The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD79 INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY GRANT IN THE AMOUNT OF SDR 63.5 MILLION (US$87.5 MILLION EQUIVALENT) AND A PROPOSED DEVELOPMENT POLICY CREDIT IN THE AMOUNT OF EUR 56.1 MILLION (US$62.5 MILLION EQUIVALENT) TO THE REPUBLIC OF TOGO FOR THE FIRST FISCAL MANAGEMENT AND ENERGY REFORM DEVELOPMENT POLICY FINANCING November 15, 2019 Macroeconomics, Trade And Investment Global Practice Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. . The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) REPUBLIC OF TOGO GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 31, 2019) Currency Unit = CFA Franc (CFAF) US$1.00 = CFAF 588 US$1.00 = Euro 0.89645899 US$1.00 = SDR 0.72495813 ABBREVIATIONS AND ACRONYMS ABP Annual Borrowing Plan AfD Agence Française de Développement (French Agency for Development) AfDB African Development Bank ARSE Autorité de Régulation du Secteur de la Communication Electronique et des Postes (Regulatory Authority of Posts and Electronic Communication Sector) ASA Advisory Services and Analytics BCEAO Banque Centrale des Etats d’Afrique de l’Ouest (Central Bank of West African States) BTCI Banque Togolaise pour le Commerce et l’Industrie (Togolese Bank for Commerce and Industry) CEB Communauté Electrique du Bénin (Electric Community of Benin) CEET Compagnie Energie Electrique du Togo (Togo Electric Power Company) CFAF Franc de la Communauté Financière Africaine (Franc of the African Financial Community) CPF Country Partnership Framework CPIA Country Policy and Institutional Assessment CwA Compact with Africa DDPF Direction de la Dette Publique et du Financement (Directorate of Public Debt and Financing) DPF Development Policy Financing ECF Extended Credit Facility EGP Togo Economic Governance Project EU European Union FDI Foreign Direct Investment FY Fiscal Year GDP Gross Domestic Product HFO Heavy Fuel Oil IBRD International Bank for Reconstruction and Development ICT Information and Communications Technology IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund Page 1 ISP Internet Service Provider Kwh Kilowatt Hour MCC Millennium Challenge Corporation MEF Ministry of Economy and Finance MTDS Medium-term Debt Management Strategy NDP National Development Plan NPL Non-performing Loans NPV Net Present Value OTR Office Togolais des Recettes (Togo Revenue Authority) PDO Program Development Objective PEFA Public Expenditure and Financial Accountability PEMFAR Public Expenditure Management and Financial Accountability Review PFM Public Financial Management PIMA Public Investment Management Assessment PIP Public Investment Plan PPP Public-private Partnership PSIA Poverty and Social Impact Assessment SBEE Société béninoise d'Energie Electrique (Benin Electric Power Company) SCD Systematic Country Diagnostic SDR Special Drawing Rights SOE State-owned Enterprise SORT Systematic Operations Risk-rating Tool TA Technical Assistance TdE Togolaise des Eaux (Togo Water Utility) TESSIP Togo Electricity Sector Support and Investment Project TOGOCOM Togo Telecom TSA Transmission Service Agreement UTB Union Togolaise des Banques (Togolese Union of Banks) VAT Value-added Tax WAEMU West African Economic and Monetary Union WB World Bank WBG World Bank Group Regional Vice President: Hafez M. H. Ghanem Country Director: Coralie Gevers Regional Director: Elisabeth Huybens Practice Manager: Lars Christian Moller Task Team Leaders: Thomas Laursen, Ernest Sergenti, and Urbain Thierry Yogo .REPUBLIC OF TOGO FIRST FISCAL MANAGEMENT AND ENERGY REFORM DEVELOPMENT POLICY FINANCING TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................4 1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................6 2. MACROECONOMIC POLICY FRAMEWORK....................................................................................9 2.1. RECENT ECONOMIC DEVELOPMENTS............................................................................................ 9 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 13 2.3. IMF RELATIONS ............................................................................................................................ 17 3. GOVERNMENT PROGRAM ........................................................................................................ 17 4. PROPOSED OPERATION ............................................................................................................ 18 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 18 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 20 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 30 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 31 5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 31 5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 31 5.2. ENVIRONMENTAL ASPECTS ......................................................................................................... 33 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 34 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 36 6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 37 ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 39 ANNEX 2: LETTER OF DEVELOPMENT POLICY..................................................................................... 42 ANNEX 3: IMFRELATIONS ANNEX ...................................................................................................... 56 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 58 ANNEX 5: DPF PRIOR ACTIONS AND ANALYTICAL UNDERPINNINGS .................................................. 59 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Project ID Programmatic If programmatic, position in series P169867 Yes 1st in a series of 2 Proposed Development Objective(s) The Program Development Objective (PDO) of the proposed operation is structured around two pillars: (i) enhancing fiscal and debt management; and (ii) strengthening energy sector financial viability and use of renewable energy. Organizations Borrower: MINISTÈRE DE L’ECONOMIE ET DES FINANCES Implementing Agency: MINISTRY OF ECONOMY AND FINANCE PROJECT FINANCING DATA (US$, Millions) SUMMARY Total Financing 150.00 DETAILS International Development Association (IDA) 150.00 IDA Credit 62.50 IDA Grant 87.50 INSTITUTIONAL DATA Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Overall Risk Rating Substantial Page 4 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) . Results Indicator Baseline (2018) Target (2021) Pillar 1: Enhancing Fiscal and Debt Management 1. Total tax revenues (percent of GDP) 16.5 18.0 2. Officials involved in public procurement who have filled 0 90 financial disclosure forms (percent) 3. PPP contract award information and data published in 0 90 open data formats (percent) 4. Deviation of actual borrowing from Annual Borrowing Plan N/A 10 (percent) Pillar 2: Strengthening Energy Sector Financial Viability and Use of Renewable Energy 5. CEET overall public sector (central and local governments, 73.4 (2017) 95 SOEs) collection rate (percent) 6. CEET cost recovery ratio, revenue collected / costs of 80 (2017) 95 service (percent): 7. Cost of power production mix 74 CFAF/kWh (2017) 70 CFAF/kWh 8. Solar photovoltaics capacity installed 0 MW 30 MW . Page 5 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) 1. INTRODUCTION AND COUNTRY CONTEXT 1.1 The proposed operation is the first of two Programmatic Development Policy Financing (DPF) operations. It builds on the reforms supported under the previous DPF series in 2017-2018, which achieved important results including: reduced tax exemptions (by 1.7 percent of gross domestic product (GDP)), increased energy utility revenue collection, and a doubling of the number of internet users. The proposed series supports pro-poor growth by increasing domestic revenue mobilization, enhancing public investment and debt management, and strengthening the financial viability of the energy sector, a necessary condition to expand access. Growth is expected to remain above 5 percent between 2019 and 2022, debt is sustainable, and the fiscal deficit is below 3 percent of GDP, with Togo meeting the West African Economic and Monetary Union (WAEMU) deficit convergence target two years ahead of schedule. 1.2 The operation consists of an IDA Grant of SDR 63.5 million (US$87.5 million equivalent) and an IDA Credit of EUR 56.1 million (US$62.5 million equivalent). Building on the accomplishments of the previous DPF series, the Project Development Objectives (PDOs) and pillars of this operation are to: (i) enhance fiscal and debt management; and (ii) strengthen energy sector financial viability and use of renewable energy. These two pillars are critical elements of the Government’s reform program and are priorities of the most recent Systematic Country Diagnostic (SCD 2016). They also directly address three of the eight core objectives of the Country Partnership Framework (CPF) 2017-2020: strengthening fiscal policy and debt management; strengthening energy, Information and Communications Technology (ICT), and logistics services; and strengthening resilience and adaptation of climate change. 1.3 The operation also contributes to advancing the Government’s reform trajectory to enable private-sector development and creating fiscal space to increase public investment and social spending. Since 2017, Togo has made substantial progress in strengthening macroeconomic stability, by improving its fiscal balance by close to 9 percentage points of GDP compared to 2016 and placing its debt profile on a downward trajectory. Over the same period, Togo has implemented many reforms to improve its business climate to attract more private investment as it strives to become a logistics hub for the West African region. As a result, Togo’s Country Policy and Institutional Assessment (CPIA) score rose in 2018, driven by improvements in macroeconomic management and the business regulatory environment, and its Ease of Doing Business ranking jumped by more than 50 places, from 156th in 2018 to 97th in 2020. 1.4 Nevertheless, progress in improving living standards in Togo has been slow, and poverty and vulnerability remain high and geographically concentrated in rural areas . Togo is a low-income country with a per capita GDP of US$663 in 2018. Though poverty has declined in recent years, more than half of the population still live in poverty. The poverty rate (using the national poverty line) decreased from 58.7 percent in 2011 to 55.1 percent in 2015. Recent simulations suggest that poverty has declined only gradually since 2015, given that per capita GDP growth (on average 2.5 percent in 2015-2018) has been relatively limited. 1.5 The current operation is informed by the 2016 SCD and builds on the 2017-2018 DPF series. The SCD identified poor fiscal governance and high and distortionary taxation as key binding constraints for progress in poverty and shared prosperity. It also identified inadequate infrastructure services, especially energy (costly, unreliable, limited access) and ICT, as an important constraint. Accordingly, these constraints featured as prominent objectives in the FY17-20 CPF. The 2017-2018 DPF series (P159844 and Page 6 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) P166739) supported fiscal management and energy sector reforms, as well as Togo’s efforts to increase competition in the telecoms sector. Supported by the IMF Extended Credit Facility (ECF), Togo stabilized public finances and debt through a major fiscal adjustment, despite challenges in mobilizing additional revenues. Significant progress was made in clearing domestic arrears and enhancing financial discipline in the energy sector, and in strengthening competition and service delivery in the ICT sector, where the reform process is now well advanced. This DPF series is designed as a “transition” series from the previous series, which focused primarily on fiscal adjustment, to a potential future series, which could focus more on human capital development, structural transformation, and growth. 1.6 The first pillar aims to further improve fiscal and debt management to create fiscal space to increase public investment and social spending. Reforms in this area are supported by technical assistance (TA) and analytical work, including the Economic Governance Project (P158078), the Multi- Donor Debt Management Facility and the West Africa Tax Study (P163693). Although tax revenues reached 16.5 percent of GDP in 2018, they remain below the WAEMU target of 20 percent of GDP. In addition, the efficiency and impact of public investments are limited by a lack of transparency and delays in the procurement process. And public debt and debt servicing costs are high, while the Government is committed to improve its debt reporting and debt risk monitoring and management capacity. Pillar 1 thus supports: (i) strengthening tax revenue mobilization by improving value-added tax (VAT) administration and increasing revenues from property taxes; (ii) strengthening the quality and efficiency of public procurement procedures; and (iii) improving debt management and transparency. 1.7 The second pillar aims to strengthen energy sector financial viability, a necessary condition to expand access, and the use of renewable energy. It is supported by the ongoing Togo Electricity Sector Support and Investment Project (TESSIP, P160377). Less than 40 percent of the population have access to electricity, with expensive end-user tariffs close to twice the global average. This reflects poor energy sector planning, persistent inefficiencies, and financial mismanagement and inadequate investment, in particular from the private sector. Improving the financial viability of the energy sector is a necessary condition for needed investments to expand access in order to meet the Government’s commitment to achieve 60 percent access by 2022 and universal access to affordable, reliable, and modern electricity services by 2030 (Sustainable Development Goal 7), without having to resort to broad-based tariff increases that are unaffordable.1 In addition, Togo aims to expand access in rural areas and increase the amount of energy generated from renewable sources to increase energy security and mitigate against climate change.2 Pillar 2 thus supports: (i) the clearance of all arrears in the energy sector and the establishment of mechanisms to prevent the creation of new arrears; (ii) optimization of technical efficiency and operational costs of the electricity utilities; (iii) establishing a mechanism to increase billing collection rates, including from the central and local governments and state-owned enterprises (SOEs); and (iv) promotion of renewable energy. Moreover, the measures designed to promote technical efficiency in electricity transmission and the use of renewable sources of energy support efforts to mitigate climate change. 1.8 Togo’s recent economic performance has been relatively stable, despite political and social tensions. Growth remains robust, averaging 5.2 percent in 2014-2018, driven by domestic demand 1 The Electricity Subsidy Reform in Guinea, Mali, and Togo Project (P166128) is conducting an assessment to ensure that tariff- setting is pro-poor and less regressive. 2 Togo is a targeted country of the Regional Off-Grid Electrification Project (P160708) approved by the Board in April 2019. Page 7 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) including public infrastructure investment. Reflecting the Government’s strong commitment to reduce public debt, the fiscal balance improved from -9.5 percent of GDP in 2016 to -0.8 percent in 2018, while arrears declined from 13 percent of GDP to 7.6 percent of GDP over the same period. Nevertheless, public debt remains at the highest level in the WAEMU region, at 76 percent of GDP in 2018, and debt service is a major burden at more than 52 percent of government revenues in 2018. 1.9 Socio-political tensions have subsided since 2017 but may increase ahead of presidential elections scheduled for February 2020. Togo’s governance and institutional capacities are weak, with a CPIA of only 3.2 out of 5 in 2018. The political environment is also fragile, with Togo having experienced political unrest during the second half of 2017. Although the opposition demonstrations have declined since then, the political and governance risk is heightened by the uncertain socio-political situation. Following parliamentary elections in December 2018, which many opposition parties boycotted, the National Assembly approved a constitutional amendment capping the number of five-year presidential terms at two, without a provision to apply the new rule retroactively. This allows the current president to contest two additional elections, which opposition parties had opposed. Local elections took place peacefully in June 2019, but tensions may rise again around presidential elections. 1.10 The macroeconomic framework is adequate for the purposes of this operation. Growth prospects are solid, supported on the demand side by continued strong domestic demand and recovery in exports and on the supply side with stronger growth in services such as logistics, telecommunications, and transport. The Government has maintained fiscal discipline and refrained from contracting non- concessional loans, and Togo is expected to remain below the 3 percent of GDP WAEMU deficit target over the medium term. Togo has also performed satisfactorily under the IMF ECF Program, which provides an anchor for the macroeconomic policy framework. Monetary and exchange rate policy is anchored in WAEMU membership. Debt is sustainable, with a moderate risk of external debt distress though high risk of overall debt distress. Page 8 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) 2. MACROECONOMIC POLICY FRAMEWORK 2.1. RECENT ECONOMIC DEVELOPMENTS 2.1 The economy picked up in 2018 driven by a rebound in public investment and stronger growth in the services sector. After declining to 4.4 percent in 2017, amid heightened political tensions and fiscal consolidation, growth reached 4.9 percent (2.3 percent per capita) in 2018. On the supply side, the pick- up in growth reflects the robust performance of the service sector, including transport and telecommunication activities. On the demand side, growth was driven by private consumption and a recovery in public investment. The latter reflects the construction of new infrastructure in the ICT, education and health sectors. Inflation increased from -0.2 percent in 2017 to 0.9 percent in 2018, reflecting a reduction of the output gap and higher fuel and food prices. Table 1. Contributions to GDP Growth, Demand and Supply Side 2016 2017 2018 2019 2020 2021 2022 Demand side GDP growth 5.2 4.4 4.9 5.3 5.5 5.5 5.5 Consumption 2.0 3.5 3.1 3.8 2.1 3.1 3.1 Private Cons. 3.3 2.8 2.9 2.3 2.4 2.0 2.0 Gov. Cons. -1.3 0.7 0.2 1.5 -0.2 1.1 1.1 Investment 2.4 2.9 3.5 2.0 2.5 2.4 2.4 Net exports 0.8 -2.0 -1.7 -0.5 0.9 0.0 0.0 Supply side Agriculture 2.3 2.2 1.3 1.0 1.1 1.2 1.2 Industry 1.2 0.4 0.5 0.7 0.7 0.7 0.7 Services 1.7 1.8 3.1 3.6 3.7 3.6 3.6 Source: World Bank and IMF estimates and projections as of October 16, 2019. 2.2 The external current account deficit widened in 2018 reflecting higher capital imports and lower phosphate export prices. Lower export volumes of cocoa and coffee also contributed. The deficit rose from 2.0 percent of GDP in 2017 to 4.9 percent of GDP in 2018. It was financed through a combination of external concessional borrowing and foreign direct investment (FDI). In early 2019, however, exports recovered somewhat, leading to a narrowing of the current account deficit. 