Madagascar - Transport sector memorandum

Report No. 4057-MAG FILE' Madagascar f Transport Sector Memorandum February 4, 1983 Eastern Africa Projects Department Transportation I FOR OFFICIAL USE ONLY Document of the World Bank 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.  MADAGASCAR TRANSPORT SECTOR MEMORANDUM CURRENCY EQUIVALENTS Currency Unit Malagasy Franc (FMG) US$0.0033 FMG 1 January 1982 US$0.0029 = FMG 1 June 1982 (used in report) US$0.0027 = FMG 1 July 1982 US$1.00 = FMG 375 July 1982 ABBREVIATIONS CCCE - Caisse Centrale de Cooperation Economique (France) CIMACOREM - Confgrence Internationale Malgache, Comores, Reunion et Maurice CMM - Compagnie Malgache de Manutention CMN - Compagnie Malgache de Navigation DGP - Directorate General of the Plan EPIC - Entreprise Publique a Caractare Industriel et Commercial FAC - Fonds d'Aide et Cooperation (France) FIBATA - Fitateram Bahoakan Antananarivo FIMA - Fitaterana Malagasy ICAO - International Civil Aviation Organization IFAD - International Fund for Agricultural Development IMF - International Monetary Fund INSRE - Institut National de Statistiques et de Recherche Economique MIC - Ministry of Industry and Commerce MPW - Ministry of Public Works MTRT - Ministry of Transport Supplies and Tourism RNCFM - Reseau National des Chemins de Fer Malgache SCR - Supreme Council of the Revolution SEPT - Socifte d'Exploitation du Port de Tamatave SINPA - Societe d'Interet National pour la Production Agricole SINTP - Societe d'Interet National pour les Travaux Publics SMTM - Socifte Malgache des Transports Maritimes SOLIMA - Socifte Petroliere Malgache TASCAF - Taxe sur le Chiffre d'Affaires .4  FOR OFFICIAL USE ONLY MADAGASCAR TRANSPORTr SECTOR MEMORANDUM Table of Contents Page NDo: SUMMARY AND CONCLUSIONS ...................................... 1 General Recommendations .................................... 1 A. Financial Shortcomings ................................ . . 1 B. The Degree of State Control in the Transport Sector ..... 2 C. The Lack of Adequate Pricing Policy . . . 2 D. Transport as a Bottleneck in the Economy . . .............. 3 E. Transport Planning and Coordination ..................... 3 F. Manpower Training and Technical Assistance . . . 4 G. The Use and Price of Energy in Transport ............... 4 Sub-Sectoral Issues ....... ........................ 4 A. Road Transport ............... 4 B. Passenger Transport .... 5 C. Road User Charges .... 5 D. Railway ................................................ . 6 E. Ports and Shipping . . .................................... 7 F. Aviation . . .............................................. 7 I. SECTOR OBJECTIVES, PLANS AND RESOURCES ................. 9 - Objectives .... ............... 9 - Planning and Resources .............. .............. , 11 - Transport Coordination.... 15 - Intermodal Coordination . . .17 - Manpower Resources ..... . .... 17 II. THE PRESENT SITUATION .19 Transport Infrastructure .19 A. Roads ...19 B. Ports and Shipping . . .19 C. Rail Transport a n s p o rt........... 20 D. Air Transport ....21 This report was written by Messrs. M. Le Blanc and S. Rahim, follow- ing a mission to Madagascar in February 1982. Other mission members who contributed on specific topics include Messrs. B. Chatelin, C. Delvoie, J.-C. Crochet and Ms. E. Bolenge-Bongeli. 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.  (Table of Contents - Cont'd) Transport Equipment .. ............................ 22 A. Road .............................. 22 B. Rail .............................. 22 C. Ports and Coastal Shippin g . ........ ....... 23 D. Air Transport .............................. ... 23 Organization and Management ............................ 24 A. Road Transport .............................. . . 24 B. Road Passenger Transport Industry . . 25 C. Road Maintenance .......... ................... . ...... * 26 D. Railway ......................................... 27 E. Ports and Shipping .. . ......... ............. .......*.....*. 28 F. Air Transport ........................................ 30 Transport Tariffs ...................................... 32 A. Road Transport .. ............................... . ..... 32 B. Railway ......................................... 32 C. Maritime and Air Transport ..... 33 III. THE ECONOMICS OF THE TRANSPORT SYSTEM ........ .......... 35 - Rising Costs ......................................... 35 - Economic Consequences ................................ 37 IV. RECOMMENDATIONS FOR A RECOVERY PROGRAM ................ . 40 A. Sector Rehabilitation Strategy ...................... . 40 B. Consultative Mechanisms . . ......................... 43 (i) Governmental .................... 43 (ii) Aid Coordination .......................... . 44 V. PAST BANK GROUP INVOLVEfMENT IN THE SECTOR .... .......... 45 - Past projects in Sector and Strategy for the future.. 45  ANNEX I - Tables 1. Freight Traffic - All .orts 2. Classement Escales par Activite 1980 3. Indicateur de Trafic Aerien sur le Reseau International (Air Madagascar) 4. Indicateur de Trafic Aerien sur le Reseau Interieur (Air Madagascar) 5. Vehicle Fleet (1977-1980) 6. Situation Actuelle de la Flotte Aerienne Commerciale de la Compagnie Air-Madagascar 7. Road Maintenance Budget 8. Rail Traffic General 9. Madagascar Railway - Balance Sheets 10. Madagascar Railway - Income Statement 11. Importations - 1981: Repartition du Trafic pour les Principaux Pays Desservis par la CIMACOREM 12. Exportations - 1981: Repartition du Trafic pour les Principaux Pays Desservis par la CIMACOREM 13. Air Madagascar: Profits ou Pertes ANNEX II - Miscellaneous Data on the Transport Sector 1. Air Traffic - Antananarivo 2. Air Traffic - Tamatave 3. Air Traffic - Mahajanga 4. Trafic a4rien r4alise sur l'enseuble des services offerts par Air Madagascar 5. Madagascar Railway CoBmercial Freight Traffic 6. Vehicle Fleet - 1979 7. Registration Fees & Taxes on Commercial Vehicles - Trucks 8. Registration Fees & Taxes on Commercial Vehicles - Pick-ups 9. Road User Taxes 10. Selected Road Transport Users/Operators 11. Docking Statistics - Port of Mahajanga 12. Port of Toamasina General Traffic 13. Port of Toamasina Genetral Freight and Petroleum Products Traffic 14. SOLIMA Market Consumption 15. Price Trends of Petroleum Products   TRANSPORT SECTOR MEMORANDUM SUMMARY AND CONCLUSIONS 1. The main problems affecting the transport sector in Madagascar have been identified in Chapters II, III and IV. In some cases Government has begun taking steps to study the problems and adopt corrective mea- sures. However, the measures required to rehabilitate the sector will need a coordination of efforts across all modes and in some cases require the assistance of authorities normally considered outside the transport field. It is to help the Government in orienting its efforts at redressing the problems of the transport sector that the following recommendations are proposed. General Recommndations A. Financial Shortcomings 2. The most serious issue facing the sector in the immediate future is of a financial nature. Two aspects are involved: (i) the overall lack of financing for normal operating purposes, and (ii) the critical shortage of foreign exchange. The sit:uation in the transport sector has become cri- tical and all sub-sectors are facing severe deficits in operations. The shortage of foreign exchange has resulted in a virtual cut-off of spare parts and imported inputs necessary for the day-to-day operations of the transport system. In the road sub-sector, this has resulted in about 50% of the fleet being unserviceable; those trucks and buses in service are only kept operational by cannibalizing parts from idle vehicles. The pro- blem is repeated in shipping, railway and air transport and constitutes a very serious threat to the already precarious economic situation prevailing in the country. 3. Given this situation, it is recommended that the Government care- fully review procedures for allocating foreign exchange and give due prior- ity to transport. It is estimated that about FMG 4.5 billion in foreign exchange (US$13 million equivalent) would be required annually by the transport industry for the puLrchase of spare parts without which the trans- port sector cannot operate effectively. Because of the serious backlog of maintenance, it can be anticipated that this amount would be somewhat high- er in the first couple of years of a recovery program. 4. It is also recommiended that Government prepare a financial re- dressment program for the transport sector including the elimination of arrears and a program of how to deal with the services which require a sub- sidy or rationalization.  - 2- B. The Degree of State Control in the Transport Sector 5. The state has progressively increased its control in the trans- port sector with very poor results. In addition, primary responsibility for collection of agricultural crops and distribution of basic necessities to towns and villages, which were previously handled by small local truck operators, has been allocated to state enterprises operating their own truck fleets. Private truck operators and coastal shippers are slowly being squeezed out of business through shortages of spare parts and because state controlled enterprises operating on subsidies have taken over their businesses. There appears to have been an overall decline in effectiveness as a result. 6. Because of the lack of any significant economies of scale parti- cularly in road transport and the overall failure of the Government's attempt to gain more control over the sector, it is recommended that Government acknowledges a role and takes steps to encourage the private sector. This is particularly important in road transport and coastal ship- ping where the most efficient operations are currently in the hands of private operators. To achieve this objective would likely require a tran- sition period in which some degree of flexibility would be needed since the present system could not easily be dismantled in the very short term. C. The Lack of Adequate Pricing Policy 7. The lack of adequate pricing policies is placing serious strains on the transport industry in Madagascar. This is evident from the deficits being incurred by the transport entities which operate in each mode. Because tariffs do not accurately reflect costs, distortions have been in- troduced into the system in terms of modal choice and are resulting in very poor resource allocation for the sector. The components of vehicle operat- ing costs for trucks severely underestimate, among other items, maintenance costs, thus rendering the tariff structure unable to cover costs adequately and having a severe impact on the supply of road transport services. Simi- larly for other modes, operators are incurring heavy losses and are only able to continue operations by consuming capital. As replacement of old equipment becomes necessary, neither funds nor new vehicles are available and many services have been curtailed. 8. While the ideal situation may be that of completely deregulated systems, this assumes that transport functions in a perfectly competitive environment. This is not the case in Madagascar since tariff policy has been subordinated to overall pricing policy and any departure from the cur- rent practice is likely to have disruptive effects. It is therefore recom- mended that the Government undertake in the short term cost studies for each mode and provide some automaticity of tariff increases in the in- terim. The need for tariff adjustments is immediate, particularly for road and rail transport.  - 3 - D. Transport: as a Bottleneck in the Economy 9. The magnitude of the physical deterioration of the transport sys- tem has reached such proportions that it is creating bottlenecks that, ii not resolved, will have serious negative effects on the economy as a whole. These bottlenecks are the result of network gaps in the road sub- sector, poor maintenance, and a severe shortage of spare parts for all modes which has seriously reduced transport capacity. 10. It is recommended that a moratorium be placed on new investment in the transport sector for the next 3 years so that Government's efforts to rehabilitate the existing priority infrastructure can be concentrated to help remove some of the critical bottlenecks. This will require rationali- zation and abandonment of some less important links (see specific modal re- commendations). E. Transport Planning and Coordination 11. It is recognized that the lack of adequate sectoral management and coordination have been in part responsible for many of the ills pla- guing the sector. The need for greater transport planning and coordination of projects was acknowledged by Government which has already taken steps to increase the role of the Directorate of Planning by placing it directly within the Presidency. Nevertheless, insufficient attention has been given to inter-modal considerations and projects like the Pangalanes Canal are still outside the Government's planning and coordination structure and their impact on the use of investment funds and supply of transport capaci- ty must be taken into consideration in the overall transport coordination function. One of the reasons for the difficulty in adequately carrying out the planning function is the weak data base and the poor timeliness of the information which is availabLe. This is particularly important concerning the information basis for real (economic) costs of services throughout the sector, which is very weak, and which has a significant impact on inter- modal competition. 