Madagascar - Village Livestock and Rural Development Project

FILE COPY DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1478a-MAG REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE MALAGASY REPUBLIC FOR A VILLAGE LIVESTOCK AND RURAL DEVELOPMENT PROJECT July 3, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRT.CY BQUIVALENTS Unit a Malagasy Franc (FMG) US$ 1 - FXG 215 FMG 1 - US$ o.0o465- FMG 1 million - US$ 4,65 Fiscal Year - January 1 to December 31 tl As at time of appraisal in October 1973  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE MALAGASY REPUBLIC FOR A VILLAGE LIVESTOCK AND RURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a prorosed development credit to the Malagasy Republic for the equivalent of US$9.6 million on standard IDA terms to help finance a Village Livestock and Rural Development Project. The Government would relend to the OMBY State Farm: a) $260,000 for 13 years including three years of grace with interest at 7-1/4 percent per annum to develop a beef fattening program and b) $300,000 for 20 years including one year of grace with interest at 5 per- cc.nt per annum to finance a pilot pig production schere. PART I - THE ECONOMY 2. An economic report entitled "Recent Economic Position and Prospects of the Malagasy Republic" (Report No. AE-lla) was distributed to the Executive Directors on January 27, 1971 (R71-17). A basic economic mission visited Madagascar in November 1972. Its report was discussed with the Government in February 1974 and will shortly be distributed to the Executive Directors. Country data are attached as Annex I. 3. The economy of Madagascar has developed at a rather slow pace since independence of the country in 1960. There was virtual stagnation up to the mid-1960s and income per capita actually declined during this period. Between 1967 and 1971, GDP increased at an average annual rate of 3.6 percent in real terms. Since then, the uncertainties about future economic strategy and policies resulting from the change in Government have adversely affected production and incomes. Real GDP declined by about 3 percent in 1972 and did not recover much in 1973. 4. The sluggishness of agriculture accounts in part for Madagascar's limited growth performance. Agricultural output has risen at about the same rate as population whereas production of foodstuffs lagged behind growth in domestic demand. Agriculture supports directly about 80 percent of the popul- ation and contributes about one-third to GDP. Most of the country is well suited for diversified agriculture. The hot and humid eastern coast produces coffee, spices and bananas. In the north, there are timber and vanilla, while the west is suited for cotton production and cattle raising. Rice is the staple food; it is grown on more than half of the area under cultivation and accounts for about half of the country's crop production.  -2- 5. While the country is sparsely populated - 13 inhabitants per square kilometer - there is great pressure on cultivable land in specific regions. In these areas, people have standards of living close to subsistence level; nutrition is deficient and child mortality is high. Another difficulty has been the lack of an adequate inland transportation network. Despite the heavy investments which took place in the last decade, oniy one- third of the highway network is all weather roads and only 3,000 kilometers are paved in a country where production centers may be as far as ,200 kilo- meters from the capital. Finally, it seems that the Government has been slow in taking appropriate steps to ensure the farmers (through price incentives and marketing facilities) that additional efforts in increasing output would be rewarded. With respect to rice in particular,. a policy aimed at maintaining a low retail price for the urban consumer adversely affected domestic production. Madagascar, which was a net exporter of this commodity in the 1960s is now facing shortages. Imports rose from an average of 4,000 tons in 1966-68 to 124,000 tons in 1973 and the deficit for 1974 is estimated at-about 50,000 tonss. 6. Manufacturing has made a small contribution to overall economic growth although it has expanded faster than GDP. It still is a small sector occupying about 42,000 people or less than 2 percent of total active population; it contributed about 12 percent to GDP in 1972. Industrial production is almost entirely devoted to consumer goods for domestic use. As it ei.:anded, the imports of non-food consumer goods declined as a percentage of total merchandise imports from 42 percent in 1960 to 28 percent in 1972. However, the scope for further import substitution is limited by the smallness of the monetized domestic market. In addition, this industrial growth has required high protection against competitive imports and resulted in a sharp increase in imports of raw materials and intermediate products utilized for local processing. 7. During 1966-72, total capital formation averaged 15.5 percent of GDP, a ratio probably too low for a country which needs to build its infra- structure, promote its industry and develop its agriculture. During this period, domestic savings averaged 9.7 percent of GDP, and financed over 60 percent of total capital formation. In 1972, the investment ratio declined and the country relied more heavily on its own savings. 8. Government policies were not sufficiently geared to economic and social development. To a certain extent, they favored manufacturing and trade through protective policy; they favored urban consumers through price controls on domestically produced commodities; they favored high income groups through liberal imports of goods that did not compete with local production. At tne same time, reliance on foreign technical assistance was substantial autd re- course to external borrowing was limited. This relative conservatism can be explained in part by the inertia of a tradition-bound society, the regional fragmentation and the ethnic diversity. It can also probably be explained by an institutional framework inherited from the colonial period, ivhich was not geared to rapid development.  -3- 9. Other impediments to faster economic growth probably were insufficient investment in development projects, and inappropriate development policies and programs. Madagascar's first five-year development plan (1964-68) sest specific productior objectives, but the investment p-rogram was expressed in general terms only. In 1967, it became clear that progress of both investment and production was in ufficient. By that time, public capital expenditure in the transport- ation sector had amounted to almost half of the target program, but agriculture was lagging behind with only 34 percent. The Government decided to take remedial action and in 1968 introduced an interim program "Le Programme des Grandes Operations" which consisted of a number of investment projects, mainly in agri- culture to be implenented over the subsequent two years. Since then, Madagascar has not had a formal development program. A draft interim plan for 1972-1974 was prepared but was never adopted. 10. A set of new economic policies are being prepared and will be inter- grated into a new plan, the outline of which has been submitted in late 1973 to the National Development Council for discussion. The Government is expected to adopt the plan in late 1974. The Government increased the producer price for paddy by close to 90 percent. The retail price of meat and the producer price of groundnuts have also been substantially increased. Village communi- ties are being associated with the management of development projects, the marketing and processing of agricultural commodities and the distribution of agricultural inputs, including credit. The Government has also taken steps to increase the role of nationals in the management and ownership of private enterprises. In the framework of new cooperation agreements with France, Madagascar left th_ Franc Zone in July 1973. This withdrawal has been accompanied by the introduction of exchange control regulations and the establishmernt of an autonomous central bank. Imports of non-essential com- modities have been curbed by licensing and an increase in import taxes. 11. The long-term prospects of the balance of payments are favorable. The country's export trade is already diversified. Coffee, cloves and vanilla face inelastic demands on international markets; their future depends to a great extent on developments in these markets. They account, however, fcr only half of Madagascar's total merchandise exports. Investments and policies favoring production of meat, high quality rice, fish and sugar should permit Madagascar to improve its export position. In addition, the association with the EEC should provide in the long run markets for an industry more oriented towards exports. There is also some potential for tourism. 12. The short-term prospects, however, are uncertain. Net foreign ex- change reserves still account for about four months of merchandise imports, but Madagascar is likely to face during the next few years a balance of pay- ment constraint due primarily to the high cost of rice and oil imports. While total imports in 1972 amouinted to about $230 million (against exports of about $200 mils.ion) the cost of rice imports is expected to increase from $4.7 mil- lion in 1972 to about $38.0 million in 1975, while net imports of oil products would rise bv about $20 million. The scope for reducing domestic consumption of oil products without hampering seriously economic activity seems very limited. Heavy taxes are levied on passenger cars and gasoline, and these taxes were increased further in 1973. The deficit on current account is tentatively projected to grow from $59 million in 1972 to $80 million in 1976.  - 4 - 13. In the 1970-72 period, external assistance averaged $73 million annually, mostlv in the form of technical assistance grants. Annual dis- bursements on medium and long term official aid amounted to about $12 million. As a result of this concessionary assistance, and further to the cancellation, in 1972, of about 45 percent of Madagascar's debt vis-a-vis France, the current level of Madagascar's indebtedness is relatively low. The external public debt, disbursed only, outstanding at the end of 1973, was estimited at about $117 million, of which the Bank Group's snare was 33 percent. St the same time, total external public debt, including undisbursed, amounted to $200 million, of which the Bank Group's share was 45 percent. The service on public debt amounted to $11 million in 1973 or about 4.1 percent of exports earnings, of which the Bank Group's share was $0.8 million. As indicated in paragraph 11 above, Madagascar is facing difficult adjustment problems which require particular attention. In the next few years, the need for foreign ex- change will be greater than the imported component of externally-financed projects. It would therefore be appropriate that external assistance finance a substantial share of local costs. At this time, it is difficult to forecast how Madagascar's projected resource gap will be financed. If one assumes that about one fifth would be financed on soft (IDA-type) terms, three-fifths on IBRD-type terms and the baiance on commercial terms, the debt service ratio would remain below 10 percent by 1980, but would rise steeply thereafter to reach close to 20 percent by 1985. This points to the need for most external assistance to continue to be provided on concessionary terms, although Madagancar shouldremain creditworthy for moderate amounts of Bank lending. Even with some increase in our program, the Bank Group's share in Madagascar's disbursed foreign debt is expected to decline gradually over the next 10 years to reach about 25 percent by 1985. Over the same period, the Bank Group's share in Madagascar's debt service would remain below 15 percent. PART II - BANK GROUP OPERATIONS 14. Madagascar has received seven IDA credits totalling $67.2 million and four Bank loans totalling $26.1 million. About 67 percent of the total lending has been for transport, 27 percent for agriculture and the balance for education. There have been no IFC investments. Annex II contains a summary statement of Bank Loans and IDA credits as of May 31, 1974 and notes on the execution of on-going projects. Except for the Livestock project (Loan ,85-MAG) and to some extent for the Tamatave Port project (Credit 200- MAG), both of which are covered in greater detail in Annex II, the execution of Bank Group financed projects has been satisfactory. The Morondava irrig- ation project (Credit 322-MAG), however, may face serious problems in the future due to heavy increases in implementation costs. 