (“) 1 kilometre (km) = 0.62 mile 1 hectare (ha) = 2.47 acres

LIST OF TABLES Table 1 : Programme Financing Requirements, 2009-2010 16 Table 2 : Programme Financing 2008-2010 LIST OF ANNEXES Annex 1 Matrix of Programme Measures 2 Annex 2 Note on Status of Cooperation between IMF and Benin 1 Annex 3 Medium-Term Economic and Financial Indicators 1 Annex 4 Table of Government Financial Operations for 2004-2011 1 Annex 5 Public Expenditure and Financial Accountability Assessment (PEFA 2007) 1 Annex 6 List of Background Documents 1 LIST OF TECHNICAL ANNEXES Annex 1 Development Policy Letter 1 Annex 2 Matrix of Budget Support Framework Arrangement (ACAB) 1

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ACRONYMS AND ABBREVIATIONS

AFD : French Development Agency AFRITAC : Regional Technical Assistance Centres BWI : Breton Woods Institutions CaR-GBAR : Results-Based Budget Management Reform Framework CHF : Swiss Franc CNRMP : National Procurement Regulatory Commission (CNRMP) CPMP : Public Procurement Units CSPEF : Economic and Financial Programmes Monitoring Unit DKK : Danish Kroner DNMP : National Directorate of Public Procurements EDF: European Development Fund ERSP : Economic Reform Support Programme EUR : Euro GBS : General Budget Support GOB : Government of Benin GPRSSP : Growth and Poverty Reduction Strategy Support Programme HIPCI : Heavily Indebted Poor Countries Initiative IMF : International Monetary Fund JPRBS : Joint Poverty Reduction Budget Support MCA : Millennium Challenge Account MDG : Millennium Development Goals MDRI : Multilateral Debt Relief Initiative MEF : Ministry of the Economy and Finance MTEF : Medium-Term Expenditure Framework PAAGFP : Action Plan for Improved Public Finance Management PAP : Priority Action Programme PFM : Public Finance Management PLR : Budget Execution Bill PRGS : Poverty Reduction and Growth Strategy PRGSP : Poverty Reduction and Growth Strategy Paper PRS : Poverty Reduction Strategy PRSC : Poverty Reduction Support Credit (World Bank) PRSP : Poverty Reduction Strategy Paper PRSSP : Poverty Reduction Strategy Support Programme SAP : Structural Adjustment Programme SBEE : Electricity and Water Company of Benin SBS : Sector Budget Support SIGFIP : Integrated Computerized Public Finance Management System SONACOP : National Petroleum Products Marketing Company SONAPRA : National Cotton Company TFP : Technical and Financial Partners WAEMU : West African Economic and Monetary Union

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LOAN AND GRANT INFORMATION

Country : Republic of Benin Sector : Economic and Financial Governance Executing Agency : Economic and Financial Programmes Monitoring Unit (CSPEF) within the

Ministry of the Economy and Finance Amount : UA 22 million, comprising UA 11 million in the form of a loan and UA 11

million in the form of a grant Terms : ADF Loan and Grant Repayment period of 50 years, including grace period of 10 years

Number of Tranches : Two tranches to be disbursed following fulfilment by the Borrower of the

specific conditions for each tranche

Programme Financing (2009-2010) Source Amount (in UA) ADF : 22 million WORLD BANK : 33.55 million EUROPEAN UNION : 28.35 million NETHERLANDS : 17.00million DENMARK : 3.00 million SWITZERLAND : 1.2 million

Time frame – Key Dates

Approval of Concept Note : 15 October 2008 Programme Approval : 29 April 2009 Effectiveness : June 2009 Joint Review with Partners : June 2009 Disbursement of 1st tranche of loan or grant : June 2009 Joint Review with Partners : June 2010 Disbursement of 2nd tranche of loan or grant : June 2010 Bank Completion Report : January 2011

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EXECUTIVE SUMMARY

Programme Overview and Intervention Instruments The Third Growth and Poverty Reduction Strategy Support Programme (GPRSSP III), covering the 2009-2010 period, is a follow-up to the previous support programmes by the Bank (PRSSP I and PRSSP II)1. This Programme consolidates ADF’s contribution to the implementation of the Poverty Reduction and Growth Strategy (PRGS 2007-2009) and the Action Plan for Improved Public Finance Management 2009-2011. More specifically, it has two major objectives, namely: (i) strengthen good governance through increased efficiency and effectiveness in public finance management, and (ii) build solid bases for sustainable economic growth. To achieve these objectives, the Programme will focus on the following two components: (i) strengthening of public finance management, and (ii) improvement of the business climate. In view of the progress made by Benin in public resource management, particularly since the Country Financial Accountability Assessment (CFAA) in 2002, and the Country Procurement Assessment Review (CPAR) in 2003, the Government and donors give priority to budget support as a reform programme support instrument. Thus, the support to be provided by the Bank under GPRSSP III will take the form of a General Budget Support to cover the 2009-2010 period. This intervention method draws on the key declarations on the alignment and harmonization of development aid. Programme Outputs and Outcomes The expected outputs of GPRSSP III, under the component, “Strengthening of Public Finance Management” , are as follows: (i) enhanced transparency in budget implementation; (ii) public finance audit and control system improved through production of timely and quality annual financial statements, as well as by making up for delays in the adoption of the audited budget laws; (iii) improved management of public procurement through the adoption of a revised Procurement Code, the facilitation of access by SMEs/SMIs to government contracts and the reduction of procurement times for both goods and services. These outputs are expected to produce the following outcomes: i) increased budget implementation rates of more than 80% in 2009 and 100% in 2010 for priority sectors; (ii) improved PEFA indicators (PI-1, PI-21, PI-26; PI-27; PI-28) as from 2010; (iii) increase in the number of audits of central government entities, covering at least 50% of total public expenditure; (iv) reduction of procurement time lines from 8 months in 2008 to 5 months in 2010; and (iv) timely production of audited budget bills as from 2010. Under the component, “improvement of the business climate”, the expected outputs include: (i) finalization of the SONAPRA privatization process; (ii) progress in activities leading up to the privatization of the Benin Telecom; (iii) restructuring of the Electricity and Water Corporation of Benin (SBEE); (iv) reinforcement of port facilities and concessioning them to private partners; (iv) revision of company taxes; (vi) simplification of business registration procedures; and (v) introduction of good governance and anti-corruption

1 PRSSP I and II covered the periods of 2004-2005 and 2006-2007. The objectives of these two Programmes were to help

the Government: (i) strengthen macro-economic stability; (ii) improve and beef up the efficiency of public service; and, (iii) promote good governance.

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practices in all government services. These outputs are expected to produce the following outcomes: (i) increase in contribution of private sector investment to GDP (national accounts) from 13.6% in 2008 to 15% in 2010; (ii) reduction in business registration time from 31 to 12 days; (iii) reduction of the business profit tax from 35% to 25%; (iv) enhanced efficacy of the electricity sector, where power cuts will be reduced by 5%; (v) improved quality of ports and telecommunications services; and (vi) reduced scope of corruption. Justification for the Programme GPRSSP III is aligned on PRGS 2007-2009, and is based on the Bank’s intervention strategy in Benin for the 2005-2009 period, namely “the diversification of production”. The Programme is the continuation of the previous reform programmes (PRSSP I and II), and is intended, in particular, to complete the structural (privatization and diversification of the economy) and public finance (improvement of internal and external controls) reforms initiated under PRSSP II so as to further contribute to accelerating economic growth and poverty reduction. Value Added for the Bank Through close collaboration with the World Bank and the European Union, PRSSP I and II enabled the Bank to gain experience in providing support to public finance reforms and promotion of the private sector. Based on this experience, during the design of GPRSSP III, the Bank played a dynamic role in the identification of priority actions and measures that would improve the quality of public finance management and the business climate. Furthermore, these actions and measures were designed in such a way as to enable GPRSSP III to build on the achievements of the previous programmes as regards structural reforms and public finance management, as well as strengthen synergy with the interventions of the Joint Budget Support (JBS)2 Group and with active projects in the portfolio, such as the Public Finance Control Institutions Support Project (PAIC). Institutional Development At the institutional level, the implementation of PRSSP III will be backed by the ongoing institutional support project (PAIC) and followed by the future Capacity Building Project which is in the pipeline of the Bank’s financing programme for 2010. These two projects will contribute to building the capacities of the various internal (Financial Control, Audit and Internal Control Department, and General Inspectorate of Finance) and external (Audit Bench and National Assembly) control bodies, as well as agencies responsible for procurements and combating corruption.

2 The Joint Budget Support (JBS) Group falls within a Budget Support Protocol Agreement signed in December 2007

between the Government and nine multilateral and bilateral Technical and Financial Partners, comprising: European Commission, African Development Bank, World Bank, Germany, Denmark, France, Netherlands and Switzerland.

 

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PRSSP III LOGICAL FRAMEWORK MATRIX

Benin: Logical Framework Matrix of the Third Growth and Poverty Reduction Strategy Support Programme (GPRSSP III) 2009-2010

Hierarchy of Objectives Expected Outcomes Scope

(Beneficiaries) Performance Indicators Targeted Indicative Timeframes Assumptions/Risks

1. Overall Goal 1.1 Contribute to the implementation

of the Government’s Programme in terms of growth and poverty reduction

Long-term Outcomes 1.1.1 Wealth creation, poverty reduction and improved well-being of the Beninese population 1.1.2 Significant reduction in the incidence of poverty

Beninese population

1.1.1.1 GDP growth rate in real terms (source: Macro-economic framework) 1.1.2.1 Implementation rate of pro-poor expenditures (PRGS Implementation Report) 1.1.2.2 Population living below poverty line (Source: Household Survey)

Expected Long-term Progress Annual GDP growth rate in real terms is at least 6% as from 2010. The contribution of the private sector to GDP increases from 13.6% in 2008 to 15.8 % between 2009 and 2010. Implementation rate of expenditures allocated to priority sectors increases to more than 80% in 2009 and 100% in 2010. Population living below the poverty line drops from 63.4% in 2007 to 60% in 2010.

Assumptions - Government’s commitment to pursue structural and institutional reforms - Predictability of assistance from Budget Support partners - Increased absorption of budget resources - Allocation of resources to pro-poor expenditure Risks - The occurrence of adverse external shocks such as oil and food price increases - Unstable weather conditions affecting agricultural production, particularly cotton, which could also be affected by the volatility of international market prices - Persistence of structural rigidities leading to delays in the restructuring of the energy and telecommunications sectors - Lack of predictability of TFPs’ assistance and low foreign direct investments.

