Madagascar - Second Mangoro Forestry Project

Docu TheWa Wn ; Report No. 9705 PROJECT COMPLETION REPORT MADAGASCAR SECOND MANGORO FORESTRY PROJECT (CREDIT 1161-MAG) JUNE 21, 1991 Agricultural Operations Division South-Central and Indian Ocean Department III Africa Regional Office 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.  EXCHANGE RATES Unit: Malagasy franc (FMG) Year US$1 equivalent 1982 367.7 1983 492.2 1984 658.0 1985 635.8 1986 769.8 1987 1234.9 1988 1526.4 1989 1532.5 1990 (March) 1538.9 ABBREVIATIONS ABEDA Arab Bank for Economic Development in Africa FANALAMANGA Fanjarian' Ala Ambatondrazaka-Moramanga - Mangoro Forest Company (Project Entity) FAO United Nations Food and Agricultural Organization FOFIFA Parastatal organization responsible for forestry and agricultural research GOM Government of Madagascar IFC International Finance Corporation NPK Chemical fertilizer consisting of nitrogen, phosphorus and potassium. Sometimes, zinc is added, in which case it is referred to as NPKZn SAR Staff Appraisal Report TPA Tons of air-dried pulp per year UNIDO United Nations i.dustrial Development Organization FISCAL YEAR OF THE GOVERNMENT OF MADAGASCAR: January 1 - December 31  THE WORLD SANK Washington, D.C. 20433 U.S.A. Offim of DIouecvmwtal June 219 1991 MEMORANDUM TO THE EXECUTIVE DIRECRSO_a AND THE PRESIDENT SUBJECT: Project Completion Report on MADAGASCAR Second Manaoro Forestry Proiect (Credit 1161-MAG) Attached, for information, is a copy of a report entitled "Project Completion Report on Madagascar - Second Mangoro Forestry Project (Credit 1161-MAG)" prepared by the Africa Regional Office with Part II of the report contributed by the Borrower. This project has not been audited by the Operations Evaluation Department at this time. Attachment 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.  PROJECT COMPLETION REPORT FOR OmCIL USE ONLY MADAGASCAR SECOND MANGORO JORESTRY PROJECT (CREDIT 1161-HAG) TABLE OF CONTENTS Page No. P E ACE . . . . . . . . ... ...... ... ..................... . EVALUATION SUMMRY . . . ... .. .. li . PART I; PROJECT REVIEW FROM THE BANK'S PERSPECTIVE A. Project Identity . 1 . . . * . . . . . . . . B. Background . . . . . . . . . .1 C. Project Objectives and Description . . . . . . . . . . . 2 D. Project Design and Organization . . . 3 E. Project Implementation . . . . . . . . . . . . . . . 3 Credit Effectiveness and Project Start-up . . . . . . . 3 Implementation Schedule * .. .* .... *.... 4 Project Costs . . . . . . . . . . . . . . . . . . . . . 4 Disbursements . . . . . . . . . . . . . . . .* .. 4 CreditAllocation ........... ....... . 4 F. Project Results . 4 . . . . . . . . . . . . . . . . . 4 G. Sustainability 8 . . . . . . . . . . * . . . . . . . 8 H. Performance of the Bank ......... . . . ..... 9 1. Performance of the Borrower . . . . . . .. . . . ... 10 J. Bank/Borrower Relations . . o . . . . . . . . . . . . . . 10 K. Performance of Consultants . . . . . . . . . . . . . . . 10 L. Documentation and Files . . . . . . . . . . . . . . . . 10 PART II: PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE A. Analysis of Results a . . - . . . . . . . . . . . a . . 11 B. Evaluation of Bank Performance and Lessons to be Learned ...... a. . .. 12 C. Evaluetion of Borrower Performance and Lesk-us to be Learned .... ..... ....... 12 PART III: STATISTICAL DATA Table l: Related Bank Loans ........ 13 Table 2: Project Timetable . . . . a . . . 14 Table 3: Cumulative Estimated and Actual Disbursements e 15 Table 4: IDA Disbursements . . o . . . . . . . . . . . 16 Table 5: Project Implementation - Key Indicators . . & 17 Table 6: Project Costs and Financing . . . a . . . . . 18 Table 7: Project Results . . . . . . . . . . . . . . . . . . 19 Table 8: Status of Covenants . . . . . . . . . . . . . . . 20 Table 9: Use of Bank Resources ... . 22 MAPS: IBRD 15290(PCR) and 15266(PCR) 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.  - i - PROJECT COMPLETION REPORT MADAGASCAR SECOND MANGORO FORESTRY PROJECT (CREDIT 1161-MAG) PREFACE Tnis is the Project Completion Report (PCR) for the Second Mangoro Forestry Project in Madagascar, for which Credit 1161-HAG in the amount of SDR 16.3 million was approved on June 16, 1981. The credit was closed on June 30, 1987, three years behind schedule. SDR 2.7 million were cancelled, and the last disbursement was made on February 12, 1988. The PCR was jointly prepared by the Agriculture Operations Divi- sion of the Africa Regional Office and the FAO Investment Center (FAO/World Bank Cooperation Program) (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). This document is based on reports (particularly the Project Brief, the Appraisal Report, supervision and/or back-to-office reports, studies and internal Bank documents), discussions between the mission and respon- sible officials, the mission's own knowledge of the local forestry sector, and an on-site assessment of the results.  - iii - PROJECT COMPLETION REPORT MADAGASCAR SECOND MANGORO FORESTRY PROJECT (CREDIT 1161-MAG) EVALUATION SUMMARY Obiectives 1. Since the 1950s plans have existed for manufacturing wood pulp in Madagascar. Large plantations were established, initially in Mahitsiatra (Faritany 1/ of Fianarantsoa) and subsequently, when it became apparent that the land available in that location was inadequate for new plantations, in Mangoro (Faritany of Toamasina). 2. In the early 1970s the Bank was asked by the Government of Madagascar to help sustain and expand the efforts already made: a first credit (565-NAG) was provided in 1974 and constituted the "First Forestry Project." It was understood at the time that this was the first phase of a program that was to lead to the construction of a pulp mill that would be competitive on the international market. 3. During preparation of the Second Mangoro Forestry Project, the Bank expressed doubts regarding the viability of the proposed pulp mill, with the result that it was decided that this second phase would be a holding operation during which, while the momentum achieved during the first project was preserved, studies would be financed to identify as carefully as possible the silvo- industrial potential of the Mangoro plantations. The Second Mangoro Forestry Project was financed by an IDA credit of US$20.0 million (Cr. 1161-MAG), cofinanced with ABEDA (US$4.2 million); the disbursement period was to be three years and the objective was to maintain investments at the same rate as before, including planting and related operations, and to carry out the studies referred to above. Implementation Experience 4. The credit was signed on October 20, 1980 and the credit was declared effective on July 1, 1981. Fanalamanga, the mixed-economy company that had successfully implemented the first project, continued to be responsible for project implementation. Project implementation was hampered by two constraints: (a) the initial inventory produced an average annual increment far below appraisal projections, and (b) the studies, while ignoring for no very clear reason the sawn wood outlet, failed to identify any remunerative silvo-industrial activity. 5. These constraints led to a reduction in the rate of new investment (in particular, planting operations declined from 6,000 ha to 1,000 ha a year) and 1/ Faritany is Malagasy administrative equivalent of province.  - iv - led to the large-scale use of fertilizers to raise yields and to a change in the management of existing stands to reorient growth toward the production of sawn wood; the Government of Madagascar acknowledged, in 1984, that the pulp objective war not necessarily the only one. The sawn wood objective, however, required huge pruning and thinning programs. Fertilization, pruning and thinning entailed expert advice which had not initially been envisaged in the project, any more than these operations themselves. 6. The reduction in planting operations and the time needed to carry out the tasks referred to above led to the postponement of the closing date from June 30, 1984 to June 30, 1987 (three successive postponements). Even so, the new program could not be implemented in its entirety: in the end only about 11,000 ha were planted compared to 18,000 ha foreseen at appraisal. Fertilizer use was sigrificantly below expectations, due to delivery delays, cumbersome procurement procedures, and Fanalamanga's limited fertilizer application capacities. Results 7. Institutional Impact. The First and Second Forestry Projects have considerably strengthened the implementation capability of Fanalamanga. In additwo.an, it is clear that the technical difficulties encountered and training provided by the project have greatly increased local technical icnowledge as regards the cultivation of pine species. 8. Economic and Financial Results. The economic and financial analyses presented in this report are based on two sets of scenarios: (a) an optimistic scenario that assumes that sufficient market outlets can be found for all wood that can theoretically be produced on the plantations; and (b) a pessimistic scenario that assumes that market outlets can be found for only part of the theoretical wood production. The resulting financial rate of return ranges between 2.6 percent and 8.1 percent, and the economic rate of return ranges between 7.0 percent and '3.9 percent; the actual results will likely be toward the lower end of the ranges. This compares to appraisal estimates of 11.5 percent and 12.3 percent for the financial and economic rates of return respectively. Sustainabilitv 9. The sustainability of the achievements of the two Mangoro projects is questionable as it depends on decisions still to be taken. While a high portion of sawn wood production is now a goal of the management program followed (as this requires mature trees, only a small portion is presently marketed), the sawn wood production potential is larger than the actual domestic sawn wood