2.3 The tight fiscal stance loosened somewhat in 2018. With IMF support, Togo succeeded in reducing its overall budget deficit by 9 percentage points of GDP between 2016 and 2017. It also met the 3 percent of GDP WAEMU fiscal deficit target ahead of schedule. In 2018, Togo eased its fiscal stance slightly as allowed for under the IMF ECF. The fiscal deficit edged up from 0.3 percent of GDP in 2017 to 0.8 percent of GDP in 2018. The tight fiscal stance was sustained through the first half of 2019, with the overall fiscal deficit estimated at 0.2 percent of GDP in H1-2019. Page 9 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Table 2. Togo’s Key Macroeconomic Indicators 2016 2017 2018 2019 2020 2021 2022 Est. Proj. Annual percentage change, unless otherwise indicated National Accounts and Prices GDP at constant prices 5.6 4.4 4.9 5.3 5.5 5.5 5.5 Exports (in CFA) 2.8 -3.7 -0.4 11.1 8.1 10.6 11.1 Imports (in CFA) -1.9 -18.6 7.6 9.3 9.2 7.4 8.7 GDP deflator 1.5 0.8 1.7 2.1 2.8 2.9 2.9 Consumer prices (average) 0.9 -0.2 0.9 1.4 2.0 2.0 2.0 Selected Monetary Accounts Credit to nongovernment sector1 7.5 1.7 3.1 3.9 8.2 8.2 8.1 Broad money (M2) 12.6 10 9.0 9.2 9.3 9.3 9.3 Interest rate 2.5 2.5 2.5 2.5 Percent of GDP, unless otherwise indicated Fiscal Accounts Total revenue and grants 21.6 21.4 23.9 23.0 23.7 23.9 24.2 Total expenditure and net lending 31.1 21.6 24.7 25.8 25.6 25.5 25.6 Overall budget balance -9.5 -0.3 -0.8 -2.9 -1.9 -1.5 -1.5 Basic fiscal balance2 -4.5 0.8 2.4 1.4 2.6 2.9 2.9 Total public debt 81.4 76.0 76.2 73.1 68.9 64.7 60.8 External Sector Current account balance -9.8 -2.0 -4.9 -5.5 -6.0 -5.5 -5.2 Foreign direct invest. (- = inflow) 6.8 -2.5 -2.5 -2.7 -3.0 -3.2 -3.5 BCEAO gross reserves 3.9 4.1 4.5 (in months of imports) Terms of trade (deterioration = -) -1.4 25.4 -5.9 0.0 1.6 1.0 3.2 LCU per US dollar (avg.) 592.8 580.9 555.2 External public debt 20.2 20.1 20.5 22.2 21.9 21.5 21.1 Nominal GDP (CFA Billions) 2,649 2,789 2,975 3,199 3,469 3,767 4,089 Source: National Authorities and World Bank and IMF estimates as of October 16, 2019. 1 As a percent of the broad money stock at the beginning of the period. 2 Revenue minus expenditure excluding interest on external debt and foreign-financed investment. 2.4 Revenues (excluding grants) increased markedly driven, by non-tax revenues. Revenues increased from 18.2 percent of GDP in 2017 to 20.3 percent of GDP in 2018. Non-tax revenues rose from 2.1 percent of GDP to 3.8 percent of GDP over the same period, mainly from the collection of one-off fees on 4G licenses awarded to the two largest telecommunication companies. Tax revenues increased by 0.4 percent of GDP, supported by higher custom revenues. In H1-2019, domestic revenues were 4.4 percent higher than the same period in 2018. The improvement of tax revenues partly reflects reforms supported under the previous DPF series, including the implementation of a new system for electronic tax filing, the amendments made to the tax code to simplify the tax system, and the reduction of tax exemptions. Page 10 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Table 3. Togo’s Main Fiscal Indicators, 2017 – 2022, Percent of GDP 2017 2018 2019 2020 2021 2022 Est. Proj. Revenue and Grants 21.4 23.9 23.0 23.7 23.9 24.2 Total Revenue 18.2 20.3 19.9 20.0 20.3 20.5 Tax Revenue 16.1 16.5 17.6 17.8 18.0 18.2 Tax Administration 8.9 8.7 9.6 9.8 10.0 10.2 Customs Administration 7.2 7.8 8.0 8.0 8.0 8.0 Non-Tax Revenues 2.1 3.8 2.3 2.2 2.2 2.3 Grants 3.2 3.6 3.1 3.6 3.6 3.6 Budget Support 1.7 1.1 0.6 0.5 0.5 0.5 Project 1.4 2.4 2.5 3.2 3.2 3.2 Expenditures and Net Lending 21.6 24.7 25.8 25.6 25.5 25.6 Current Expenditure 15.4 17.9 18.0 16.6 16.2 16.1 Primary Current Spending 13.6 15.5 15.5 13.7 13.7 13.7 Wages and Salaries 6.9 6.7 6.7 6.8 6.8 6.8 Goods and Services 3.0 4.9 4.9 3.2 3.1 3.1 Transfers and Subsidies 3.7 3.9 3.9 3.7 3.7 3.7 Interests 1.7 2.4 2.5 2.9 2.5 2.5 Public Investment 6.3 6.8 7.9 9.0 9.3 9.5 Domestically Financed 3.7 2.4 3.0 3.7 3.7 4.0 Foreign Financed 2.5 4.4 4.9 5.3 5.5 5.5 Net Lending 0.0 0.0 0.0 0.0 0.0 0.0 Balance Overall Balance, incl grants (Commitment) -0.3 -0.8 -2.9 -1.9 -1.5 -1.5 Overall Balance, incl grants (Cash basis) -2.1 -4.2 -2.9 -1.9 -1.5 -1.5 Overall Balance, excl grants (Cash basis) -5.3 -7.7 -7.0 -5.5 -5.2 -5.1 Financing 3.8 6.4 5.7 4.9 5.2 5.1 Domestic Financing (net) 1.0 2.0 0.2 0.2 0.0 0.0 External Financing (net) 2.8 4.4 5.5 4.7 5.1 5.1 Financing Gap / Unidentified Financing 1.4 1.3 1.3 0.6 0.0 0.0 IMF ECF 1.4 1.3 1.3 0.6 0.0 0.0 Source: National Authorities and World Bank and IMF estimates and projections as of October 16, 2019. 2.5 Expenditures increased from 21.6 percent of GDP in 2017 to 24.7 percent of GDP in 2018 , with a significant increase in current spending ahead of parliamentary elections in December, higher interest payments, and higher capital spending. Government spending remained on an upward path through June 2019, with the expenditure outturn about 0.9 percent of GDP higher than the previous year reflecting continued increases in both current and capital spending. 2.6 The Government reduced the stock of arrears by half since 2016 and has taken steps to prevent future arrears accumulation. The overall stock of government arrears (including pre-2006 legacy arrears) was estimated at 13 percent of GDP in 2016. All arrears were owed to domestic creditors and about 26 Page 11 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) percent were in the energy sector (see Table 4). Since 2017, with the support of this operation and the previous DPF series, the Government has strengthened the implementation of its cash plan and commitment authorizations, centralized the payment of electricity bills of all line ministries through the Ministry of Economy and Finance (MEF), and paid outstanding SOE arrears. As a result, by June 2019, energy sector arrears were completely cleared, and the total stock of arrears had fallen to 6.5 percent of GDP (or 1.7 percent of GDP if legacy arrears are excluded).3 Table 4. Stock of Arrears, 2016-2019 In CFAF billions 2016 2017 2018 Jun-19 Energy Arrears 49.3 17.5 18.3 0.0 Central Government 16.0 1.6 1.2 0.0 State-Owned Enterprises (SOEs) 13.3 13.8 13.7 0.0 Local Government 9.9 1.5 2.9 0.0 Other State Organizations 10.1 0.5 0.5 0.0 Other Arrears 295.3 276.7 208.1 208.5 Of which: Liquidated SOEs 39.2 39.2 36.2 36.2 Of which: Before 2006 stock 154.8 154.8 154.8 154.8 Total Domestic Arrears 344.6 294.2 226.4 208.5 Total Domestic Arrears, excluding pre-2006 stock 189.8 139.4 71.6 53.7 Total External Arrears 0.0 0.0 0.0 0.0 Total Arrears 344.6 294.2 226.4 208.5 Energy Arrears (% Total Arrears) 14.3 5.9 8.1 0.0 Energy Arrears (% GDP) 1.9 0.6 0.6 0.0 Total Arrears (% GDP) 13.0 10.5 7.6 6.5 Total Arrears (% GDP), excluding pre-2006 stock 7.2 5.0 2.4 1.7 Source: National Authorities and World Bank and IMF estimates and projections as of October 16, 2019. 2.7 Togo’s monetary and exchange rate policies are managed at the regional level by the Central Bank of West African States (Banque Centrale des Etats d’Afrique de l’Ouest, BCEAO). BCEAO’s international reserves stabilized in 2018, supported by significant Eurobond issuances by Côte d’Ivoire and Senegal and improved compliance with export repatriation requirements. Reserves covered 4.5 months of imports of goods and services at end-2018, up from 4.1 months at end-2017. The monetary policy stance remained broadly unchanged in 2018. The real effective exchange rate (REER) appreciated by 1.9 percent in 2018, mainly because of euro strengthening. Continued fiscal consolidation among member countries is needed to support additional regional reserve accumulation. 2.8 Reforms in the financial sector are moving slowly as weaknesses in the two public banks to be privatized continues to weigh on the soundness and profitability of the sector. Non-performing loans (NPL) remain high but decreased from 19.3 percent of total loans in 2017 to 17.8 percent in 2018. The high share of NPLs likely affected credit to the private sector, which decreased from 39.4 percent of GDP 3 The clearance of pre-2006 arrears is not part of the IMF ECF program as clearing these arrears are not expected to require significant financial resources from the Government given that most companies have reportedly not brought forward the required evidence to verify their claims. Page 12 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) in 2017 to 36.5 percent of GDP in 2018. However, during the first half of 2019, credit to the private sector expanded by 6 percent relative to the same period in 2018, reflecting a 90 basis points decline (y-o-y) in the lending rate during the first half of 2019. Overall, banking sector profitability as measured by return on assets declined from 1.1 percent in 2017 to 0.3 in 2018. Among the most affected are the two public banks, Togolese Bank for Commerce and Industry (Banque Togolaise pour le Commerce et l’Industrie, BTCI) and Togolese Union of Banks (Union Togolaise des Banques, UTB). Both banks continue to operate with negative equity.4 With technical support from the IMF, a draft law for privatizing the two banks was adopted by the National Assembly in October 2018, and as part of the ECF program, a tender for the sale of both banks was launched on September 20, 2019. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 2.9 The medium-term outlook is favorable. GDP growth is expected to average 5.4 percent (2.8 percent per capita) over the medium term (2019-2022), in line with potential growth. The output gap is expected to narrow gradually, reflecting stronger domestic demand, driving inflation up to 2.0 percent by 2022. On the demand side, growth will be supported by increases in private consumption and investment underpinned by an improved business climate. The expansion of credit to the private sector will further support private investment, while rising wages are expected to boost consumption from 2020 onward. On the supply side, the service sector will drive growth, reflecting the expansion of port and airport activities in line with the National Development Plan (NDP). 2.10 The external current account deficit is expected to stabilize at around 5.5 percent of GDP over the medium term. This forecast relies on the expected increase in capital imports and a projected improvement in exports. The projected pickup in capital imports reflects the intensification of investment needs related to the implementation of the NDP, while the rise in exports is expected to be driven by an increase in cotton and phosphate exports. Togo’s terms of trade are also forecasted to improve, boosted by a rise in the prices of many of Togo’s exports (phosphate, cotton, cocoa and coffee). FDI is projected to pick up slowly from 2019, supported by ongoing business climate reforms and the implementation of public investment projects such as the Adakpame logistic platform and Cinkasse dry port, and should reach 3.5 percent of GDP by 2022. FDI will meet about 53 percent of financing needs, with the rest met by long-term concessional loans. Capital transfers and grants are projected to grow on average by 6 percent through 2022, supported by a steady increase in remittances. 2.11 Fiscal policy will remain guided by WAEMU targets. The fiscal stance is expected to ease further in 2019 to provide more fiscal space for social spending and accommodate one-off outlays (1.2 percent of GDP) needed to safeguard social and economic stability. The fiscal deficit is projected to reach 2.9 percent of GDP in 2019 and to stabilize at around 1.6 percent of GDP over the medium term, well below the WAEMU target of 3 percent of GDP, as spending edges higher while revenues increase gradually from 2020 onwards. The deficit will be financed through external concessional borrowing and regional bond issuances. 4 The cost to recapitalize both banks is estimated at about 3 percent of GDP. Page 13 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Table 5. External Financing Requirements and Sources, 2017-2022, (CFAF billion) 2017 2018 2019 2020 2021 2022 GROSS FINANCING REQUIREMENTS 95.3 180.4 209.2 244.2 240.6 249.6 Current Account Deficit 56.1 146.7 176.5 207.9 208.5 211.0 Debt Amortization 39.2 33.7 32.7 36.3 32.1 38.5 FINANCING SOURCES 95.3 180.4 209.2 244.2 240.6 249.6 Foreign Direct Investment (net) 70.3 74.4 86.0 103.8 121.3 142.2 Capital Transfers and Grants 141.4 171.5 209.2 209.2 219.1 229.7 Short-Term Debt / Errors & Omissions -110.6 -37.1 -184.7 -134.8 -157.8 -185.8 Long-Term Debt (Excluding IMF) -20.6 -42.6 78.9 72.4 88.7 96.3 IMF Credit (net) 25.0 26.0 31.5 14.1 -1.4 -2.0 Change in Reserves (- = Increase) -10.1 -11.9 -11.7 -20.5 -29.2 -30.8 Source: National Authorities and World Bank and IMF estimates and projections as of October 16, 2019. 2.12 Total revenues (excluding grants) are projected to increase over the medium term driven by higher tax revenues. Total revenues will increase from 19.9 percent of GDP in 2019 to 20.5 percent in 2022. Tax revenues are projected to increase from 17.6 percent of GDP in 2019 to 18.2 percent in 2022, supported by administrative and policy measures to reduce tax avoidance, strengthen the collection of property taxes, and streamline tax exemptions. These measures include: (i) the elimination of the preferential VAT rate introduced as part of the 2017 budget law; (ii) making mandatory the online submission of declarations and supporting documents for customs clearance of imports for the 30 largest importers or filers; (iii) the creation of a single dedicated account to improve the functioning of the VAT refund system, (iv) prohibition of import customs clearance by agents and/or owners who have outstanding tax arrears and (v) improvements in the capacity to collect property taxes. Measures (i), (iii), and (v) are supported by the current DPF program. 2.13 Public spending is expected to increase on account of higher public investment. Spending is expected to increase to 25.8 percent of GDP in 2019 and to stabilize around 25.6 percent of GDP in 2022. The projected increase in public investment (by 2.7 percentage points of GDP) to 9.5 percent of GDP in 2022 reflects the expected increase of both domestically-financed and externally-financed infrastructure spending. Current spending is projected to decrease because of lower spending on goods and services starting in 2020. The wage bill is expected to stabilize at around 6.8 percent of GDP over the medium term. The 2019 budget allocates about CFA 36 billion (1.1 percent of GDP) for arrears clearance. The clearing of arrears accumulated by SOEs TOGOCOM and Togo Water Utility (Togolaise des Eaux, TdE) to the electricity company Togo Electric Power Company (Compagnie Energie Electrique du Togo, CEET) will cost CFA 12.3 billion (0.4 percent of GDP). 2.14 Total public debt is projected to decline from 73 percent of GDP in 2019 to 61 percent of GDP in 2022. The positive debt outlook is based on the continuation of fiscal consolidation, with the primary surplus expected to stabilize at around 1 percent of GDP in the medium term. It also reflects (i) a gradual pick up in GDP growth (due to the ongoing GDP rebasing and structural reforms under implementation and in part supported by this DPF series) and (ii) a debt management strategy emphasizing a preference for concessional loans. Page 14 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) 2.15 Enhancing SOE transparency and accountability as well as management efficiency is needed to contain fiscal and financial sector risks. Fiscal risks to the budget could arise from losses incurred by SOEs, such as TOGOCOM and TdE, and from their inability to regularize their payment obligations to CEET. In addition, the privatization of the two weak public banks, UTB and BTCI, could entail fiscal costs. Fiscal costs could increase further if SOEs resort to borrowing to honor their commitments to suppliers, and non-repayment of credit by SOEs could increase financial sector risks by raising the level of NPLs. Fiscal costs could also materialize from inefficient implementation of public-private partnerships (PPPs), as some financial arrangements (including loan guarantees) could become an explicit fiscal responsibility of the State. If not contained, these risks could undermine the projected path of fiscal consolidation and debt reduction. To alleviate these risks, the authorities have put in place mechanisms (supported by this operation) to ensure that TOGOCOM and TdE remain current on their payments to CEET. In addition, the World Bank is providing TA to help develop a road map for the water sector through 2030, with the goal of strengthening the financial viability and environmental sustainability of the sector, and the Government is accelerating the process to resolve the two public-sector banks. Further, a new PPP law supported by the DPF series is under preparation to strengthen the regulation and transparency of PPP implementation. 2.16 Togo is assessed at a moderate risk of external debt distress and high risk of overall public debt distress, according to the joint World Bank-IMF DSA of October 2019. The DSA covers central government and SOE debt.5 Under the baseline and alternative scenarios, all external debt sustainability indicators remain below their indicative policy-relevant thresholds (Figure 1). However, under the historical scenario, several indicators of public debt breach their respective thresholds in outer years. Table 6. Togo’s Debt Composition, 2017-2022 2017 2018 2019 2020 2021 2022 Total Public Debt 76.0 76.2 73.1 68.9 64.7 60.8 External public debt 20.1 20.5 22.2 21.9 21.5 21.1 Interest on external debt 0.4 0.3 0.4 0.3 0.3 0.3 Domestic debt 55.9 55.7 50.9 47.0 43.2 39.7 Interest on domestic debt 1.4 2.1 2.1 2.6 2.3 2.2 Source: National Authorities and World Bank and IMF estimates and projections as of October 16, 2019. 5Togo’s recourse to non-concessional external borrowing has been limited. During the period July 2014 to April 2017, when Togo was not under an IMF program, it contracted two loans on a non-concessional basis. The first loan of EUR 4.5 million (0.1 percent of GDP) was used to expand the existing port channel to accommodate larger commercial vessels. The second loan of EUR 13.5 million (0.4 percent of GDP) was used to finance security expenditures. However, starting in May 2017, as part of the IMF ECF program, Togo has taken substantial steps to reduce its public debt levels and refrained from non-concessional external borrowing. Page 15 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Figure 1. Togo DSA: Indicators of Public Debt and External Debt – Baseline Scenario A. External Debt B. Public Debt Source: World Bank and IMF June 2019 Debt Sustainability Analysis. 2.17 The Directorate of Public Debt and Financing (Direction de la Dette Publique et du Financement, DDPF) is pursuing efforts to improve debt reporting and transparency. Since 2018, the Medium-term Debt Management Strategy (MTDS) has been published on the Government’s website dedicated to reforms (http://www.togoreforme.com). The MTDS provides information on the structure of the debt portfolio by currency, interest rate, maturity and instruments as well as an analysis of portfolio risk, refinancing risk, market risk and exchange rate risk. In addition, since 2018, the Government has published a Debt Statistical Bulletin, which contains comprehensive information on central government debt by type of currency, creditor and instrument. These efforts are set to continue as a part of ongoing reforms of the debt management system in Togo and are supported by this DPF. 2.18 Despite the positive economic outlook, macroeconomic risks remain substantial. Political uncertainty and weak administrative capacity could continue to limit private investment needed to finance Togo’s NDP. Socio-political tensions could reignite ahead of planned presidential elections in February 2020, which might delay the implementation of economic reforms and add renewed fiscal pressures. Fiscal risks could be exacerbated if tax revenue collection does not improve, and if the two public banks cannot be sold as they are. Sluggish progress on improving the business environment could impinge on economic growth, as could adverse weather affecting the agriculture sector. External factors could also weigh on the positive outlook. The security situation in neighboring countries, weaker-than- expected global growth or demand for Togo’s exports, and tighter financing conditions in regional markets could lead to higher borrowing costs and affect debt sustainability. Finally, the strong vulnerability to changes in commodity prices (including higher oil prices) and worsened terms of trade could reduce export revenues and impact regional reserves. 