15. The emphasis 'ln our lending for transport and agriculture conforms to Madiagascar's development requirements and objectives. Our program in transport is geared to: (i) the development of the main road network; (ii) the construction of penetration roads into promising agricultural areas;  - 5 - (iii) the improvement of port facilities; and (iv) the strengthening of the railroad which provides the most economic means of transportation in certain areas and for certain commodities. The Tamatave Port Project, currently in execution, will soon provide an improved outlet for exports. Roads financed by the Bank and IDA in the central, northern and part of the western regions have helped to increase all-weather land connections within the island. A secondary network, however, is largely lacking and secondary roads in exist- ence are in poor physical condition; this hinders the development of poten- tially rich agricultural areas. Under the Railway project, assistance is given to prepare a program of secondary road improvement. 16. In agriculture, Madagascar's development objective is to regain self sufficiency in rice by expanding production, and to diversify and increase production for export. The Bank is assisting the Government in the implement- ation of this policy by two of the ongoing projects whose principal production will be rice, while the proposed project will increase beef exports. Several additional projects for general agricultural development are at various stages cf preparation and should result in Bank Group financing in the next two fiscal years. A forestry project has recently been appraised. The Government is currently preparing, with Bank assistance, a scheme to rehabilitate various irrigation works that would enable Madagascar to expand rice production. Consideration is being given to devise mechanisms whereby financial assistance could be provided to local communities to finance small development projects. In education, an important reform is underway, on the basis of which a project, suitable for Bank Group financing, may materialize in FY 1976. Finally, a hydro-electric power project and a development finance company project are also under preparation. PART III - THE AGRICULTURAL AND LIVESTOCK SECTOR IN MADAGASCAR 17. Agriculture is the most important sector in the economy of Madagascar. It directly supported about 80 percent of the population, contributes about one-third of GDP, and is the source of about 85 percent of foreign exchange earnings. On farm consumption absorbs about 60 percent of total agricultural production. Basic food crops are rice, maize and manioc. The principal agricultural exports are coffee, cloves, vanilla, pepper and beef. Livestock production accounted for about 10 percent of total GDP in 1972, and contri- buted about 11 percent of total exports. 18. There are five major agricultural production regions in the country: the "high plateau" in the central part of the island, accounting for most of the irrigated rice grown; the east coast, where the main products are coffee, rice and bananas; the northern zone, which has a tropical climate, growing mainly cash crops such as sugarcane, cocoa and spices; the middle west, where soil and climate conditions are ideal for livestock development; and the west coast, where the population is scarce and where food crops (rice, cassava) and livestock are the main traditional activities. The high fertility of some of  - 6 - the alluvial flood plains in this latter region has led to the development of cotton aHd tobacco cultivation as well as to the production of high quality rice for export. 19. In spite of the population pressure on the high plateau and east coast, agricultural development in these regions is difficult because of the relatively limited potential of the former and unfavorable topographic condi- tions in the latter. Increasing emphasis is therefore being given by the Gov- errment to the development of the less populated but highly productive middle west and west coast regions. The proposed village livestock and rural devel- opment project would support the Government's regional development efforts by promoting livestock expansion and rural development in these areas. 20. The country's livestock population is estimated at about 10 million cattle, about 1.7 million sheep and about 0.7 million pigs. Growth of the national herd has averaged about 1 percent annually over the past decade. About 900,000 head of cattle are slaughtered annually, a total offtake of about 9 percent. Only about 350,000 are marketed or slaughtered through commercial channels, resultin, in a commercial offtake rate of about 3.5 percent. Virtually all beef production comes from the traditional sector since commercial beef production is limited to the OMBY 1/ State Ranches and a few private producers. Exports of live cattle, meat and meat products have increased significantly in recent years: fresh and frozen meat exports rose from 1,060 tons in 1955 to 3,340 tons in 1966 and 10,250 tons in 1972. Livestock exports in 1972 reached about US$23 million. The most important markets are France, Mauritius, and La Reunion. 