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Hierarchy of Objectives Expected Outcomes Scope (Beneficiaries)

Performance Indicators Targeted Indicative Timeframes Assumptions/Risks

2. Programme Objectives 2.1 Improve public finance management 2.2 Improve the business climate

Medium-term Outcomes 2.1.1 The public finance internal and external control system is improved. 2.1.2 Procurement management is improved 2.2.1 Conditions for starting a business are improved, and access by Small and Medium-size Enterprises (SMEs) to public contracts is facilitated 2.2.2 The activities of SONAPRA, Cotonou Port and the Telecommunications Corporation are partially or fully privatized;

Ministry of the Economy and Finance Audit Bench, National Assembly economic operators, Beninese population. Economic operators, Public administration; Beninese population Economic operators, Public administration; Beninese population Economic operators, Government and the population

PEFA3 Indicators (PI-21, PI-26 ; PI-27 ; PI-28) 2.1.1.1 PI-21: Effectiveness of internal audit system; 2.1.1.2 PI-26 : Scope, nature and follow-up of external audit; 2.1.1.3 PI-27: Legislative scrutiny of the annual Budget Act; 2.1.1.4 PI-28: Legislative scrutiny of external audit reports; 2.1.1 Procurement time 2.2.1 Minimum capital required to start a business 2.2.2 Time required for starting a business 2.2.3 Ownership transfer time Source: World Bank’s Doing Business 2.2.2. Invitations to bid for the privatization of SONAPRA, Cotonou Port and the Telecommunications Company

IP 21 rating of C+ in 2007 moves up to B in 2010; IP 26 rating of D in 2007 moves up to C in 2010; IP 27 rating of C+ in 2007 moves up to B in 2010; IP 28 rating of D in 2007 moves up to C in 2010; Time reduces from 8 months in 2008 to 5 months in 2010. The minimum capital required is reduced by 10% in 2010 compared to 2008. Time required for starting a business is reduced from 31days in 2008 to 12 days in 2010 Ownership transfer time is reduced to less than 120 days, and registration cost reduced in 2010 Privatization of the industrial tool SONAPRA and Benin Telecommunications Plc. and concessioning to private operators of the two additional quays of Cotonou Port are carried out between 2009 and 2010;

Assumptions - Government’s commitment to pursue structural and institutional reforms - Predictability of assistance from Budget Support partners - Increased absorption of budget resources - Allocation of resources to pro-poor expenditure Risks - The occurrence of adverse external shocks such as oil and food price increases - Unstable weather conditions affecting agricultural production, particularly cotton, which could also be affected by the volatility of international market prices - Persistence of structural rigidities leading to delays in the restructuring of the energy and telecommunications sectors - Lack of predictability of TFPs’ assistance and low foreign direct investments. Assumptions - Government’s commitment to pursue structural and institutional reforms

3 Source: PEFA Review 2010

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Hierarchy of Objectives Expected Outcomes Scope (Beneficiaries)

Performance Indicators Targeted Indicative Timeframes Assumptions/Risks

3. Activities/Resources

3.1 Activities Negotiate, approve and sign the grant memoranda of understanding Implementation of all measures on Programme Matrix Monitoring, evaluation and supervision Audit of the special account 3.2 Resources ADF: UA 22 million; World Bank : US$25 million; Denmark: EUR 1.7 million; France (amount to be determined); Netherlands: EUR 10 million; Switzerland :

Short-term Outcomes Satisfactory implementation of PAREF Matrix of Measures.

Government

GPRSSP III Matrix of Reforms Source: Annex II

100% of measures implemented by end-2010

- Predictability of assistance from Budget Support partners - Increased absorption of budget resources - Allocation of resources to pro-poor expenditure Risks - The occurrence of adverse external shocks such as oil and food price increases - Unstable weather conditions affecting agricultural production, particularly cotton, which could also be affected by the volatility of international market prices - Persistence of structural rigidities leading to delays in the restructuring of the energy and telecommunications sectors - Lack of predictability of TFPs’ assistance and low foreign direct investments.

I. PROPOSAL 1.1 This proposal submitted to the Board of Directors of the African Development Fund for consideration concerns the financing of the Growth and Poverty Reduction Strategy Support Programme (GPRSSP III) for Benin in the form of a general budget support. It is in response to a request from the Government of Benin dated 19 March 2009, as outlined in its Development Policy Letter in Technical Annex 1. The Programme was appraised in January 2009, shortly after the annual joint review of Technical and Financial Partners (TFPs) conducted in September 2008, under the Joint Budget Support Group Memorandum of Understanding concluded between the Government and the development partners in 2007. It is consistent with the Poverty Reduction and Growth Strategy (PRGS II) adopted by the Government in 2007. It is also in line with the Bank Group’s assistance strategy for Benin for the 2005-2009 period. The Programme design took account of good practice principles on conditionalities and the Bank’s policy on non-concessional debt accumulation. 1.2 The Programme’s overall goal is to contribute to the implementation of the Government’s Poverty Reduction and Growth Strategy. Its specific objectives are: (i) to strengthen good governance through efficient and effective public finance management, and (ii) to build a solid base for accelerated growth. It has two components, namely: (i) strengthening of public finance management, and (ii) improvement of the business climate. The choice of these components is based on recent studies and evaluations in public finance management and the business climate in Benin, as well as lessons drawn from the completion reports of the Bank Group’s last two budget support operations in Benin (PRSSP I and PRSSP II). These studies and completion reports revealed persisting weaknesses in the implementation of the reforms initiated by the Government in these areas. It is proposed that the Programme be supported with a loan of UA 11 million and a grant of UA 11 million from ADF XI resources, in the form of a General Budget Support covering the 2009 to 2010 period. II. COUNTRY AND PROGRAMME CONTEXT 2.1 Government Development Strategy and Medium-Term Reform Priorities 2.1.1 Given Benin’s economic and social situation marked by poverty and lack of economic competitiveness and dynamism of the productive system, the Government has adopted Development Strategic Guidelines (OSD) for 2006-2011. The goal of the OSD is to meet the challenges of economic competitiveness and achievement of the Millennium Development Goals (MDGs), as well as good governance. To help achieve this objective, the Poverty Reduction and Growth Strategy (PRGS II 2007-2009), adopted by the Government at the end of 2007, focuses on the following main areas: (i) acceleration of growth; (ii) infrastructure development; (iii) development of human capital; (iv) promotion of good governance; and (v) balanced and sustainable development of the national space. PRGS II constitutes the operationalization instrument of the Development Strategic Guidelines and the reference framework for the Government’s medium-term development policies and strategies. The key actions of the PRGS are incorporated in the Priority Action Programme (PAP) 2008-2010, which links the Strategy to the programme budgets. Under this programme, the Government intends to consolidate the successes of PRGS I, which covered the 2003-2005 period, and to deepen the reforms that were initiated under PRSSP I and PRSSP II and were aimed at improving public finance management and revitalizing the private sector.

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2.1.2 As regards public finance management, the Government is pursuing efforts to ensure better allocation of public resources for promoting growth and reducing poverty. To that end, it has adopted a Results-Based Budget Management Reform Framework (CaR-GBAR), which focuses on: (i) strengthening the macro-economic framework and putting in place an efficient tax system; (ii) enhancing expenditure management and the culture of results-based management; (iii) strengthening controls and audit, particularly internal and external control, and (iv) accelerating administrative reform and stepping up the fight against corruption. In efforts to generalize the results-based budget management approach, the Government, in keeping with WAEMU guidelines, has endeavoured to make programme-budgets the sole budget preparation and management instruments. Consequently, this approach has been gradually rolled out to all the Ministries with the adoption of Medium-Term Expenditure Frameworks (MTEFs). However, for this new instrument to be consistent with the legal framework governing budget preparation and public accounting, the Government has embarked on a process of preparing a new draft Organic Law relating to Finance Laws, which will replace Law 86-021- of 26 September 1986. Lastly, in order to ensure financial accountability and guarantee good economic governance, the Government has initiated actions to streamline and build the capacities of public finance control bodies, and has embarked on public procurement reform, with support from the ADB. In this regard, it is the first WAEMU country to harmonize its Public Procurement Code with the WAEMU guidelines. 2.1.3 Despite such progress, the Public Expenditure and Financial Accountability Assessment (PEFA) conducted in 2007 identified persisting PFM weaknesses and inadequacies, including: (i)budget coverage and transparency; (ii) the predictability and control of budget implementation; and (iii) external oversight and audit. In order to address these inadequacies which are a cause for concern and reduce fiduciary risks, the Government has, with the assistance of the JBS-TFPs, prepared an action plan to improve PFM from 2009 to 2012. This action plan contains the main recommendations of the 2007 PEFA assessment. It portrays the Government’s desire to make the management of public resources more transparent, reliable and efficient, as indicated in Article 7.1 of the Memorandum of Understanding of the Joint-Budget Support (JBS) Group, which defines Benin’s eligibility criteria for budget support. GPRSSP III will support the Government in the implementation of this action plan to improve Public Finance Management. 2.1.4 With regard to improving the business climate, despite the structural and institutional reforms undertaken since 2006, the development of private investment and the competitiveness of the Beninese economy continue to be hampered by persisting barriers and constraints in the business environment. These constraints concern, in particular: (i) the slow pace of reforms in the privatization of state-owned enterprises; (ii) the weak financial and institutional capacity of promoters; (iii) difficulties for SMEs to access bank financing due to lack of long-term resources and a reliable risk guarantee system; (v) the relatively high cost of factors of production; (vi) difficulties in access to land; (v) costly and lengthy business registration time lines; (vii) lengthy procurement time lines and delays in related payments; and (viii) the extent of corruption. In addition, serious infrastructure problems persist, particularly in the area of transport and electricity supply. 2.1.5 According the World Bank’s “Doing Business 2009” Annual Report, all these unfavourable factors have contributed to bringing Benin’s ranking down from 167th to 169th out of 181 countries. Taking into account this poor performance and in order to move towards

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a better standing in business, the Government is taking some measures under the Millennium Challenge Account (MCA-Benin) project. It intends to develop, with the assistance of International Finance Corporation (IFC), a medium-term action plan to improve the business climate assessment indicator rating. This plan will draw from the Strategic Orientation Document4 for private sector development, prepared in 2006. Pending the finalization of this plan, the Government has already embarked on taxation reform, simplification of administrative procedures for access to land and business registration, improvement of financial services and telecommunications, as well as acceleration of the process of restructuring and privatization of state-owned enterprises. With regard to combating corruption, the Government in 2001 prepared a National Anti-Corruption Strategy5 and in 2004 set up the Anti-Corruption Observatory (OLC), which received the Bank’s technical and financial support. The OLC prepared an action plan for 2005-2006 whose implementation has started with the communication aspect, which is expected to help improve citizens’ access to public information and thus foster the civil society’s participation in decision-making. PRSSP III will support the Government in undertaking reforms so as to promote the development of the private sector, improve public service delivery, reduce production costs, and enhance the competitiveness of the economy. 2.2 Economic Development and Medium-Term Prospects Recent economic and social developments 2.2.1 Despite the relative difficult political climate and a global economic environment marked by strong pressures on oil and food prices, Benin has maintained a fairly impressive pace of economic growth. The upturn in economic growth observed since 2006 was consolidated in 2008 with measures taken by the Government to revive the BPW sector, improve food crop production, and normalize electricity supply. The real growth rate rose from 3.8% in 2006 to 4.6% in 2007. According to the latest IMF assessment, it was estimated at 5.3% in 2008, representing the highest growth rate within WAEMU, after that of Senegal. As stated above, this economic performance was achieved within an inflationary context resulting from the global food crisis and soaring oil prices in 2007 and during the first quarter of 2008. Inflation averaged at 7.9% in 2008 compared to 1.3% in 2007, which was one of the highest in the WAEMU zone. The Government responded by temporarily granting subsidies in the form of tax cuts and customs duty reductions for consumer goods such as rice, sugar, milk, flour, etc. Petroleum products and some building materials (cement and iron rods) were also subsidized. This situation caused a significant revenue shortfall estimated at about CFAF 85 billion in 2008. The budget deficit widened to 5.4% of GDP in 2008 as against 5.1% of GDP in 2007. This was also the case for external accounts which recorded a deficit of 10.4% of GDP as against 7.5 % of GDP in 2007. 2.2.2 Despite the impressive pace of economic growth, Benin continues to be confronted with many socio-economic development challenges. The economy is still dominated by agricultural production and services related to activities in Cotonou Port. Growth from these 4 This document underscores the need to improve the business climate through the reform of the regulatory framework,

strengthening of public/private sector partnerships, reduction of factor costs through increased private sector investment in sectors such as telecommunications and infrastructure, and the development of micro-finance

5 The National Anti-Corruption Strategy included an action plan comprising the following five priority areas: (i) strengthening the legal arsenal by passing an anti-corruption law; (ii) building the civil society and private sector’s capacities for action; (iii) creating a hostile environment for corruption; and (iv) reinforcing accountability and combating impunity.