market can absorb at the present. Madagascar's overall economic growth would therefore have to accelerate strongly to achieve an absorptive capacity that would match production, which is unlikely. Moreover, the economic justification of sawn wood exports is equally doubtful; at present costs and market conditions, they probably would not be. However, there is private sector interest in exporting wood for processing into pulp and paper, and Fanalamanga has recently expressed interest in participating in joint ventures with this objective in mind; a Government decision is awaited. The implementing institution, Fanalamanga, has gained a good reputation in project execution, showing an impressive capability in adjusting itself toward changing objectives.  -v - Findings and Lessong Learned 10. The major lesson learned is that, once the initial market option becomes unclear and no other markets have as yet been identified, a holding style operation should only limit itself to maintaining existing plantations only. Other lessons are t4at (a) terms of reference for marketing studies should be clear, detailing all the alternative markets that should be resoarchad, domestic as well as for export and not be loft open to liberal interpretation by consultantsi and (b) a network of species growth trials and soil analyses should be established prior to making investment decisions, and maintained during project implementation to serve as an early warning system for problems later on.  PROJECT COMPLETION REtORT MADAGASCAR SECOND MANGORO FORESTRY PROJECT (CREDIT 1161-MAG) PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE A. Proiect identity Name: Secori Mangoro Forestry Project credit No. 1161 r-AG Region: South-Central and Indian Ocean Department Country: Madagascar Sectur: Agriculture Subsector: Forestry B. Backoround As part of its industrial development, Madagascar has since the early 19603 envisaged the construction of a pulpmill in the Moramanga region, and a mission from the PAO/World Bank Cooperation Program visited Madagascar in 1967 to identify forestry projects that could potentially be financed by the Bank. Following this mission, the Government of Madagascar developed plantations on 18,)00 ha in this region while at the. same time associated research and tests were undertaken within the framework of an FAO/UNDP project. 2. The establishment of 96,000 ha of plantations was required to supply the raw material for a pulpmill with a planned initial output of 200,000 tons per annum (TPA), the minimum required to make it internationally competitive. In 1974, the Government received a first loan/credit (Loan 1065-MAGO Credit 525-MAG) from the World Bank to help finance the First Mangoro Forestry Project, including the planting of 35,000 ha of fast-growing species. These plantations were to complement the 25,000 ha already existing. A little over 40,000 ha were planted by Fanalamanga. 3. A supervision mission for this project recommended in January 1978 that the Bank continue its support for the planting operations and appraise a second phase during 1978. The same report noted that, as a result of changes in wood production costs and pulp prices on the world market since the appraisal of the First Mangoro Project, the capacity of the proposed plant should be increased from 200,000 TPA to 270,000 TPA. / Hereinafter the word "pulpmill" refors to a unit of this size. 4. The above-mentioned supervision mission report provoked much discussion in the Bank, from which it emerged that the pulpmill would no doubt be viable but that other market outlets should be sought for Mangoro wood in case it were not built after all. This possibility had to be considered for two reasons: (i) the rates of return calculated on the project were not particularly attractive to foreign investors, and (ii) it was not evident, in the context of Madagascar's economy as a whole, that priority should ba given to investing several hundred million U.S. dollars in a project of this type. 5. The Bank therefore informed the Government of Madagascar that it could not appraime a second planting program until it was more certain of the viability of the pulpmill. With the United Nations Food and Agriculture Organization (FAO) assistance, the Government then had the United Nations Industrial Development Organization (UNIDO) carry out a prefeasibility study i/ Back-to-office report by Messrs. Patorni and Wong You Choong, dated December 12, 1979.  - 2 - of a pulpmill producing 270,000 TPA (pro3ect DP/MAG/008). This stady, made by the Sandwell Company, was delivered in September 1978 and concluded that the plant was technically and financially viable. The Government sent to the Bank a wPreparatory Report" prepared by Fanalamanga (May 1979). 