2.19 The macroeconomic policy framework is considered adequate for this operation. Growth prospects are solid, supported by a rebound in industrial production and improved performance of the tertiary sector (logistics, telecommunication and transport). The Government has refrained from contracting non-concessional loans, halted pre-financing of public investments, and started repaying domestic arrears. Togo has gained credibility in fiscal policy by meeting the WAEMU deficit target two years ahead of schedule and is expected to stay below the 3-percent-of-GDP target over the medium Page 16 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) term. Togo has also performed satisfactorily under the IMF ECF Program, which provides an anchor for the macroeconomic policy framework. Monetary and exchange rate policy is anchored in WAEMU membership. Debt is sustainable with a moderate risk of external debt distress though the overall (external and domestic) risk of debt distress is high. 2.3. IMF RELATIONS 2.20 On October 25, 2019, the IMF Executive Board concluded the Fifth Review of Togo’s performance under the ECF Arrangement, and the Sixth and final Review is scheduled for Board discussion in early 2020. Economic performance under the ECF has been broadly satisfactory. The fiscal position has improved significantly, and public debt is on a downward path. However, the fiscal adjustment has relied more on public spending cuts, as mobilizing additional tax revenues has remained challenging. The key recommendations of the fifth review included: move forward with the privatization of the two weak public banks, while paying careful attention to the balance between speed and quality and keeping in mind that the ultimate goal is to strengthen the financial sector; ensure that social spending is better monitored and minimum targets met; and enhance debt management capacity including to support a potential debt reprofiling operation. Togo plans to enter into a new ECF once a new government is formed following presidential elections expected in late February 2020. 3. GOVERNMENT PROGRAM 3.1 The Government’s priorities are outlined in the NDP for 2018-2022. The NDP’s overall goal is to transform the economy structurally to achieve strong, sustainable, resilient and inclusive growth, create decent jobs, and improve social welfare. The NDP emphasizes good governance, improved public financial management, development of the private sector and strong public private partnerships. It also aims to enhance the competitiveness of the economy by reducing the cost of energy and improving the quality of telecommunication and transport services. Within the energy sector, Togo also aims to increase access to electricity, especially in rural areas and shift the production mix to cleaner and more renewable sources of energy. The promotion of tourism, development of agro-industrial parks, sound management of natural resources, and decentralization are also key priorities to foster job creation and sustainable growth. The NDP is structured around three pillars: (i) to establish a world-class logistics hub and business center in the sub-region; (ii) to develop agricultural processing, manufacturing and extractive industries; and (iii) to consolidate social development and make growth more inclusive. The overall cost of the NDP is estimated at CFAF 4,622 billion (166 percent of GDP). Public investment would cover 35 percent, with private investment expected to cover the rest. 3.2 During 2018, Togo implemented several reforms aimed at strengthening macroeconomic stability and creating a business environment conducive for private investment. The Government made progress in strengthening revenue mobilization, public investment efficiency, and the financial viability and service delivery of key infrastructure sectors, such as energy and ICT. In addition, Togo adopted a new land code, digitalized the land registry, and created new commercial courts with the option to fast track some procedures. As a result, Togo’s Ease of Doing Business ranking increased by more than 50 places from 156th in 2018 to 97th in the 2020 Doing Business report. Page 17 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) 3.3 In 2018, Togo joined the Compact with Africa (CwA) initiative. Since joining the program, Togo continues to implement reforms, particularly aimed at fiscal adjustment, public finance management, and improving the business environment. This reflects the commitment of the Togolese authorities to implement reforms that are conducive to private sector development. With the support of development partners, including the World Bank and the IMF, the Government is making progress on the macroeconomic and business climate reforms agreed to under the CwA framework. For example, to strengthen public investment efficiency, the Government published a manual of procedures to scrutinize and prioritize public investment proposals. To improve the business environment, the Government abolished registration fees for new businesses and established a one-stop shop for the settlement of fees for public services. The CwA should continue to serve as a catalyst for reforms and increase the attractiveness of Togo for investors. 4. PROPOSED OPERATION 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 4.1 The proposed operation is the first in a programmatic series of two single-tranche DPFs designed to support the implementation of Togo’s NDP. The DPF series aims to support pillars (i) and (iii) of the NDP. The PDOs are to support the Government in: (i) improving fiscal and debt management; and (ii) strengthening energy sector financial viability and use of renewable energy. The proposed DPF series is consistent with the 2016 SCD which identified poor fiscal governance and high and distortionary taxation as key binding constraints for progress in reducing poverty and enhancing shared prosperity. It also identified inadequate infrastructure services, especially energy (costly, unreliable, limited access) and ICT, as an important constraint. 4.2 Pillar 1 on enhancing fiscal and debt management supports: (i) strengthening tax revenue mobilization by improving VAT policy and administration and enhancing the capacity to collect property taxes; (ii) strengthening the quality and efficiency of public procurement procedures; and (iii) improving debt management and transparency. Over the period 2010-2016, Togo’s tax performance in the WAEMU region was second only to Senegal, as it broadened the taxation of income and consumption. Since 2017, however, Togo collected lower VAT revenues, reflecting numerous tax exemptions, including the introduction of the temporary 10 percent preferential rate following a drought and poor harvest, and a poorly functioning VAT refund system. Similar to most other SSA countries, the collection of property tax revenues should be strengthened. Broadening the tax base and enhancing revenue mobilization will help create fiscal space for critical investments in human and physical capital. While important steps have been taken to improve public investment efficiency, the procurement process is slow and the control mechanisms to deal with fraudulent practices are poor, wasting scarce public resources. In addition, while Togo is increasingly turning to PPPs to finance and operate large infrastructure projects, a rigorous legal framework to procure and manage such projects is lacking. Finally, debt management capacity is weak and practices not fully transparent, with the MTDS not providing the needed anchor for fiscal policy and resulting in high debt service costs. Page 18 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Table 7. Selected Policy Measures and Results from 2017-2018 DPF Series Selected Policy Measures Selected Results Revenue Efficiency and Mobilization • A new system for electronic tax filing was put • The introduction of the electronic tax filing in place to facilitate tax payment. reduced the time to comply by 57 hours • An audit of tax exemptions was completed between 2016 and 2018. and measures to reduce tax exemptions • Tax exemptions decreased from 3.5 percent included in the 2018 budget law. of GDP in 2016 to 1.8 percent in 2018. Public Investment Efficiency and Debt Management • Publication of a new manual to guide the • 88 percent of the projects included in the PIP selection of projects to be included in the and funded in the 2019 annual budget were Public Investment Plan (PIP). selected/prioritized based on the new • Publication of a new Medium-Term Debt manual compared to 0 before. Management Strategy geared to ensuring • The debt service-to-revenue ratio decreased debt sustainability and minimizing debt from 66 percent in 2016 to 57 percent in service costs. 2018. Financial Viability and Service Delivery in the Energy Sector • Clearance of arrears of the central • The revenue collection rate of CEET from the government and government entities to CEET General Government increased from 36 and establishment of a centralized system of percent in 2016 to 86 percent in 2017 and payment through the MEF in the context of reached 100 percent in 2018 (exceeding the the 2018 Budget Act. target of 95 percent) Financial Viability and Service Delivery in the ICT Sector • Publication of a reference interconnection • The number of internet users increased from offer from TOGOCOM providing the terms 528,076 in 2016 to 999,800 in 2018, close to and conditions that will ensure fair, non- the target of one million. discriminatory and transparent access to wholesale broadband services to improve competition and ensure an Open Access Regime in the international and national bandwidth capacity market. • Issuance of a standard model and guidelines to be used for the granting of internet service provider (ISP) authorizations that contain only limited and reasonable restrictions to service provision and geographic coverage. 4.3 Pillar 2 on strengthening energy sector financial viability and use of renewable energy supports: (i) the clearance of all arrears in the sector and the establishment of mechanisms to prevent the creation of new arrears; (ii) the optimization of the technical efficiency and operational costs of the electricity utility; (iii) establishing a mechanism to increase billing collection rates, including from the central and local governments and SOEs; and (iv) the promotion of renewable energy. While access to electricity has almost doubled between 2005 and 2016, it remains below the average in Sub-Saharan Africa, and access rates are especially low in rural areas. Togo relies on expensive sources of energy, which combined with poor operational efficiency results in high costs. Despite having among the highest average electricity tariffs in Sub-Saharan Africa, this is insufficient to cover costs, and SOE arrears further undermine the Page 19 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) financial viability of the electricity company and its ability to pay suppliers. Reforms in the sector are critical to boost energy investments and expand access needed for private sector development and inclusive growth. 4.4 This DPF series builds on the reforms supported under the previous series and draws lessons from it. The previous DPF series 2017-2018 supported measures to enhance tax revenue mobilization and strengthen public investment and debt management, and significant progress was made in these areas (Table 7). It also supported Togo’s efforts to improve the financial sustainability and service delivery of its energy sector, including settlement of arrears between the Government and CEET and between CEET and Electric Community of Benin (Communauté Electrique du Bénin, CEB) along with a mechanism to ensure timely payments from the Government. It further supported efforts to increase competition in the telecoms sector, including through partial privatization of TOGOCOM (the national telecoms monopoly), and reforms in this sector are now well-advanced. Important results included: reduced tax exemptions (1.7 percent of GDP), increased energy utility revenue collection from the central government from 36 to 86 percent, and an increased number of internet users from 0.5 to 1 million. The proposed DPF series represents a continuation of the reform program supported by the previous series, including further reforms to increase tax revenues (by 1.5 percent of GDP) and energy utility revenue collection including from SOEs and local governments (to 95 percent). The DPF series is a critical part of IDA’s engagement in Togo and is supported by TA and investment projects. 4.5 The experience with the most recent DPF series demonstrated the critical importance of strong political commitment at the highest levels and selectivity in the choice of reforms based on the Government’s priorities and implementation capacity. In addition, a good understanding of the political economy implications of reforms and strong donor coordination, technical assistance, and the complementarity of reforms with World Bank investment projects also contributed to its success. These conditions are all present in the proposed new DPF series. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Pillar 1: Enhancing Fiscal and Debt Management A. Tax Revenue Mobilization Prior Action 1. To increase VAT revenues and improve tax administration, the Recipient has: (i) adopted one statutory VAT rate of 18 percent and eliminated the previous 10 percent preferential VAT rate on certain products through Togolese Revenue Authority (Office Togolais des Recettes, (OTR) circular; (ii) suspended the use of VAT refund certificates through OTR’s decision; and (iii) created a dedicated single account for the payment of VAT credits in line with the new tax code of January 2019. Prior Action 2. To increase property tax revenues, the Recipient has: (i) merged the data from the land census with the data from the land title registry to create a single digital database on property through OTR’s report on the consolidation of land databases; and (ii) updated the tax payer registry at the OTR based on the results of the land census. Page 20 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Background 4.6 Togo’s tax performance remains below potential, reflecting weaknesses in tax policy design and tax administration. Although tax revenues were in line with the average for sub-Sahara Africa, at 16.5 percent of GDP in 2018, and despite a very strong performance over 2010-2016, they remain below the WAEMU target of 20 percent of GDP. The recently-published West Africa Tax Policy Analysis (P163693) performed a thorough analysis of the portfolio of taxes available to the Government (including income, excise, customs, etc.) and identified VAT and property taxes as those taxes with a high potential to contribute to an increase in revenues. 4.7 First, VAT revenues, which account for 43 percent of total tax revenues, were only 8.0 percent of GDP in 2018. This reflected a lower 10 percent preferential rate implemented in 2017 on some staple goods (oil, sugar, cereals, etc.) in response to a drought and weak harvest but also subsequently extended to ICT and agricultural equipment. Revenue losses from all VAT exemptions were estimated at 1.6 percent of GDP, of which one-third was because of the 10 percent preferential rate. VAT exemptions also negatively affect supply chains because exempted companies have an incentive to trade only with partners that are also exempt. This weakens the self-reinforcing nature of the VAT system and leads to revenue shortfalls. Likewise, the use of multiple VAT rates increases the complexity of the tax system, raising compliance costs and discouraging businesses to register as formal enterprises, thereby reducing the tax base and tax revenues. Finally, a poorly-functioning VAT refund system lowers compliance and negatively affects the competitiveness of exporters. 4.8 Second, property taxes are very low by international standards. In 2018, the revenue from property taxes was only around 0.1 percent of GDP, down from 0.2 percent of GDP in 2016 and 2017 and compared to 0.4 percent of GDP in sub-Saharan Africa and 1.9 percent of GDP in the OECD. This underperformance is due in part to poor registration of properties and their values. Although all existing land titles are digitized, they represent only 11.6 percent of total land identified by the OTR in June 2018. As urbanization increases, taxing land and property could allow the Government to significantly improve the capture of property tax revenues. Improving property tax revenues, however, takes time in practice, as updated cadasters and property valuations result in enhanced revenues only in subsequent years. Progress under the Previous DPF series 4.9 Several important steps were taken with the support of the previous DPF series to improve tax revenue mobilization. A new system for electronic tax filing to ease tax payment was put in place. The tax code was amended to reduce the number of taxes from 26 to 17 to simplify the tax system and reduce administrative costs. An audit of tax exemptions was completed and measures to reduce tax exemptions were included in the 2018 budget law. The cadaster and conservation services were modernized, custom and domestic tax databases were harmonized, and a land census was carried out to identify zones with large revenue potential. These measures led to the reduction of the time to comply with tax obligations by 57 hours between 2016 and 2018, a decrease in tax exemptions from 3.5 percent of GDP in 2016 to 1.8 percent of GDP in 2018, and an increase in the number of taxpayers by 23.6 percent. Page 21 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Prior Actions, Indicative Triggers, and Expected Results 4.10 With the 2019 Budget, the Government mainstreamed the VAT statutory rate at 18 percent. This removes the 10 percent VAT preferential rate instituted following a drought and poor harvest in 2015 and 2016. The removal of the preferential VAT rate thus represents a return to one single VAT rate, aligning Togo with WAEMU directives. International best practice also suggests that the robust generation of VAT revenues requires the broadest possible tax base and one statutory rate, with targeted social spending used to address redistributive concerns. In addition, the Government suspended the use of VAT refund certificates6 and established a list of companies eligible for a simplified reimbursement procedure. Finally, the Government issued a ministerial order creating a dedicated single account for the payment of VAT credits in line with the new tax code, which entered into force in January 2019 (Prior Action 1). 4.11 The authorities plan to remove VAT exemptions to ensure alignment with WAEMU directives . This will be accompanied by the publication of an annual report on tax expenditures and the establishment of an institutional mechanism to manage, monitor, and evaluate the efficiency of tax expenditures across all tax sources on a regular basis (Indicative Trigger 1). This measure is intended to enhance the transparency and management of VAT exemptions, enable informed decision-making by the legislature, and facilitate public understanding and advocacy. 4.12 The Government published the results of the recently executed land census and used the census data to update the tax payer registry at the OTR. The publication of the land census provides easier access to information about a property, such as its location, ownership, estimated value, and mortgages and liens attached to the property. This helps improve the accuracy of the valuation of the property for tax collection purposes. Information provided by the land census also helps with the creation of a single digital property database, which will bring unregistered land owners into the tax registry and increase the tax base (Prior Action 2). 4.13 The Government plans to establish a fiscal cadaster of land and property and replace the rental value with the market value for the valuation of some property (Indicative Trigger 2). The establishment of a fiscal cadaster involves re-registering properties with faulty records, updating property boundaries and ownership information, and adjusting assessed values. This should lead to an improvement in the identification and valuation of property for tax purposes. In addition, the replacement of the rental value with the market value for some properties is consistent with international standards and will further improve the assessment and update of the taxable value of the property. 4.14 The tax measures proposed in this operation are informed by the recently completed West Africa Tax Policy Analysis (P163693). That study identifies a poorly-functioning VAT refund system, the widespread use of VAT exemptions, and the inefficiency of property tax revenue collection as the source of weak tax revenue mobilization in Togo. The proposed policy measures build on international best practices. 