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different sectors is still not enough to reverse the negative poverty trends affecting more than 63.4% of Beninese. If this situation persists, it could jeopardize the achievement of the key MDGs by 2015, particularly in the areas of education, health, access to drinking water, and poverty reduction. The situation underscores the urgent need for a response to social demand, a crucial factor in strengthening the democratic framework. Such a response will require the establishment of an enabling development framework for the creation of decent and sustainable employment in urban and rural areas, driven by strong economic growth. Medium-Term Economic Prospects 2.2.3 According to the IMF, the macro-economic prospects of Benin in the coming years are generally favourable with nonetheless risks of negative impacts arising from the global financial crisis. These risks stem from a decrease in income from external trade, especially for cotton, and the decline in remittances from migrants as well as foreign direct investments. For now, Benin is one the countries where the impact of the crisis has been moderate. A recent study by the Economic Situation Department shows the declining consumption in Nigeria, which is Benin’s main trade partner (as a result of pressure on revenue from oil whose price has dropped substantially since July 2008), could lead to a drop in exports and customs revenue. The real growth rate in 2009, initially projected at about 6%, could lose 1.4 points and maintain a level relatively close to that of 2008 level. Continuation of works on major public infrastructure projects, particularly the extension of Cotonou Port, the performance expected in food production and decline in oil import costs are expected to mitigate the impacts of the crisis. The budget and external deficits are not expected to improve and the State’s financing needs could continue to increase. 2.3 Bank Portfolio Status As at 13 February 2009, the ongoing portfolio comprised 19 operations with net commitments of UA 173.9 million. Out of these operations, 97.7% were financed by the ADF window and 2.3% by the NTF window. To date, sectors with the lowest disbursement rates are agriculture and the social sector. The disbursement rates for these two sectors are 28% and 23% respectively, as against an average rate of 34% for the entire portfolio. Overall, the portfolio’s performance is deemed fairly satisfactory. Taking into account the Bank’s commitments during ADF-XI replenishment, efforts have been made to improve the portfolio’s performance, including better preparation of new projects to ensure a good implementation level. III. PROGRAMME KEY DESIGN ELEMENTS 3.1 Links with CSP, Analytical Work underpinning Programme Preparation and

Country Eligibility for Budget Support 3.1.1 The Bank Group’s assistance strategy for Benin over the 2005-2009 period as outlined in the CSP is based on the following two pillars: (i) diversification of production, and (ii) broadening of access to basic social services. In the dialogue with the Government during the CSP 2005-2009 mid-term review and the budget support joint review, held in September 2008, the Bank and the authorities unanimously agreed on the main structural and institutional constraints hampering achievement of the objectives of the two pillars of CSP 2005-2009. The constraints concern: (i) inadequacies in the business climate as indicated above; and (ii) the low implementation rates in priority sectors, which continue to record lower levels of budget

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implementation than those of other sectors (53.7%). For instance, the rates for the health and water sectors are 34% and 35% respectively. GPRSSP III will help to reduce these constraints through improvement of the business climate and better public resource allocation to priority poverty reduction sectors. 3.1.2 The GPRSSP design was, for the component, “strengthening of Public Finance Management (PFM)”, based on the Public Expenditure and Financial Accountability Assessment (PEFA) conducted in 2007, as well as other analyses carried out previously (PEMFAR in 2003). The main weaknesses and inadequacies identified by these analytical works in public finance management include: (a) budget coverage and transparency, (b) the internal and external control system, (c) the role of the legislative power in external control, (d) budget implementation reports and delays in transmission of audited budget bills; and (e) the public procurement system. With regard to the business climate, the Programme’s design was based on the Government’s Strategic Orientation Document, the ‘Doing Business 2009’ Report, and the results of the survey on corruption jointly financed by the Bank and the World Bank. All these works highlighted the areas needing improvement to create a conducive environment for the development of business. The Programme design also took into account activities conducted under the World Bank’s Competitiveness and Integrated Growth Opportunities Project and the ongoing activities under the United States Millennium Challenge Account (MCA/Benin). 3.1.3 Pre-requisites for budget support: As summarized in the table below, Benin has the key characteristics required for a budget support operation based on the Bank’s budget support policy.

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Prerequisites Focus Remarks on Current Situation

A General Political Stability Economic Stability

Benin has enjoyed socio-political stability since the broad-based national consultation held in the country from 19 to 28 February 1990. Since then, it has had three Presidents following democratic elections. President Soglo (1991 to 1996) was followed by President Kerekou (1996-2006) and lastly President Boni Yayi since April 2006. Parliamentary elections were also held in April 2007 under good conditions that enabled President Yayi to start his presidential term with a majority in Parliament. However, since the April 2008 municipal elections, the President has been confronted with dissent in Parliament. A shift in the political landscape has allowed the opposition to regain the majority in Parliament, sometimes complicating the implementation of the Government’s programme Benin has for several years conducted a prudent macro-economic policy within the framework of economic and financial programmes supported by the International Monetary Fund. This performance allowed it to receive, as from 2003, HIPCI debt relief, and in 2006, MDRI. The last review of the PRGF-supported Government programme conducted in March 2009 showed that the results obtained are generally satisfactory and that Benin’s fiscal situation was strengthened in 2008, thus consolidating the progress achieved in macro-economic stability

B Technical

Existence of a well designed Poverty Reduction Strategy Paper (PRSP)

Availability of resources in the medium-term

Viability of the macro-economic and financial framework

Solid partnership between the country and donors

Solid partnership among donors

Satisfactory review of the fiduciary framework

In February 2007, the Government adopted a second Poverty Reduction and Growth Strategy (PRGSII) for 2007-2009. Benin’s development partners have undertaken to financially and technically support the implementation of PRGS II for 2009-2011. The PRGF concluded with IMF in December 2008 defined a viable macro-economic and financial framework for 2007-2009 Under the Memorandum of Understanding signed in December 2007 between the Government and TFPs, the Government is managing, with considerable ownership, the implementation of the PRGS and leading the coordination of budgetary assistance. Benin’s development partners are concertedly supporting the entire reform programme contained in the PRGS, either through project assistance (loans and grants) or through budget support/assistance (loans and grants) programmes. Budget support is preferred by the JBS-PR Group and other TFPs, such as ADF and the World Bank. The JBS-PR contributes crucially to strengthening coordination among TFPs and in the application of the principles of the Paris Declaration on aid harmonization in Benin. Coordination is ensured through periodic meetings among the TFPs in Benin and is pursued through joint supervision missions and annual joint reviews. Implementation of the Poverty Reduction Strategy has enabled Benin to continue to improve public finance management on the basis of the recommendations of the Public Expenditure Review (PER) and Country Financial Accountability Assessment (CFAA), as well as the Country Procurement Assessment (CPAR) conducted between 2003 and 2005. Apart from these works, in June 2006 and with the Bank’s support, Benin embarked on the harmonization of its Procurement Code with the new WAEMU guidelines. In addition, in view of the Government’s desire to further strengthen fiduciary protection measures, public finance management was once again subject to a PEFA in June 2007. A Public Finance Management plan derived from this assessment was prepared by the Government, and will be implemented with the support of the JBS Group.

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3.2 Collaboration with other Donors 3.2.1 The clear resolve of Benin’s partners to coordinate their general budget support operations for the implementation of PRGS 2007-2009 is indicated in the Budget Support Memorandum of Understanding signed between the Government and the JBS-PR in December 2007. This Memorandum served as the framework for more effective organization and intensification of dialogue between the JBS Group and the Government during the preparation of this budget support. Within this context, the Bank’s areas of support were identified on the basis of its experience and taking account of the support of other TFPs. Furthermore, the Bank prepared its support in close collaboration with the World Bank and the European Union with the aim of strengthening synergy between their respective interventions, namely PRSC-5 and General Budget Support 2009-2011. Apart from these two institutions, the Bank coordinated the preparation of GPRSSP III with other bilateral partners of the JBS Group (Netherlands, Denmark and Switzerland) in the areas of procurement management and capacity building of internal and external control structures. It also collaborated with IMF in the monitoring of structural reforms, particularly those relating to the state-owned enterprises privatization programme. In addition, in keeping with the Paris Declaration which encourages the homogenization and harmonization of disbursement conditions, the Government and the JBS Group aligned themselves on the World Bank’s Poverty Reduction Support Credit matrix, which they consider a common matrix for monitoring implementation of the key reforms of PRGS II. In this regard, the conditionalities and triggers identified in GPRSSP III and presented at Annex 3 were drawn from this common matrix (cf. Technical Annex 2). 3.3 Outcomes and Lessons from Similar Previous Operations 3.3.1 Since 1990, the Bank has financed a series of reform support operations that have enabled Benin to embark on a process of stabilizing public finance and significantly reducing internal and external deficits. Consequently, after an initial stabilization phase, the Bank, from 2004 to 2007, financed two Poverty Reduction Strategy Support Programmes, (PRSSP I 2004-2005) and (PRSSP II 2006-2007), whose objectives were to help the Government: (i) strengthen macro-economic stability; (ii) improve and strengthen public service efficiency; and (iii) promote good governance. This support was consistent with the Poverty Reduction Strategy Paper (PRSP 2003-2005) and the Poverty Reduction and Growth Strategy Paper (PRGSP 2007-2009). The financing instrument used by the Bank to support these programmes was Budget Support prepared jointly with other Technical and Financial Partners (TFPs), including the World Bank, International Monetary Fund and European Union. 3.3.2 PRSSP I and PRSSP II helped to consolidate Benin’s achievements in growth and macro-economic stability and to mobilize greater resources for poverty reduction. In the area of public finance management, the adoption of the programme-budget approach, the computerization of expenditure through the Integrated Public Finance Management System, and the slight improvement in procurement procedures allowed for progress in the implementation of the PRS. However, despite the significant strides made in improving the public expenditure management system and social indicators, the completion reports prepared for the two programmes revealed that it would be difficult for Benin to achieve most of the MDGs if there is no strong Government resolve: (i) to pursue and consolidate the reform of the public finance system; (ii) reduce the impediments to private sector promotion, and accelerate the programme for the privatization and rehabilitation of state-owned enterprises.