6. The results of this study were, however, merely theoretical; apart from the fact that some reservations were expressed regarding rates of return, the problem of the availability of the capital needed to construct the pulpmill (the *etimates ranged from US$300 millio, US$500 million) wa not addressed. if this capital could not be mobilized, what financially viablu outlets for Mangoro timber existed and what volumes could be absorbed 4/? 7. The Bank became concerned about the6e Issues in 19' and, despite the Government's exclusive focus on the pulpmill 5/, regarded the market outlet study now as the top priority. It would thus have been logical to limit the project to maintaining the existing plantations and to the studies in question. However, it was felt that to interrupt the planting operations would have been interpreted at the international level as a withdrawal by the Bank from the pulp project (thereby making its execution even more problematical), and as a result, would have compromised the return on the human and physical investments already made, because these were geared towards the eventual construction of the pulp mill. S. The Bank therefore took the view that it was not desirable for planting operations to be interrupted and, with the agreement of the Government, an appraisal mission visited Madagascar in May/June 1980. The resulting "Second Mangoro Poaestry Project" represented a compromise between the need to expand the plantations (and maintain those already existing) in order to supply the pulpmill if it were built, and the possibility that its construction mlght be abandoned. 9. The project supported IDA's development strategy. It was expected that industrlal and infrastructure investments would be generated through the silvo-industrial development of the Mangoro valley. The project was therefore designed to strengthen the links between agricultural, infrastructure and industrial development activities in Madagascar. C. Proiect Ob_ectivea and RescriLtion 10. Objectives. The compromise nature of the project was reflected ln its twofold objective: (L) to provide the Government with the necerdary information to select the most approprLate market outltt for Mangoro wood; (ii) to continue planting operations and maintain existing plantations as necessary, i.n order to plan for the future and preserve and enhance the value of existing installations. 11. 25zjnGDs Ln . It follows from the foregoing that the "Second Mangoro Forestry Project" was a holding orsratlon designed to extend in both 4/ The potential production from the plantations existing at the end of 1980, although insufficient for a pulpmill of the size contemplated, nonetheless posed marketing problems as regards other industrial applications. j/ This position would change in 1984 when the Government began to acknowledge that the mill's dimensions could be reduced.  - 3 - time and space the acti-ittes of the first project until such time as the conclusions of the studies required to achieve objective (i) above were available. The implementation period was estimated at three years, (1981/82-1983/84). The project components were as follows: (i) Maintenance and protection of the existing plantations (a1,out 70,000 ha); maintenance of roads end buildings in the project zone. (ii) Establishment, maintenance and protection of about 18,000 ha of pine and 500 ha of eucalyptuo. (iii) Construction and maintenance of new roads and structures. (iv) Pasture improvement (about 450 ha) (v) Reaearch and training. (vi) Studies for industrial development planning and preparation of projects in the forestry and agriculture sector. D. Proiect Delign-and Qrganization 12. The design of the project had to take account of the fact that, at the time of appraisal, the Government did not wish to abandon the plan to construct a pulpmill of international dimensions, despite the reservations of Bank specialists. Necessarily, this situation adversely affected the smooth progress of the studies, which would have produced more precise coinclusions more quickly if more exact terms of reference could have been dravm up right away. 13. The oreanization of the project merits no special comments; the choice of Fanalamanga as executing agency was obvious, more especially in view of its excellent management of the first project. The company was also able to adapt its structure to the new tasks devolving on it under the second project (establishment of the ailvo-culture depar:ment). B. Proiect Im.leMentation 14. Credit Effectiveness and Prolect Start-u,. Although the Credit Agreement was signed on October 29, 1981, the credit only b4icame effective on July 1, 1982, after a delay ef five months. 15. This interval was a consequence of the time required to fulfill certain conditions for credit effectiveness; when the first supervision mission visited Madagascar from April 2 through 12 1982: - the Government had not yet made the loan to Fanalamanga that represented its contribution to the project (section 3.03a); - the recruitment of a General Manager for Fanalamanga with qualifications acceptable to the Bank had not been formalized 6/ (section 3.06);