4.15 In addition, the IDA-European Union (EU) Economic Governance Project (EGP; P158078) will be supporting these reforms through TA to strengthen the institutional framework for tax policy. This 6As discussed in the Government’s Letter of Development Policy, t he Government has committed to eliminate the use of VAT refund certificates with the upcoming 2020 Budget law. Page 22 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) project will continue to build capacity at the OTR and finance the implementation of an electronic system of taxpayer filing and documentation. The EGP will also implement a survey of taxpayer services and support archiving of taxpayer files. 4.16 The measures supported under this series are expected to help improve tax administration and increase tax revenues. The adoption of a single statutory VAT rate, improvements in the functioning of the VAT refund mechanism, and the elimination of VAT exemptions are expected to lead to an increase in VAT revenues. The authorities are targeting an increase in VAT revenues from 8 percent of GDP in 2018 to above 9 percent of GDP over the medium-term. Property tax revenues are also expected to increase, as Togo strengthens transparency, establishes a fiscal cadaster, and uses the market to value some properties for tax purposes. Indeed, between 2018 and 2022, property taxes are expected to increase by almost six times. These measures will contribute significantly to the expected increase in the total tax revenue, from 16.5 percent of GDP in 2018 to 18.0 percent of GDP in 2021. B. Public Investment and Debt Management Prior Action 3. To improve the efficiency and transparency of public investment procedures, the Recipient has: (i) adopted a decree on code of professional ethics for the public procurement process; and (ii) adopted a decree on strengthening the supervision of large infrastructure projects and the implementation of public projects delegated to third parties. Prior Action 4. To improve debt management and transparency, the Recipient has: (i) issued the 2019- 2023 Medium-Term Debt Management Strategy (MTDS) with an analysis of the impact of potential liability management operations; and (ii) established a public debt portal on the Recipient’s MEF web-site that consolidates in one web-site all information related to central government and publicly guaranteed debt. Background 4.17 Despite recent reforms in public investment management, more effort is required to support public procurement and PPP supervision. The timeliness, transparency, and efficiency of public investment depends critically on the quality of public procurement procedures. In Togo, the procurement process and control and complaint mechanisms are too slow, wasting scarce public resources and delaying the implementation of public investment projects. These shortcomings reflect several governance challenges, such as the lack of appropriate procedures to ensure a transparent bidding process. A more rigorous legal framework to procure and manage PPP projects is also required as Togo increasingly uses PPPs to finance and operate large infrastructure projects. Finally, as a WAEMU member, Togo must align its PPP and procurement texts to the requirements of WAEMU directives by June 2021. 4.18 Debt management is guided by WAEMU targets but without a robust and transparent debt recording, monitoring, and reporting system to support sustainable borrowing. While public debt declined from 81.4 percent of GDP in 2016 to 76.2 percent of GDP in 2018, it remains among the highest in the WAEMU. Debt service has also become a major burden on the budget, driven by Togo’s large stock of high-interest domestic debt. Moreover, based on the most recent DeMPA assessment in 2016, the quality of debt reporting and transparency is low, reflecting major institutional weaknesses, including weak capacity in debt management and lack of transparency in public debt reporting. Page 23 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Progress under the previous DPF series 4.19 The previous DPF series also supported reforms to strengthen public investment efficiency and debt management. Key measures included the establishment of a high-level inter-ministerial Public Investment Committee to scrutinize and prioritize all public investment proposals using rigorous standardized economic, environmental and social appraisal criteria, publication of a new manual to guide the selection of projects to be included in the PIP, and publication of a new Medium-Term Debt Management Strategy geared to ensuring debt sustainability and minimizing debt service costs. As a result, 88 percent of the projects included in the PIP and funded in the 2019 budget were selected/prioritized based on the new manual, higher than the target of 59 percent envisioned in the program. In addition, the debt service-to-revenue ratio decreased to 59 percent from 66 percent in 2016. Prior Actions, Indicative Triggers, and Expected Results 4.20 To enhance the efficiency and transparency of public investment procedures, the Government has adopted a code of professional ethics for the public procurement process (Prior Action 3). An ethics code provides the legal basis to ensure optimal use of public resources and helps safeguard public trust in the legitimacy, fairness, and integrity of the public procurement process. The openness of the system should be strengthened, with the interests of all stakeholders taken into account. The code should also provide for better and more effective tools in the fight against fraud and corruption in public procurement. 4.21 The MEF has also strengthened regulations governing the supervision of large infrastructure projects and implementation of public projects delegated to third parties (Prior Action 3). The decree will bring more professionalism to the assignment of functions to delegated contracting authorities and introduce a mandatory competition for their recruitments. This should put an end to monopoly practices in which one only candidate is chosen via single-source selection of contracts. In addition, strengthening the professionalism of the delegated contracting authorities’ functions should help ensure that the timeframe, budget, and delivery objectives of the public infrastructure projects are met. No negative environment or social impacts are anticipated. 4.22 The Government also plans to update its procurement law and adopt a new PPP law in line with WAEMU directives (Indicative Trigger 3). The updated procurement law will further strengthen the efficiency and transparency of the public investment process and reduce procurement delays. The new PPP law will strengthen transparency and efficiency in the use of PPPs and increase the mobilization of private sector funds and the use of PPPs to finance public investments. It will also harmonize Togo’s practices with WAEMU directives. 4.23 The Economic Governance Project (P158078) will be used to assist in the implementation of these prior actions. In addition, the adoption of the professional ethics codes will be accompanied by dissemination of the associated decrees and their texts of application followed by training workshops. And, the ongoing World Bank-supported MAPSII project will be used as a better diagnostic tool and catalyst to modernize the 2009 procurement law. 4.24 The Government has updated its 2019 MTDS with an analysis of the impact of potential liability management operations. The Government has also established a public debt portal on the Government’s Page 24 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) web-site to publish debt-related information (Prior Action 4). These measures support the improvement in technical capacity and transparency at the DDPF. 4.25 The Government also plans to approve a draft law requiring the DDPF to present an annual report to parliament, with an evaluation of the implementation of the MTDS for that year, the costs and risk profile of the existing debt portfolio, and an estimation of contingent liabilities (Indicative Trigger 4). The evaluation of the MTDS would include a comparison of Togo’s actual borrowing versus a previously- published Annual Borrowing Plan (ABP). These measures would further strengthen the transparency of the design, implementation, and monitoring of Togo’s debt strategy. 4.26 The World Bank Debt Management Facility (DMF) program will support these reforms by providing TA to the DDPF to build technical capacity and improve transparency . The program will support the DDPF in: (i) updating the MTDS; and (ii) designing an appropriate institutional and organizational debt management set-up along the back-middle-front office model, including the preparation of terms of references for new staff. 4.27 The measures supported by this DPF series are expected to improve public investment and debt management outcomes. Improved supervision of public procurement and PPPs, along with a revised procurement law and a new PPP law, both in line with WAEMU directives, should increase the number of officials involved in public procurement who have filled financial disclosure forms from 0 percent in 2018 to at least 90 percent in 2021 and the share of PPP contract award information and data published in open data formats from 0 percent in 2018 to 90 percent in 2021. The improvements in debt management and transparency are expected to translate into actual borrowing adhering to the MTDS, as measured by the deviation from a published ABP lower than 10 percent for each category of debt. Enhanced transparency should also increase accountability at the DDPF to implement the ABP. Page 25 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Pillar 2: Strengthening Energy Sector Financial Viability and Use of Renewable Energy Prior Action 5. To protect the revenues of the energy sector: (i) all SOEs and central and local government entities have paid their outstanding arrears as of December 31, 2018 to the Togo Electric Power Company (CEET); (ii) the water utility, Togolaise des Eaux (TdE), and TOGOCOM have established escrow accounts at a certified bank to help ensure that they remain current on their bills to CEET; and (iii) CEET has paid its outstanding arrears as of December 31, 2018 to the Electric Community of Benin (CEB). Prior Action 6. To strengthen the financial viability of the power sector, the Recipient has: (i) issued an inter-ministerial arrêté that requires CEET clients to pay a fee for public lighting; and (ii) issued an inter- ministerial arrêté authorizing the Regulation Authority to determine the periodic adjustment of the revenue requirement for CEET to reach financial equilibrium. Prior Action 7. To promote increased technical and cost efficiency in the power sector, the Recipient has ensured that CEET and CEB have entered into a Transmission Service Agreement (TSA), establishing the obligations of each company to ensure an efficient and financially sustainable transmission of electricity. Prior Action 8. To promote the use of renewable energy, the Recipient has issued decrees to strengthen the legal framework for renewable energy generation projects. Background 4.28 The energy sector in Togo faces a number of fundamental challenges and is a binding constraint on inclusive growth. Energy supply is costly and unreliable, tariffs high yet insufficient to cover costs, the public sector (including SOEs) have not been fully paying for their consumption, the technical and operation performance of the energy utility has been poor, large arrears have accumulated along the chain of energy production and consumption, and new investments in the sector have not been sufficient to expand low access (especially in rural areas) and support rapidly expanding demand. 4.29 Togo has historically relied on regional power trade from the West Africa Power Pool to serve its electricity consumers. Prior to the commissioning of the Heavy Fuel Oil (HFO) Contour Global plant at the end of 2010 with IFC financing, 95 percent of Togo’s electricity was imported from Nigeria and Ghana. Import costs of CFAF 8 centimes per kilowatt hours (c/kWh) from Nigeria, 10 c/kWh from Ghana and 12 c/kWh from Cote d’Ivoire were lower than the costs from national thermal units. However, until the last two years, power imports into Togo and Benin through the binational import and transmission utility, CEB, were not always reliable, in part due to poor distribution networks, operational constraints in transmission, and poor hydrological conditions and unavailability of gas on the supply side. 4.30 The national distribution utility (Togo Electric Power Company, CEET) has experienced financial distress due to a combination of non-cost reflective tariffs, poor revenue collection, operational inefficiency, and lack of regular compensation payments by the Government. Although electricity tariffs are already high in the country (at 18 c/kWh), Togo does not have a cost reflective tariff as the cost of service (20 c/kWh) is unaffordable for the vast majority of the population. CEET has had a negative operational cash flow since at least 2015, including because of poor collection rates from the public sector (at 73 percent in 2017) which accounts for about 20 percent of total consumption. Also, transmission and Page 26 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) distribution losses are high at about 6 percent and 15 percent, respectively. Further, the Government has not compensated CEET for its losses. 4.31 The poor performance of CEET had resulted in a non-payment chain that affects the entire electricity sector and increasingly spills over into neighboring countries. The arrears accumulated by public sector entities to the CEET, CEET to CEB, and CEB to electricity exporters are summarized in Table 8 below. Given that a similar situation exists with respect to the national distribution utility in Benin, CEB is doubly affected and has not been able to honor payment of power import contracts, accumulating debts of US$148 million to Nigerian, Ghanaian and Ivorian utilities (or 1.1 percent of the combined GDP of Togo and Benin) at end-2016. Concern about the magnitude of these debts has prompted diplomatic actions of various kinds on behalf of the power exporting countries and motivated the World Bank’s work on the securitization of payments within the WAPP. Table 8. Energy Sector Arrears 2016-19 (million US$) End-2016 End-2018 August 2019 General Government to CEET 5.8 2 0 SOEs to CEET 24 24 0 CEET to CEB 40 56 18 (wheeling charges) CEB to International Suppliers 148 108 50 4.32 The Government has begun to address these challenges through (i) clearing cross-arrears and ensuring full payment for all services received by the General Government; (ii) launching management improvement plans for the national power utility; (iii) developing a methodology for ensuring that tariffs reflect costs; and (iv) preparing a masterplan for expanding power generation based on least-cost, integrating national and regional supply options to reduce generation costs. The Government’s ambition is to raise the national electricity access rate to 60 percent by 2022. 4.33 However, while General Government arrears to CEET and CEET arrears to CEB as of end- December 2018 were settled in early 2019, CEET has been unable to stay current on the payment of wheeling charges in 2019 and CEB remains in arrears to international suppliers. With the re-organization of the energy sector in Togo and Benin, CEB is no longer responsible for domestic power generation and imports of electricity, with these functions delegated to CEET and the Benin Electric Power Company (Société béninoise d'Énergie Électrique, SBEE) since January 2019. With its new business model, CEB’s only revenue-generating activities are transmission charges (wheeling charges) to the national utilities when these use CEB’s transmission lines, and some residual selling of energy from existing hydropower plants to large consumers. CEET was unable to fully pay wheeling charges in 2019 and wants to renegotiate these to differentiate between imports and domestic wheeling, and CEB remains in arrears to international suppliers (US$50 million in August 2019). The World Bank has committed to undertake a tariff study for CEB’s viability, and in the meantime the Government is committed to partially settle the new wheeling charge arrears in 2019. 4.34 With an expected demand growth of 8 percent per year (20-25 MW/year), Togo needs to secure additional generation in a way that balances cost‐efficiency with energy security considerations. While the least cost generation plan is still under preparation with financing from TESSIP, Togo is committed to shifting its energy mix from domestic generation, dominated by HFO and diesel (85 percent) in 2017, Page 27 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) towards a mix of gas-fired generation, solar energy and hydropower, to be supplemented by electricity imports for about a third of its consumption. 4.35 Several initiatives are under way to expand and diversify power generation. In 2019, the Government authorized a second thermal independent power producer (IPP), ERANOVE, to develop a 65 MW combined cycle gas turbine (CCGT). The Government also secured the supply of gas from a private supplier in Nigeria via the West Africa Gas Pipeline (WAGP) to power Contour Global and ERANOVE. Generation costs were reduced by about 15 percent with the switch from HFO to gas. Togo also signed a Scaling Solar mandate with the IFC for the installation of 50 MW of solar photovoltaics (PV) power plants and has secured financing from the EU and AFD for the construction of a medium-size hydropower plant (Sarakawa, 24MW) by 2023. Moreover, the IFC has supported the identification of additional small- to medium-size hydro sites (around 100 MW overall) to be procured under PPP arrangements, although the least cost generation plan under preparation will determine if these are cost competitive relative to gas- fired power plants and imports, taking into account energy security concerns. The Regional Off Grid Electrification Project (ROGEP, P160708), approved in 2019, could finance companies interested in solar off-grid solutions under a government program with the private sector which relies on a pay-as-you-go scheme, with the objective of providing Solar Home Systems to 200,000 households in the coming three years. Progress under the Previous DPF series 4.36 Several reforms were implemented to improve financial viability and service delivery in the energy sector. To strengthen the financial position of the electricity production and distribution companies, the previous DPF series supported the clearance of arrears between the central government, CEET, and CEB. In addition, the program supported the establishment of a centralized system of payments through the MEF in the context of the 2018 Budget Act. The latter reform led to an increase in CEET’s revenue collection rate from the general government from 36 percent in 2016 to 100 percent in 2018 (exceeding the target of 95 percent). Prior Actions, Indicative Triggers, and Expected Results 4.37 All SOEs and government entities have paid their outstanding arrears at end-2018 to CEET and have established a mechanism to remain current on their bills. In addition, CEET has paid its outstanding arrears at end-2018 to CEB (Prior Action 5). Paying down arrears with CEET and CEB supports the financial viability of the sector. In addition, the establishment of escrow accounts for some SOEs, such as Togolaise des Eaux and TOGOCOM, to remain current on their payments to CEET should help prevent the accumulation of future arrears. 