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The key lessons drawn from the implementation of the two previous programmes are: (i) the need to reduce in future programmes the number of measures and to formulate specific conditions and consistent with the common matrix of the TFPs; (ii) the need to step up dialogue with Government on the major budget orientations and key concerns relating to procurement, combating corruption and compliance with accountability requirements by making up for delays in the adoption of audited budget laws; and (iii) pursuance of capacity building programmes to improve good governance. 3.3.3 Consequently, based on the lessons learnt, PRSSP III will pursue and deepen reforms to promote good governance for more effective fiduciary risk control, as well as those that can create conducive conditions for the emergence of a dynamic and competitive private sector. Its design is based on a selective approach that focuses on a limited number of components and corresponds to better targeted priorities, so as to consolidate the impact of previous programmes and create synergies between the Bank’s support and that of other donors. Furthermore, the reforms that were not carried out or not sufficiently covered under previous programmes (such as those on the privatization of state-owned enterprises, budget implementation control, external control and audit, and creation of a conducive business climate) are at the core of this Programme. On the whole, the measures envisaged under this Programme have been reduced to eighteen (18) compared to sixty-three (63) for PRSSP II (Cf. Matrix of Programme Measures at Annex.1) and take into consideration the measures supported by the other TFPs, as well as the country’s institutional capacities. 3.4 The Bank’s Comparative Advantages Since 1990, the Bank has financed a series of reform support operations that have enabled it to gain considerable experience in the public finance recovery process in Benin, which was one of the first countries to receive budget support. Furthermore, PRSSP I and II enabled the Bank, through its collaboration with the World Bank and the European Union, to enrich its experience in public finance reform support and private sector promotion. Thus, based on this experience, the Bank played a dynamic role, during the design of GPRSSP III, in the identification of priority actions and the formulation of measures aimed at improving the quality of public finance management and the business climate. In addition, these actions and measures were intended to enable GPRSSP III to consolidate the successes of the previous programmes in the area of structural reforms and public finance management, and to strengthen synergy with the interventions of the JBS Group and TFPs as well as with the active projects of the portfolio, such as the Public Finance Control Institutions Support Project. Lastly, with regard to enhanced transparency in the procurement management system, the Bank has the advantage of consolidating, at the level of the country, the outcomes of the Regional Public Procurement Systems Reform Project in WAEMU. 3.5 Relationship with Other Bank Operations This budget support is in line with Bank Group portfolio operations in Benin and with those financed under the strengthening of regional integration and the promotion of good governance in the WAEMU area. They include: (i) the Public Finance Control Institutions Support Project (PAIC); (ii) the Public Procurement Systems Reform Project in WAEMU, and (iii) AFRITAC Regional Technical Assistance Centres. PAIC, worth UA 2.00 million, is intended to support the implementation of the public finance reform plan (CaR-GBAR) adopted by the Government of Benin in October 2005. The expected outcomes of the project are: (i) consolidation and deepening of the system for preparing the budget-

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programmes of Ministries, and operationalization of results-based management; (ii) the streamlining and strengthening of the control function within the public administration; (iii) the building of internal and external control capacities. The purpose of the Regional Public Procurement Systems Regional Project, amounting to UA 4.00 million, is to carry out the modernization and harmonization of public procurement systems in member states of the Union through the implementation of community procurement regulations (RCMP) adopted by WAEMU in December 2005. The AFRITAC project, worth UA 4.5 million, is aimed particularly at supporting public finance management and the modernization of customs and tax administration. Consequently, in view of the set objectives, these projects are complementary to GPRSSP III and consistent with Pillar 1 of CSP 2007-2009, as they contribute to achievement of pillars 1, 4 and 5 of the PRGS, namely, acceleration of growth and promotion of good governance. 3.6 Application of Good Practice Principles on Conditionalities The five (5) good practice principles on conditionalities were carefully applied in the design of the present Programme. The application of these principles is presented in the table below:

Good Practice Principles on Conditionality Principle No 1: Reinforcement of ownership: GPRSSP III is based on the progress made in the implementation of PRS 2004-2006 and PRGS 2007-2009 adopted by the Government in 2004 and 2007 respectively, after broad-based consultations with civil society, the private sector and Technical and Financial Partners. GPRSSP III is based mainly on policies and programmes designed by the Government, with the active collaboration of TFPs, both in terms of the preparation and implementation of PRGS 2OO7-2009. Principle No 2: Coordinated responsibility framework agreement: The Government and the JBS Group and other TFPs in December 2007 signed a Memorandum of Understanding defining a framework of mutual and coordinated responsibility in budget support. In addition, the two parties drew up a framework for the monitoring and evaluation of the Paris Declaration principles. Principle No 3: Customizing framework to country circumstances The framework of accountability and modalities for Bank support has been customized to the country’s circumstances by taking account of the political environment and the socio-economic priorities. Consequently, PRSSP III is based on a profound understanding of Benin’s specific circumstances and is aligned on the top priorities of the Strategic Orientations for Development 2006-2011 geared towards ensuring a development that is capable of meeting the needs and adapted to the circumstances of the country. Principle No 4: Choice of conditions for disbursement PRSSP III comprises a series of priority actions and measures which have been integrated into the results framework with specific targets that are consistent with the objectives of the PRGS. The conditions for disbursement are based on critical actions aimed at achieving results in the areas of public finance management and improved business climate. Principle No 5: Conduct of periodic performance reviews As agreed with the Government, joint reviews of PRGS progress evaluation and budget preparation and implementation reviews are conducted annually. The results of such reviews will be a key factor for continuation of the budget support of the Bank and other TFPs.

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3.7 Application of Bank Policy on Non-Concessional Loans The Bank Group’s Policy on Non-Concessional Debt Accumulation has been taken into account in this programme. To preserve the viability of public finance, the Government has been requested to avoid contracting non-concessional external financing. Prudence is also advised with regard to the sub-regional financial market from which the Government has increasingly borrowed in order to avoid weakening the country’s debt position. During the last IMF review in December 2008, the Board of this institution approved a request for a waiver by Benin for the non-observance of two performance criteria relating to net domestic financing and new external debts contracted on non-concessional terms. IV. PROPOSED PROGRAMME 4.1 Programme Goal and Objectives The goal of the Programme is to support the implementation of the Poverty Reduction and Growth Strategy 2007-2009 and the Public Finance Management Action Plan 2009-2011. The specific objectives are: (i) to strengthen good governance through increased efficiency and effectiveness in public finance management; and (ii) build a solid base for sustainable private sector-driven economic growth. 4.2 Programme Pillars, Components and Expected Results 4.2.1 Aware of the fact that effective poverty reduction requires higher growth levels, the Government of Benin, through GPRSSP III, seeks to consolidate the successes of the previous programmes by laying special emphasis on improving public finance management and revitalizing the private sector. These two components are therefore expected to contribute to achieving the Government’s objectives, as stated in pillars 1 and 4 of PRGS 2007-2009, through more efficient management of public resources and increased participation of the private sector in wealth creation.

A Strengthening of Public Finance Management 4.2.2 Taking into account the guidelines of its governance strategic plan and the interventions of other TFPs, the Bank will support the Government to address deficiencies concerning two aspects of Public Finance relating to the budget cycle, namely (i) the quality of internal and external control; and (ii) public procurements. Measures to address these two aspects are contained in the action plan for improved public finance management, which will be adopted by the Government in 2009 under GPRSSP III. The action plan defines all the appropriate actions for improving PFM in terms of budget formulation, preparation, implementation and control. The plan will be implemented under an institutional support project, which will be jointly financed by the JBS Group of partners. ADF will participate in the financing of this project as from 2010. The adoption of this plan is a condition for disbursement of the Programme’s first tranche.

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a) Quality of Internal and External Control 4.2.3 Internal Control: The Government in 2006 adopted a decree (No. 2006-627 of 4 December 2006) on the organization of the internal control framework. By virtue of this decree, control and inspection bodies are mandated to conduct all missions of verification, investigation and auditing of public agencies, including government services, local authorities and public institutions. There are two types of such public administration control and inspection bodies: control and inspection bodies with nationwide jurisdiction, and control and inspection bodies with sector jurisdiction. The control and inspection bodies with nationwide jurisdiction are the General Inspectorate of State (IGE); General Inspectorate of Finance (IGF) and the General Inspectorate of Public Services and Employment (IGSEP). The General Inspectorate of State, which reports directly to the Head of State, is mandated to coordinate internal control. The General Inspectorate of Finance (IGF), which reports to the Minister of Finance, is responsible for the permanent control of public funds management. The control and inspection organs with sector jurisdiction are those that exercise control functions over the activities of the administrative structures within which they were established. Presently, it is only the IGF that is fully operational and conducts verifications in conformity with international standards. It is responsible for coordinating the activities of internal audit of Ministries and auditing of the most important central government entities. It is important to point out that the implementation of Decree 2006-627 has contributed significantly to the progress made in coordinating the control and harmonization of work programmes and quality control. However, in spite of the progress made, control inspections continue to be limited by inadequate human and administrative resources. To address these weaknesses, the Government intends to prepare a yearly training plan aimed at increasing the number of inspectors and improving the efficiency of control bodies. This measure, which is included in the conditions for the disbursement of the first tranche of the proposed support, will enable the Government to increase the number of inspectors and IGF missions in public establishments, municipalities and decentralized structures. 4.2.4 External control of public expenditure: This control falls under the responsibility of the Audit Bench of the Supreme Court (pending the establishment of the Audit Court) which, by law, exercises judicial control over the management accounts of government services, local authorities and autonomous agencies. In Benin, this responsibility of the Audit Bench is currently fulfilled only to a limited extent, due to its dependence on the Supreme Court and to constraints in terms of the limited human and material resources at its disposal. Legally, the constitutional provisions prevent the development and adaptation of the Audit Bench’s capacities to the scope of external control missions assigned to it. Its interventions are therefore limited pending the requisite legal amendments for its autonomy, in conformity with the WAEMU guidelines. Furthermore, at both the human and material levels, the Audit Bench is operating from offices with inadequate space for the archiving of its documents and is understaffed with twenty-eight (28) officers, including eight administrators, eight auditors and eight assistant auditors. In view of these difficulties, the audited budget bills are presently being prepared several months late (on average 22 months after the end of the fiscal year). The last Audited Budget Bill (PLR) presented to Parliament was that of 2003. However, these delays do not only stem from financial problems, but are also caused by Government’s late production and submission of Government Management Accounts to the Audit Bench. Thus, the 2005 accounts were only submitted to the Audit Bench in April 2008, or 28 months after the end of the fiscal year. To eliminate these delays, the Government has undertaken, under GPRSSP III, to prepared a plan to offset the delays in the preparation of Government Management Accounts and audited budget bills. In this regard, the Programme indicates that the PLRs for 2005 and 2006 must be submitted to Parliament no later than 2010. The

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formulation of a catch-up plan for delays in the preparation of Government Management Accounts, as well as the submission of the 2005 and 2006 PLRs to Parliament are conditions for the disbursement of the first and second tranches of this budget support. The expected outcome of these measures is the timely production of audited budget bills by the Audit Bench as from 2010. In order to be able to produce the PLRs within the time required by law, the Audit Bench will benefit from the capacity building activities planned under the Control Institutions Support Project (training of auditors and equipment of Audit Bench offices), as well as those envisaged by other TFPs under support to the implementation of the PFM improvement action plan

b) Fiduciary Aspects: Public Procurement Management 4.2.5 Benin continues to pursue the procurement reform initiated since 2004. Previous studies, particularly the May 1999 CPAR (Country Procurement Assessment Review), revealed many weaknesses and dysfunctions in current practices. The previous Bank-financed programmes from 2004 to 2007 helped to slightly improve public procurement procedures by putting in place a new institutional framework that is now based on the National Procurement Regulatory Commission (CNRMP), the National Procurement Directorate (DNMP) and the Procurement Units (CNPMP). Under GPRSSP III, the Bank will pursue dialogue with the Government to further enhance transparency in the management of public finance. To this end, a new Public Procurement Code will be adopted by Parliament in 2009 to reduce delays and improve procurement procedures. To support this reform, GPRSSP III will monitor, more specifically, the implementation of the following measures: (i) the promulgation and publication of the new Public Procurement Code; (ii) setting up of the organs of all the structures provided for in the new code; adoption of the implementing texts of the new code, preparation and implementation of the strategic and operational plans for the public procurement system; (iii) training of trainers within CNRMP, DNMP and CPMPs; (iv) auditing of procurement in at least four key Ministries; (v) study on capacity building strategy; and (vi) tightening of fraud and corruption prevention measures. The importance of these measures calls for the rapid adoption of instruments for the enforcement of the new Code, in accordance with WAEMU guidelines. The adoption of the new procurement code and the preparation of its implementing texts have been adopted under this Programme as conditions for the disbursement of the first tranche of this budget support; their implementation will help to: (i) ensure that there is a regulatory framework for efficiency, transparency and accountability, and that the framework prevents situations of conflict of interest in the public procurement chain, and (ii) reduce competitive bidding time lines from 8 months in 2006 to 5 months as from 2010.