12. It is recommended that a high level transport planning and coor- dination unit be set up in the Ministry of Transport responsible for all modes and working closely with the Directorate of Planning on overall poli- cy issues. In addition, to carry out its function, the Ministry of Trans- port should set up an inter-modal coordination committee with representa- tion from all interested ministries and transport modes to review budget and investment proposals for the transport sector in light of transport needs and capacity. This committee should have the role of reviewing all the policy implications of the recommendations contained in this document including the need to collect and analyse basic transport data, the prepa- ration of the recommended recovery program and the review and action upon the studies recommended. It is further recommended that a high level task force be created under the General Directorate of Planning in close colla- boration with the INSRE (Insl:itut National de la Statistique et de la Re- cherche Economique) to identify the data needs required to carry out the transport planning function and set up a program to collect and publish the data in a timely fashion.  - 4 - F. Manpower Training and Technical Assistance 13. Part of the problems now being encountered in the transport sec- tor are due to the lack of sufficiently experienced and qualified person- nel. While the problem is being addressed to some extent in the highway subsector, the overall approach is too peacemeal and "ad hoc" to be really effective in filling the manpower needs for the sector. 14. It is recommended that as part of an overall long term strategy to improve sector management and performance, Government undertake a com- prehensive study of training needs at both technical and managerial levels to identify needs, set priorities and establish the training programs need- ed to provide the required personnel. As this program is expected to be carried out over a number of years, the study should also identify critical areas to be filled by technical assistants in the interim. G. The Use and Price of Energy in Transport 15. Madagascar has been slow to react to recent world trends in fuel consumption. There is no clear-cut energy policy or energy conservation program. While current prices of gasoline and diesel fuel are above their opportunity costs, there is a 100% differential between the two fuels which may lead to a shift from gasoline to diesel oil, in particular for private passenger cars. In addition to the higher initial cost of diesel vehicles, continuation of such a differential could have an impact on location of in- dustry resulting from a distorted transport cost perspective. 16. It is recommended that Government initiate a national energy pro- gram and review its pricing policy with respect to motor vehicle fuels in order to place a larger share of the road construction and maintenance costs on the heavy vehicles concomitant with their use of the infrastruc- ture. Sub-Sectoral Issues A. Road Transport 17. Among the most critical areas identified as having a serious effect on the transport sector and the economy as a whole is the inadequacy of road transport. Four problematic areas were identified. First, the in- dustry is suffering from a critical lack of spare parts resulting in very low fleet availability; secondly, Government's attempts to give the state a greater control of road transport has had disastrous and costly results; thirdly, the system operates under a totally inadequate tariff structure; and finally, the state of road transport infrastructure has reached a cri- tical level (see further discussion below). 18. Given these serious problems and those identified elsewhere in this report, it is recommended that: (i) The six large provincial trucking companies be abolished. The Government could either create smaller public companies (each with 10 to 15 trucks) or, better, sell the trucks to enterprises that could operate them efficiently, including the private sector.  (ii) The existing tariff for the category of trucks of 10 tons and above be immediately increased by at least 50%. This will allow the owners of the largest population of trucks to cover their costs. In addition, two to three man-months of technical assist- ance to the Ministry of Transport are required to develop appro- priate expertise in computing vehicle operating costs. (iii) The Government authorize the truck dealers to import spare parts, since the trucks owned by the private sector represent a large capital that the Government cannot afford to lose. The annual needs are estimated at FMG 2 billion (US$5.7 million equi- valent). (In the future the government should also give greater attention to vehicle maintenance facilities, while importing new trucks). (iv) Government should be encouraged to abandon its project of making mandatory the use of planned freight terminals. B. Passenger Transport 19. Road passenger transport is faced with the same problems as freight transport. The private sector is being squeezed out of business and tariffs are set much too low to cover operating costs. 20. In order to improve the situation, it is recommended that the Government: (i) Raise the tariffs for urban transport, particularly in Antanana- rivo. (ii) Authorize bus and car dealers to import an appropriate amount of spare parts. (iii) Carry out comprehensive analysis of the road passenger transport industry (both urban and inter-city) in order to define the rela- tive role of the large bus companies and rural suburban traffic, and of the existingr cooperatives. C,. Road User Charges 21. Revenues from taxes on gasoline and diesel oil (US$0.23 per liter for gasoline and US$0.12 per liter for diesel oil) constitute the main sources of revenue from road user charges. Estimated consumption in 1981 of gasoline was about 100,000 m3 and consumption of diesel oil about 160,000 m3, of which at least 80% was consumed by the transport sector. Revenues from these taxes reached about FMG 13.9 billion (US$39.7 mil- lion). Import duties and saLes tax on transport equipment and spare parts (about FMG 8.40 billion in 1980, or US$24.0 million), yearly licence fees, vehicle inspection fees, etc. (about FMG 1.5 billion, US$4.2 million) should also be added. Total revenues from road user charges are estimated at FMG 20 billion in 1981 (US$57.0 million). This exceeds what was spent on roads for maintenance and construction and is far above what should be correctly allocated for a normal road maintenance. Both light and heavy vehicles seem therefore to cover far above their short run marginal cost of using the road networks.  -6- 22. Despite the adequate resource base, there is an urgent need to rehabilitate the road network. Funds allocated by the Government from the general budget for this purpose are insufficient. It is recommended that a special road fund be set up for routine and periodic maintenance. Part of the revenue from taxes on gasoline and diesel oil could then be automati- cally earmarked for this fund. Care should be taken that the earmarked funds would be exclusively used for maintenance, excluding any major road construction. IHowever, in the short run, this fund could be used for urgently needed road rehabilitation works. D. Railway 23. The railway has suffered from particularly severe technical pro- blems in the last couple of years. Identification of specific problems, e.g. locomotive maintenance, track, and specific recommendations were pro- vided by short term technical assistance under an emergency program financed by the French Caisse Centrale in 1981. Although this program was useful, it may not be sufficient to sustain a recovery in the long term. Also technical problems may soon reappear if they are not addressed in a more global context of reinstating adequate operational, maintenance and financial procedures. 24. To help reduce the incidence of these problems, it is recommended that the railway prepare a program whereby technical assistance would be hired for a specified time period, coupled with a comprehensive training, to reorganize operational procedures and establish a "program contract" between the Government and the railway to deal with these matters. 25. Financial problems are serious and the railway is near bankrupt- cy. Under the ongoing Second Railway Project (Cr6dit 903-MAG) a complete financial recovery program is being studied by the Government, including a change in the railway's financial management. Such a program is an abso- lute condition if the railway is to function normally in the future; it is also a condition of any additional involvement by the Bank Group in this subsector, including the continuation of the Second Railway Project. One additional problem which will need to be tackled is the allocation of sufficient foreign exchange for normal operating purposes. 26. Operational problems have developed in the last few years. All productivity indicators show a downward trend. Although this is partly due to the two problems mentioned previously the Association believes that the overall operational organization of the railway needs to be strengthened, particularly (i) all maintenance procedures (locomotives,, rolling stock and track); (ii) planning of operations; and (iii) procurement procedures. 27. It is recommended that the Government be required to prepare an action program to deal with the above mentioned problems. This will likely involve a fundamental change in the management philosophy of the railway towards a more modern approach based on productivity objectives and commer- cially oriented operations. It is further recommended that an improvement in railway operations be a prerequisite to any major injection of addi- tional hardware in the railway.  -7- 28. The long term viability of the railway also needs to be studied before new investments are undertaken. This relates to specific services and low density lines for which less costly alternatives need to be studied. Construction of the road between Toamasina and Antananarivo also rLeeds to be speeded up to decrease the dependence of the whole economy on the railway; this involves a need to prepare basic reorganization measures in the railway to enable it: to compete efficiently with road traffic as soon as the road is completed. 29. It is recommended that before any further investments are under- taken, the railway should undertake (i) an action program in all areas, and (ii) a comprehensive technical assistance/training program. It is also re- commended that as a condition of continued Bank assistance the railway be required to carry out the feasibility studies of the Fianarantsoa-Manakara and Antananarivo-Antsirabe lines which were included under the second pro- ject but not yet carried out. E, Ports and Shipping 30. Because of poor internal connections in the past, Madagascar developed a dense network of coastal ports. However as air and road con- nections developed, some of the smaller ports may no longer be justified. It is more critical now that: the strategy to be adopted for coastal ports and shipping be complementary to the development of other transport modes so that the least-cost solution prevails. A study of secondary ports and coastal shipping is about to begin and will deal with the needs and propo- sed strategy in the subsector. 31. It is recommended that until the secondary ports and coastal shipping study is completed Tend 1982) no investments in the subsector be undertaken except for routine maintenance. This recommendation applies es- pecially to the Pangalanes Canal where major investments are about to begin. Further investments in this subsector should be made only on strict economic grounds and would likely involve a rationalization of traffic and ports system. 32. It is recommended that Government encourage the return of second- ary ports administration to the private sector where it has been demons- trated (Mahajanga) that productivity is up to five times greater than that other state run ports. This should of course follow the results of the study which is currently underway. F. Aviation 33. Air transport plays an important role in the transport system of Madagascar. However, as withL the development of coastal ports, the country has been provided with many airports more or less equipped and maintained which now must compete with other modes for traffic and resources. In the past many of the facilities were not suited to the type of aircraft uti- lized and because of lack of maintenance, certain runways no longer provide the strength and length required to provide an economic service with pre- sent equipment.  -8- 34. In view of the limited resources available and the financial difficulties under which Air Madagascar has had to operate, it is recommen- ded that investments in air transport infrastructure be limited to those which are needed to ensure a minimum level of safe operations and allow certain critical airstrips to be rehabilitated to allow the airline to fully exploit its potential. 35. Following the colonial period and before the first fuel price crisis, receipts from international services of Air Madagascar were suffi- cient to compensate for the losses on domestic services and the general rise of international prices. Recent changes in international traffic de- mand no longer provide the revenues from these services to subsidize the domestic system. 36. It is recommended that to allow Air Madagascar to operate effi- ciently, the Government should establish a policy of sharing the deficits on an initial 50-50 basis with an incentive program for the airline to im- prove efficiency over time as the Government takes on a greater share of the deficits. I-n addition, it is further recommended that, as and when other transport alternatives become available, continued air service should be self supporting or the service abandoned. 37. The financial situation of Air Madagascar has deteriorated markedly over the past few years and it is no longer a generator but a drain on foreign exchange. The general decline of load factors and the heavy debt burden are partly to blame. Load factors, particularly on international services, have been steadily falling from a level of 59% in 1977 to a low of 36% in 1981. 38. Since the Government has already considered and rejected the op- tion of selling Air Madagascar's B-747 it is recommended that Government, with the assistance of Air Madagascar, take all measures possible to devel- op and encourage tourism in order to increase load factors and thereby im- prove the financial performance of Air Madagascar.  - 9 - I. SECTOR OBJECTIVES, PLANS, AND RESOURCES Objectives 1.1 The Government has had three main objectives in the transport sector. First, it wished to create an integrated transport infrastructure, notably paved highways, thal: linked the main regions of the country. Second, it wished to play a more significant role in international trans- port by bringing a part of Madagascar's transport links with other coun- tries under Malagasy control. Third, it wished to extend the State's con- trol over the sector as a whLole. That these have been the Government's main objectives is apparent from a multitude of actions, expenditures, and statements, but nowhere are they clearly and explicitly formulated. Other objectives, such as proper maintenance of existing infrastructure and re- construction of the road linking Antananarivo to Toamasina, receive at least equal mention in official documents but have been neglected in prac- tice. The Government appears to have been torn between political and eco- nomic objectives and the political objectives have prevailed. They are un- derstandable in the context of the country's political evolution, but the excessive emphasis on them at the expense of economic objectives has led to the disintegration of much of the existing transport system and has been ultimately self-defeating. It is now unlikely that Madagascar can make much progress towards its original plan of constructing its integrated road system during this decade and, though it has acquired aircraft and ships for its external communications, it has become more dependent on financial and technical assistance for their operation. A great extension of state control has been achieved, but: at the expense of an alarming deterioration of the transport system, which can be partly remedied in the short term only by restoring the private sector. 1.2 The main feature of the Government's objective regarding infras- tructure has been the dream of the authorities since 1890, of building a system of paved highways radiating from the central plateau and going around thecoast. The road system that evolved, however, responded mainly to immediate economic needs. As late as 1972, the short length of highway network that was not on the central plateau consisted of isolated stretches adjoining some ports. Some regions had, and still have, no overland con- nections with the rest of the country, as, for instance, the provincial ca- pitals of Toliara and Antseranana, which still depend almost entirely on the sea for merchandise transport. The main link between the port of Toa- masina and the central plateau area - the country's lifeline - is the ina- dequate railway system, maintenance of the old road having been neglected through the 1960s to ensure demand for the railway. Areas with crops to market were relatively well endowed with earth and gravel roads to the ports and the main transport axes, but the rest of the country was neglect- ed and difficult to reach. The lack of overland communications explains why Madagascar has developed an air transport network that is denser than in most comparable countries, and the Government has been anxious to extend this network. On the other hand, its interest in improving port infras- tructure has been limited, at least partly, because it has hoped roads would replace coastal shipping.  - 10- 1.3 The Government's desire to increase its control over Madagascar's external transport links stemmed from apprehensions over their cost and se- curity. The overall freight costs (excluding insurance) of imports and ex- ports are high, equivalent to 16 percent of exports in 1979. It was be- lieved that the international shipping conference, the CIMACOREM, held a near monopoly of the country's external merchandise transport and set its tariffs accordingly. At the same time the feeling of security was low; the two ocean going ships under Malagasy flag carried a very small part of the country's cargoes. The Government, therefore, purchased two new vessels in 1980 and 1981. However, recent data show that the CIMACOREM carries only 20 percent of these cargoes and that the SMTM, the Malagasy shipping line belonging to the conference, carried the largest share of all the members. Malagasy negotiators have also shown that they can limit the conference's tariff increases. The situation with air transport seemed satisfactory since Air Madagascar made a small profit in 1978 with a B707 flying to Paris and two B737s able to reach neighboring countries. However, it re- placed the B707 with a B747 and added some small aircraft to its domestic services. Since then it has been in financial difficulties that jeopardize both its domestic and international services. These difficulties have also been aggravated by the 1979 fuel crisis. The costs to the country of the two new ships and the B747 are probably much above the economic benefit. 1.4 The motivation behind the Government's desire to extend its con- trol over the transport sector was primarily a desire to take the distribu- tion system out of the hands of the non-Malagasy minority that dominated it and secondly its socialist ideology. The trading enterprises that col- lected and marketed crops, or those with the largest import/export and wholesale businesses, were nearly all owned by non-Malagasies. As the experience of other countries shows, a strong political reaction against this state of affairs was inevitable; in fact most of the takeovers of en- terprises engaged in rural areas occurred under the conservative government preceding the present one. It was encouraged by the widespread but mis- taken belief, also shared by other countries, that the intermediaries ex- ploited both peasant and consumer by charging excessive prices for services that the State could provide better and cheaper. After 1972 the State took over all the large trading houses, created some new ones, and excluded the private sector from all large scale commerce with the rural sector or from any dealings in rice except at retail. With this, the State role in road transport became a major one. The present Government took over the SMTM; the coastal shipping company, the CMN; and the three petroleum companies, which had their own distribution systems. One result was to give it the greatest share in Malagasy shipping. Despite its socialist organization, the present government has taken over very little else in the transport sector, though it has neglected the needs of the private sector. 1.5 In addition to having acquired greater direct control over econo- mic activities, the Government now fixes most consumer, producer, and ex- port prices. Several motives lie behind this policy: protecting consumers, encouraging some producers, and augmenting Government revenues from ex- ports. The rules governing the determination of prices are not precisely  - 11- laid down, but generally prices are calculated from estimates of costs. Since transport enters into nearly all activities, the Government has fixed road transport tariffs for the various types of vehicle in Madagascar ac- cording to estimates of the costs of efficient firms. These tariffs are supposed to apply to all transporters, but being based on assumptions that are excessively optimistic, particularly under the present difficult cir- cumstances, they are well below actual costs and private transporters re- fuse to abide by them. The authorities seem resigned to allowing the pri- vate sector to charge according to the market, even when working for the public sector, but state controlled enterprises must still accept the offi- cial tariffs for their transport operations. Planning and Resources 1.6 Having set itself these ambitious, non-economic objectives, the Government has failed to develop coordinated and practicable policies for achieving them. This was particularly marked with its investment plan- ning. The first development plans came out in 1978, comprising a long term plan, 1978-2000, (LTP) and a medium term plan, 1978-80, (MTP), but they were too unrealistic to be of practical value and there was not enough ins- titutional support for their implementation. In the transport sector the absence of clear, authoritative statements of the objectives and their non- economic nature made it harder to devise planning criteria. Not answering to economic needs, the Government's objectives became ends in themselves, and transport planning lost its connection with the rest of the economy. This may be why there is scarcely any mention of transport in the LTP. The MTP contains lists of transport projects, but without indications of priorities or economic justification. They broadly correspond to the ob- jectives described above, though compiled with little modification from lists submitted by the Ministries of Public Works and of Transport, and, as was the case with other sectors, the total estimated cost of the projects is much above any realistic estimate of financing possibilities. The ac- tual outcome for 1978-80 bore little relation to the MTP; ministries and other government agencies introduced new projects according to their own choice or following directives from the political leadership. The data available do not permit precise comparisons of intersectoral allocations of resources. The only comparison possible at present is a rough estimate of overall investment in transpDrt with total gross fixed capital formation in the economy for 1980. Investment in 1980 (FMG billions) Infrastructare 80 of which transport 7 (use 1980 Travaux Publics budget) Machinery and equipment 80 of which transport 27 Thus transport took up 21% of gross fixed capital formation, which does not accurately reflect the importance of the sector to Madagascar.  - 12- 1.7 The MTP was far beyond the resources available to Madagascar. The country had extremely limited domestic resources and it lacked the ins- titutional arrangements and the political inclination to prepare a medium term external borrowing strategy. Prolonged economic stagnation since 1972, rapidly increasing social expenditures, and the contraction of the private sector, had made even recurrent expenditures difficult to finance from domestic resources. Up to 1978 the Government's budgetary and balance of payments policies had remained cautious and external borrowing had been kept low; but the disorganization caused by the wave of reforms and take- overs combined with the departure of expatriate technical personnel on whom Madagascar depended had greatly reduced the economy's capacity for imple- menting projects. In 1978 the Government tried to break out of the impasse by obtaining from abroad the necessary financing for a high rate of invest- ment and, being in a hurry and lacking experience in preparing external borrowing programs, it did this by giving certain ministries and other agencies freedom to contract commercial loans without any coordination. This is illustrated in Table I below. Table 1 Debt Incurred for Transport Sector 1972-80 (Commitments in US$ million) 1972 1973 1974 1975 1976 1977 1978 1979 1980 9.5 31.81/ 9.1 5.6 29.3 24.7 90.3 116.0 36.6 Source: World Bank 1/ All IDA/IBRD In 1979 an investment boom took place in all sectors of the economy, which has left Madagascar with an unmanageable debt burden. The transport sector took a large share of the investments. Road projects were financed on the whole on concessional terms, but ships, aircraft, vehicles, were financed on commercial terms with suppliers' credits and bank loans. Few of these investments yield commensurate economic or financial benefits, many having been undertaken with little technical preparation and no calculation of economic returns. Consequently as a whole their benefits are far below the costs of their debt servicing.  - 1- Table 2 Servicing on Transport Sector External Debt, 1978-85 (US$ million) 1978 1979 1980 1981 1982 1983 1984 1985 Transport Sector debt up to 1980 7.4 1.5.2 23.4 36.1 40.0 39.7 37.2 31.4 Transport sector debt 1978-80 - 7.4 16.1 27.9 31.6 31.5 31.0 25.1 All official debt up to 1980 19.0 34.3 59.4 171.0 214.6 211.1 189.7 145.5 Source: World Bank 1.8 The excessive emphasis on new investments greatly aggravated Madagascar's longstanding inability to maintain its existing capital stock. This was particularly true of the transport sector. The budgetary allocations for road maintenance dropped sharply after 1972 and have remained insufficient for even the most urgent needs. Table 3 Expenditures from Recurrent Budget on Transport Sector by Ministry of Public Works 1972-82 (FMG millions) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 (budg.) 550 158 81 275 405 n/a n/a 832 608 296 880 1/ Source: Ministry of Public Works and First Plan 1978-80. 1/ Includes FMG 383 million in capital budgets for road repair. It is true that the Ministry of Public Works' submissions to the budget in- cluded much larger allocations for road maintenance than were accorded, but they were accompanied by enormous submissions for the construction of new infrastructure. Since the Directorate of the Budget in the Ministry of Finance and Planning received equally unrealistic submissions from other ministries, the budget could only accommodate a fraction of the requests and even then they involved a high degree of borrowing from the Central Bank. The problem was aggravated by the policy of the Ministry of Public Works of including in its submissions a large number of projects in order to secure for each a budget entry that would imply a commitment that could be used in the future, although it was clear that the resources would be unavailable for a long time. Thus the Directorate of the Budget was placed in the difficult position of having to decide on how much to allocate for each budget entry, a task for which the MTP, because of its lack of real- ism, was no useful guide. Although the final outcomes were generally de- termined by discussions of the Directorate of the Budget with the Ministry  14- of Public Works and the political leadership, the final results indicate that the general procedure was to leave externally financed projects more or less as requested by the Ministry of Public Works and to reduce other items in roughly equal proportions. Thus for the national budget of 1982, amounting to FMG 134 billion for recurrent expenditures and FMG 50 billion for the capital budget, the Ministry of Public Works submitted requests for FMG 5.9 billion for road maintenance, whereas the budget only allocated FMG 0.9 billion. Table 4 Budgetary Requests for Recurrent Costs on Transport Sector by Ministry of Public Works 1979-81 (FMG billions) 1979 1980 1981 1982 7.9 7.1 4.8 5.9 Source: Ministry of Public Works 1.9 A similar pattern emerged with regard to the foreign exchange al- locations for spare parts. The imports of ships, aircraft, buses, and trucks since 1978 amounted to US$ 228 million, as compared to total exports in 1981 of roughly US$336 million and debt servicing in 1981 of US$171 million.l/ Once again projects financed externally went ahead while raw materials and spare parts essential for operating and maintaining the existing capital stock were in short supply. Consequently the vehicle fleet, as well as the airline and the coastal shipping fleet, which is mostly old, are desperately short of spare parts. Table 5 Major Equipment Imports c.i.f. 1977-80 (US$ millions) 1977 1978 1979 1980 Buses 7.1 1.8 7.5 5.6 Trucks and vans 11.8 11.8 23.5 43.3 Vehicle parts and components 6.1 6.6 9.6 10.7 Ships (civilian) - - - 55.5 Aircraft (civilian) - 52.6 - - Total 25.0 72.8 40.6 115.1 Sources: Ministry of Transport, Supplies and Tourism; World Bank 1/ Debt servicing for the period January 1981 to June 1982 is being rescheduled by an agreement reached with the Paris Club in April 1981. The figures here are not adjusted for that.  - 15- Transport Coordination 1.10 Another obstacle to fulfilling the plan was insufficient inter- ministerial coordination and consequently a lack of commitment to the plan. The MTP had been drawn up by the Directorate General of the Plan (DGP) from lists of projects submitted to it by the various ministries. Being part of the Ministry of Finance and Planning, the DGP itself had no authority over other ministries, but the MTP derived authority from being part of a law on socialist planning and having been endorsed by the National Assembly. This rather formal obligation on the implementing ministries that the plan represented did not compensate for a lack of dia- logue between DGP and ministries in preparing the plan and the absence of a process for reaching a consensus on it. Moreover the authority of the plan was undermined by the existence of a number of commissions in the Joint Council of the Government consisting of the Supreme Council of the Revolution (SCR) and the mlnisters. A Commission for Infrastructure and Transport was in fact the highest policy making authority for the transport sector, responsible for coordinating the work of different ministries. It could introduce new projects as well as intervene in the day to day ma- nagement of the sector, but it is not clear how far its members acted in their individual capacities, as opposed to acting on decisions agreed on in meetings of the commission. 1.11 Coordination within the transport sector is complicated by the fact that the sector depends equally on three different ministries. The Ministry of Transport Supplies and Tourism (MTST) is responsible for road transport, the railway, air transport, shipping, and ports. However its actual degree of control is in practice limited. Only a small part of the state owned road transport system is under its control, and consists of en- terprises that are supposed to enjoy some autonomy in their management, while the construction and maintenance of roads, airports and ports are the responsibilities of the Ministry of Public Works. Similarly the railway, Air Madagascar, the shipping companies, and the Port of Toamasina are auto- nomous enterprises. The other ports are under the direct control of the Ministry. It is the Ministry's responsibility for supplies that gives it some authority to direct transport movements, though here again this autho- rity is mainly restricted to the railways and shipping. In both these sub- sectors, but especially with the railway from Antananarivo to Toamasina, one of the principal bottlenecks of the economy, the Ministry, of its own accord or at the request of the political leadership, routinely determines priorities. But even with the railway, its authority has been limited. Before May 1982 the accountaLnt of the railways company came under the au- thority of the Ministry of Finance and the railway budget- and tariffs were determined jointly by the two ministries. Reorganization of financial and management functions of the railway are conditions for reinstating the second railway credit which was suspended on June 23, 1982. 1.12 The importance of the Ministry of Industry and Commerce (MIC) arises from its control over a large proportion of the road transport sys- tem; its responsibility, jointly with the Central Bank, for determining im- ports; and its control over most prices. All the enterprises responsible for the collection and marketing of crops, with the exception of SINPA, (Soci6t4 d'Int4r6t National pour la Production Agricole) which comes under the Ministry of Agricultural Production and Agrarian Reform, are under the MIC's authority and they, with the private sector, account for the majority  - 16- of road transport. They too enjoy autonomy in principle but are frequently directed by the Ministry to carry out priority tasks. The MIC's control over imports is vital to the transport sector because of the scarcity of spare parts and, to a lesser extent, of vehicles. Imports are obtained through a tedious process of obtaining import licenses from the Ministry and foreign exchange allocations from the Central Bank. With the current acute balance of payments problems only a fraction of licenses actually re- sult in imports and decisions are made from day to day by the Central Bank in consultation with the MIC. The local vehicle assembly plants come under the MIC's control both because they are industries and because they import all components. Very few CKD parts for assembly have been imported since 1980 and so these plants are mostly idle. The main additions to the vehi- cle fleet recently have been Government imports of 1,000 East German IFA trucks, being distributed to various users, and 400 Spanish EBRO trucks for the army's transport enterprise, the "Regiment du Train". The private sector has been unable to import vehicles since 1979. These imports of trucks were decided on in 1979 by the political leadership, apparently wi- thout consulting the enterprises. The MIC's responsibilities for commerce include the greater part of administering price controls, though most deci- sions on prices of essentials and export crops are political decisions in which the MIC has a technical advisory role. 1.13 The Ministry of Public Works (MPW) is responsible for the con- struction and maintenance of most infrastructure, the greatest part belong- ing to the transport system. It is meant to be a ministry that responds to the requirements of others, but in practice its construction programs re- flect mainly the long term objectives of the political leadership. Though the determination of its priorities is obscure, it appears that, where the Ministry does not itself decide its activities, it responds to the Commis- sion on Infrastructure and Transport. There is little trace among its lists of highway projects of responses to the requirements of other minis- tries, especially the MTST and the MIC. Nevertheless these are the lists that had been accepted with little modification by the DGP. 1.14 In principle, these ministries are concerned with infrastructure and regulatory functions, while the rest of the transport system functions through enterprises. The theory behind this is that the dominance of state controlled enterprises safeguards the public interest while ensuring the autonomy required for efficiency. In practice, however, neither this Government nor its predecessors have been successful in reconciling the desire to allow autonomy with their choices of priorities that are not re- flected in prices or in any other signalling mechanism that an enterprise can directly read. For example, the government attaches great importance to avoiding local shortages of commodities classified as "essential", in- cluding rice, gasoline and cooking oil, whose prices are fixed. It there- fore must instruct enterprises to make the required collections and deli- veries. For reasons such as this the search for autonomy has never been wholehearted and the various pieces of legislation enacted since indepen- dence have only resulted in several categories of enterprises. each with its special features, but no real autonomy. The transport sector spans all these categories. For instance, up to May 1982 the railway was an "Entre- prise Publique a Caractare Industriel et Commercial" (EPIC) based on legis-  - 17- lation of 1968 while the port of Toamasina is a Socialist Enterprise as provided for in the Charter of Socialist Enterprises of 1978. But even if legislation had been more successful and less heterogeneous, a great deal would still depend on attitudes. The authorities are too conscious of im- mediate priorities such as delivering rice quickly to where it is in short supply, to be willing to trust to a system that is more automatic, like the market, even though they are fully aware of the importance of efficient ma- nagement. Moreover, as the economic situation deteriorates, scarcities grow worse and the apparent need for intervention increases. The only way out of this vicious cycle is to permit the private sector to engage in at least some of the collection and distribution activities they are excluded from, while adjusting price poLicies. Intermodal Coordination 1.15 In the past, intermodal coordination was not a consideration as the transport systems operated independently with only limited interfere at modal connection points. Coastal shipping provided service where no roads existed and the railway was protected in a monopoly situation on its main axis from Toamasina to Antananarivo by Government regulation which limited trucks to five tons gross weight on the very poor road which was intention- ally not maintained. Air transport mainly provided passenger service to isolated areas not easily accessible by other modes. However, domestic air transport of freight has been increasing and in 1980 it accounted for 23% of capacity available on domestic services. 