4.38 CEET will also establish a mechanism to improve billing collection rates, including from SOEs, through the implementation of a revenue protection program for major clients and the installment of pre- payment meters in all SOEs and non-essential central and local government entities. This mechanism will permit CEET to increase its revenue collection, particularly from SOEs. The Government will also assume CEB’s arrears to its external suppliers corresponding to Togolese consumption (Indicative Trigger 5). Lowering CEB’s arrears to external suppliers is critical for energy supply security. Page 28 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) 4.39 The Government has required CEET clients to pay a fee for public lighting, and the Ministry of Energy has enabled the regulator to establish a methodology for tariff setting to promote financial equilibrium (Prior Action 6). The fee for public lighting will support the financial viability of CEET and help local governments stay current with their payments to CEET as formerly public lighting was the largest electricity expense for local governments. CEET has developed a financial equilibrium model, which will be reviewed by the Regulatory Authority of Posts and Electronic Communication Sector (Autorité de Régulation du Secteur de la Communication Electronique et des Postes, ARSE), who will propose periodic adjustments to the tariff. An electricity tariff study and financial model will help clarify electricity provision costs, increase accountability, and facilitate oversight by ARSE. 4.40 The Regulation Authority will establish a compensation mechanism that would explicitly provide for a subsidy if the Government does not agree with any proposed tariff increase, and CEET will develop a cost reduction plan to optimize financial and operational costs (Indicative Trigger 6). These measures will help put Togo on a path towards the convergence of electricity costs and tariffs, thus improving the financial sustainability of the sector. This will be done both on the revenue side through adjustments in the tariff schedule and on the expenditure side through improvements in CEET’s operational efficiency. 4.41 CEET and CEB have entered into a Transmission Service Agreement (TSA) establishing the obligations of each company to ensure technically efficient and financially sustainable transmission of electricity. More important, the TSA legally defines the respective roles of CEB and CEET and formalizes the obligation of CEET to pay a wheeling charge to CEB, which will make CEB financially viable (Prior Action 7). This clarifies the new roles of both organizations and should reduce the cost of electricity provision by promoting increased technical and cost efficiency in the transmission of electricity over CEB’s and CEET’s transmission lines. In addition, regular payments from CEET to CEB will permit CEB to continue to invest in maintaining its transmission network in good working order. 4.42 The Government will ensure that new power generation projects and electricity imports are procured on a competitive basis and in accordance with least cost planning principles (Indicative Trigger 7), which should lower costs and contribute to financial sustainability. This will be informed by the results of the Least Cost Power Development Plan (LCPDP) currently under preparation. The goal is to reduce the cost of electricity provision by identifying the least cost technology generation options of future electricity supply needs that will also avoid the use of emergency power plants. The LCPDP will also take into account environmental and social issues, as well as energy security considerations. It will be based on prefeasibility studies that include, in addition to technical and economic analysis, environmental and social screening of potential sites, and it will select sites which have low or moderate environmental and social impacts. 4.43 To promote the use of renewable energy, Togo has issued decrees to strengthen the legal framework for renewable energy generation projects (Prior Action 8). In August 2018, the National Assembly of Togo approved a forward-looking law to promote the development of electricity from renewable sources of energy (Loi No. 2018-010). Two additional application decrees have been signed that permit the law to be implemented and realize its objectives. The first decree sets the power levels that determine under which judicial regime an energy project falls (free, declaration, or authorization). The second establishes the conditions and procedures for the conclusion and termination of energy Page 29 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) concession agreements, required of all energy-generation projects that connect to Togo’s national energy grid. 4.44 In addition, the Government will launch a competitive process for solar projects from IPPs with should eliminate the current policy of negotiated deals (Indicative Trigger 8). This will promote the development of efficient and low-cost sources of solar power. It will also further strengthen the institutional environment for renewable energy generation projects in Togo. Potential environmental and social adverse impacts are expected to be moderate to negligible, and the country has an acceptable national legal and regulatory framework to properly assess and manage these impacts. 4.45 The TESSIP is supporting these reforms through investments and technical assistance. The project is assisting with financing for the supply and installation of smart and pre-paid meters as part of the Revenue Protection Program for CEET, as well as the preparation of a tariff study, the Least Cost Power Development Plan, and CEET’s financial equilibrium model. 4.46 The measures supported under this series are expected to lower the costs of energy provision, increase the financial sustainability of the sector, and promote a shift towards renewable energy. The clearing of arrears and the implementation of the Revenue Protection Program at CEET should improve CEET’s collection rate from the overall public sector from 73 percent in 2017 to 95 percent in 2021 (i.e. from 87, 73, and 42 percent in 2017 for the central government, SOEs, and local governments, respectively, to 100, 95, and 90 percent in 2021). The fee for public lighting, the new tariff schedule, and the cost reduction plan at CEET are expected to increase CEET’s cost recovery ratio (revenue collected/ costs of service) from 80 percent in 2017 to at least 95 percent in 2021. Technical and cost-based improvements in the transmission and generation of electricity are expected to reduce the average cost of the power production mix from 74 CFAF/kWh in 2017 to below 70 CFAF/kWh in 2021. Finally, installed solar capacity is expected to increase from 0 MW in 2018 to 30 MW in 2021. 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 4.47 The key areas of support under the DPF are consistent with the key pillars of the Togo CPF FY17- FY20 (Report number 112965-TG) discussed by the Board of Executive Directors on May 16, 2017. They are also consistent with the adjustments to the CPF proposed in the 2019 Performance and Learning Review (Report number 139734-TG). The DPF supports the CPF cross-cutting theme of governance, the foundation of the World Bank Group (WBG) program in Togo building on the SCD, through measures aimed at strengthening key government institutions and bringing in private actors to deliver results under each of the CPF Focus Areas. The DPF supports directly Focus Area I on Private Sector Performance and Job Creation, by contributing to improving the business environment through strengthening fiscal policy and debt management and strengthening the energy sector; and CPF Focus Area II on Inclusive Public Service Delivery, by increasing available fiscal space through improved domestic revenue mobilization, promoting efficient public investment, and enhancing the financial viability of the energy sector needed to improve reliability and expand access. 4.48 The DPF series complements other World Bank interventions in Togo through its investment financing projects. Most of the prior actions and triggers are supported by other World Bank investment projects in the chosen sectors. The Togo Economic Governance Project (EGP; P158078) is helping to realize Page 30 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) some of the reforms linked to improving revenue mobilization and enhancing the efficiency of public investment. The EGP will continue to build capacity at the OTR and enhance the implementation of public investments, including through a more efficient public procurement process. The DMF program will support debt management reforms by providing TA to the DDPF to build technical capacity and improve transparency. The energy reforms are also supported by the Energy Support and Investment Project (P160377). The energy project is divided into two components: a reform component and an investment component. Both components of the planned energy intervention are supporting the energy reforms in the DPF series. 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 4.49 The policy and institutional reforms supported under the DPF program reflect formal consultations organized by the Government during the preparation of the NDP. The Government carried out country-wide consultations with various stakeholders, including central and local authorities, members of parliament, unions, private sector operators, civil society organizations (religious groups, women’s organizations, the media, development organizations, and youth groups). 4.50 The DPF was also discussed with key development partners, including the African Development Bank (AfDB), IMF, EU, the French Agency for Development (Agence Française de Développement, AfD), the German Cooperation (GIZ and KFW), and the US Millennium Challenge Corporation (MCC). The AfDB’s reform and investment program focuses on governance and fiscal reforms, notably support for OTR and tax administration reforms as well as debt management reform. The EU is supporting reforms to promote decentralization and improve service delivery and is co-financing (with IDA) the EGP, supporting the implementation of public financial management, domestic resource mobilization, and oversight institutions such as the general inspector of finances and court of accounts. The EU is also providing fast disbursing support. 4.51 The reforms to strengthen energy sector financial viability have been designed to complement the support of other donors. The DPF program has been developed in close coordination with the IMF in the context of the ECF and TA in treasury management, tax policy, and debt management. The EU, AfD, German Cooperation, and other donors are financing a program which includes institutional strengthening and investments to rehabilitate energy infrastructure. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 5.1 The measures supported by the proposed operation are expected to have positive impacts on poverty and social indicators, although some of the poor may experience a negative impact in the short term. First, poor households should benefit from expected improvements in public spending as access to social services and basic infrastructure improves for a broader range of the population. Second, increased fiscal space through tax reform and improved tax collection should enable the Government to increase its contribution to the NDP, which aims at promoting inclusive growth and achieving the Sustainable Development Goals. Third, improvements in the business environment (through energy and tax Page 31 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) simplification reforms) should encourage the creation of new enterprises (as well as foreign investment), which in turn would generate additional jobs and help absorb a young and fast-growing population into the labor market. Fourth, increasing the revenue generation of property taxes enhances the progressivity of the tax system and should provide for fairer and more buoyant taxation going forward. Finally, the removal of the temporary 10-percent VAT preferential rate will increase tax revenues, which could be used for pro-poor spending. Nevertheless, although empirical evidence suggests that the rich benefit much more from consumption tax exemptions than the poor and thus the removal of the VAT exemptions would be borne mostly by the richest deciles of the population, it is likely that some of the poorest will witness a decline in their purchasing power in the short-term. Hence, a Poverty and Social Impact Assessment (PSIA), based on the new 2018-2019 round of Living Standards Measurements Survey, will be prepared during the second operation of the DPF series to help identify additional mitigation measures. 5.2 The increase of VAT revenues based on a single 18 percent rate for all products and services (Prior Action 1) will reduce the revenue loss due to tax expenditures. In 2017, the VAT rate was temporarily lowered from 18 to 10 percent on a small list of commodities (including some staple food items and some agriculture and ICT equipment) to safeguard the purchasing power of the poorest households following a drought, which led to weak harvests and an increase in food prices. Hence, the removal of the preferential VAT rate represents a return to the one single VAT rate, aligning Togo with WAEMU directives. 5.3 However, the removal of the preferential VAT rate could impact the poorest in the short term as it could translate into higher prices and lower household consumption. A preliminary poverty analysis, nevertheless, indicates that prices for staple products declined in almost all incidences during the first six months of 2019, despite the normalization of the VAT rate in January 2019. Further, empirical evidence suggests that the rich benefit much more from consumption tax exemptions than the poor and that the poor can be reached more cost-effectively through expanded safety nets and targeted expenditure policies. Indeed, with the support of the Safety Nets and Basic Services Project (P157038), Togo is increasing the number of households benefiting from its cash transfer program from 9,000 in April 2019 to 52,000 at end-2019 and 120,000 by end-2021. Nevertheless, a PSIA will be prepared to analysis in greater detail the distributional impact of the normalization of the VAT rate. 5.4 Land and property tax revenues are expected to increase significantly over the coming years (Prior Action 2) and to impart higher progressivity on the tax system. Property taxes are inherently progressive, since ownership of various forms of property increases with increasing income and wealth. As such, the enhanced use of property taxation is a cornerstone of a fairer and more robust tax revenue generation system. This is in addition to other benefits such as reducing tax base volatility and engendering fewer distortions, with zero or limited impacts on private labor and investment decisions. Furthermore, the merger of the data from the land census and the land registry is expected to ease land titling by reducing multiple registration. The poor could then more easily secure their property rights and use that land as collateral for credit. However, the improvements in the property tax base could also negatively affect the poor if they cannot afford to pay taxes on the land they own. Hence, during the second operation, a PSIA will examine the extent to which the expansion of the property tax base might negatively impact the poor. Page 32 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) 5.5 Improving the performance of the electricity sector (Prior Actions 5 to 8) is likely to benefit poor households over the medium- to long-term. The energy sector measures intend to strengthen CEET’s ability to improve its management, sustain its financing, and promote cost-efficiency in the power sector. These are prerequisites for the expansion of CEET’s operations and ensuring greater access for poor households to electricity. In addition, a strong CEET that is offering reliable and high-quality electricity will benefit small- and medium-sized enterprises, as the PSIA on electricity reforms completed in 2016 showed. The Energy PSIA demonstrated that electricity availability is an indispensable input for small entrepreneurs to run their everyday business. However, if electricity tariffs were to be increased for poor households (which is not foreseen in the program as tariffs in Togo are among the highest in West Africa), this could have an adverse impact on the poor. 5.6 Reforms in the electricity sector will also help reduce poverty through better quality of service. Increasing efficiency in the energy sector, ensuring that the Government pays for its services, and getting the tariff structure right will all help maintain financial viability of the sector without necessarily having to increase tariffs, especially for lower-income households. In turn, improved financial viability will help attract additional needed investment in the sector, which will improve the access to and quality of services, including for the poor. Better access to electricity liberates non-paid family time demands, particularly for women and girls, and further increases the quality of life and opportunities for investment in human capital. Increased and more reliable access to electricity at affordable prices should also boost the productivity of large and small enterprises, helping them expand their business and creating additional demand for labor. It should also have a significant impact on firm creation, firm growth and resultant employment opportunities, particularly in the higher productivity formal sectors. 5.7 A PSIA will be prepared during implementation of the DPF series to assess the social, economic and distributional impacts of the supported reforms.7 The PSIA will include a more thorough analysis of the distributional effects of the normalization of the VAT rate. It will also analyze whether the beneficiaries of cash transfers and other targeted expenditures overlap with those most negatively affected by the VAT uniformization. The PSIA will also examine the extent to which the expansion of the property tax base could have a negative impact on the poor. If so, the Government could enact mitigating measures, including exemptions to the property tax based on income. Such practices are common in many countries, including in Sub-Saharan Africa, where different classes of land are exempted. The policy reforms supported by the energy pillar will also be examined, including the likelihood or impact of any potential energy tariff increase or any negative effects on the poor from measures taken by SOEs to pay their electricity bills on time, for example in the water and telecoms sectors. 5.2. ENVIRONMENTAL ASPECTS 5.8 The pillars supported by the proposed operation are not likely to have significant negative effects on the country’s environment, forests, or other natural resources. The first pillar aims primarily at strengthening fiscal management by increasing tax revenue mobilization and improving public investment and debt management, while the second seeks to strengthen energy sector financial viability and the use of renewable energy. Based on a preliminary assessment, no significant adverse environmental effects are anticipated. Moreover, with Pillar 2, the Least Cost Power Development Plan 7A PSIA could not be conducted beforehand as the necessary data from the revised household surveys will not become available until December 2019. Page 33 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) (LCPCP) will be based on prefeasibility studies that include environmental and social screening of potential sites to select sites that have low or moderate environmental and social impacts. Regarding Indicative Trigger 6, if electricity tariffs were increased for poor households as part of Indicative Trigger 6 (which is not foreseen as tariffs in Togo are among the highest in West Africa), this could have a negligible to moderate adverse impact on the environment, forests and natural resources from a potential increase in the use of firewood by the poor, leading to deforestation and forest degradation. 5.9 Some measures, by contrast, support improvements to the country’s environment, forests, or other natural resources. With Pillar 1, the good and regular supervision of large infrastructure projects and the implementation of public projects delegated to third parties could help to mitigate potential adverse effects on the environment and promote a sustainable management of natural resources. With Pillar 2, the measures designed to promote technical efficiency in electricity transmission and the use of renewable sources of energy should support efforts to mitigate climate change. 