B Improvement of the Business Climate 4.2.6 This second component of the Programme is based on a series of works on the promotion of the private sector (studies on competitiveness, sources of growth, the investment climate and land reform) and results of the latest “Doing Business” assessment conducted by the World Bank end-2008. To address these constraints (see paragraph 2.1.4) and create enabling conditions for an attractive and competitive business climate, the Government has accelerated the pace of implementation of structural reforms, and is presently taking adequate measures to gradually improve the indicators that determine the quality of the business climate. Thus, in addition to the structural reforms not implemented under PRSSP II, GPRSSP III aims to support reforms for improving the business climate indicators, such as: (i) facilitating business creation; (ii) access to land; (iii) simplification and streamlining of taxes; and (iv) combating corruption.

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a) Structural reforms

4.2.7 Accelerating implementation of the privatization programme: Aware of the role that the private sector can play as an engine for the revival of growth and the country’s economic emergence, the Government has undertaken, in PRSSP II, to privatize the National Agricultural Promotion Corporation (SONAPRA), the Electricity and Water Corporation of Benin (SBEE), Benin TELECOMS S.A, and the management of Cotonou Port. To date, apart from the transfer of the SONAPRA industrial tools, no measure relating to the privatization of the other corporations has been carried out to completion. GPRSSP III therefore intends to support the structural reforms initiated under PRSSP II, particularly those aimed at: (i) accelerating the process of restructuring the telecommunications (Benin-Telecoms) and electricity (SBEE) corporations, and enhancing the competitiveness of Cotonou Port. These reforms are indispensable for improving public service delivery, reducing production costs and improving the business climate. To achieve these results, the Government intends to set up, in replacement of the Electricity Corporation of Benin, a concessionary company and a private distribution company whose efficient management is expected to find long-lasting solutions to the energy crisis. With regard to Benin TELECOMS S.A., the Government has opted to recruit a consortium of consultants whose assistance is needed to prepare and implement the strategic opening of this company’s capital to the private sector. Concerning Cotonou Port, the Government, with the assistance of MCA-BENIN, has already recruited a ports expert to assist in implementing reforms (including concessioning of the Port’s two quays) to strengthen its competitiveness. The decisions on the options and management structures of Benin TELECOMS, as well as the concessioning of the two quays to be built in Cotonou Port will be submitted to ADF for approval. This is one of the conditions for the disbursement for the Programme’s second tranche.

b) Reforms relating to Improvement of the Quality of the Business Climate 4.2.8 Following the publication of the results of “Doing Business” study conducted by the World Bank at the end of 2008, the Government set up thematic reflection groups on improving the evaluation indicators for the quality of the business climate. The results of these discussions, as well as those expected from the ongoing work conducted by the International Finance Corporation (IFC), will enable the Government to prepare an action plan for improving these indicators. Pending the results of this work and the formulation of an action plan, the Government has continued to implement the private sector development strategy through reforms in the area of land, the industrial free zone and taxation. It has therefore: (i) ensured adoption of the Land Law; (ii) introduced a single tax identification number for taxpayers; (iii) stepped up dialogue for public-private partnership; (iv) continued the sanitation, paving and electrification works in the Industrial Free Zone; (v) adopted the decree on the micro-finance sector development policy; and (vi) simplified the customs procedures for goods imports or exports. However, in order to help the private sector to play a more active role in generating dynamic and sustainable growth, GPRSSP III will support government efforts at: (i) improving the business climate indicators; (ii) simplifying administrative procedures and implementing fiscal measures to facilitate the creation of business; and (iii) adopting a tax reform strategy. More specifically, the Programme will also support the implementation of the action plans for improving the business climate indicators, currently being prepared with IFC’s assistance. Implementation of this action plan is one of the conditions for the disbursement of the second tranche.

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4.2.9 Facilitating the starting of businesses: Up until June 2008, starting a business in Benin required on average 31 days and involved several procedures. To improve this indicator, the Government has already embarked on the simplification of administrative procedures and the implementation of fiscal measures to facilitate starting a business within 12 days instead of 31. In the medium-term, it intends to transform the Centre for Business Formalities (CFE) into a proper one-stop shop for starting a business so as to significantly reduce the required time to 48 hours (2 days) from the currently targeted 12 days.

4.2.10 Access to Land: This is a serious problem in Benin. It was highlighted in the findings of the Investment Climate Assessment survey conducted in 2005 and the “Doing Business 2009” assessment carried out in 2008, which revealed that for most enterprises operating in the manufacturing, tourism and construction sectors, access to industrial land is difficult and constitutes a "major" impediment to starting or expanding businesses. This is because the cost of land in Benin is one of the highest in the entire sub-region and several plots are under litigation (most court cases are land-related) and, the acquisition of premises or land to build involves a myriad (15) of extremely lengthy (410) administrative procedures. These constraints often diminish the capacity of entrepreneurs to provide guarantees to banks, thus making it difficult for them to obtain loans. To solve this problem, the Government has already initiated several measures aimed at improving land management. These include: (i) the operation for the drawing up of Rural Land Tenure Plans (PFR), with the support of the Natural Resource Conservation and Management Programme, which aims at securing rural lands by issuing land certificates; like the land occupancy permits, these certificates can be changed into land title deeds; (ii) the operation for transformation of land occupancy permits into land title deeds, based on a simplified and less costly registration procedure; (iii) the Millennium Challenge Account (MCA) “Land Access” Project, which is specifically intended to formalize land rights, and (iv) the World Bank-financed private sector development support project, which is intended to improve land access conditions and the emergence of a proper real estate market. Within this context, GPRSSP III will support the Government to implement reforms geared towards facilitating procedures for land access, the transformation of land occupancy permits into land title deeds, and obtaining building permits so as to foster the development of the private sector.

4.2.11 Simplification and Streamlining of the Tax System: The tax system in Benin is has a fairly cumbersome taxation structure. Public revenue is collected from a narrow tax base and is concentrated, in practice, on a few formal businesses. The 35% business profit (BIC) tax is penalizing, and is one of the highest in WAEMU, compared to Senegal and Côte d’Ivoire (27%). Consequently, in order to create a more enabling framework for private sector development, economic operators have prepared a platform of tax proposals geared towards contributing to business development and wealth creation in Benin. The proposals include: (i) simplifying the tax system; (ii) adapting taxation rules to the performance of businesses; (iii) broadening the tax base, through a general reduction of tax rates, which will serve as an incentive for tax payments; (iv) promote business development in key or potential sectors of Benin’s economy; and (v) promote direct investments that introduce new technologies into services and production. In response to this appeal, the Government embarked on an overhaul of the corporate tax system, leading to major tax relief measures in the 2009 Finance Law. In this regard, BIC tax rates have been cut from 35% to 25%. Other measures are also envisaged, such as the easing of the corporate tax burden and procedures, and streamlining of control and dispute settlement measures. GPRSSP III intends to support the Government in implementing these tax reforms through the adoption of a tax reform strategy geared towards simplifying business taxes. Implementation of this measure will help to increase the private sector’s contribution to GDP.

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4.2.12 Fight against Corruption: As part of efforts to improve the business climate, the Bank and the World Bank supported the Government in 2006 to conduct a survey on the extent of corruption in private enterprises and the public sector. According to the findings of this survey, corruption is a major cause for concern for entrepreneurs. Over 80% of formal businesses surveyed considered corruption in Benin a major impediment to their development. They indicated that the worst affected services are, by order of pervasiveness: electricity (74%); taxes and levies (59%); traffic police (56%) and procurement (50%). As a result of this, it is a contributing factor to increased operating costs for businesses. Based on this observation, the survey provided the Government with new benchmarks for updating the National Anti-Corruption Strategy adopted in 2001. Indeed, following this survey, and in keeping with the commitments made at the workshop on governance held in March 2008, the Government, through the Survey Follow-Up Committee, proceeded to disseminate the findings of the survey in the 12 departments of the country. Under GPRSSP III, the Government intends to continue to use the results of this survey to update the national anti-corruption strategy and adopt an action plan for its implementation. The adoption of this action plan is included in the conditions for the disbursement of the Programme’s second tranche. 4.3 Financing Requirements and Sources of Finance 4.3.1 Implementation of the Government’s programme will generate financing needs and require support from the TFPs. The table below shows the Government’s budget financing requirements. The national budget deficit (excluding grants) will amount to CFAF 167.5 billion in 2009 and CFAF 180.3 billion in 2010, due to the anticipated impacts of the tax cuts introduced in the 2009 Finance Law and continuation of major public infrastructure projects. The financing needs identified amount to CFAF 167.5 billion in 2009 and CFAF 159.6 billion in 2010. Budget support for the 2009 and 2010 budgets is expected mainly from the World Bank, ADF, European Union, Netherlands, Denmark and Switzerland. In 2009, the World Bank, the European Union, Netherlands, Denmark and Switzerland will contribute to financing requirements to the tune of UA 20.20 million, UA 16.20 million, UA 8.80 million, UA 5.96 million and UA 1.15 million respectively. ADF contribution to securing the budget will be UA 12 million (CFAF 9 billion) in 2009, or 5% of the requirements. In 2010, ADF will contribute UA 10 million (CFAF 7.5 billion), or 4.2% of financing requirements. The residual gap of CFAF 20.7 billion in 2010 will be covered by the other partners of the JBS Group.

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Table 1: Programme Financing Requirements and Sources

(CFAF Billion) Item/Year 2009 2010 2011

- Revenue, excluding grants 656.7 705.8 774.4 - Net expenditure and loans 793.2 854 945.6

. Current expenditure 501.7 536.4 585 Incl.: Transfers 169.1 181.4 198 . Capital expenditure 291.5 317.6 360.6

Overall balance, excl. grants (payment order basis)

-136.5 -148.2 -171.2

Adjustment (cash basis) -31 -32.1 -28.5 Overall deficit (cash basis) -167.5 -180.3 -199.7 Financing 167.5 159.6 165.4 Domestic financing -7.6 -22.5 -21.7 External financing, including 175.1 182.1 187.1 * Project financing 143.9 153.6 167.8 Project grants 75.3 80.4 87.8 Project loans 68.6 73.2 80 * Programme assistance 43 41.7 34.1 Budgetary grants 26.25 24.95 21.1 Budgetary loans 16.75 16.75 13 * Debt amortization -11.8 -13.2 -14.8 Financing gap 0 20.7 34.3 Source: IMF Report No. 08/374 of December 2008 and Bank staff calculations

4.4 Programme Beneficiaries 4.4.1 The main beneficiaries of the Programme will be the Beninese population and, more specifically, the poor to whom the Government will allocate substantial expenditures by maintaining a good implementation rate of budget allocations to the priority sectors of the PRGS (Agriculture, Health, Education, Water and Sanitation), as well as more efficient public resource management. Furthermore, economic operators will benefit from the improvement of the business climate through the easing of procedures for starting businesses, facilitating access to land, combating corruption and granting tax benefits, and they will be increasingly motivated to invest in activities that create wealth and employment. The other beneficiaries are the government financial services whose capacities will be strengthened through implementation of the public finance management system reforms. The Government will also benefit from the improved public finance through the appearance on the formal business market of enterprises and operators that hitherto operated outside the organized channels of the economy. 4.5 Macro-Economic Impact The Programme will contribute to mitigating the impact of the international financial crisis on public finance, and will strengthen macro-economic stability. More specifically, the tax and administrative measures envisaged under the Programme for the promotion of the private sector will help to boost production, trade, agriculture and service sectors, as well as promote GDP growth. Furthermore, the proposed measures will contribute sustainably to the job market. Lastly, by the end of the Programme, the reforms undertaken will help to: (i) achieve a GDP growth rate of 5.7% in 2009 and 6% in 2010, and push the investment rate up to more than 20% of GDP between 2009 and 2010, and (ii) curb inflation to below 3% in 2010, while budgetary revenue is expected to account for 19.8% of GDP in 2009 and 20.0% of GDP in 2010.