21. The potential for expanding exports is considerable, since Madagascar, because it is free of food-and-mouth and other diseases, has access to European and other markets. Export growth, however, is hampered by the slow increase in overall beef production and by the rapid population growth, which induced the Government, about a year ago, to adopt temporary measures to restrict exports and control domestic meat prices. The Govern- ment, however, is conscious of the need to increase meat exports and to pro- vide adequate incentives to farmers to encourage livestock production. Actually, meat prices (consumer price) have recently been raised by more than 40 percent of their 1973 level. It is the Government's intention to phase out price controls and lift export quotas over a period of four years, or even earlier, if developments in the livestock sector, especially the im- provement of the national herd, occur as anticipated. The Government has agreed to consult with the Association, at least once a year, on its pricing, export quotas and other policies relating to the production and marketing of beef cattle with a view to encouraging production and export of beef products and to ensuring the financial viability of live- stock producers (Section 4.11 of the draft Development Credit Agreement). 1/ The State ranching organizetion set up to manage the ranches established under the Beef Cattle Devel_opment ?rolect (Loan 585-MAG).  - 7 - 22. Much of Madagascar is covered by vast natural pastures. Under the traditional management system (where pasture is burned every y-ar and grazing is uncontrolled), the carrying capacity of these natural pastures is about 10 ha per animal unit. With improved grazing management and controlled burn- ing, this can be increased to about 4 ha per animal unit. By planting a sub- tropical legume "stylosanthes," which remains green and provides good feed during the dry season, due to its deep rooting ability, the carrying capacity can be improved to about 1.5 ha per animal unit. The improvement of pasture by planting stylosanthes has been highly successful under the Beef Cattle Development Project, which was the first major effort to apply this technology to commercial farming. Apart from its evident value in improving natural pastures, the broader agricultural implications of stylosanthes are still more important. It can aid in transforming vast areas now under grasslands into productive cropping land, as stylosanthes helps to build soil fertility and humus. 23. The Department of Livestock and Fisheries of the Ministry of Rural Development is responsible for veterinary and extension services, livestock marketing and slaughtering, research and the establishment and supervision of state farms for livestock. The field operations of the Department are organized on a provincial basis with a Chief Veterinary Officer responsible for oper- ations in each province. Although the headquarters staff in Tananarive are well trained and competent, the services provided by the Livestock Department at the provincial level, and particularly in villages, are generally weak. The veterinary service reaches only between 40 and 50 percent of the total cattle population annually. This is due largely to inadequate transport and cattle handling facilities and to insufficient field staff at the lower levels. PART IV - THE PROJECT 24. A report entitled "Madagascar - Appraisal of a Village Livestock and Rural Development Project" (No. 403a-MAG), dated June 25,1974 is being, circulated separately to the Executive Directors. A creait and project summary is provided in Annex III, and the project area is shown on the attached map (IBRD No. 10854). 25. The project was appraised in the field in September-October 1973. Negotiations were held in Washington in May 1974. The Malagasy delegation was led by Mr. Pierre Rajaonah, Secretary-General, Ministry of Rural Devel- opment. The Project Area 26. The project area, which covers the Majunga Province in the north- west of Madagascar and the Tsiroanomandidy sub-prefecture of the Tananarive Province in the Middle West Zone (about 16.2 million ha), is relatively sparsely populated (about 1.1 million). With three million cattle, it is one of the principal breeding and fattening regions of Madagascar. Average herd  - 8 - size is about fourteen animals per family. The potential for livestock development and for increased cropping is good, as the soils are generally rich and the climate favorable. Cattle owners, however, are facing serious problems, namely the poor quality of feed during the pronounced dry season, poor animal health, and inadequate supply of drinking water for cattle on the range land. 27. The project area is one of the least developed regions of Madagascar. About 90 percent of the population lives in rural villages, most close to subsistence levels. Poor communications are a critical constraint to develop- ment, since few roads are passable year-round and the rural population is often cut off completely from other parts of the country for 6 to 8 months of the year. Difficulties of access hamper agricultural extension efforts, limit both social and economic services, and make marketing of crops difficult, if not impossible, outside the producing villages. Social services also are very limited. There are few doctors or health centers in the rural areas; and less than 50 percent of school-age children attend primary schools. The Project 28. As pointed out in paragraph 14 above and described in greater detail in Annex II, the Bank's First Livestock Project in Madagascar (Loan 485-MAG of 1969), while successful in certain respects such as pasture development, has encountered from the outset a number of serious problems. Most of these re- sulted from the fact that the scheme had been devised as a ranching enclave, under expatriate management, without taking fully into account the presence on the ranch area of farmers who had been using large tracts of land for tradition- al grazing and for the cultivation of paddy. The proposed project aims at avoiding the mistakes of the past and addresses itself directly to the trzadi- tional farmer. At the same time, it is designed to spread those components of the first project that have proved successful, particularly in the field of pasture improvement. The project would be a broadly based program to assist Government's livestock and