5.10 Any potential adverse impacts of this DPF series will be addressed and monitored through the national legislation and procedures in place in Togo. In accordance with the environmental legislation of Togo, any activity or investment that might be associated with a potential adverse impact on the environment or communities would be subject to the development of an Environmental and Social Impact Assessment (ESIA) and/or a Resettlement Action Plan (if necessary). For that purpose, the Government has established strict guidelines to ensure that all planned reforms including PPPs comply with environmental regulations. All bidders submitting technical or financial proposals, are also obliged to prepare an environmental impact assessment for review and approval. The environmental impact assessments and any other environmental and social instruments will be prepared in accordance with national law and regulations and good international industry practice. 5.11 The Ministry of Environment and Forestry Resources (MERF) is responsible for setting policy guidelines on environmental issues and ensuring compliance with national environmental standards . Within the ministry, the National Agency of Environment Management (ANGE, Agence Nationale de Gestion de l’Environnement) oversees compliance with national environmental standards for all projects. The unit’s technical capacities are acceptable, but the number of staff is too low to cover the entire country. As such, the Government is actively recruiting additional staff to allow the agency to fulfil its mission. The World Bank is assisting with a wide range of initiatives, including capacity building and support to increase the decentralization of ANGE to other parts of the country outside of the capital, Lomé. The World Bank is also assisting environmental and social experts to create a professional association. 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 5.12 The institutional framework for public financial management (PFM) was improved with the adoption of Organic Law No. 2014-013 of June 27, 2014, to bring budgeting in line with the WAEMU Directives. This law redirects the public financial system toward a more results-based approach in budgetary management to improve the effectiveness of expenditure and public policies; increase transparency in public expenditure management; and adopt a performance approach based on programs, goals, and results indicators. The results expected from this comprehensive reform are: (a) realistic and sustainable budget estimates by programs; (b) comprehensive budget packages determined within the Page 34 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) framework of multiyear budgetary and economic planning; (c) a more rational allocation of budgetary resources based on performance indicators so that the goals of accelerated growth and employment creation are actually targeted; (d) increased responsibility for the principal commitment authorizers (Ministers and Presidents of institutions) so as to improve de-concentration and impose accountability; (e) effective supervision by the Parliament of the execution of budget laws fostered by budget performance projects and reports by programs and ministries; and (f) ex-post controls to assess the effectiveness of management and performance. The Government budget is made publicly available on the Government website www.togoreforme.com and in printed form, in accord with the provision in BP 8.60. 5.13 However, the 2016 Public Expenditure and Financial Accountability (PEFA) assessment revealed continued weaknesses in Togo’s PFM system: (a) poor budget credibility due to major variations between forecasts and budget execution, changes made in the initial composition of expenditures, particularly through supplementary budgets, and underestimation of tax expenditure forecasts; (b) a high level of off- budget operations (over 10 percent of total expenditures); and (c) poor predictability and inadequate supervision of budget execution. The Treasury single account system is still not in place in Togo, annual cash flow plans are developed but not systematically updated and not operational, and the current budgetary regulation mechanism is not effective as it is not based on a regularly updated cash flow plan. Payroll supervision is limited by the nonexistence of a direct link between the civil service and payroll files, and it is incomplete with respect to the documentation of changes made. As discussed above, the EGP assists the Government in improving core areas of economic governance, including PFM. 5.14 Moreover, the procurement system in Togo is inefficient. The 2016 PEFA and Public Expenditure Management and Financial Accountability Review (PEMFAR) found unusually long delays in the procurement processes, with a large share of public contracts awarded on a single-source basis, and there was no disclosure of public contract awards information. In addition, the IMF Public Investment Management Assessment (PIMA) (2016) revealed that the efficiency and impact of public investments are limited by a lack of transparency and delays in the procurement process, through late awarding of public contracts leading to significant delays in the implementation of public investments. Furthermore, the 2018 World Bank Procuring Infrastructure PPP in Togo study showed that PPP governance is weak, holding back the development of an efficient PPP environment. PPP contract awards information is also not disclosed. 5.15 The Safeguards Assessment of the BCEAO was updated in April 2018 in line with the four-year cycle for regional central banks. It found that the BCEAO continues to maintain a strong internal control environment and its governance arrangements, as well as its audit and financial reporting mechanisms, are broadly appropriate. 5.16 Togo’s fiduciary risks are substantial, and IDA reserves the right to request an audit of the dedicated foreign currency account. However, this DPF series promotes greater fiscal transparency that should establish stronger controls and lower fiduciary risks over time. 5.17 The proposed operation would consist of a single-tranche development policy grant of SDR 63.5 million (equivalent to US$87.5 million) and a single-tranche development policy credit of EUR 56.1 million (equivalent to US$62.5 million). The Recipient of the proposed IDA grant is the Republic of Togo, represented by the MEF. The proposed grant would follow IDA’s disbursement procedures for Page 35 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) development policy operations and would not be linked to specific purchases. The disbursement of grant and credit proceeds would be subject to satisfactory implementation of the development policy program and maintenance of a satisfactory macroeconomic framework. 5.18 Proceeds of the IDA Grant. Once the operation becomes effective, the Government of Togo will submit a withdrawal application to IDA requesting that the proceeds of the grant be deposited in the BCEAO into a Dedicated Euro Account that forms part of the country’s official foreign-exchange reserves. Within five working days of the credit’s being deposited into that account, the Government will ensure that an equivalent amount is credited to its budget management system in a manner acceptable to the World Bank. It will report to the World Bank on all amounts deposited in the foreign currency account and credited to the budget management system. Disbursement will not be linked to specific purchases. When funds are disbursed from the dedicated account to finance budgeted government expenditures, the official exchange rate for that day will be used. If the proceeds of the grant are used for ineligible purposes as defined in the Financing Agreement, IDA will require that the Government refund an amount equal to the amount of the ineligible payment to IDA promptly upon notice from IDA. Amounts refunded to the World Bank upon such a request will be canceled. The World Bank reserves the right to seek an audit of the dedicated account by independent auditors acceptable to the World Bank. 5.19 The closing date for the series is December 31, 2021. 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 5.20 The MEF is responsible for overall monitoring and evaluation of the proposed operation and for coordinating actions among other concerned ministries and agencies. This also includes the regulatory authorities for the energy sector and SOEs. Regular discussions will take place with the Government and the donor community on progress made, results achieved and possible next steps. The monitoring and evaluation process by the Government and the World Bank will be based on a systematic review of implementation and impact of prior actions and will compare results achieved with agreed results indicators in the Policy and Results Matrix. 5.21 Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. Page 36 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) 6. SUMMARY OF RISKS AND MITIGATION 6.1 The overall risk rating for the proposed operation is substantial. This assessment is consistent with the CPF risk assessment and reflects the persistence of several interrelated risks that may jeopardize the achievement of the PDOs. These include political and governance risks, macroeconomic risks, sector strategies risks, risks related to the technical design of the program, institutional capacity for implementation, and fiduciary risks, 6.2 Political and governance risks are rated as substantial. Although the incidence of mass opposition demonstrations has receded since May 2017, the political and governance risk is heightened by the uncertain socio-political situation as the country prepares for presidential elections in 2020. During the election period, it could be difficult for the Government to maintain fiscal discipline and to engage in bold structural reforms. Focusing on results that benefit the population at large and maintaining a close dialogue with the Government and other stakeholders as well as coordination with the IMF are the best ways to mitigate these risks. 6.3 Macroeconomic risks are substantial. Continued political uncertainty and weaker-than-expected global growth could weigh on private investment and undermine the program objective of enhancing revenues. At the regional level, security risks, including terrorism threats could hinder local and foreign private investment, hamper tourism activities, and obstruct government’s efforts to make Togo a regional hub for transport and financial activities, which could translate into lower government revenues. Togo is highly dependent on agriculture and fisheries, and natural disasters related to climate change could affect growth in the future. Finally, higher international oil prices may erode the objective of improving the financial position of the energy utility to the extent that subsidies are not increased or tariffs not adjusted. 6.4 Sector strategies and policies risks are substantial . Togo’s performance in formulating and implementing sector strategies is mixed, and the SCD concluded that weak governance has led to policies and implementation that are often not sufficiently pro-poor. Government spending in the past years has not always been allocated efficiently and implementation bottlenecks often lead to underspent budgets. While certain sectors have relatively good strategies, including agriculture, education, and health, they are not adequately funded, and implementation and monitoring is mixed. Weak institutional capacity compounds these risks. The Government is committed to ensuring a better alignment of the budget with sector programs. IDA support for sector strategies (by providing investment operations that help implement these strategies) and analyses provided under the FY17 PEMFAR and proposed Public Expenditure Review will also help improve allocation of resources for implementation of sector strategies. 6.5 The technical design of the program is also subject to substantial risks . Key reforms in the revenue area are being overseen by the revenue authority (OTR) and it is critical for the MEF to monitor developments closely. The complex reforms in the energy sector also warrant close monitoring by the MEF, including to properly account for potential fiscal impacts. These risks could be reduced through the formation of an inter-ministerial DPF coordination committee. 6.6 Institutional capacity risks are substantial. Capacity constraints present a serious challenge to the implementation of the reform program. Despite recent improvement in the CPIA rating, the performance of the public administration and its ability to efficiently implement World Bank supported Page 37 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) programs remains weak. To mitigate these risks, the World Bank continues to support strengthening of key institutions that are engaged in implementing WBG programs and has helped establish new public institutions that have filled institutional gaps in service delivery. Further technical support is being provided in the context of the Economic Governance Project. 6.7 Fiduciary risks are substantial. Important weaknesses persist in expenditure and cash management. The fiduciary risk is mitigated through a dedicated account and other bank operations by using and strengthening the country systems for staffing, budgeting, accounting, financial control, and disbursement. IMF TA in this area also helps mitigate these risks. Risk Categories Rating 1. Political and Governance ⚫ Substantial 2. Macroeconomic ⚫ Substantial 3. Sector Strategies and Policies ⚫ Substantial 4. Technical Design of Project or Program ⚫ Substantial 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Substantial 7. Environment and Social ⚫ Moderate 8. Stakeholders ⚫ Moderate 9. Other ⚫ Moderate Overall ⚫ Substantial . Page 38 Togo First Fiscal Management and Energy Reform DPF (P169867) ANNEX 1: POLICY AND RESULTS MATRIX Prior Actions DPF-1 Indicative Triggers DPF-2 Results Indicators Pillar 1: Enhancing Fiscal and Debt Management A. Tax Revenue Mobilization Prior Action 1. To increase VAT revenues and improve Indicative Trigger 1. To increase VAT revenues and Total tax revenues (percent of tax administration, the Recipient has: (i) adopted one improve fiscal transparency, the Recipient has: (i) GDP): statutory VAT rate of 18 percent and eliminated the removed VAT exemptions to ensure alignment with Baseline (2018): 16.5 previous 10-percent-preferential VAT rate on certain WAEMU directives; (ii) published an annual report on Target (2021): 18.0 products through OTR circular; (ii) suspended the use of tax expenditures to be annexed to the 2021 Budget VAT refund certificates through OTR’s decision; and (iii) Law; and (iii) set up an institutional mechanism to created a dedicated single account for the payment of manage, monitor, and evaluate the efficiency of tax VAT credits in line with the new tax code of January expenditures across all tax sources on a regular basis. 2019. Prior Action 2. To increase property tax revenues, the Indicative Trigger 2. To increase property tax revenues, Recipient has: (i) merged the data from the land census the Recipient has: (i) established a fiscal cadaster of with the data from the land title registry to create a land and property; and (ii) replaced the rental value by single digital database on property through OTR’s the market value in the valuation of land for tax report on the consolidation of land databases; and (ii) purposes, when the market value would be more updated the tax payer registry at the OTR based on the efficient. results of the land census. B. Public Investment and Debt Management Prior Action 3. To improve the efficiency and Indicative Trigger 3. To improve the efficiency and Officials involved in public transparency of public investment procedures, the transparency of public investment procedures, the procurement who have filed Recipient has: (i) adopted a decree on a code of Recipient has: (i) updated the public procurement law financial disclosure forms (percent): professional ethics for the public procurement process; and issued the relevant application texts to harmonize Baseline (2018): 0 and (ii) adopted a decree on strengthening the the law with WAEMU directives; and (ii) adopted a draft Target (2021): 90 supervision of large infrastructure projects and the PPP law and related application texts. implementation of public projects delegated to third PPP contract award information parties. and data published in open data formats (percent): Page 39 Togo First Fiscal Management and Energy Reform DPF (P169867) Prior Actions DPF-1 Indicative Triggers DPF-2 Results Indicators Baseline (2018): 0 Target (2021): 90 Prior Action 4. To improve debt management and Indicative Trigger 4. To improve debt management and Deviation of actual borrowing from transparency, the Recipient has: (i) issued the 2019- transparency, the Council of Ministers has approved a Annual Borrowing Plan (percent): 2023 Medium-Term Debt Management Strategy draft law requiring the Directorate of Public Debt and Baseline (2018): N/A (MTDS) with an analysis of the impact of potential Financing (DDPF) to present an annual report to Target (2021): 10 liability management operations; and (ii) established a parliament with an evaluation of the implementation of public debt portal on the Recipient’s MEF web-site that the MTDS for that year (i.e. an analysis of actual consolidates in one web-site all information related to borrowing versus a published annual borrowing plan), central government and publicly guaranteed debt. the costs and risk profile of the existing debt portfolio, and an estimation of contingent liabilities. Pillar 2: Strengthening Energy Sector Financial Viability and Use of Renewable Energy Prior Action 5. To protect the revenues of the energy Indicative Trigger 5. To protect the revenues of the CEET overall public sector (central sector: (i) all SOEs and central and local government energy sector, CEET has: (i) implemented the Revenue and local governments, SOEs) entities have paid their outstanding arrears as of Protection Program for large consumers; (ii) adopted a collection rate (percent): December 31, 2018 to the Togo Electric Power policy that requires the installation of pre-payment Baseline (2017): 73.4 Company (CEET); (ii) the water utility, Togolaise des meters in all non-essential (“interruptible”) central and Target (2021): 95 Eaux (TdE), and TOGOCOM have established escrow local government entities; and (iii) approved a accounts at a certified bank to help ensure that they mechanism proposed by CEB, by which the Government remain current on their bills to CEET; and (iii) CEET has will assume CEB’s arrears to its external suppliers paid its outstanding arrears as of December 31, 2018 to corresponding to Togolese consumption. the Electric Community of Benin (CEB). Prior Action 6. To strengthen the financial viability of Indicative Trigger 6. To strengthen the financial viability CEET cost recovery ratio, revenue the power sector, the Recipient has: (i) issued an inter- of the power sector, the Recipient has (i) issued an collected / costs of service ministerial arrêté that requires CEET clients to pay a fee inter-ministerial arrêté establishing a new electricity (percent): for public lighting; and (ii) issued an inter-ministerial tariff schedule, determined by the Regulation Authority Baseline (2017): 80 arrêté authorizing the Regulation Authority to and based on a completed comprehensive electricity Target (2021): 95 determine the periodic adjustment of the revenue tariff study involving all stakeholders, that includes a requirement for CEET to reach financial equilibrium. methodology to periodically calculate and adjust CEET tariff levels to provide electricity at cost recovery levels; (ii) covered any shortfall between electricity tariffs and Page 40 Togo First Fiscal Management and Energy Reform DPF (P169867) Prior Actions DPF-1 Indicative Triggers DPF-2 Results Indicators the revenue required to reach financial equilibrium; and (iii) required, by inter-ministerial arrêté, that CEET has adopted a plan to optimize financial and operational costs. Prior Action 7. To promote increased technical and cost Indicative Trigger 7. To promote increased technical Cost of power production mix: efficiency in the power sector, the Recipient has and cost efficiency in the power sector, based on the Baseline (2017): 74 CFAF/kWh ensured that CEET and CEB have entered into a results of