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4.6 Impact on Gender GPRSSP III will contribute, through the expenditures earmarked for the priority sector Ministries, to the implementation of gender action plans, notably in the health, education and water sectors. Like PRSSP II, it will help to carry out targeted actions in favour of women, who will benefit, in accordance with the gender action plans, from measures for reducing malnutrition, combating genital mutilation and improving access to primary health care in health zones. In addition, the support of GPRSSP III to the implementation of land reforms is aimed at improving land governance in Benin and, consequently, promoting gender equality and the empowerment of women. Thus, in securing land ownership, the Programme will allow women, particularly the poor, to gain access to land, credit and micro-finance for the setting up of businesses and the development of income-generating activities. 4.7 Environmental Impact Classified under Environmental Category III, GPRSSP III is not expected to generate any negative impacts on the environment. Rather, the Ministry of the Environment, Housing and Town Planning (MEHU) is one of the pilot Ministries of the programme budget approach, and as such it benefits from priority budget allocations under the PRGS. 4.8 Other Programme Impacts 4.8.1 Impact on governance: All the measures contained in the first component of the Programme (“strengthening of public finance management”) will contribute to promoting good governance, including notably: Results-based budget management, curbing embezzlement and mismanagement of public funds, enhanced control of public procurement and regular accountability to the external public finance management oversight bodies, namely the Audit Bench and Parliament. Similarly, the measures contained in the second component will contribute to improving governance (access to land, combating corruption, etc.) 4.8.2 Impact on Poverty Reduction: The ultimate goal of PRSSP III is to contribute to poverty reduction through more effective public resource allocations to pro-poor expenditures, as well as to create a more attractive business climate for the private sector, and the creation of jobs and wealth. Increasing the resources earmarked for the Ministries in charge of the social sectors, through GPRSSP III, will lead to improved access to health services (60% in 2009 and 65% in 2010) and basic education (95% in 2009 and 96% in 2010) for the population, and drinking water supply rates (54% in 2009 and 57% in 2010). As such, through the improved quality and channelling of public expenditures, the implementation of this Programme will also help to reduce infant mortality, malnutrition, sexually-transmitted diseases and malaria. It will contribute to improving the general living conditions of the entire population, without discrimination, and alleviate the burden of poverty among the most vulnerable populations. 4.8.3 Impact on regional integration: The Programme will further strengthen regional integration, specifically within the framework of WAEMU. It is consistent with the Regional Public Procurement Systems Reform Project in WAEMU member countries, whose objectives are to improve public expenditure management, and strengthen the common market through harmonization of regulations and capacity building in public procurement.

18

V. IMPLEMENTATION, MONITORING AND EVALUATION 5.1 Programme Implementation 5.1.1 Executing agency of the budget support: The Ministry of the Economy and Finance will have prime responsibility for the implementation of GPRSSP, through the Economic and Financial Programmes Monitoring Unit (CSPEF). The latter will be assisted by a technical team comprising representatives of the Ministry of the Economy and Finance and all the administrative structures involved in the implementation of reforms and measures within the scope of their fields of action. Furthermore, the CSPEF will be mainly responsible for the monitoring-evaluation of the PRGS and all the reform programmes accompanying its implementation, particularly public finance reform. Lastly, the CSPEF will collate and transmit to the Bank and to the other JBS-TFPs, through the Ministry of the Economy and Finance, the relevant information for monitoring budget support programmes such as: (i) the sector review reports; (ii) the annual GPRSSP III status reports, and (iii) any other document required for monitoring the implementation of the Programme. 5.1.2 Disbursements: The loan and grant, totalling UA 22 million, will be disbursed in two tranches of UA tranches of UA 12 million and UA 10 million in 2009 and 2010 respectively, subject to fulfilment by the Borrower of the specific conditions stipulated for the disbursement of these tranches. Each of the two tranches will comprise 50% of the grant amount and 50% of the loan amount. The first tranche amount is higher because of the substantial financial requirements in 2009 as a result of the impact of the international crisis on exports, the tax relief granted to the private sector, and the slowdown of exports and customs revenue due to the expected slackening of trade with Nigeria. 5.1.3 Audits: The Bank, jointly with the other member partners of the TFP-JBS Group that have extended the budget support, reserves the right to commission, at the end of each fiscal year, an audit of the financial flows from the Treasury account opened at the BCEAO national agency. A certified copy of the audited accounts will be transmitted to the Bank. 5.2 Monitoring and Evaluation The Programme will be monitored, first, in collaboration with the TFP-JBS Group, who have agreed, in conformity with the Memorandum of Understanding on budget support signed in December 2007, to institute regular dialogue with the Government for the implementation of the PRGS and the reform programmes underpinning it. This dialogue with the Government mainly depends on the conduct of joint annual review of the PRGS and the Matrix of Common Measures and the performance indicators. Thus, the review exercise will help to strengthen the annual budgeting process so as to contribute more effectively to dialogue on substantial resource allocations to PRGS priority sectors of the PRGS. Implementation of GPRSSP III will also be monitored through the semi-annual and annual implementation performance reports. Furthermore, the Bank will field programme mid-term review and supervision missions. Lastly, monitoring of GPRSSP III will be based on the outcome indicators in the logical framework and the Matrix of Programme Measures.

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VI. LEGAL DOCUMENTS AND AUTHORITY 6.1. Legal Document: For the financing of the Programme from ADF resources, a Loan Agreement and a Grant Memorandum of Understanding, stipulating the conditions, duration, interest rates and repayment periods, will be signed between ADF and the Republic of Benin. Conditions precedent to effectiveness of the Loan Agreement and the Grant Memorandum of Understanding Effectiveness of the Loan Agreement and the Grant Memorandum of Understanding shall be subject to fulfilment by the Borrower of the provisions of Section 5.01 of the General Conditions applicable to loan agreements and guarantee agreements of the African Development Fund.

A. Conditions precedent to the disbursement of the first tranche of 12 million Units of Account (UA 12 000 000).

In addition to effectiveness of the two Agreements (Loan and Grant), and satisfactory assessment of macro-economic stability (programme with IMF), the disbursement of the first tranche, amounting to UA 12 million, shall also be to subject to the Borrower providing satisfactory evidence to the Fund concerning:

i) validation and adoption of the Public Finance Management Improvement Action Plan (paragraph 4.2.2);

ii) submission, to ADF, of the annual training plan of the General Inspectorate of

Finance aimed at increasing the number of inspectors and improving the efficiency of control bodies (paragraph 4.2.3);

iii) preparation of a catch-up plan for delays in the preparation of the Government

Management Accounts and audited budget bills (paragraph 4.2.4) ; iv) adoption by the National Assembly of the Public Procurement Code

(paragraph 4.2.5) ; v) preparation of the implementing texts of the new Public Procurement

Code (paragraph 4.2.5) ; vi) the opening of a special account in the name of the Treasury with the National

BCEAO Branch to receive only the grant and loan resources.

B. Conditions precedent to disbursement of the second tranche of 10 million Units of Account (UA 10 000 000)

6.2 The disbursement of the second tranche shall be subject to satisfactory review of the implementation of programme measures, supported by the IMF’s PRGF, and fulfilment of the following specific conditions:

i) submission, to ADF, of an implementation report on the PFM action plan deemed satisfactory by ADF;

20

ii) adoption, by the Government, of a privatization option for Benin-Telecom

(paragraph 4.2.8); iii) concessioning, to private operators, of the two quays to be constructed in

Cotonou Port (paragraph 4.2.8); iv) implementation of an action plan for improving the assessment indicators for

the quality of the business climate (paragraph 4.2.9); v) adoption of an action plan for implementing the national good governance and

anti-corruption strategy (paragraph 4.2.13). 6.3 Compliance with Bank Group Policies Bank Guidelines on Development Budget Support Loans in Regional Member Countries, as defined in Document ADF/BD/WP/2003/182/Rev.2 of 28 April 2004, are applicable to this Programme, which is therefore in conformity with these guidelines. VII. RISK MANAGEMENT 7.1 Risks likely to affect implementation of the Programme include: (i) vulnerability of Benin’s economy to external shocks; (ii) political and economic trends of Nigeria; (iii) weak capacities; and (iv) fiduciary risks. 7.2 Vulnerability of Benin’s economy to external shocks: The occurrence of adverse external shocks, such as the international financial crisis and increases in food and fuel prices, constitutes a major risk for the Benin’s economy. The same applies to weather conditions affecting agricultural production, particularly cotton, and the volatility of commodity prices on the world market, as well as the appreciation of the Euro to which the CFA franc is pegged. Within the context of the global financial crisis, the downturn of the global economy will lead to sharp drops in export prices and reduced capital inflows and public assistance. Under GPRSSP III, acceleration of structural reforms in the cotton sector, as well as the Government’s commitment to developing the energy and telecommunications sectors, promoting the private sector and diversifying the sources of growth could be factors for mitigating the vulnerability of Benin’s economy to the global crisis and to external shocks. 7.3 Nigeria’s political and economic trends also continue to be a major risk factor for Benin, given that this country is its main trade partner. This risk can be mitigated through structural reforms, specifically those relating to strengthening the competitiveness of Cotonou Port. 7.4 Weak Government capacity to address the shortcomings in the public procurement process and the production of management accounts and audited budget bills, which, in spite of the strides made, remain cumbersome and slow. This risk will be mitigated given the Government’s commitment to: (i) increase the human resources of the CNRMP, DNMP and CPMPs; (ii) provide technical assistance to the control and inspection bodies; (ii) organize IT and thematic training; (iii) organize short-term courses abroad for Finance Inspectors; (iv) organize a reflection week on accountability so as to design an integrated catch-up timetable and an institutional support programme aimed at preventing delays in the preparation of the audited budget bills.

21

7.5 Fiduciary risks: These risks will be mitigated, since Benin has embarked on the implementation of the PEMFAR and PEFA recommendations. The procurement system is being reformed, and new management and regulatory bodies have already been put in place. In addition, under the Programme itself, the measures selected under the component “strengthening of public finance management” will help to reduce the fiduciary risks. Consequently, this Programme will help to strengthen and speed up the auditing of government management accounts by the Audit Bench, as well as submission of the audited budget bill to Parliament. VIII. RECOMMENDATION In light of the foregoing, it is recommended that the Board of Directors should approve a loan and a grant of UA 11 million each, representing a total amount not exceeding UA 22 million, to the Government of Benin for purposes of implementing the Programme and subject to the conditions stipulated in the present Report.