village development schemes over four years through the provision of improved veterinary and extension services, as well as essen- tial rural infrastructure in about 2,000 villages in the project area. It would also comprise three pilot development schemes in the Middle West Zone which would assist villagers in the development of livestock and mixed farming enterprises. It would specifically comprise: (a) Development of an intensive veterinary and livestock extension service; (b) improvement of 10,000 ha of communal pasture for about 200 villages through the introduction of stylosanthes; (c) construction of water facilities for about 300 villages; (d) improvement or construction of about 170 km and maintenance of about 280 km of secondary and tertiary roads;  - 9 - (e) construction of 28 village schools, an agricultural training center, and provision of eight mobile health units; (f) three pilot development programs in the Middle West Zone: an extension, veterinary, and community development program, a beef share fattening program, and a pig production scheme; and (g) provision of technical services, training, project monitoring and evaluation, and preparation of follow-up proiects. 29. The principal objective of the project is to increase meat production in the project area by providing an efficient veterinary and extension service, by providing water for cattle and by demonstrating the value of improved pasture. The road program would contribute directly to the project by facilitating access to villages. Although the modest education and health programs included in the project would not contribute directly to increases in production, they constitute a necessary support and would assist in promoting general development in the project area. Detailed Features of Project Components Intensive Veterinary and Extension Service 30. An intensive veterinary and extension service would be developed for seven of the eighteen sub-prefectures of the Majunga Province (see map). The service would ensure annual vaccination of all village cattle against black- leg and anthrax, and would provide advice on animal husbandry techniques and range management. When fully operational, in about 4 years, the service Id reach about 1.1 million cattle grazing over an area of about five million ha and owned by about 1,900 village communities. Pasture Improvement 31. The pasture improvement program would cover about 200 villages scattered throughout the Majunga province. About 10,000 ha of village com- munal grazing land would be improved over four years through the introduction of stylosanthes on a broad basis. The main items financed under the program would include seed, fertilizer, tractors, and machinery. Construction of Water Points 32. Drinking water for cattle and human beings would be provided in about 300 villages through the construction of about 100 ponds, 50 shallow wells and 150 boreholes. The main items financed would include earth-moving equipment, fencing, water piping, vehicles and spare parts. Road Improvement 33. The feeder road network in the MVajunga Province would be improved to facilitate access to villages gor veterinary and extension agents as well as  - 10 - for supplies and marketing. About 170 km of secondary roads would be upgraded or built over four years. The average cost of improving these roads would be about US$5,000 per km. Provision would also be made under the project for the arnual maintenance of about 280 km of roads at an annual cost of about US$300 per km. Village Schools, Agricultural Training and Health Facilities 34. The project would include: (i) the construction of 28 village primary schools, most of which would be located in the Maintirano prefecture where there is a serious shortage of school facilities; (ii) the establishment in Maintirano of an agricultural training center for about 80 young farmers, which would specialize in practical training in livestock husbandry; and (iii) the provision of eight mobile health units, most of which would operate in the Maintirano prefecture where access to medical care is limited. These health units would emphasize basic health education such as sanitation and nutrition, and preventive medicinei. Middle West Pilot Development Programs 35. OMBY Extension Program: The project would assist the OMBY State Farm to establish an extension program for 40 villages surrounding its four ranches financed under the Beef Cattle Development Project (Loan 585-MAG). Each ranch would provide villagers with veterinary and crop extension services, tractcr services, and seeds and fertilizer on short-term credit. A primary school and health center would be constructed on each ranch. 36. Pilot Pig Development Scheme: Fifty small pig farms would be de- veloped by OMBY with the assistance of ODEMO in the vicinity of the Kianjasoa research station. ODEMO is a government agency responsible for a wide range of rural development activities in the Middle West Zone. Pig farmers would be provided with essential services including veterinary and extension ser- vices, machinery, contract service and credit and marketing facilities by a management unit established under the project. 37. Cattle Share Fattening: A share fattening program wculd be organized in about 30 villages in the Middle West Zone by OMBY with the aid of ODEMO. In each village, OMBY/ODEMO would improve about 25 ha of land by planting stylosanthes and purchase about 100 4-year old steers per village. Villagers would herd cattle on both the improved and unimproved communal pasture and follow veterinary and husbandry techniques under the general guidance of an extension and veterinary service provided by OMBY/ODa4o. After about one year OMBY/ODEMO would market the steers and the gross profit would be divid- ed equally between OMBY/ODEMO and the villagers. Share fattening on these lines is traditional in Madascar, but has not so far been linked to improved pasture and veterinary and extens:.or services.  