1.16 However, as each of the sub-sectors developped, the Association tried to get the Government to give more importance to intermodal planning since it was obvious that resources were limited and a lack of proper coor- dination could result in bad resource allocation. An attempt to remedy the situation by including a "Transport Planning and Coordination Study" under the First Railway Credit was not successful due to Government's reluctance to accept technical assistance and the fact that the Ministry of Transport and the Ministry of Public Works were reorganized as separate units. In addition, these Ministries lacked the sufficient numbers of qualified staff to be assigned as counterparts to the consultants carrying out the study. As a result, the study produced little other than voluminous reports on the transport situation in Madagascar. [.17 During the 1970's the Government continued to invest heavily in the expansion of its transport system by adding to the road network, ex- panding air transport facilities, purchasing new ships and aircraft without any thought of transport demand and intermodal considerations. As a re- sult, Ministries and transport agencies operated in a vacuum without really knowing or caring about other ports of the system. The result now is a system with overcapacity in soire areas (i.e. coastal, shipping ports) and undercapacity in others (i.e. railways). The costs to the economy of this mismanagement is tremendous particularly in lost time and reduced output. Manpower Resources 1.18 From independence up to 1972, Madagascar benefitted from ample foreign technical assistance, mostly french, to help it operate its insti- tutions including those involved in the transport sector. From 1972 on- wards, the Government's objective of "Malgachisation" saw their numbers re- duced to the absolute minimum. The exodus of technical experts along with  - 18- the lack of a cohesive plan to replace them through training led to a mark- ed deterioration of the services provided by the institutions and para- statals operating in the transport sector. This combined with policies which concentrated on new investments rather than maintenance resulted in seriously deteriorated levels of service for all but particularly surface modes over a period of time. 1.19 The need to improve the capabilities of the local staff was re- cognized by the Association in the mid 70's and to this effect a transport planning and coordinating team was financed under the first railway credit to help the Government in its transport planning function and train local staff. However due to the Government's unresponsiveness to this need and because the consultant's team arrived in Madagascar just at the time when the Ministries of Transport and Public Works were split, the study did not achieve the results sought. Because of its indifference to the objectives of the study the Government did not appoint sufficient motivated candidates as counterparts and the training results desired did not materialize. How- ever the Government has now recognized the need for careful planning and coordination and has recruited suitable candidates in the Ministry of Transport, Supplies, and Tourism who, if given the task, can assist the planning efforts. 1.20 With respect to the training needs of the Public Works Ministry the Association through its ongoing projects is helping finance the con- struction of training facilities and is providing technical assistance and equipment to help the Ministry fill its need for qualified staff. With respect to the road transport industry there is not a training program since drivers and mechanics are usually formed on the job. There is a de- finite need however in providing operators with management training, cost accounting and operations planning. 1.21 The major shortcomings in human resources in railways, ports and aviation center mainly on managerial and planning capabilities. Informa- tion is lacking on the training needs of operational personnel in these sub-sectors. A 1980 study of civil aviation carried out by ICAO (Interna- tional Civil Aviation Organization) pointed out the deficiencies in train- ing which could be met by overseas training. In the case of the railways there is not an established training program beyond the apprenticeship stage except for "ad hoc" scholarships financed by foreign grants. For ports, there is no established program to identify training needs and pro- vide a program to improve staff skills and any action will depend on the strategy to be adopted following the. study on ports and coastal shipping expected to start by mid-September 1982. As part of its overall planning and coordination function, the Ministry of Transport should, with the assistance of a training specialist, identify the shortcomings for each sub-sector and prepare a program as part of an overall rehabilitation pro- gram for the sector in close collaboration with the local university so that programs which are responsive to identified needs can be established.  - 19- II, THE PRESENT SITUATION Transport Infrastructure A. Roads 2.1 A comparison of a road map of Madagascar in 1972 with one giving the present situation would show no great change. The paved highways of the central plateau have been extended a little; the stretches around the coastal towns of Mahajanga and Manakara are now joined to the plateau sys- tem, and new stretches exist in the North and East. The total length of paved road has increased from 3502 km to 3957 km. However the road link between Antananarivo and Toamasina, which was neglected since the early 1960's and has been undergoing reconstruction with Chinese assistance since 1978, is still far from complete. Approximately 80 km going South from Toamasina are ready, but the stretch of about 150 km from there to noramanga, from where the paved road to Antananarivo is in fair condition, remains scarcely passable, even in the dry season. The unpaved road system of 10,170 km has scarcely ch.anged. There is still no year round road link between the plateau area and the northern and southern ends of the country and within these areas, especially across the South, communications remain poor. 2.2 What a map now would not show would be the marked deterioration of most roads. Among the paved roads the greatest problem arises with the road from Antananarivo to Mahajanga, since it is one of the most important in the country. A truck was able to perform the journey in eight hours when the connection was completed, but now requires three days, and heavily laden trucks frequently have to be unloaded in order to pass some bad spots and to be reloaded after that. The condition of earth and gravel roads is alarming since these are the roads used for collecting crops and many have reached the point of being impassable to almost any vehicle in the dry sea- son. An inventory of the most important such roads that need urgent repair is estimated to exceed 2000 km. The main reason for this serious deterio- ration of the road system is, as already mentioned, the lack of maintenance over the last ten years. But a contributing factor has been the excessive- ly heavy loads that are continually carried over them. In some places the road will be further damaged since the only way of transporting vitally im- portant export crops along them is by four wheel drive vehicles, with loads of 1-2-2 tons, that tear up road surfaces. B. Ports and Shipping 2.3 In addition to its obvious dependence on international shipping, Madagascar also depends on coastal shipping to circumvent its difficult overland communications. The primary international port is Toamasina, which handled 667,000 tons of general cargo and 763,000 tons of petroleum products in 1980, but there are three secondary international ports, Mahajanga, Antseranana, and Toliara, which respectively handled 160,000 tons, 180,000 tons, and 85,000 tons in 1980 (ANNEX I, Table 1). Besides these ports, the 5,000 mile coastline is dotted with about 20 primary and secondary coasting ports, of which only two handled more than 50,000 tons in 1980, others handling 5,000 to 20,000 tons.  - 20- 2.4 Even a small port may be vital in its area, but most of the ports are hampered by inadequate connections with the areas they serve. The cen- tral highlands are mainly served by Toamasina via the railway to Antananarivo, though, since the railway is often unable to handle all the traffic, recourse must be had to the old road, which is all but im- passable. Mahajanga's role as an alternative port for the highlands is at present also restricted by the condition of the road to Antananarivo. None of the other ports serves beyond its neighboring areas, and in many cases, such as Antseranana, Toliara, Maintirano, and Vohemar, the ports may be the only practicable way for merchandise traffic to reach these areas. 2.5 The ports often operate in difficult conditions, though the in- frastructure would be in general adequate if properly maintained. Silting and shallow draft are common problems, while on the east coast winds and waves can be high and cyclones occur during December to February. Toamasina has adequate berth and storage facilities for the foreseeable needs of the medium term. Antseranana, once a French naval base, has an excellent deep water port and dry dock facilities that give it the poten- tial of becoming a ship repair center for the western Indian Ocean if its management problems can be overcome. The other ports rely mainly on light- ers and LCTs, but the levels of traffic do not seem to warrant any exten- sive construction. 2.6 Along the East Coast, going from the Toamasina harbor 600 km to the South, almost in a straight line, is the Pangalanes Canal, the only im- portant waterway in the country. This canal has fallen into disuse but is being rehabilitated and could become a valuable means of transport, espe- cially for the cash crops of the south east region. However no study has yet been done to demonstrate its economic viability. C. Rail Transport 2.7 Madagascar's railway consists of two unconnected single track systems totalling 860 route-km. The northern system (about 700 km) includes: (i) the TCE, a 376 km section from the port of Toamasina to Antananarivo, in which corridor the railway constitutes the only surface transport means, (ii) the TA, a 154 km section from Antananarivo south to Antsirabe, industrial town and center of a densely populated area, and (iii) the MLA, a 167 km section north from Moramanga to the agricultural region of Lake Alaotra and the chromite mines. The southern system (FCE) connects the regional center of Fianarantsoa and the agricultural areas in the southern plateau region to the port of Manakara. 2.8 In general, the railway's network is in poor condition due to the lack of regular maintenance; speed restrictions caused by the deterioration of the track are numerous; and most of the major civil works need to be re- habilitated for safety reasons. The railway is undertaking a track rehabi- litation program, but implementation is slow due principally to its limited absorptive capacity.  - 21- 2.9 Any operating problem on the railway affects directly the whole economy since the major part of Madagascar's international traffic moves on the TCE line. This monopoly will however cease as soon as the road bet- ween Antananarivo and Toamasina is complete. Traffic on the TA line has been traditionally very low, but could increase drastically in the future when the major Government projects under implementation are completed; (flour mill, soja and cement plants in Antsirabe and fertilizer plant in Toamasina) although the rail line is paralleled by a paved road, it is ex- pected that most of traffic generated by these projects would be carried more economically by rail than by road in view of their bulk nature. The FCE line is in very poor condition and carries little traffic; any rehabi- litation of this line shouLd be carefully weighted against alternative transport means. An econornic study to be carried out under the second railway project on the FCE and TA lines has yet to be started in spite of Bank pressure to do so; any investments should await the results of this study. D. Air Transport 2.10 Because the Republic of Madagascar is a large island with diffi- cult terrain, widely dispersed communities and a relatively poor surface transport system, air transport has played a significant role as a means of communication both internally and internationally (ANNEX I, Table 2). The domestic air transport system serves no less than 52 regular points which is the densest of any country in Africa. 