the Least Cost Power Development Plan Target (2021): 70 CFAF/kWh Transmission Service Agreement (TSA), establishing the (LCPDP), the Recipient has issued an inter-ministerial obligations of each company to ensure an efficient and order adopting a policy that power generation projects financially sustainable transmission of electricity. and electricity imports will be procured according to the LCPDP on a competitive basis. Prior Action 8. To promote the use of renewable Indicative Trigger 8. To promote the use of renewable Solar photovoltaics capacity energy, the Recipient has issued decrees to strengthen energy, the Recipient has launched a competitive installed: the legal framework for renewable energy generation procurement of solar projects from IPPs. Baseline (2018): 0 MW projects. Target (2021): 30 MW Page 41 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) ANNEX 2: LETTER OF DEVELOPMENT POLICY Page 42 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Page 43 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Page 44 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Page 45 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Page 46 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Page 47 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Page 48 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Page 49 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) MINISTERE DE L’ECONOMIE REPUBLIQUE TOGOLAISE ET DES FINANCES Travail-Liberté-Patrie --------------- ---------- SECRETARIAT PERMANENT POUR LE SUIVI DES POLITIQUES DE REFORMES ET DES PROGRAMMES FINANCIERS -------- SERVICE DU SUIVI DES RELATIONS BM&BAD ------------------- N° 3114 /MEF/SP-PRPF/BM-BAD Lomé, November 13, 2019 The Minister of Economy and Finance To Mr. David R. Malpass President of the World Bank 1818 H Street NW Washington DC 20433 USA Subject: Letter of Development Policy Dear Mr. President, This Letter of Development Policy highlights Togo's progress in implementing its National Development Strategy as well as the outlook for 2019-2022. It describes the development objectives and policies defined by the authorities with a view of the implementation of the National Development Plan (NDP) aimed at structurally transforming the economy, for strong, sustainable, resilient, inclusive growth, creating decent jobs and reducing poverty. To achieve these objectives, the government continues to seek the technical and financial support of all the different technical and financial partners including the World Bank through the first operation of the program of support for fiscal management and energy sector reforms. I. Socio economic context 1. Economic activity recovered in the second half of 2018 after a short period of slowdown due to socio- political tensions that the country experienced in the second half of 2017. Thus, the growth rate recorded an increase from 4.4% in 2017 to 4.9 percent in 2018. This upturn is due to the strong recovery of the extractive industry favored by the strength of the activities in the phosphate and cotton sectors, as well as by the strong performance of the tertiary sector, especially airport services. After a stagnation in the first half of the year, credit to the private sector increased by 5% on average in the second half of 2018. The contribution to growth is 0.7 percentage point for the primary sector, 0.1 percentage points for the secondary sector, 2.1 percentage points for the commercial tertiary sector and 2.0 percentage points for non- commercial branches and taxes. The growth rate of the harmonized index of consumer prices came in at 0.9% compared to 2017. Inflation remained moderate; after having fallen below zero in 2017 (-0.7%), it increased to 2% in 2018, i.e. at a level below the WEAMU community ceiling of 3.0%. For 2019 and 2020, projected growth is 5.1% and 5.4%, respectively, driven by the dynamism of all sectors and in particular the primary sector through the continued implementation of the National Plan for Agricultural Investment and Food and Nutrition Security (PNIASAN) and the improvement of the business environment and public Page 50 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) infrastructure. The private sector should play a growing role as the driving force for growth through the implementation of projects included in the National Development Plan (NDP). 2. The performance indicators show a remarkable evolution in the primary sector with value added (VA) up by 3.4% compared to 2017, mainly driven by growth in the "food-producing" branches (+ 3.0%), “Export agriculture” (+ 9.7%) and “Livestock and hunting” (+ 4.3%). The contribution to growth of the primary sector is 0.7% against a contribution of 0.3% in 2017. The value added of the secondary sector increased by 0.5% in 2018. With the exception of the “electricity, gas and water” branches, for which the value added fell by 8.4%, all other branches of the secondary sector recorded increases. This sector contributed +1% to economic growth. This moderate growth is explained by the underperformance recorded in the production of electricity, gas and water. In the commercial tertiary sector, value added increased by 7.4% as a result of growth in all branches, notably “Trade” (+ 3.0%), “Repairs” (+7.2), “Transport and Telecommunications” (+ 9.6%), “Financial Services” (+ 7.9%), and “Business Services” (+ 6.3%). Its contribution to GDP growth is + 2.1% in 2018. 3. Regarding the public debt, the government is continuing efforts to gradually reduce the debt ratio. The ratio decreased from 79.9 percent of GDP in 2016 to 76.1 percent in 2018, thanks to the Extended Credit Facility and the implementation of a more prudent budget management, which allowed Togo to borrow on preferential terms from international donors. The current account balance improved significantly in 2017 and 2018 compared to previous years. This improvement is mainly due to a vigorous fiscal consolidation and the reduction in imports, notably imports of capital goods. 4. The overall fiscal deficit excluding grants (cash basis) has improved for the last two years. It narrowed from 7.7% of GDP in 2016 to 5.5% of GDP in 2017 and 5.2% of GDP in 2018. The deficit is projected at 1.6% in 2019. 5. Tax revenues amounted to 568.5 billion CFA francs in 2016, 563.2 billion CFA francs in 2017 and 575.2 billion CFA francs in 2018, an average increase of 0.6% between 2016 and 2018. The decrease observed between 2016 and 2017 is mainly due to the drop in custom revenues from the decline in imports following the rigorous implementation of WAEMU Regulation 14 on axle load and the effects of the socio-political crisis triggered in the second half of 2017. In contrast, the increase recorded in 2018 is due to the recovery of imports and the effect of tax reforms, notably the online tax reporting system for large corporations, the tax payment program for small and medium-sized businesses through mobile telephones. The budget revenue forecast for the year’s budget law is estimated at 881.1 billion CFA francs, an increase of 13.8% compared to the performance of 2018. 6. Budget expenditure is estimated at 883.7 billion CFA francs, 708.2 billion CFA francs and 787.0 billion CFA francs for 2016, 2017 and 2018 respectively, an average increase of 0.8% over the period. Budget expenditures are projected at 895.0 billion CFA francs by the end of December 2019. As for social spending, although they have not reached the minimum threshold of 0.3% of GDP, this rate has improved significantly compared to 2017. A system to improve the monitoring of the execution of social expenditures has been put in place. II- The outlook for 2019-2022 7. The National Development Plan (PND 2018-2022), officially launched on March 04, 2019, is now the single reference for development issues in Togo. It presents a solid foundation for sustainable development, which should lead to the modernization of the country and its better positioning in the sub-regional and international environment. The continuation of the implementation of the digital economy sector policy, a key sector in the modernization of the national economy over the period 2018-2022, which serves as a reference framework for both the public authorities and stakeholders, will make Togo a true logistical and Page 51 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) financial hub while continuing to support the effective and efficient implementation of the two other axes of the NDP. The implementation of the NDP would accelerate growth starting from 2019. 8. The main challenges facing the government in pursuing the implementation of this plan to ensure the structural transformation of the economy are mainly: (i) the development of a logistics and transport chain around the Autonomous Port of Lomé integrating it into a renovated transport network with a view to creating a competitive logistics hub and development corridor; (ii) the development of value chains in the manufacturing, craft and extractive industries through the creation of integrated industrial parks oriented towards export and labor-intensive industries; (iii) the reduction of the deficit in the supply of energy services; (iv) improving governance in all its forms that results in an administration whose performance must be reinforced to accompany the transformation of the economy; (v) social and financial inclusion, which should ensure a better redistribution of the benefits of growth; (vi) resource mobilization to improve the government's debt capacity and attract private investments. Government Reforms During 2019-2022: Governance and Transparency 9. The Government remains committed to further improving public finance management in the context of strengthening economic and financial governance. The Government also intends to solicit a new program with the IMF after the current one, which ends in December 2019. To this end, it will continue to implement its Public Financial Management Reforms (PA-RGFP) action plan covering the period 2017-2021; program-based budgeting reforms, including the publication of budget data, the deepening of revenue collection measures, the selection and prioritization of public investment projects based on a rigorous cost- benefit analysis. The acceleration of the implementation of the recommendations of the various evaluations carried out in 2016 (PEFA, PEMFAR, PIMA and DeMPA); the development of a new medium-term debt management strategy focused on guaranteeing debt sustainability and minimizing the cost of servicing debt, as well as producing and publishing the 2017 and 2018 statistical bulletins on public debt will be pursued. 10. Continuing the fight against corruption and fraud is necessary for the success of the NDP. To this end, the government operationalized the National Anti-Corruption Agency (HAPLUCIA) in 2017; two new laws to strengthen the asset declaration regime are being adopted, that is: (i) the law on the declaration of property for all civil servants professionally and politically exposed to the risk of corruption and (ii) the framework law for the full implementation of the United Nations Convention on Corruption. The texts governing the various control bodies are now being adopted by the Council of Ministers. 11. The Government also undertakes to (i) consolidate the public procurement reforms, notably the revision of the public procurement texts, the elaboration and adoption of a single guide or manual of public procurement procedures and the delegation of services for all actors in the public procurement chain, the development of practical guides on standard files, incoterms and conditions of guarantees; (ii) strengthen the control of public financial management; (iii) improve revenue collection and mobilize external resources; (iv) develop the results-based budgeting tools, strengthen the technical capacities of the actors and continue the information technology work for the implementation of program-based budgeting as a first step before the rewriting of the new system and its extension in all ministries, institutions and regions to improve coordination. 12. Reducing public debt remains a priority for the Government. To this end, it will continue to work for the reduction of the public sector debt ratio (central government and state-owned companies). This rate, which was respectively 79.9% of GDP in 2016, 76.07% of GDP in 2017 and 76.36% in 2018, will be reduced to 69.2% of GDP in 2019 and 38% of GDP by 2025 to meet the WAEMU convergence criterion, Page 52 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) which sets the debt ceiling at 70% of GDP. It will also continue to implement the prudent borrowing policy and strengthen debt management to limit its vulnerability. Our budget framework for 2020 provides for continued budget consolidation to reach a global fiscal deficit of 2% of GDP (excluding potential recapitalization costs) in line with WAEMU convergence criteria, which fix a maximum deficit of 3% of GDP. The Government will continue to give a strong preference to external concessional borrowing (denominated in foreign currency) and to contract domestic debt (denominated in CFAF) at a competitive rate in line with the debt strategy. After 2020, we will do our best to keep the budget deficit around 2% of GDP and in any case below the WAEMU norm of 3%. This sustained effort will bring the magnitude of the budget consolidation to about 7.5 percentage points of GDP over the whole period of the ECF program (2016-2020), and should allow maintaining the downward trend of public debt, making it fall below 70% of the GDP starting in 2020 and below the over-indebtedness threshold as suggested by the debt sustainability analysis over 2027-2028. Reforms in the business environment 13. The Government will continue to improve the business environment to encourage private investment which is necessary to support the implementation of the NDP and the promotion of the private sector. Togo made considerable progress in improving the business environment, which placed it as the first (1st) of the best reforming countries in Africa, according to the latest Doing Business indicators assessment. Government action will focus on access to credit and payment of taxes; the strengthening of support to SMEs / SMIs as part of their access to public contracts and to reduce payment deadlines. The creation of specialized structures to assist SMEs / SMIs in carrying out feasibility studies to improve the bankability of projects, strengthening the dialogue with the private sector and civil society by clearly communicating on the medium-term strategy of the government, the implementation of the new investment code adopted by the National Assembly on June 11, 2019, which is inspired by the practices of the neighboring countries and international standards to attract investors, while orienting their actions towards the implementation of the NDP. Reforms in the agricultural sector 14. The Government is convinced of the need to promote “agribusiness”-oriented agriculture to attract private investment, increase the return, professionalize stakeholders and create thousands of jobs in the sector and with services connected to the sector. Thus, the government created an agency for the promotion of the development of agropoles, whose role is to establish public-private partnerships by backing the National Plan for Agricultural Investment and Food and Nutrition Security (PNIASAN) covering the period 2017-2026. Similarly, the creation of training institutes for agro-development (IFAD) is part of the dynamics of professionalization and competitiveness. To achieve these objectives in connection with the NDP, the government will set up agropoles unifying several activities through the agri-food processing project of Togo, support for the risk-sharing agricultural financing incentive mechanism (MIFA) to mobilize credit from commercial banks and decentralized financial systems for the benefit of farmers, the development of cooperatives enlisting more farmers as well as the development of planned agricultural development zones (ZAAP). Reforms in the energy sector 15. The Government's policy is aimed at strengthening electricity generation and distribution capacities and increasing the access of people, especially the poorest, to domestic energy services. Emphasis will be placed Page 53 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) on (i) diversification of sources of energy production and improvement of access to low-cost energy through the implementation of the Sarakawa hydroelectric project and the continuation of the rehabilitation project of the Nangbeto hydroelectric power station; (ii) the promotion of low-cost renewable energy through the Rural Solar Electrification Initiative using Individual Kits (CIZO), the continuation of rural electrification and the intensification of domestic gas promotion, (iii) strengthening the governance of the energy sector through the projects of reforms and investments in the energy sector in Togo (PRISET) and assistance to the energy sector in Togo (PASET) as well as (iv) improving the country's coverage of hydrocarbon supply through the standardization of hydrocarbon distribution. Reforms in the health sector 16. Government action will focus on the continued implementation of the National Health Development Plan (NHDP) through: (i) strengthening governance in the health sector through the contractualization approach, financing based on the results and quality of the care and services provided; (ii) strengthening of health infrastructure and equipment; (iii) improving the availability of medicines including safe labile blood products and other quality health products; (iv) strengthening health security and response to epidemics and other public health emergencies; and (v) strengthening the fight against diseases and all forms of malnutrition. Support Program for Fiscal Management and Energy Sector Reforms General Objectives 17. The Program aims to (i) increase tax revenue through VAT and property tax revenues with the goal of improving tax administration; (ii) improve the efficiency and transparency of public investment procedures and debt management; (iii) improve financial viability and governance in the energy sector. The program is structured in two (02) main pillars namely: ✓ improving tax management and increasing the efficiency of public expenditure and debt management: this pillar aims at a better coordination by the Ministry of Economy and Finance of the implementation of tax reforms through improving tax transparency and revenue growth, improving the efficiency and transparency of public investment and debt management. ✓ improving financial viability and environmental sustainability in the energy sector: this second pillar aims to (i) protect energy sector revenues by strengthening the financial viability of the sector and promoting the efficiency of electricity costs; and (ii) promote the use of renewable energies throughout the national territory. Reforms supported by the program and expected results 18. Mobilization of tax revenues: the main reforms concern: (i) the adoption of a single VAT rate of 18% by eliminating the 10% preferential rate previously applied to certain products; (ii) the suspension of the use of the VAT refund certificates. The government intends to eliminate its use as part of the coming new budget law; (iii) the establishment of a list of companies eligible for an accelerated and simplified VAT refund procedure; (iv) the opening of an account dedicated to refunding VAT credits, in accordance with the new tax code, which came into force in January 2019; (v) the publication of the results of the land census; (vi) integration of existing land register data and real estate data from the census into a single digital database of land ownership that can be used by the tax administration; (vii) updating the taxpayer register with the OTR on the basis of the results of the land census; (viii) conducting a feasibility study for interconnection between the OTR and various institutions that interact with potential taxpayers, including SIGFIP, CFE and INSEED. 