Project Implementation 38. In view of the diversity of items included in the project, the Government has decided that the Livestock Department of the Ministry of Rural Development should have overall responsibility for coordination and implement- ation of all project activities. Under its general direction, a livestock development unit (FAFIFAMA) established in March 1974, would have responsibility for coordinating and supervising all project activities in the Majunga Province. Project components outside Majunga Province would be carried out by OMBY with the assistance of ODEMO under arrangements to be entered into with the Gov- ernmer2t. FAFIFAMA, which is set up as an autonomous agency responsible for livestock development, will be built on an existing government organization, the Majunga Provincial Livestock Service, and will take over its facilities, budget, personnel and functions for the seven sub-prefectures where it will operate. The technical and administrative capability of the new livestock unit will be strengthened by about 75 additional staff provided under the project. FAFIFAMA will be administered by a General Manager with full control over day-to-day operations and responsible to a Board of Directors which in- cludes the Director of Livestock and representatives of the Ministries con- cerned, as well as representatives of the local communities in the project area. The intensive veterinary and extension service included in the project would be administered by two senior Malagasy veterinarians and each would be assisted by an internationally recruited senior veterinary adviser. An animal production adviser would also be provided to strengthen animal pro- duction aspects of the service. The road improvement program would be executed by the Ministry of Public Works while the mobile health units would be operated by the Ministry of Social Affairs. FAFIFAMA would be responsible for building and equipping the village schools in cooperation with the Ministry of Education and the village councils. Projects Costs and Financing 39. The total cost of the project, including taxes and duties ($700.000) is estimated at US$12.8 million with a foreign exchange component of US$6.4 million. The proposed IDA credit of $9.6 million would cover about 80 percent of total project costs, net of taxes and duties, including $6.4 million of foreign exchange costs and $3.2 million of local costs. The villagers' contribution would be about $150,000 equivalent, and the balance of US$2.3 million exclusive of taxes and duties would be financed by the Government.  12 2 40. The proceeds of the credit would be used as follows: (i) $4.0 million by FAFIFAMA for the veterinary and extension service, pasture improvement, construction and maintenance of water points, road and rural schools in the Majunga Province; (ii) $400,000 by the Ministry of Social Affairs for the mobile health units; (iii) $400,000 by the Ministry of Rural Development to finance technical services; (iv) $530,000 by OMBY as a Government grant for the extension program in the Middle West Zone; (v) $560,000 US Government loans to C4BY: a) 260,000 to finance the share fattening program at 7-1/4 percent annually for 13 years including 3 years of grace; and b) $300,000 for the pilot pig program at 5 percent annually for 20 years includ- ing one year of grace. This interest rate of 5 percent is considered appropriate in view of the experimental nature of this component. OMBY would onlend to pig farmers at 7-1/4 percent annually for 5 years including one year of grace; and (vi) about $3.7 million will be available to meet contingencies. Before the Credit Agreement becomes effective, the Government would enter into a Project Funds Agreement with FAFIFAMA and a Financing Agreement with OMBY, under terms acceptable to the Association (Section 6.01 of the Develop- ment Credit Agreement). Procurement and Disbursement 41. Contracts for vehicles and equipment (US$2.4 million) would be awarded after international competitive bidding in accordance with Bank/IDA guidelines. Contracts for borehole construction (US$1.2 million) would be tendered locally since the amount involved is unlikely to attract inter- national competition. Construction of piggeries and buildings for the pilot pig scheme would be subject to local competitive bidding or carried out directly by the project managemer.t. Draft tender documents for all contracts exceeding US$50,000 would be submitted to the Association for approval before invitations are issued. Since the diversity of items and  their dispersed location would be unlikely to attract international and local bidding, construction of cattle handling facilities, buildings, housing, schools, water ponds, and stylosanthes planting would be carried out directly by FAFIFAMA. The Department of Public Works would carry out road improvement and maintenance by force account. Because of the small size of individual purchases, items such as single tractors, single tractor attachments, spare parts, furniture, veterinary equipment and supplies, etc. would be procured locally; supplies are adequate and competition between firms is satisfactory. Cattle and pigs would be purchased locally. 42. The proceeds of the IDA credit would be disbursed over four years to cover (a) 100 percent of foreign expenditures or 85 percent of local ex- penditures for road construction and maintenance equipment and for other equipment and vehicles; (b) 75 percent of total expenditures for civil works carried out by contractors and by force account, and for agricultural inputs; (c) 65 percent of total expenditures for wages and salaries of additional staff to be provided under the project; and (d) 100 percent of foreign ex- penditures and 80 percent of local expenditures for technical services. Economic Benefits and Rate of Return 43. At full production in 1986, the project would produce an additional 70,000 head of cattle, or 10,600 tons of meat annually - a 27 percent increase in output for the project area. The project would also result in increased output of pigs, rice, maize, manioc and peanuts. About 80 percent of the incremental beef production would be exported, and