Annex 1 Page 1 of 2

REPUBLIC OF BENIN Growth and Poverty Reduction Strategy Support Programme

GPRSSP III Matrix of Measures

Objectives

GPRSSP III Measures/2009

GPRSSP III Measures/2010 ERSP-II/2010

Outcome Indicators

1. Improve public finance management

1.1 Budget implementation for priority sectors 1.1.1 Increase the level of budget implementation for priority sectors (education, health, rural development, water and sanitation) 1.2 Internal and external control 1.2.1 Adopt the Action Plan for Improved Public Finance Management 1.2.2 Build the capacity of internal and external control institutions (General Inspectorate of Finance; Audit Bench). 1.1.3 Make up for delays in passing the budget review laws and audits of financial flows from budget support; 1.2 Fiduciary Framework 1.2.1 Adopt the revised procurement code 1.2.2 Draft the implementing provisions of the new procurement code 1.2.3 Set up the organs of all the structures provided for in the new code; 1.2.4 Implementation of strategic and

1.1.2 Budget implementation for priority sectors 1.1.2.1 Increase the level of budget implementation for priority sectors (education, health, rural development, water and sanitation) 1.2.1 Internal and external control 1.2.1.1 Present an annual report on the status of implementation of the Action Plan for Improved Public Finance Management 1.2.1.2 Present an annual training programme for finance inspectors 1.2.1.3 Complete the recruitment and install the new staff of the Audit Bench at the annex of the Supreme Court 1.2 Fiduciary Framework 1.2.1.1 Continue to develop capacity in procurement management including the harmonization of standard bidding documents and evaluation reports with WAEMU standard documents. 1.2.1.2 Conduct a feasibility study of the integrated procurement management system and launch the installation of this system:

- Implementation rate of expenditure allocated to priority sectors increases to more than 80% in 2009 and 100% in 2010. - Improved PEFA indicators, PI-21, PI-26; PI-27; PI-28) as from 2010. Thus: - IP 21 rating of C+ in 2007 moves up to B in 2010; - IP 26 rating of D in 2007 moves up to C in 2010; - IP 27 rating of C+ in 2007 moves up to B in 2010; - IP 28 rating of D in 2007 moves up to C in 2010; - (i) Existence of a regulatory framework that ensures efficiency, transparency and accountability, and which prevents situations of conflict of interest in the public procurement chain

Annex 1 Page 2 of 2

Objectives

GPRSSP III Measures/2009

GPRSSP III Measures/2010 ERSP-II/2010

Outcome Indicators

operational plans for the procurement system

- (ii) competitive bidding time lines are reduced from 8 months in 2008 to 5 months as from 2010.

2. Improve the business climate

2.1 Structural Reforms Nil 2.2 Improvement of business climate indicators 2.2.1 Cut tax rates and simplify business taxes;

2.1 Structural Reforms 2.1.1 Submit to ADF for assessment the decisions on the management options and structures of Benin TELECOMS, as well as on the concession of the two quays to be built at the Cotonou Port 2.2 Improvement of business climate indicators 2.2.1 Adopt and implement the action plan for improving the business climate indicators

2.2.2 Facilitate the procedures for transforming occupancy permits into land title deeds

2.2.3 Reduce the time for obtaining building permits

2.2.2 Adopt an action plan for the implementation of the anti-corruption strategy;

- Benin TELECOMS Company is privatized in 2010. - Two quays of Cotonou Port are built and concessioned to the private sector in 2010. Improved ranking of Benin in ‘Doing Business 2010’ - Increase in private sector investment share in GDP (National Accounts) from 13.6% in 2008 to 15% in 2010. - Time required to start a business is reduced from 31 days in 2008 to 12 days in 2010 - Ownership transfer time reduced to less than 120 days and registration cost reduced in 2010 - Extent of corruption reduced in 2010.

Annex 2 REPUBLIC OF BENIN

Growth and Poverty Reduction Strategy Support Programme

Note on Status of Cooperation between IMF and Benin IMF Executive Board Completes Fifth Review under PRGF Arrangement with Benin and Approves US$ 1.3 Million Disbursement Press Release No. 08/323 15 December 2008 The Executive Board of the International Monetary Fund (IMF) has completed the fifth review of Benin's economic performance under the SDR 15.48 million (about US$23.1 million) Poverty Reduction and Growth Facility (PRGF) arrangement. The arrangement was approved on August 5, 2005 (see Press Release No.05/190), and subsequently extended to August 4, 2009. In June 2008 it was augmented by 150 percent in order to help the country deal with rising food and oil prices. In completing the review, the Board approved Benin's request for waivers of the non-observance of two performance criteria pertaining to net domestic financing and to the contracting of new non-concessional external debt. The completion of the review enables Benin to draw an amount equivalent to SDR 0.88 million (about US$1.3 million). Following the Executive Board's discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated: “Supported by prudent fiscal policies, economic growth in Benin continues to strengthen, while the inflationary impact of higher international food and fuel prices is subsiding. The authorities are cognizant of the need to keep the momentum on fiscal consolidation and structural reforms, in order to preserve macroeconomic stability and to raise growth further to help reduce poverty. These efforts have become more crucial with the weakening of the global economy. “The authorities have allowed full pass-through of international prices, accompanied by well-targeted safety net measures. This will help the economy adjust and foster a positive agricultural supply response. The authorities are persevering in their efforts to improve governance in the revenue agencies and strengthen tax and customs administration. It will also be critical to improve public expenditure management and bolster civil service reform. These reforms will create increased fiscal space for poverty reduction and growth-supporting expenditures. “The preservation of fiscal and public debt sustainability will require continued prudent public debt management, reliance on highly concessional external financing, and limited recourse to non-concessional financing in the regional financial market. “Further structural reforms are needed to free Benin’s growth potential. The recent privatization of SONAPRA’s ginning activities and Continental Bank-Benin will help strengthen Benin’s competitiveness. The authorities are encouraged to complete the comprehensive reform strategy for the cotton sector, restructure the state-owned telecommunications and electricity companies, and enhance the competitiveness of the Cotonou Port. These reforms are critical to improving the delivery of public services, lowering production costs, and alleviating capacity constraints.”

Annex 3 REPUBLIC OF BENIN

Growth and Poverty Reduction Strategy Support Programme

2011 2012 2013Act. Est. EBS Proj.

08/62

National income GDP at current prices 6.9 7.4 8.1 12.3 10.6 6.8 9.2 9.2 9.2 GDP at constant prices 3.8 4.6 5.3 5.1 5.7 5.9 6.0 6.0 6.0 GDP deflator 3.1 2.6 2.7 6.9 4.6 0.8 3.0 3.0 3.0 Consumer price index (average) 3.8 1.3 2.9 8.8 6.5 2.8 2.8 2.8 2.8 Consumer price index (end of period) 5.3 0.3 5.5 13.1 3.7 3.3 2.8 2.8 2.8 Production of cotton (in '000 of tons) 1/ 240.6 268.6 312.5 237.9 268.3 302.6 335.2 371.4 411.4

Central government finance Revenue 8.7 31.4 -3.3 5.5 13.6 7.5 9.7 9.9 9.9 Expenditure and net lending -1.1 21.0 12.2 19.3 13.6 7.7 10.7 10.1 9.8Money and credit Net domestic assets 2/ -4.1 -0.9 6.2 17.8 15.4 9.5 8.9 8.8 8.8 Domestic credit 2/ -2.6 -3.4 6.2 17.8 15.4 9.5 8.9 8.8 8.8 Net claims on central government 2/ -7.3 -16.4 -0.5 -0.5 0.1 -0.4 -0.4 -1.5 -1.6 Credit to the nongovernment sector 2/ 4.6 13.0 6.7 18.3 15.3 9.9 9.3 10.2 10.5 Broad money 16.5 17.7 8.3 14.1 12.0 9.8 9.2 9.2 9.2 Velocity (GDP relative to average M2) 3.3 3.0 2.9 2.9 2.9 2.8 2.8 2.8 2.8External sector (in terms of CFA francs) Exports, f.o.b. -18.3 10.7 13.2 19.1 7.6 11.7 12.8 11.9 12.3 Imports, f.o.b. 6.8 16.5 14.5 32.2 1.6 2.1 6.5 7.2 7.8 Export volume -24.8 12.5 9.8 9.5 6.6 9.7 9.5 9.5 9.5 Import volume 4.4 12.8 5.4 5.2 6.3 7.0 8.8 8.8 8.8 Terms of trade (minus = deterioration) -7.8 -1.6 -5.0 -13.5 5.5 6.7 5.2 3.7 3.5 Nominal effective exchange rate (minus = depreciation) -0.3 2.6 ... ... ... ... ... ... ... Real effective exchange rate (minus = depreciation) 1.1 0.9 ... ... ... ... ... ... ...

Basic ratiosGross investment 18.1 21.4 22.1 23.1 23.9 24.3 24.9 25.2 25.5

Government investment 4.6 7.4 8.0 8.2 8.8 9.0 9.3 9.7 10.0Private sector investment 13.6 13.9 14.1 15.0 15.1 15.3 15.5 15.5 15.5

Gross domestic saving 6.8 9.2 9.9 8.0 10.6 12.3 13.5 14.2 15.0Government saving 2.4 4.8 5.5 5.8 5.8 7.3 8.6 7.1 7.3Nongovernment saving 4.4 4.4 4.4 2.3 4.8 5.0 4.9 7.1 7.7

Gross national saving 12.4 14.7 15.2 13.5 15.8 17.4 18.6 19.1 20.0Central government finance

Revenue 16.8 20.6 18.4 19.3 19.8 20.0 20.1 20.2 20.3Expenditure and net lending 19.5 22.0 22.8 23.3 24.0 24.2 24.5 24.7 24.8Primary balance 3/ -2.3 -1.2 -4.0 -3.6 -3.8 -3.8 -4.1 -4.2 -4.2Basic balance (narrowly defined ) 4/ 0.4 3.0 0.5 0.7 0.6 0.5 0.2 0.1 0.1Overall fiscal deficit (payment order basis, excl. grants) -2.7 -1.4 -4.4 -4.0 -4.1 -4.2 -4.4 -4.5 -4.5Overall fiscal deficit (cash basis, excluding grants) -2.3 -0.8 -5.1 -5.4 -5.1 -5.1 -5.2 -4.8 -4.7Debt service (after debt relief) in percent of rev. 5/ 6/ 3.6 2.5 5.4 3.1 2.7 2.9 3.0 3.1 2.7

External sectorTrade balance -10.4 -11.6 -11.4 -14.3 -12.8 -11.7 -11.1 -10.6 -10.2Current account balance (including grants) -5.7 -6.7 -6.9 -9.6 -8.2 -6.9 -6.3 -6.1 -5.6Current account balance (excluding grants) -6.4 -7.4 -7.5 -10.4 -8.8 -7.5 -6.8 -6.5 -6.1Overall balance of payments 4.7 3.2 0.7 -1.2 -1.3 -0.7 -0.8 -0.8 -0.6Debt-service to exports ratio 6/ 5.7 4.4 8.2 5.1 4.7 5.0 5.2 5.4 4.7Debt-to-GDP (post MDRI) 11.5 12.5 13.4 12.6 13.6 14.8 15.7 16.5 17.3Gross reserves in months of imports 7/ 9.2 8.5 ... 7.9 7.2 6.8 6.4 6.1 5.7

Nominal GDP (in billions of CFA francs) 2,481.0 2,663.8 2,880.7 2,991.4 3,309.2 3,534.5 3,859.3 4,214.7 4,602.1CFA francs per U.S. dollar (period average) 522.4 478.6 ... ... ... ... ... ... ...Population (midyear, in millions) 7.6 7.9 8.1 8.1 8.4 8.6 8.9 9.2 9.5

Sources: Beninese authorities; and IMF staff estimates and projections.

2/ In percent of broad money at the beginning of the period.3/ Total revenue minus all expenditure, excluding interest due. 4/ Total revenue minus all expenditure, excluding foreign-financed capital expenditure and interest due.5/ Interest payment only.6/ The 2006 projections incorporate the MDRI resources for the IMF, IDA and AfDF in stock operations.7/ Months of prospective import of goods and non factor services.

Table 1. Benin: Selected Economic and Financial Indicators, 2006–13

(In percent of GDP, unless otherwise indicated)

(Annual changes in percent, unless otherwise indicated)

1/ Cotton production for T-1/T season. Production of cotton seed in crop year T-1/T affects agricultural production in year T-1, while industry, services, and exports of ginned cotton in year T.

20092006 2007 2008Projections

2010

Annex 4 REPUBLIC OF BENIN

Growth and Poverty Reduction Strategy Support Programme

2010 2011 2012 2013Act. Est. June EBS Dec.

Est. 08/62 proj.