2.11 Agreements for international services have been negotiated at both inter-governmental and inter-company levels. International services now operated link Madagascar with France, Russia, Tanzania, Kenya, Mauri- tius and Djibouti. Agreements not yet operated are those between Madagas- car and Seychelles, Swaziland, Poland, North Korea, Romania, Cuba, Algeria and inter-company agreements with Air Afrique, Swissair and British Air- ways. These together with other agreements that may be arranged from time to time as well as inter-company agreements will ensure that adequate ser- vice can be provided on regional and international routes. Traffic on the international and regional routes is relatively small. The primary objec- tives would be to focus on the operating efficiency of the international airport of Antananarivo and the financial viability of each international and regional route operated by Air Madagascar, particularly in view of the low overall load factors (ANNEX I, Table 3). 2.12 Air Madagascar is the sole operator on the domestic routes, a dense network linking the capital city with towns in the interior and on the coast. The longest direct flight is about 800 km from Antananarivo to Antseranana while a number of towns on the network are less than 150 km apart. This can present problems with respect to efficient (least cost) aircraft operation particularly as the traffic is low (from 1,200 to 10,000 passengers per annum) for the majority of airports. A few major centers such as Tolanara, Nossy Be, Mahajanga, Antsiranana and Toamasina have a significantly higher utilization but even so, the level is so low that the system is unlikely to be self-supporting (ANNEX I, Table 4).  - 22- Transport Equipment A. Road 2.13 As with the road infrastructure, the Government has allowed the existing stock of vehicles to deteriorate while concentrating on new ones (ANNEX I, Table 5). Moreover its choice of vehicles, especially trucks, is poorly suited to the conditions of the country. There are estimated to be roughly 5000 trucks of all categories in use in Madagascar. Of these about 1500 arrived after 1979, while, half of the older vehicles are out of commission for lack of spare parts. Enterprises place a heavy premium on solidly built trucks that can operate on bad roads, notably Mercedes, Berliet, and Saviem, which constitute almost the entire stock of older trucks. In addition, they are now forced to use 4-wheel drive Unimogs where other trucks will not pass, though these have high operating costs. The more recently purchased vehicles were chosen largely because they were less costly, a false economy since they are unable to operate off the better roads. Furthermore the trucks purchased since 1979 have generally been too large for the smaller roads and are responsible for a great part of the damage to them. As a consequence, tnere is an excess supply of vehicles on good roads and an extreme shortage everywhere else. Even this excess supply however is not likely to last since the new trucks have the same problems of spare parts as the old ones. B. Rail 2.14 RNCFM is fully dieselized and has adequate traction with a fleet of 36 line locomotives, 22 shunters and 11 motorized railcars. During the last few years, the railway has undertaken a major renewal program of its rolling stock and locomotive fleet: 7 line locomotives were acquired in the mid 1970's, 7 are new and 2 more will arrive soon. The total fleet of freight wagons, passenger coaches and railcars consists of 975, 21 and 56 units respectively. 95 freight wagons and 15 passenger coaches were ac- quired in the last five years and 7 passenger coaches are still to come. In addition, the railway operates about 100 relatively new tank wagons for transport of petroleum products. Although about 250 units are more than 35 years old, the wagon fleet is in good condition. 2.15 Although the present rolling stock and locomotive fleet should in theory be largely sufficient to carry the present traffic, the railway has experienced major technical problems during the last few years; as a result it has not been able to carry the traffic offered, particularly in 1980 when the railway become a major bottleneck in international traffic, affecting the whole economy (ANNEX I, Table 6).. Although these problems are being resolved, the railway still needs to regain its past productivity levels. Substantial strengthening of operations planning, maintenance procedures and procurement is needed if normal utilization of equipment is to be regained and maintained; these should constitute the major objectives of the railway in the short to medium term.  - 23- C. Ports and Coastal Shipping 2.16 Coastal shipping is handled primarily by the Compagnie Malgache de Navigation (CMN) which was created in 1960 and is now 92% owned by the state. Its total shipping capacity is 13,900 tons in 9 ships ranging for 150 tons to 5,000 tons. The Compagnie Malgache de Manutention (CMM), a private operator in Mahajanga, has eight small barges ranging between 100 and 150 tons. In addition, there are 150 schooners and other traditional sailboats operating on the west coast. 2.17 The CMN operates a relatively modern fleet but is plagued by shortages of spare parts and difficult operating conditions and a low level of productivity among its labcurers. CMM manages through an incentive sys- tem to achieve higher levels of productivity than all other ports in the country but is also fighting a losing battle because of lack of spare parts. 2.18 The port of ToamasiLna is adequately equipped to handle its pre- sent traffic. On the other hand, the equipment of secondary ports (tugs, barges and cargo handling equ1ipment) is generally old and in precarious condition and the productivity is very low (about 100/150 tons/day). Under German financing (DM 5 million) Madagascar will soon receive some high priority equipment. Indications are, however, that this will not fill the needs and the Ministry of Transport has drawn up a list amounting to about US$3 million of additional necessary equipment. It is important that available resources not be too thinly spread over the large number of ports, but that new equipment be given to the highest priority ports. 2.19 Madagascar's aging shipping fleet was considerably expanded during 1979-81 by the acquisil:ion of four cargo boats and three LCTs. The two ships of 14,000 and 15,00D tons belonging to the Socigtg Malgache des Transports Maritimes (SMTM)2/, the state-controlled international shipping line, have been joined by two new Spanish built sister ships of 16,000 tons each. The remaining vessels were transferred to the Compagnie Malgache de Navigation (CMN), the state owned coasting company, which now has a fleet of nine boats ranging from a 5,300 ton cargo boat to a 250 ton LCT. The rest of the Malagasy merchant fleet consists of 11 privately owned vessels, all smaller than 2,000 tons, and five small tankers owned by the state oil coimpany, SOLIMA. These vessels are all used for coastal traffic, though occasionally some visit nearby countries. IX. Air Transport 2.20 The national carrier, Air Madagascar (Soci6te Nationale Malgache de Transports Aeriens), formed in 1961, provides all of the domestic ser- vice and international service to Nairobi, Mauritius, Reunion, Seychelles, Paris, Marseilles and Djibouti. The company operates one B747-200, two HS748 and five DHC6-300 Twin Otters on its regional and domestic services. 2/ One of these, the Manakara is chartered.  - 24- In addition five Aztecs, two Navajo and one Cherokee are available for air taxi/charter service but are not used in regular service (ANNEX I, Table 7). The Government holds about 80% of the shares outstanding, Air France about 18%, Compagnie Generale Maritime (France) about 2% and private holdings 0.01%. Organization and Management A. Road Transport 2.21 Road transport is the most variegated sub-sector of the transport system in its organization, both because it comprises state and private en- terprises and because for most of the state enterprises transportation is only one, albeit essential, part of their activities. In principle, there is free entry into the freight transport industry, after payment of appro- priate fees, taxes and insurance. However, in practice, there have been no new entrants into the industry over the last five years due to the unavai- lability of new vehicles, a general lack of spare parts and Government's policy of greater state control in the transport sector. Until recently the public sector did not include any enterprises that were exclusively de- voted to the road transport of goods, but entrusted the task to a number of large trading firms and some parastatals, like regional development agen- cies. However, at the end of 1980 the Govrnment created a trucking enter- prise in each Faritany, to each of which it is transferring 100-150 of the recently acquired IFA trucks. Moreover the army has set up its own truck- ing operation, the "Regiment du Train". The private sector, which includes numerous small owner operators and a few cooperatives, is relegated to a marginal role. 2.22 State enterprises dominate in the transport of commodities by road. Some are specialized by region or commodity. SINPA, for instance, is responsible only for rice in certain designated regions, including the collection, processing and distribution. Others, such as the enterprises responsible for exports, COROI, ROSO, SICE, and SOMACODIS, are trading firms and undertake the movement of a variety of commodities, including rice in certain areas. In some cases they have reluctantly had to increase their transport activities to satisfy the authorities or to compensate for the general decline of the private sector's activities. There has been a growing tendency for them to collect export crops, particularly coffee, cloves, and vanilla, directly from local traders, instead of awaiting deli- very from the traders. These traders, mostly Indian and Chinese, have to some extent escaped displacement by the State's takeover of rural commerce and growers still bring to them at any moment as much of their crops as they wish to market, but, because of the condition of the roads, the tra- ders are growing increasingly reluctant to transport, as they used to, to the warehouses of the state trading firms. Both the state trading firms and several parastatals undertake the collection and delivery of products they are concerned with. For example, regional development agencies per- form these activities for the crops grown in their areas, in addition to their other responsibilities, such as managing irrigation works, collecting dues, providing credit and inputs to farmers in their areas, and even run- ning schools and training facilities. Similarly, industrial enterprises often assure the delivery of their products to the trading houses or even to retailers.  -25- 2.23 The decision by the Government to create Faritany trucking enter- prises seems to have been sudden, prompted by the need to find suitable or- ganizations to operate the 1,000 IFA trucks it had acquired. These enter- prises were set up in haste and none of them has the trained personnel and the facilities for this kind of operation. Some have tackled the problem with ingenuity by creating enterprises in which potential users have shares and the management consists of people with transport and commercial ex- perience, but even they face difficulty in becoming viable entities. Very wisely, some of them refrain from using their trucks on the worse roads. Others have responded less effectively; one for instance, has put the en- terprise under the control of a former university official who had been obliged to leave his university post. Because of insufficient preparation, all these enterprises lack the facilities to store trucks and spare parts. In Antananarivo an old slaughterhouse is being used for the trucks, and spare parts are held by an Air Madagascar subsidiary. According to the purchase agreement for the IFAs, maintenance facilities will be provided and they will be distributed to the Faritany, but, since problems of debt repayment for these trucks have arisen, it is not clear when the remaining deliveries from East Germany will take place. Nor is there any specific plan as to how the Faritany will pay for their vehicles. Little is known of the army's "Regiment du rrain", which owns the 400 Ebro trucks recently :imported from Spain, except that, state enterprises that have used it com- plained of its high tariffs and of its unwillingness to travel on bad roads. B. Road Passenger Transport Industry 2.24 The passenger transportation system seems to be heterogenous, de- pending on location, and entry into the industry is relatively easy. Regu- ]Lations and urban fares are fixed by the Ministry of Transportation, and inter-urban fares are based on an official minimum-maximum rate system. Owner-operators and Cooperatives 2.25 There are three types of passenger transportation: owner- operators, cooperatives and bus companies. After purchasing a bus, a pri- vate operator obtains a license and works independently for one year, after which he is required to join a cooperative. If there is none on the line on which he wishes to operate, he can establish a cooperative by addressing the bureau professionnel, an advisory group under the Ministry of Transpor- tation, to obtain a permit to operate in a given zone. Bus companies 2.26 In addition to owner-operators and cooperatives, there are a num- ber of bus companies. In Antananarivo, there are two bus systems -- one urban and one inter-urban. The Malagasy transport company, Fitaterana Ma- lagasy (FIMA), a semi-public enterprise with stockholders, offers urban and  - 26- inter-urban transportation in and between Antananarivo, Fianarantsoa, Maha- janga and Toliara. The Antananarivo urban transport company, Fitaterana Banlieue d'Antananarivo (FIBATA), previously a public enterprise but de- signated for conversion to a socialist enterprise, was created to serve the capital alone. Both companies are trying to branch out of urban passenger transport to include the more profitable inter-city lines which are subject to less control. In Tamatave, the bus service is operated by the Societg d'Exploitation du Port de Tamatave (SEPT), set up as a subsidiary corpora- tion. It is not however a profitable operation. In other parts of the country, urban passenger transport operations, are entirely private. 2.27 Passenger transporters are burdened with many of the same pro- blems encountered by the freight transporters, namely poor road conditions, lack of spare parts, varied fleets and scarcity of fuel and lubricants. The major problem of the two bus companies, FIMA and FIBATA, are the fares: more political than economic, they are too low to cover operating expen- ses. In 1979, the bus fare in Antananarivo was 10 FMG (US$0.03); in 1980, 20 FMG (US$0.06); and from 1981 to the present, 25 FMG (US$0.07). In pro- vinces with fewer roads and area to serve, the fares are substantially higher: Mahajanga and Toliara, 30 FMG; Fianarantsoa, 40 FMG; and Toamasina, 50 FMG. 2.28 A second problem has been the fierce competition for profitable lines between the two companies. FIBATA became so desperate to minimize its losses in 1981 that it unilaterally abandoned service in parts of the city and began competing with FIMA for the latter's most profitable routes. 2.29 Because of the low fares and the difficulty of policing fare col- lection, operators are incurring losses and are often forced to curtail services resulting in shortages of public transportation, particularly in Antananarivo. The operating problem and especially the tariff situation need immediate attention to avoid further losses and continued deteriora- tion of service. C. Road Maintenance 2.30 Road maintenance is the responsibility of the Ministry of Public Works which has six regional district offices responsible for about 15,000 km of primary and secondary roads. In principle, at the beginning of each year, the proposed program for primary roads is submitted by the regional engineers to the Programming Directorate in the MPW for approval and coor- dination with other regions. The program of the secondary network is sub- mitted by the regional engineers to the political regional authority only for their approval. Maintenance funds in theory are distributed to the re- gional district offices in proportion to the length of roads they must maintain. Tertiary roads and tracks are supposed to be maintained by villagers using hand labour but in fact there is no maintenance carried out in part due to the scarcity of funds available to the local communities and the lack of staff experienced to supervise the operations.  - 27- 2.31 The most critica. problems currently affecting road maintenance are the lack of funds and a poorly organized maintenance operation. T.- Government's policy of decentralization has resulted in no overall planning of maintenance operations since the local decentralized collectivities d- cide on their own programs which because of political motivation are oriented towards new constriction. In addition the funds given to theem from the central government for maintenance are grossly inadequate and the- do not have any possibilities of raising revenues themselves (ANNEX Is Table 8). However, these problems were preceded by a government policy that shunned maintenance in favour of new construction as far back as 1972; as a result the network has deteriorated badly. The resulting backlog of aaintenance and rehabilitation is now so great that only a concerted effort to set up a program covering the remainder of this decade will be able to restore the most critical links of the network. D. Railway 2.32 The Malagasy Railway (RNCFM) is operated as a state enterprise attached to the Ministry of Transport and Supplies. It employs about 4,500 people, which is an optimum number for a railway of this size. An exten- sive review of the railway organization and management was carried out in l974-75 by external consultants financed under the Bank's First Railway Project. However, their most important recommendations, mainly concerning t:he financial planning, accounting, and information systems have not been implemented, pending a modification of the railways statutes to grant it a real autonomy especially on financial matters. This modification has just been enacted. 2.33 The major organizational problems are the following: On the op- erating side, there are major weaknesses in transport planning, and in overall maintenance procedures. These problems are exacerbated by Govern- ment's continuous interventions in day-to-day operations and in the esta- blishment of transport priorities. As a result, productivity indicators for the locomotive and wagcon fleet have substantially and continuously dLeclined. Strong action including some technical assistance is thus re- quired to install a proper planning process and reestablish transport operations on a more normal and systematic basis. 2.34 On the financial side, the Railway finances have deteriorated very rapidly and the railway has reached a state of bankruptcy (ANNEX I, T'ables 9 and 10). Despite twvo recent increases, the tariffs have not kept up with costs and operating losses reached FMG 1 billion (USF2.9 million) in both 1980 and 1981. In addition, the railways accounts receivable and payable have accumulated very rapidly leading to severe cash flow problems. The root of the problem is in the absence of a unified system of financial management. Accounting and budgeting functions are still shared by an "agent comptable" who is a civil servant reporting to the Ministry of Finance and the railway's own chief of financial services, with no one having real and overall responsibility or accountability over the railway's financial management. This situation led the Bank to suspend disbursements with the Second Railway Project on June 23, 1982.  - 28- 2.35 The railway has so far been basically seen by the Government as a "technical support service". Its performance was judged by its ability to provide the transport services required, but with little regard to produc- tivity, costs and tariff setting and financial performance. This policy has led to a progressive neglect of existing assets and deterioration of overall operations. A basic change in the management philosophy of the railway is thus required to use more modern management techniques oriented towards productivity objectives and commercial operations--the most important being appropriate budget, control and planning procedures. E. Ports and Shipping (a) Ports 2.36 With the exception of Toamasina, the ports are administered by the MTST, under legislation dating from the 1960s, and their budgets are annexed to the Government budget. Again excepting Toamasina, the handling of cargo within the port is done by several state owned companies, most of which were private firms in financial difficulties before being taken over. In the larger ports, storage facilities are owned by the chambers of commerce, though actual storage may be the responsibility of a cargo hand- ler. Toamasina has enjoyed a special position; the Societ6 d'exploitation du Port de Tamatave (SEPT) became autonomous, in 1970 under legislation creating a category of autonomous ports and became a socialist enterprise in 1978. As a socialist enterprise SEPT is managed by a Director appointed by the Government and a board with representatives of the MTST, the Minis- try of Finance, the SMTM, the Faritany and the dockers. The port handles the merchandise and the dockers are its employees. 2.37 Discipline and security have become matters of major concern in several ports. Toamasina has been plagued with labour problems for a long time and more recently thefts have become serious. Because of the labor problem, productivity has been low, despite generally adequate equipment. The usual rate of cargo handling by a gang of 20 dockers is about 50 tons per day, as compared to about 250 tons per day in Mahajanga where the Com- pagnie Malgache de Manutention provides financial incentives to its employ- ees. Labor relations in Toamasina are complex, since in addition to in- fluencing the management board through the workers' representatives, dock- ers act on Faritany representatives through local politicians. The level of theft has become alarming, despite the existence of three security forces to guard the port3/. Theft from the port is clearly well organized and is a major source of scarce imports for the parallel market. Some other ports have serious security problems too; in one a ship was sunk while entering the harbour in what was deemed to be a security related pro- blem. 3/ The Gendarmerie du Port, part of the Gendarmerie nationale; a detachment of the local police force; and the port's own security force.  - 29- (b) Shipping 2.38 Madagascar still controls only a small part of its maritime transport connections with other countries, but coastal shipping is largely done by Malagasy ships. The SMTM, which operates the country's four ocean- going vessels, carried only 7 percent of the 1.3 million tons of externally traded merchandise in 1981, while the CMN, some of whose coasting vessels visit nearby countries, carried another 3 percent. Nevertheless, within the CIMACOREM, the shipping conference for Madagascar, the Comoros, la Reunion, and Mauritius, to which it belongs4/ the SMTM carried more of Madagascar's merchandise trade than any other conference line. Ships operating under the conference carried 20 percent of Madagascar's mer- chandise trade, i.e. roughly one-third of non-oil cargo, in 1981. But they carried 83 percent of the cargo going to or froa the main European ports served by the conference (ANNEX I, Tables 11 and 12). Similar information is not available yet for coastal shipping. A study financed by the FAC is under way to examine the economics of coastal shipping and to plan its development as part of the overall development of the transport sector. 2.39 The SMTM, though a Malagasy limited liability company, is still heavily dependent on the conference's members, who own the 40 percent of its shares not owned by the Malagasy state. There nave been three basic reasons for this dependence. Firstly the predominant partner of the con- ference, La Havraise, which. was originally the main founder of the SMTM and now owns 20 percent of its shares, has played a major part in providing the officers of the SMTM. A few of the officers are French, but most are Malagasies who have gone through the standard French maritime training and promotion process under the auspices of La Havraise. Second, the SMTM has depended on the agencies of other conference members, especially of La Havraise, for business, though it has now began to set up its own. As long as the SMTM was the subsidiary of La Havraise, the parent company ensured that it carried adequate cargoes. However, having become a competitor and having more than doubled its capacity, its capacity utilization has dropped considerably while its import cargo includes a larger share of low value mierchandise than with the other conference members. It does better on exports because, although companies are under no formal obligation to use the SMTM, the Government can bring pressure to bear. The SMTM also tends to lose business because it has not managed to establish a reputation of regularity equal to that of the other conference members. A third source of dependence of the SMTM on the conference arises from the several technical services in ports, such as supplies and maintenance, that the other lines help it obtain. 