the net foreign exchange earnings from these exports would total about US$10 million annually. The economic rate of return from the project is estimated at nearly 70 percent. The sensitivity of this return was tested under a variety of unfavorable assumptions. Under all, the rate of return remains high. An increase i.l project costs of 20 percent would lower it by 13 percent, and a decrease in total benefits of 20 percent would lower it by 16 percent. In addition, there would be substantial benefits accruing from the project, particularly from the health and education components, which are difficult to quantify, but woul' help raise the standard of livinl in the rural areas. Separate financial rates of return on investments have been calculated for those project com- ponents which are directly productive, and each of these is satisfactory varying from 22 percent to over 100 percent. The project, however, does involve an element of risk. While the potential for expanding livestock production through village producers is great, successful development is dependent on an effective and well organized veterinary and extension service and efficient implementation of other project works. The indications are that the Government, which places a high priority on the development of the livestock sector, would ensure an efficient execution of the project. 44. Despite the satisfactory economic and financial returns, it would not be possible for the Government to recover all investments directly9 since several of the investments require long demonstration periods before poor and isolated villagers are convinced that the services provided are essential. On the other hands the existing tax structure (primarily taxes on the movement of animals, market taxess meat and slaughter taxes and export taxes), when applied to the expected output of the project, would increase Govern- ment revenuepand at full development, the project is expected to yield about W.5 miion annually. The Government nonetheless expects gradu1ally to in- crease its direct recovery of costs from beneficiaries to the extent feasible without detracting from the project's purpose of improving sarnices and demonstrating new techniques: in particular, through a system of annual  charges,, villagers will pay in fuli the cost of maintaining water pointsi and of operating the veterinary and extension services. Similar arrangenents would apply to the cost of drugs, seeds and fertilizers. Through the mech- anism of landing to participating vilagers, OMBYT and ODEK) would recover the full cost of extablishing and operating the share fattening and the pig development programs, and in the Middle West Zone, which is more developed and prosperous than the Majunga Province, project costs would be reoovered directly from beneficiaries salwt in their entirety. The capital and 3per- ating costs of road iprovement, schools and mobile health units would 'be viewed as a public service but villagers would contribute about 30 percent of the total cat of school cnstructiv,. 45. The project would assist about 80,000 poor rural families (400,000 persons) in the Majunga province and would increase their per capita cash incomes from about US$20 to US$30 a year. In the Middle West Zone, under the OMBY extension program, per capita cash incomes in 40 villages (8,000 persons) would increase from about US$35 to US$65 a year. The project would primarily benefit villages living close to subsistence level. PART V - LEGAL INSTRUMENTS AND AUTHORITY 46. The draft Development Credit Agreement between the Malagasy Republic and the Association, the %ecommendation of the Committee provided for in Arti- cle V, Section 1(d) of the Articles of Agreement and the text of a Resolution approving the proposed Development Credit is being distributed to the Executive Directors separately. 47. Features of the draft Development Credit Agreement of special interest are referred to in paragraphs 21 and 40 of this report. The addi- tional conditions of effectiveness include the entering into the FAFIFAMA Project Funds Agreement and the OMBY Financing Agreement, and the appoint- ment of FAFIFAMA's General Manager (Section 6.01 of the Development (redit Agreement). 48. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 49. I recommend that the Executive Directors approve the proposed devel- opment credit. Robert S. McNamara President July 3, 1974  COUNTRY DATA - MALAGASY REPUBLIC ANNEX I Area: 592,000 Kmn2 Population: 7.7 million (mid 1973) Density: 13 per K2 Page 1 of 3 pages 85 per Km2 of arable land SOCIAL INDICATORS -epublic prance Reference Comparisons !!a&a-sJ lesPublic P ran0ce 1 yria 1970 ~~1970 17 17 ONP per Capita U$ (Atlas basis) .. 140 3,100 150 250 Lb sograp hic Crdebith rate (per thousand) 44 /a 46 16.6 48 47 Crude death rate (per thousand) 20 7W 21 11.9 16 14 Infant mortality rate (per thousand live births) 133 7W 102 15.1 Life expectancy at birth (years) 51 /a 42 71.5 49 55 Gross reproduction rate /1 2.9 /a 3.2 1.2 3.3 3.5 Population growth rate /2_ 2.5 2.5 0.9 /b 3.3 3.3 Population growth rate - urban .. 6 /c 2.4 7d 6 d /e 5.2 b, If Age structure (percent) 0-14 . 45 23.7 47 46 15-6b 52 62.9 51 51 65 and over .. 3 13.4 2 3 Dependency ratio 13 .1 .2 /g 0.9 /k 1.2 /i 1.6 Population dansity per sq. km. 9 12 93 20 35 Urban population as percent of total 13 /, J 17 d 70 d 9 / 1k 44 I Family planning: No. of acceptors cumulative (thous.) .. .. No. of users (% of married women) .. EBnloyment Total labor force (thouBands) . 3,200 I 20,439 /h 5,o60 Ii /k 1,979 Percentage employed in agriculture .. 81 15.4 7i 90 /k 67 Percantage unemployed . .. 2.1 7i .. 4 Income 'istribution Percent of national income received by lowest 20% .. .. Percent of national income received by highest 5% .. .. Health and Nutrition Population per physician 9,54Uo 9,970 /k 750 12,350 /k 3,850 Population per nursing person .. 2,570 7k 260 /m 3,050 7k 2,810 /m Population per hospital bad ., 350 7W 110 730 7-k 1,010 Per capita calorie supply as % of requirements /4 93 /a .. 