19. Improving the management of public investments and public debt: the main reforms are aimed at: (i) the adoption of a decree on the code of ethics and deontology of public procurement; (ii) the adoption Page 54 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) of a decree regulating the supervision of major infrastructure projects and delegated project management; (iii) the revision of the medium-term debt strategy for 2019 and its annual plan for issuing domestic securities with an analysis of the impact of potential debt reprofiling operations; (iv) assessment of the staffing needs at the Department of Public Debt and Financing (DDPF); (v) publishing on the government's website a page that contains all the information relating to the debt. 20. Improving financial viability and governance in the energy sector: Main reforms in the energy sector relate to: (i) the payment of arrears of all state-owned enterprises and central and local governments as of December 31, 2018 at CEET and the establishment of a mechanism to stay current in the payment of electricity bills. Regarding the public enterprises for which arrears have been noticed, protocols have been signed to avoid further accumulation of arrears. This mechanism could be extended to other companies if they find themselves in the same situation. For public hospitals, a clearance plan was approved, and the contractualization mechanism make it possible to no longer accumulate arrears; (ii) the settlement of CEET’s debts to the CEB and the setting up of the mechanism to remain current in the payment of CEB bills; (iii) the payment of a fee for public lighting by CEET customers; (iv) conducting a study on electricity tariffs; (v) the development of a model to simulate what would be necessary to achieve financial equilibrium by taking into account electricity demand, tariff revenues, all wholesale energy costs of independent producers, imports, transportation as well as distribution and retail costs; (vi) the authorization of the Regulatory Authority to verify the results of the CEET simulation model and to propose periodic adjustments to ensure the financial equilibrium of CEET; (vii) the signing of a Transport Service Agreement (TSA) with the CEB establishing the obligations for each of the companies for efficient and financially viable electricity transmission; and (viii) the approval of two decrees to strengthen the legal framework for renewable energy projects. 21. The main expected results of the Program: (i) increase in tax revenue for better budget management; (ii) improving the efficiency of public procurement; (iii) improvement of debt management and transparency; (iv) improving the financial viability and environmental sustainability of the energy sector. Program monitoring and evaluation 23. The Ministry of Economy and Finance is responsible for the overall implementation of the program supported by tax management reforms and reforms in the energy sector. The daily monitoring and evaluation of the program are the responsibility of the Permanent Secretariat for Monitoring Reform Policies and Financial Programs (SP-PRPF). This structure coordinates the implementation of the Government’s reform policies and programs and is assisted by a program monitoring and reform committee. The Government will provide quarterly reports to the World Bank on progress in program delivery, measured against agreed timelines and performance indicators. Request for financing 24. The growth prospects of the Togolese economy over the 2019-2020 period remain favorable with real GDP growth rates projected at an average of 5.1%. For the year 2019, the macroeconomic framework projects a level of total revenue (excluding grants) of 749.9 billion CFA francs against expenditures of 895.0 billion FCFA. The financing requirement would therefore be CFAF 145.1 billion. The funding identified, including the support requested from the World Bank, would allow it to balance the 2019 budget. Please accept, Sir, the assurance of my highest consideration. Sani YAYA Page 55 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) ANNEX 3: IMF RELATIONS ANNEX IMF Executive Board Completes the Fifth Review under the ECF Arrangement and Approves US$34.6 Million Disbursement to Togo October 25, 2019 • The Extended Credit Facility supported program is implemented as planned in most areas. • Togo’s economic growth is projected to accelerate to 5.3 percent in 2019 and to hover around 5½ percent over the medium term. • IMF welcomes the authorities’ determination to pursue fiscal consolidation and debt reduction. On October 25, 2019, the Executive Board of the International Monetary Fund (IMF) completed the fifth review of Togo’s economic performance under a program supported by an Extended Credit Facility (ECF) arrangement. [1] The completion of the review enables the disbursement of SDR 25.17 million (about US$34.6 million), bringing total disbursements under the arrangement to SDR 151.02 million (about US$207.8 million). Togo’s three-year arrangement for SDR 176.16 million (about US$242.4 million, 120 percent of Togo’s quota), was approved on May 5, 2017 (see Press Release No.17/151). The program aims to reduce the overall fiscal deficit substantially to ensure long-term debt and external sustainability; refocus policies on inclusive growth through targeted social spending and sustainably-financed infrastructure spending; and resolve the financial weaknesses in the two public banks. Economic growth is projected to accelerate to 5.3 percent in 2019 and to hover around 5½ percent over the medium term. Togo has complied with the WAEMU deficit criteria since 2017; the overall fiscal deficit is projected at 2.9 percent of GDP in 2019 and 1.9 percent of GDP in 2020. Debt has declined and is expected to fall below 70 percent of GDP from 2020. Discussions on the debt reprofiling operation and the related guarantees are underway and awaiting decisions. Following the Executive Board discussion, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement: “Togo’s performance under the ECF-supported program has been broadly satisfactory. The economic recovery seems to be taking hold, structural reforms are progressing, and the fiscal consolidation continues. Nonetheless, there are downside risks related to the global economic environment, regional security conditions, and the potential impact of the electoral cycle on domestic economic activity. “The authorities remain determined to pursue fiscal consolidation and debt reduction. Given high debt levels, revenue mobilization efforts and spending prioritization should continue, while Page 56 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) addressing the persistent underperformance on social spending to enhance economic inclusiveness and to reduce poverty. In case the authorities consider conducting the debt reprofiling operation, it should lead to a reduction of the NPV of public debt, and safeguard measures should be put in place to address any related risks. “It is important to address the weaknesses in the two public banks transparently. A successful privatization of these two banks would safeguard financial stability and minimize costs to the State budget. Broader financial sector developments should also be monitored, and corrective actions should be taken as needed, including in terms of the high non-performing loans. “Structural reforms are progressing on tax policy, revenue administration, and public expenditure management. Significant progress has also been made in the improvement of the business environment, which is expected to boost domestic and foreign private investment. It is essential to strengthen the AML/CFT framework, fully implement the recently adopted legal framework on governance and anti-corruption and ensure that the related institutions become fully operational.” [1] The ECF is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems. Page 57 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE Significant Positive or Negative Prior Actions Poverty, Social or Environment Effects Distributional Effects Pillar 1: Enhancing Fiscal and Debt Management Prior Action 1. To increase VAT revenues and improve tax administration, the Recipient has: (i) adopted one statutory VAT rate of 18 percent and eliminated NO. But in the short run a the previous 10-percent-preferential VAT rate on certain products through OTR unique VAT rate could NO circular; (ii) suspended the use of VAT refund certificates through OTR’s decision; reduce the purchasing power and (iii) created a dedicated single account for the payment of VAT credits in line of the poorest. with the new tax code of January 2019. Prior Action 2. To increase property tax revenues, the Recipient has: (i) merged the data from the land census with the data from the land title registry to create YES. Prior actions 2 will help a single digital database on property through OTR’s report on the consolidation NO broaden the tax base and of land databases; and (ii) updated the tax payer registry at the OTR based on increase tax revenues. the results of the land census. YES. Better supervision of Prior Action 3. To improve the efficiency and transparency of public investment large infrastructure projects procedures, the Recipient has: (i) adopted a decree on code of professional will help to mitigate potential ethics for the public procurement process; and (ii) adopted a decree on adverse effects on the NO strengthening the supervision of large infrastructure projects and the environment and promote a implementation of public projects delegated to third parties. sustainable management of natural resources. Prior Action 4. To improve debt management and transparency, the Recipient has: (i) issued the 2019-2023 MTDS with an analysis of the impact of potential liability management operations; and (ii) established a public debt portal on the NO NO Recipient’s MEF web-site that consolidates in one web-site all information related to central government and publicly guaranteed debt. Pillar 2: Strengthening Energy Sector Financial Viability and Use of Renewable Energy Prior Action 5. To protect the revenues of the energy sector: (i) all SOEs and YES. Improved financial central and local government entities have paid their outstanding arrears as of viability of the sector will YES. Improved financial December 31, 2018 to the Togo Electric Power Company (CEET); (ii) the water reduce the use of firewood or viability of the sector will utility, Togolaise des Eaux (TdE), and TOGOCOM have established escrow for people to have their own reduce poverty through accounts at a certified bank to help ensure that they remain current on their bills generators the produce more better quality of services. to CEET; and (iii) CEET has paid its outstanding arrears as of December 31, 2018 atmospheric pollution. to the Electric Community of Benin (CEB). YES. Improved financial Prior Action 6. To strengthen the financial viability of the power sector, the viability of the sector will YES. Improved financial Recipient has: (i) issued an inter-ministerial arrêté that requires CEET clients to reduce the use of firewood or viability of the sector will pay a fee for public lighting; and (ii) issued an inter-ministerial arrêté authorizing for people to have their own reduce poverty through the Regulation Authority to determine the periodic adjustment of the revenue generators the produce more better quality of services. requirement for CEET to reach financial equilibrium. atmospheric pollution. Prior Action 7. To promote increased technical and cost efficiency in the power YES. Improved technical YES. Improved financial sector, the Recipient has ensured that CEET and CEB have entered into a efficiency in electricity viability of the sector will Transmission Service Agreement (TSA), establishing the obligations of each transmission will support reduce poverty through company to ensure an efficient and financially sustainable transmission of efforts to mitigate climate better quality of services. electricity. change. YES. Greater availability of YES. Greater use of renewable Prior Action 8. To promote the use of renewable energy, the Recipient has solar power will quicken the sources of energy will support issued decrees to strengthen the legal framework for renewable energy increase in access to efforts to mitigate climate generation projects. electricity to the poor in rural change. areas. Page 58 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) ANNEX 5: DPF PRIOR ACTIONS AND ANALYTICAL UNDERPINNINGS Prior Actions Analytical Underpinnings Pillar 1: Enhancing Fiscal and Debt Management A. Tax Revenue Mobilization Prior Action 1. To increase VAT revenues and improve Togo Tax Policy study (2019): tax administration, the Recipient has: (i) adopted one • Multiple VAT rate and a poor functioning VAT refund mechanism statutory VAT rate of 18 percent and eliminated the explain part of the downward trend in VAT revenues and the overall previous 10-percent-preferential VAT rate on certain weak performance of tax revenue collection in Togo. products through OTR circular; (ii) suspended the use of • The performance of Togo in collecting property tax revenues is well VAT refund certificates through OTR’s decision; and (iii) below the Sub-Saharan Africa average and property tax revenues created a dedicated single account for the payment of contributes only to 0.2 percent of total tax revenues in 2018. VAT credits in line with the new tax code of January • The taxation of the informal sector is a long-term approach essential for 2019. the increase of the tax base and the consolidation of revenues in Togo. Prior Action 2. To increase property tax revenues, the IMF staff report (2019): Recipient has: (i) merged the data from the land census • Revenue leakage from a high proportion of non-paying VAT returns is with the data from the land title registry to create a significant (56 percent of all returns for large enterprises and 62 percent single digital database on property through OTR’s for medium-sized enterprises in 2018). report on the consolidation of land databases; and (ii) • The taxpayer register is inaccurate and unreliable, with many importers updated the tax payer registry at the OTR based on the unknown to the revenue authorities. results of the land census. IMF working paper (2017): Informal economic activity severely limits tax revenues for developing countries most in need of a stable tax base. OECD Discussion paper (2015): Building a reliable and comprehensive tax registry has an immediate and important impact on increasing tax revenues. B. Public Investment and Debt Management Prior Action 3. To improve the efficiency and • World Bank: PEFA and PEMFAR (2016): The procurement system in Togo transparency of public investment procedures, the is inefficient, due to unusual long delays of the procurement processes, Recipient has: (i) adopted a decree on code of and the large share of public contracts awarded on a sole source basis. professional ethics for the public procurement process; Though pre-financed projects mechanism was abolished; 36 percent of and (ii) adopted a decree on strengthening the contracts were direct contracts in 2017. There is no disclosure of public supervision of large infrastructure projects and the contracts awards information implementation of public projects delegated to third • IMF PIMA (2016): The efficiency and impact of public investments are parties. limited by the lack of transparency and delays in the procurement process. Late awarding of public contracts leads to significant delays in implementation of public investments. • World Bank: Procuring Infrastructure PPP in Togo (2018): There is a weak mobilization of private sector funds and a very low use of PPP to finance infrastructure projects. Also, there is a poor governance of the PPP institutions to enable an efficient PPP environment, with a lack of separation of functions and an absence of a PPP unit and a PPP steering committee. There is no disclosure of PPP contract awards information. Prior Action 4. To improve debt management and • World Bank. TA Report on Debt Management Performance Assessment transparency, the Recipient has: (i) issued the 2019- (2016): Important elements of a sound MTDS are missing, particularly the 2023 MTDS with an analysis of the impact of potential guidelines for the preferred direction of specific indicators for interest liability management operations; and (ii) established a rates, refinancing and foreign currency risks. There are no policy public debt portal on the Recipient’s MEF web-site that guidelines or limits on debt levels. There is no consideration of the consolidates in one web-site all information related to issuance of Treasury bills which might increase the refinancing and central government and publicly guaranteed debt. interest rate risks. • World Bank CPIA (2018): The average quality of the debt management policy and institution in Togo is lower than SSA IDA peers. • IMF & World Bank. G20 Note on strengthening public debt transparency (2018): Public debt transparency plays a critical role in ensuring effective risk assessment to support sustainable borrowing and lending practices. Page 59 The World Bank Togo First Fiscal Management and Energy Reform DPF (P169867) Prior Actions Analytical Underpinnings Pillar 2: Strengthening Energy Sector Financial Viability and Use of Renewable Energy Prior Action 5. To protect the revenues of the energy World Bank Advisory Services and Analytics (ASA) and TA sector: (i) all SOEs and central and local government • World Bank. Etude d’options de réforme de la CEB (December 2019) entities have paid their outstanding arrears as of • World Bank, Discussion Paper on the Securitization of Payments in the December 31, 2018 to the Togo Electric Power West Africa Power Pool (April 2018). Company (CEET); (ii) the water utility, Togolaise des • World Bank sponsored workshops to inform negotiations of the Eaux (TdE), and TOGOCOM have established escrow Transmission Service Agreement – financed by CLSG project (P163033) accounts at a certified bank to help ensure that they and PPIAF. remain current on their bills to CEET; and (iii) CEET has • IFC. The National Electrification Strategy (NES), 2018 paid its outstanding arrears as of December 31, 2018 to • World Bank Initial Assessment of Least Cost Power Development Plan, the Electric Community of Benin (CEB). 2018. Internal Bank study/simulation shared with the Government. Prior Action 6. To strengthen the financial viability of • World Bank Tariff Study (ongoing). Inception mission planned for October the power sector, the Recipient has: (i) issued an inter- 2019. ministerial arrêté that requires CEET clients to pay a fee for public lighting; and (ii) issued an inter-ministerial CEET Annual Report (2016 and 2017) ARSE Annual report (2017): arrêté authorizing the Regulation Authority to • Total Losses (non-technical and technical) in 2015 were 16.8 percent, and determine the periodic adjustment of the revenue in 2016 16.3 percent and in 2017 were 14.25 percent. Collection rate in requirement for CEET to reach financial equilibrium. 2016 was 85.5 percent and in 2017 was 90.8 percent and Days receivables Prior Action 7. To promote increased technical and cost was 185 days in 2016 and 176 days in 2017. efficiency in the power sector, the Recipient has • Arrears from public sector to CEET have improved in recent years (CFAF39 ensured that CEET and CEB have entered into a billion in 2015 to CFAF21 billion in 2017) but arrears from SOEs has been Transmission Service Agreement (TSA), establishing the growing over the years (CFAF10 billion in 2015 to CFAF14 billion in 2017). obligations of each company to ensure an efficient and • Quality of service of CEET: Number of blackouts was reduced from 2,538 financially sustainable transmission of electricity. in 2014 to 634 in 2018 but the duration of blackouts has increased from Prior Action 8. To promote the use of renewable 6,177 hours in 2014 to 8,487 hours in 2018 energy, the Recipient has issued decrees to strengthen the legal framework for renewable energy generation CEET Annual Report (2017) ARSE Annual report (2017): projects. • The financial profitability ratio and the net margin ratio have yielded negative figures in 2017, from 0.05 to -0.008 and from 0.021 to -0.0028 respectively. CEET Annual Report (2016 and 2017): • Cost of power generation mix for CEET was 69.5 CFAF/kWh in 2016 and 74.7 CFAF/kWh in 2017. • The GoT doesn’t have a least cost strategy to procure new power plants and electricity imports, Least Cost Power Development Plan (LCPDP). Page 60