2.40 In coastal shipping the state controlled companies, the CMN and SOLIMA, account for almost 90 percent of Malagasy tonnage, but the private sector still remains active. The CMN, 92 percent of whose shares are owned by the State, was also originally set up by La Havraise. It has had great- er personnel problems than the SMTM because its officers are less highly qualified and experienced. SOLIMA is the state owned oil company, with a 4/ The other members are the French lines SNCHP (La Havraise), CGM, SNC; the German line Hapag Lloyd; and the Norwegian SEAL.  - 30- complete monopoly of oil imports, refining, and distribution. All its ships are tankers. In addition to the state owned companies there are four private Malagasy coasting companies still operating. One or two small com- panies have ceased to operate in the recent past and at least one company is trying to enter into the business with chartered vessels. There are two other forms of shipping that should be associated with the coasting by lar- ger vessels already discussed. One is the dhow traffic, predominantly along the west coast, though it may also be active between Madagascar and the Comoros. Little is known of this form of shipping in Madagascar. Dhows are common all along the Indian Ocean coast and are often an effi- cient form of transport. The other is the river traffic where wooden barges owned by state trading companies are drawn by tugs to deliver cargo at the river mouth to small coasting vessels. This traffic has been sur- prisingly neglected probably because of its rather unsophisticated nature, even though its costs are low and the barges locally made. F. Air Transport (i) Civil Aviation 2.41 The Ministry of Transport is the agency responsible for adminis- tration of civil aviation airports and the government policies relating to Air Madagascar, the national airline. The civil aviation branch of the Ministry is charged with the responsibility of operating and maintaining a safe system for the airline operations. After reviewing air transport needs, the civil aviation branch in consultation with Air Madagascar, pre- pares plans for submission to Government for the necessary funding to operate the civil aviation system. Because of Government budgetary consi- derations, annual funds received fall short of needs and as a result a con- siderable maintenance backlog has been created. Many landing strips, par- ticularly those that are unpaved, have severe operating restrictions which is forcing Air Madagascar to operate sub-optimally. 2.42 With respect to airports, ICAO has established a requirement, for better communication and navigation facilities plus the ability to operate and maintain the equipment in an adequate manner. The ICAO study estimated an investment requirement in the order of US$10.5 million to completely re- habilitate the system including training and purchase of spare parts. As there are inadequate personnel to exploit such a system, a modest phased program of training and technical assistance would be appropriate until the staff is brought up to the necessary standards. 2.43 Airport investment should be concentrated on the airports where the B737 is or should be serving i.e., airports with stage lengths of 200 nautical miles or more and with more than 8-10 thousand passengers per annum. Investment should be limited to the work necessary to allow the B737 to operate without restrictions. In order to optimize benefits the  - 31- priority would be to improve first those airports where the traffic is heaviest, followed by airports that show strong growth potential. Consi- deration should be given to deferring investments such as radar, search and rescue aircraft, a new airport at Tamatave, etc. 2.44 For an island, national communications are a paramount necessity for development, and total dependence on foreign airlines would be politi- cally inacceptable hence the need for an effective national carrier. Simi- larly, with respect to domestic lines of communication, a reliable, regular air service for low traffic levels must be weighed against the cost of constructing, operating and maintaining an equivalent road network. It would therefore be useful for the Government to examine and evaluate the air route structure so that clear and rational policy decisions, reflecting a cost effective system, can be made and implemented. (ii) Air Madagascar 2.45 The overall performance of Air Madagascar may be summarized as follows. With respect to domestic flights the carrier has since 1978 main- tained an average load factor of over 60% (65% is generally considered to be at capacity). However, oni the regional and long-haul routes the average load factor has been low, particularly since the introduction of the more efficient B747. Although a. B747 can operate profitably at a lower load factor than many other aircraft, the low load factors now experienced (bet- ween 30-40%) indicates that serious consideration must be given to a ra- tionalization of the international route structure. The operating cost per ton-km increased 50% on the long-haul routes between 1973 and 1981 while the cost on the regional routes, including the cost of fuel rose by 126% in the same period. Excluding the cost of fuel, the increases were 8% and 41% respectively. The 8% indicates the effect of changing from the B707 to the B747 whereas the 41% reflects the B737 operating cost increase over the period. Fares, on the other hand, have doubled in the same period. Thus Air Madagascar has been reasonably efficient in operating its overseas fleet but has not been able to offset the low load factors. 2.46 On the domestic routes the domestic price of fuel varies consi- derably at the different points of call, up to 139% over the 1974 prices at the same respective airports. The operating costs for the B737 (including fuel) increased 158% from 1973 to 1981 and for the Twin Otter, 55% over the same period. Excluding fuel costs the increase in operating cost was 50% and 15% respectively. The general domestic fares have in- creased over 200% over the same period indicating that the carrier has relatively well managed its operations if fuel costs are excluded, since they are a factor over which it has no control. 2.47 Overall, the carrier would appear to be in a reasonably good po- sition. The B747 is a very effective aircraft with the capacity to meet growth. It can be can be very effective on both regional and domestic routes in view of its low seat/ton/km operating costs. From the informa-  - 32- tion at hand the use on regional routes should be carefully evaluated. On the domestic routes the aircraft is constrained. A program to make mar- ginal improvements to airports where the 737 can be utilized (i.e. those with a sizeable established and proven market) should be undertaken in order to take advantage of the cost effectiveness of the aircraft. There is no point in having an efficient aircraft that is used inefficiently. 2.48 Although the airline has incurred losses in the past few years (ANNEX I, Table 13), it should be in a position to be profitable if the country economy is stable. With improvements in services, the airline will fill a definite transport need. The possibility for improvement is, to some degree, related to improvements in airport infrastructure. Transport Tariffs A. Road Transport 2.49 The Government has fixed tariffs for all road transport. The tariffs for goods transport are calculated on unduly optimistic assump- tions, and in the case of export crops, estimated average transport costs are included in the margins the trading firms may retain. Since transport tariffs are part of the general price controls for goods and since enterprises may have different functions with respect to the market- ing and distribution of the same goods, the tariff system is quite com- plex. Broadly speaking, export crops are profitable to collect and to ex- port provided the conditions of roads and vehicles are not very bad. How- ever, road transport activities of passengers and freight carriers are mostly unprofitable. The assumptions used to calculate the tariffs are overly optimistic in several respects. First, it is assumed that repairs and maintenance come to only 30 percent of fuel costs, whereas they are ac- tually over 100 percent under present conditions. Second, it is assumed that trucks operate at 70 percent of capacity, though half that figure would be more realistic for those that are in operation. A higher propor- tion of the trucks are out of commission because of the unavailability of parts than is allowed for in the tariff calculation. There are also some minor errors in the calculations such as, assuming fewer wheels on some larger trucks than is the case. The public sector has to abide by these tariffs, but the private sector generally ignores them, even when trans- porting for the public sector. B. Railway 2.50 The railway operates at a deficit; although expenses could be re- duced to some extent through better financial and budget procedures, the main reason for the deterioration in the railway's finances has been the absence of adjustment in tariffs to keep up with inflation during the last ten years. In addition tariffs are not linked to the cost of services. Transport of priority products, passengers and low density lines are heavi- ly subsidized, because they are seen as social services; however, because of the inadequacy of the tariff structure the Government does not know the real cost of the subsidies involved by the low tariffs.  - 33- 2.51 A recent costing exercise was carried out by an external consul- tant with the help of the railway's costing team. The preliminary results show that the overall passenger traffic is heavily subsidized, but that while the tariffs for second class passengers cover the full costs of transport, first class passengers pay less than half their marginal trans- port costs and about a third of the related total transport costs. This clearly shows that the soc.ial goals of the Government may not be achieved through the granting of a general subsidy. Likewise, tariffs for suburban passenger traffic cover less than 20% of the related transport costs, indi- cating the need to carefully review all alternatives to satisfy this trans- port demand. 2.52 The present railway project financed by CCCE and IDA provides for the setting up of a costing system and economic studies of the low density lines. These will help the Government in defining an appropriate level of tariffs and possible transport alternatives and the Railway's management in defining where basic reorganization of the present operations is needed. These studies and the implementation of a permanent costing system should serve as a basic management tool to define an appropriate tariff structure and to continuously monitor the costs of services. These systems, however, operated satisfactorily before the overall financial and budget procedures of the railway were reorganized and integrated, and some degree of autonomy in tariff setting has been granted to the railway. C. Maritime and Air Transport 2.53 Tariffs for shipping and air transport can be broken down into two categories. For international services, tariffs set by conferences or competition are the rule and Malagasy carriers have little flexibility in the matter. In the case of domestic transport, Government tariffs are set at levels which are unremunerative. In many cases coastal shipping or air services to small communitieas are the only reliable means of transport. If the state wishes to maintain these services, a direct subsidy should be paid to the carriers involved rather than attempting to force carriers to maintain low tariffs and absorb the loss. Such a policy cannot be pursued over a period of time since it forces carriers to consume their capital to continue operating and in time they will be forced out of business. Even- tually the economy as a whoLe will have to absorb a greater loss of replac- ing equipment or having to do without transport services. 2.54 Although Madagascar has little control over tariffs of interna- tional shipping, it has managed to influence the CIMACOREM's tariff deci- sions. The island's geographical location makes it costly for shipping and most of the consignments it receives are quite small which increases trans- port costs. Further, its bargaining position is weak. Nonetheless the Go- vernment has recently been able to postpone tariff increases of the con- ference which the Comoros, La R