120 90 100 /n Per capita protein supply, total (grmus per dayB/5 53 a ., 103 68 69 7ii Of which, animal and pulse 11 7a .. 66 29 5 7W Death rate 1-4 years /6 .. 33 /o 0.9 Education Ad,usted /7 primary school enrollm t ratio ., 49 120 /k 60 lh 83 /k Adjusted 77 secondary school enrollment ratio . 10 /h 70 7V 8 7W 36 7k Years of siooling provided, first and second level 13 13- 12 13- 12 Vocational enrollment as % of sec. school enrollment 6 /h 23 /k 2 6 /k Adult literacy rate % 39 .. 30 o 7U0 Housing Average No. of persons per room (urban) ,, ,, 0.9 /h Percent of occupied units without piped water . .. 7 7.. Access to electricity (as % of total population) .* 5 99 7.. Percent of rural population connected to electricity . 98 7. Conswmption ToM r-eceivers per 1000 population 15 80 314 /k 48 /k 224 Passenger cars per 1000 population 4 8 253 9 5 Electric power consumption (kwh p.c.) 19 35 2,781 45 146 Newsprint consumption p.c., kg per year O. 0.0 12 0.4 0.2 Notes: Figures refer either to the latest periods or to and distribution by' age and sex of national populations. the latest years. Latest periods refer in principle to Protein standards (requirements) for all countries as established by the years 1956-60 or 1966-70; the latest years in prin- USDA, Economic Research Service provide for a minimum allowance of 60 ciple to 1960 and 1970. Only significantly different grams of total pro tein per day, and 20 grams of animal and pulse pro- periods or years are footnoted separately. tein, of which 10 grams should be animal protein. These standards are /1 Average number of daughters per woman of reproduc- somewhat lower than those of 75 grams of total protein and 23 grams of tive age. ardmal protein as an average for the world, proposed by FAO in the /2 Population growth rates are for the decades ending Third World Food Survey. in 1960 and 1970. L Some studies have suggested that crude death rates of children ages 1 /3 Ratio of under 15 and 65 and over age brackets to thrcugh 4 may be used aa a first approximation index of malnutrition. those in labor fcrce bracket of ages 15 through 64. /7 Percentage enrolled of corresponding populailon of school age as /4 FAO reference standards represent physiological defined for each country. requirements for normal activity and health, taking account of environmental temperature, bocdy weights, A 1962, rural population only, source dlfferent from 1970 figures; /b 1963-70t /c 1962-70; d Over 2,000 population; /e 1962-69 7f More than 1,000 population; /B Labor force 15 years and over; Ah 1968; A Labor force in age bracket 15-59; /,j1962; k1969; 1961; /n Including midwives; /n 1964-66; /o 1966; A 15 years and over; /q Definition of adult not known. July 9, 1973 R-2  AMNEX I Page 2 of 3 pages ECONOMIC INDICATORS GROSS NATIONAL PRODUCT IN 1972 ANNUAL RATE OF GRO'dTH (%, constant prices) US$ Kln. .1967 -71 1972 GNP at Market Prices 1,0l14 .100.0 3.6 - 3.2 1/ Gross Domestic Investment 118 14.2 4.1 -214.5 Gross National Saving 89 8.5 3.7 g/ -10.7 2/ Current Account Balance - 59 _5.7 Exports of Goods, NFS 199 19.1 3.4 - 1.9 Imports of Goods, NFS 2314 22.5 3.7 OUTPUT, LABOR FORCE AND PRODUCTIV1TY IN 1970 3/ Value Added Labor Force-' V. A. Per Worker US$ MlMln% M _% US $ % Agriculture 265 29.5 2.6 81.3 103 36 Industry 267 29.7 0.2 6.2 1,335 175 Services 368 40.9 0.14 12.5 920 327 Unallocated Total/Average 99 100.0 3.2 100.0 100.0 GOVE`VNm-T FINANCE Lx General Governnent J Central Government (F?Mi8 Hin. o ) COr? (FYJ Sin. ) " of GNP 72 1973 1972 19 -72 1972 1972- 1WF7- 72 Current Receipts 52.5 52.3 19.2 20.8 L1.4 15.2 15.7 Current Expenditure 49.1 50.14 18.0 18 71 12.7 1 ,_ Current Surplusra 3.L 1.9 1.2 2.5 6.7 2.5 3.2 Capital Expenditures_/ 18.8 11.6 6.9 L.9 15.0 5.5 IL.9 External Assistance (net) 3.5 5.14 1.3 1.5 MC1OT, CRE3IT and PRICES 1966 19 1970 1971 19 72 19 73 t Billion FMG outstanding end period)F Money and Quasi Money 34.1 145.6 52.3 55.9 62.3 68.2 Bank credit to Public Sector - 6.1 0.9 - 3.14 - 14.0 1.2 1.5 Bank Credit to Private Sector 31.2 41.2 148.5 514.8 55.14 55.4 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 18.8 20.4 21.0 20.9 23.1 General Price Index (1963 = 100) 108.4 114.5 117.8 124.2 130.2 1148.7 Annual percentage changes ins General Price Index 2.7 3.8 2.9 5.4 4.8 114.4 Bank credit to Public Sector .. . . . 25.0 Bank credit to Private Sector . 5.5 17.7 13.0 1.1 0.0 NOTE: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 1 GDP Domestic Savings 2/ Total labor force; unenployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. 14/ Burdgetm of the Central Goverrnment and of the orovincial eovernments and the annexed budtets. y Capital expenditures do not include those financed by foreign grants. not available not applicable  Page 3 of 3 pages TRlADE PAYKZXTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1970-72) 1970 U972 CS $ Mlrn (Millions US $) Exports of Goods, NFS 171.0 185.8 199.0 Coffee l1.2 28.6 Imports of Gcods, NTS 196.2 24L.9 234.6 Cioves 17.9 12.4 Resource Cap (deficit . -) _- - 1 _q--6 Vanilla 13.6 9.4 Beef 13.2 9.1 Interest Payments (net) - 1.9 - 2.6 - 2.2 Sugar 5.1 3.5 Workers' Remittances - 8.6 - 8.6 - 9.0 Minerals 6.4 a4J4 Other Factor Payments (net) - 11.1 - 12.5 - 14.9 Net Transfers - 1.8 _2 2 All other cociodities 46.9 32.5 Balance on Current Account - 48.6 - 79.6 - 59. Total 14.3 100,0 Direct Foreign Investment o.4 3.2 - o.4 EXTERNAL DEBT, DECE?BER 31, 1973 Net MLT Borrowing Disbursements (9.9) (15.3)( 11.2) US e Mln Amortization 6-2n.) C-.12)(6k ) Subtotal 4.9 9.1 5.2 Public Debt, incl. guaranteed 115.3 Capital Grants 66.3 66.6 66.0 Non-Gujaranteed Private Debt Other Capital (net) - 3.6 - - 0.8 Total outstanding & Disbursed Other items n.e.i 4.3 - 2. 1.9I/ Increase in Reserves (+) 23.7 - 3-1 12.5 DEBT SERVICE RATIO for 1973 7. Gross Reserves (end year) 60.0 5b.8 73.5 Net Reserves (end year) 49.9 46.8 59.3 Public Debt, incl. guaranteed .1 Non-Guaranteed Private Debt FPuel and Relased Materials3 Total outstanding & Disbursed friports 9.6 10.5 13.4 of which: Petrolr%m 9.6 10.5 13.4 Exports of Refined Products 5.6 5.3 6.5 2' IBRD/ IDA LENDIrNG.MRY 31, 1971