Total revenue 416.9 548.0 285.7 530.1 578.0 656.7 705.8 774.4 851.1 935.2

Tax revenue 378.8 446.7 247.6 468.0 511.0 578.6 622.8 686.5 755.4 831.1Tax on international trade 207.4 250.1 131.8 256.2 287.7 328.0 351.0 384.0 420.2 459.8Direct and indirect taxes 171.4 196.6 115.8 211.8 223.3 250.7 271.8 302.4 335.1 371.3

Nontax revenue 38.1 101.3 38.1 62.1 67.0 78.0 83.0 88.0 95.7 104.1

Total expenditure and net lending 483.8 585.3 294.5 656.8 698.1 793.2 854.0 945.6 1,041.2 1,143.5

Current expenditures 369.2 386.7 202.8 426.5 453.8 501.7 536.4 585.0 631.0 681.2Current primary expenditures 359.2 381.6 197.2 414.9 441.9 490.1 524.3 572.4 617.9 667.4

Wages 135.0 143.1 79.1 164.6 171.7 190.2 203.1 221.8 242.2 264.5Pensions and scholarships 29.3 34.3 16.6 37.1 40.2 47.3 51.3 56.0 61.1 66.6Transfers and current expenditures 194.9 204.3 101.6 213.3 230.0 252.6 269.8 294.6 314.7 336.3

Current transfers 102.2 106.1 59.2 103.3 116.2 121.8 130.1 142.0 147.4 152.9Other current expenditure 92.7 98.1 42.3 110.0 113.7 130.8 139.7 152.6 167.3 183.5

Interest 10.1 5.1 5.6 11.6 11.9 11.6 12.2 12.6 13.1 13.8Internal debt 0.2 0.0 3.3 5.6 5.6 5.6 4.7 3.9 3.1 2.3External debt 9.9 5.0 2.3 6.0 6.4 6.0 7.4 8.7 10.0 11.5

Capital expenditures and net lending 114.6 198.6 91.7 230.3 244.3 291.5 317.6 360.6 410.2 462.2Investment 113.4 198.4 87.7 230.3 244.3 291.5 317.6 360.6 410.2 462.2

Financed by domestic resources 48.6 85.2 50.4 100.4 114.3 147.7 163.9 192.9 227.0 262.2Financed by external resources 64.8 113.2 37.3 129.9 130.0 143.8 153.6 167.8 183.2 200.0

Net lending (minus = reimbursement) 1.2 0.2 4.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Overall balance (payment order basis, excl. grants) -66.9 -37.3 -8.8 -126.7 -120.1 -136.6 -148.2 -171.2 -190.2 -208.3Basic primary balance 1/ 9.2 81.1 38.0 14.7 21.8 18.9 17.6 9.2 6.1 5.6Primary balance -56.8 -32.2 -3.3 -115.2 -108.2 -124.9 -136.0 -158.6 -177.1 -194.4

Change in arrears -15.0 -30.9 -3.2 -15.0 -15.0 -15.0 -15.0 -15.0 -15.0 -15.0External debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Domestic debt (net) -15.0 -30.9 -3.2 -15.0 -15.0 -15.0 -15.0 -15.0 -15.0 -15.0

Payments during complementary period/float 2/ 25.8 47.5 -87.9 -4.0 -27.2 -15.9 -17.1 -13.5 1.6 4.7

Overall balance (cash basis, excl. grants) -56.1 -20.7 -99.9 -145.7 -162.3 -167.5 -180.3 -199.7 -203.6 -218.6

Financing 56.1 20.7 100.0 145.8 162.3 160.0 152.1 165.4 163.3 182.6

Domestic financing -48.4 -128.4 44.0 -12.3 -12.3 -7.6 -22.5 -21.7 -34.9 -26.1Bank financing -50.1 -131.7 40.3 -5.1 -5.1 0.6 -5.0 -5.1 -21.3 -26.1

Net use of Fund resources -31.3 0.6 0.6 7.4 8.5 0.6 0.0 -0.1 -0.3 -1.1 Disbursements 0.0 0.6 0.6 7.4 8.5 0.6 0.0 0.0 0.0 0.0 Repayments -31.3 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.3 -1.1Other -18.9 -132.3 39.7 -12.5 -13.6 0.0 -5.0 -5.0 -21.0 -25.0

Nonbank financing 1.7 3.3 3.7 -7.2 -7.2 -8.2 -17.5 -16.5 -13.5 0.0Privatization 0.0 4.1 0.0 0.0 0.0 10.3 0.0 0.0 0.0 0.0Restructuring -5.7 0.7 -5.2 -6.0 -6.0 -5.0 -4.0 -3.0 0.0 0.0Other 7.5 -1.4 8.9 -1.2 -1.2 -13.5 -13.5 -13.5 -13.5 0.0

External financing 104.5 149.1 56.0 158.0 174.6 167.6 174.7 187.1 198.1 208.7Project financing 64.8 113.2 37.3 129.9 130.0 143.8 153.6 167.8 183.2 200.0

Grants 37.6 60.6 5.6 68.8 68.1 75.3 80.4 87.8 95.9 104.7Loans 27.2 52.6 31.7 61.1 62.0 68.6 73.2 80.0 87.3 95.3

Amortization due -548.5 -8.7 -3.9 -12.5 -11.7 -11.8 -13.2 -14.8 -16.8 -28.4Program aid 18.1 44.6 22.5 40.6 56.2 35.6 34.2 34.1 31.7 37.1

Grants 18.1 18.3 4.7 15.9 22.8 22.6 21.2 21.1 17.2 22.6Loans 0.0 26.3 17.9 24.7 33.4 13.0 13.0 13.0 14.5 14.5

Debt relief obtained 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0MDRI grants 570.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Financing gap 0.0 0.0 0.0 0.0 0.0 7.5 28.2 34.3 40.3 36.0

Memorandum items:

Total grants and revenue 19.0 23.5 9.9 21.3 22.4 22.8 22.8 22.9 22.9 23.1Grants 2.2 3.0 0.3 2.9 3.0 3.0 2.9 2.8 2.7 2.8Revenue 16.8 20.6 9.5 18.4 19.3 19.8 20.0 20.1 20.2 20.3

Total expenditure 19.5 22.0 9.8 22.8 23.3 24.0 24.2 24.5 24.7 24.8Of which: wage bill 5.4 5.4 5.7 5.7 5.7 5.7 5.7 5.7 5.7 5.7Of which: Capital expenditure 4.6 7.4 3.1 8.0 8.2 8.8 9.0 9.3 9.7 10.0

Overall balance (payment order basis, excl. grants) -2.7 -1.4 -0.3 -4.4 -4.0 -4.1 -4.2 -4.4 -4.5 -4.5Overall balance (payment order basis, incl. grants) -0.5 1.6 0.0 -1.5 -1.0 -1.2 -1.3 -1.6 -1.8 -1.8Primary balance -2.3 -1.2 -0.1 -4.0 -3.6 -3.8 -3.8 -4.1 -4.2 -4.2Basic balance 1/ 0.4 3.0 1.3 0.5 0.7 0.6 0.5 0.2 0.1 0.1Current balance 1.9 6.1 0.0 3.6 4.2 4.7 4.8 4.9 5.2 5.5

GDP (in billions of CFA francs) 2,481.0 2,663.8 2,991.4 2,880.7 2,991.4 3,309.2 3,534.5 3,859.3 4,214.7 4,602.1

Sources: Beninese authorities; and IMF staff estimates and projections.

1/ Total revenue minus total expenditure, excluding investment financed from abroad, interest payments and net lending. 2/ Payment orders curried over to the following fiscal year.

Projections

Table 2 . Benin: Consolidated Central Government Operations, 2006–13

(In billions of CFA francs)

(In percent of GDP, unless otherwise indicated)

2006 20082007 2009

Annex 5 REPUBLIC OF BENIN

Growth and Poverty Reduction Strategy Support Programme

Rating by Component Public Finance Management (PFM) Performance Indicators

Rating Methodo-

logy i ii iii Iv

Overall Rating

A – PUBLIC FINANCE MANAGEMENT OUTCOMES: Credibility of Budget PI-1 Aggregate expenditure out-turn compared to original approved budget M1 B PI-2 Composition of expenditure out-turn compared to original approved budget M1 C PI-3 Aggregate revenue out-turn compared to original approved budget M1 B PI-4 Stock and monitoring of expenditure payment arrears M1 A C C+

B. KEY CROSS-CUTTING ISSUES: Comprehensiveness and Transparency PI-5 Classification of the budget M1 B PI-6 Comprehensiveness of information included in budget documentation M1 C PI-7 Extent of unreported government operations M1 D C D+ PI-8 Transparency of inter-governmental fiscal relations M2 C C D D+ PI-9 Oversight of aggregate fiscal risk from other public sector entities M1 D C D+ PI-10 Public access to key fiscal information M1 C

C. BUDGET CYCLE C(i) Policy-Based Budgeting

PI-11 Orderliness and participation in the annual budget process M2 D C A C+

PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting M2 B A B B B+ C(ii) Predictability and Control in Budget Execution

PI-13 Transparency of taxpayer obligations and liabilities M2 D C C D+ PI-14 Effectiveness of measures for taxpayer registration and tax assessment M2 C C B C+ PI-15 Effectiveness in collection of tax payments M1 D A D D+

PI-16 Predictability in the availability of funds for commitment of expenditures M1 C C C C

PI-17 Recording and management of cash balances, debt and guarantees M2 B C C C+ PI-18 Effectiveness of payroll controls M1 D D D D D PI-19 Competition, value for money and controls in procurement M2 A C B B

PI-20 Effectiveness of internal controls for non-salary expenditure M1 C C C C PI-21 Effectiveness of internal audit M1 C B C C+

C(iii) Accounting, Recording and Reporting PI-22 Timeliness and regularity of accounts reconciliation M2 B D C

PI-23 Availability of information on resources received by service delivery units M1 D

PI-24 Quality and timeliness of in-year budget reports M1 C C C C

PI-25 Quality and timeliness of annual financial statements M1 C D C D+ C(iv) External Scrutiny and Audit

PI-26 Scope, nature and follow-up of external audit M1 D D D D

PI-27 Legislative scrutiny of the annual Budget Act M1 B B B C C+

PI-28 Legislative scrutiny of external audit reports M1 D D D D D. DONOR PRACTICES

D-1 Predictability of Direct Budget Support M1 NA

D-2 Financial information provided by donors for budgeting and reporting on project and program aid M1 NA

D-3 Proportion of aid that is managed by use of national procedures M1 NA

Annex 6REPUBLIC OF BENIN

Growth and Poverty Reduction Strategy Support Programme

LIST OF BACKGROUND DOCUMENTS

1. Benin Country Strategy Paper, 2005-2009 2. Mid-Term Review of the Country Strategy Paper, 2005-2009 3. Public Finance Management Performance Report (PEFA 2007) 4. Action Plan for Improved Public Finance Management (PGFP) 2009- 2012 5. Poverty Reduction and Growth Strategy Paper (PRGSII) 6. PRGS Implementation Progress Report (2007 Review) 7. Budget Support Framework Arrangement (ACAB) 8. World Bank PRSC.5 Report (December 2008) 11. IMF Report on the Fifth Review under the PRGF Arrangement, November 2008

Technical Annex IREPUBLIC OF BENIN

Growth and Poverty Reduction Strategy Support Programme

REPUBLIC OF BENIN Fraternity-Justice-Work

MINISTRY OF THE ECONOMY AND FINANCE

DEVELOPMENT POLICY LETTER See Technical Annex 1

Technical Annex 2REPUBLIC OF BENIN

Growth and Poverty Reduction Strategy Support Programme 2. MATRIX OF COMMON ACTIONS/MEASURES AND OUTCOMES BASED ON

GOVERNMENT POLICY REFORM AGENDA See Technical Annex 2