Madagascar - Accounting and Audit Organization and Training Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10783 PROJECT PERFORMANCE AUDIT REPORT MADAGASCAR ACCOUNTING AND AUDIT ORGANIZATION AND TRAINING PROJECT (CREDIT 1155-MAG) JUNE 23, 1992 MICROFICHE COPY Report No. 10783--MAG Type: (PPR) NAMISATO, / X31678 / T9105/ OEDD2 Operations Evaluation Department 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. CURRENCY EQUIVALENTS Currency Unit: Malagasy franc (FMG) (annual averages) 1978 US$1 = FMG 225.7 1985 US$1 = FMC 662.5 1979 US$1 = FMG 212.7 1986 US$1 = FMG 676.3 1980 US$1 = FMG 211.3 1987 US$1 = FMG 1,069.2 1981 US$1 = FMG 271.7 1988 US$1 = FMG 1,407.1 1982 US$1 = FMG 349.7 1989 US$1 = FMG 1,603.4 1983 US$1 = FMG 430.4 1990 US$1 = FMG 1,494.1 1984 US$1 = FMG 576.6 12/91 US$1 = FMG 1,873.1 ACRONYMS AND ABBREVIATIONS CFC - Centre de Formation en Comptabilit4 (Accountancy Training Center, Antananarivo) CIDA - Canadian International Development Agency CNFCD - Centre National de Formation des Cadres Dirigeants (National Management Training Center, Antsirabe) EAPED - Education and Manpower Development Division, East Africa Projects Department (Education Division) EAPEG - Energy Division, East Africa Projects Department EAPEWU - Water Supply and Urban Development Division, East Africa Projects Department (Energy and Water Division) EDF - European Development Fund FAC - Fonds d'Aide et de Coop6ration (French Cooperation Agency) FMG - Malagasy franc IDA - International Development Agency IMATEP - Institut Malgache des Techniques de Planification (Malagasy Institute for Planning Techniques, Antananarivo) INSCAE - Institut National des Sciences Comptables et de 1'Administration d'Entreprise (National Accounting and Enterprise Management Institute; formerly CFC) OMEGA - Organisation Malgache d'Etudes et de Gestion Administrative (Malagasy Studies and Management Organization) Order - L'Ordre des Experts Comptables et Comptables Agr4s A Madagascar (Order of Expert Accountants and Authorized Accountants of Madagascar) PCR - Project Completion Report PMK - Peat, Marwick, Mitchell and Co. (Paris) PPAR - Project Performance Audit Report RINDRA - Socialist Enterprise for Auditing and Consultancy (Antananarivo) SDR - Special Drawing Rights FISCALa YEAR January 1 - December 31 THE WORLD BANK FOR OFFICIAL USE ONLY Washington, D.C. 20433 U.S.A. Office of Director*Ceneral Operations Evakiatkon June 23, 1992 BM W=RAD TO THE EXECUTIVE DIRECTORS AND THE XRESIDENT SUBJECT: Project Performance Audit Report on Madagascar - Accounting and Audit Organization and Training Project (Credit 1155-MAG) Attached, for information. is a copy of a report entitled "Project Performance Audit Report on Madagascar - Accounting and Audit Organization and Training Project (Credit 1155-HAG)," prepared by the Operations Evaluation Department. 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. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MADAGASCA Accounting and Audit Organization and Training Project (Credit 1155-MAG) TABLE OF CONTENTS Preface . . . . .. . . . . . . . . . . . . . . . . . . . Basic Data . . . . . . . ... . . . . . . . . . . . ........... . i.i Evaluation Summary . . . . . . . . . . . . . .. . . . . . . . . . . vii I. INTRODUCTION ., . . . . . . . . . * * . . . . . . . 1 II. PROJECT OBJECTIVES 4ND CHARACTERISTICS . . . ...... . . . . . . 3 (1) Accounting Legislation and Standardization . . . . . . . . . 4 (2) Establishment and Operation of CFC . . . . . . . . . . . . . 6 (3) Strengthening the Activities of RINDRA . . . . . . . . . . . 7 (4) Strengthening the Capability of Consultancy Firms . . . . . . 8 III. PROJECT IMPLEMENTATION . . . . . . . . . . . .... . . . . . . . 9 (1) Accounting Legislation and Standardization . . . . . . . . . 9 (2) The Creation and Operation of CFC . ....... . . . . . . 11 (a) Timetable . . . . . .......... . . . . . . . . 11 (b) Pedagogical Aspects . . . . . . . ....... . . . . . 11 (c) Financial Aspects....... . . . . . . . . . . . 12 (3) Strengthening the Activities of RINDRA...... . . . . . . 13 (a) The Directorate General . . . . . . ..... . . . . . 13 (b) Technical Assistance for the Audit Department . . . . . 13 (c) Technical Assistance for the Management Consultancy Department . . . . . . . . . . . . . . . . . . . . . . 14 (4) Strengthening the Capacit-y of Private Firms . . . . . . . . . 14 (5) Borrower, Bank and Consultants' Performances . . . . . . . 15 (a) Borrower . . . . . . . . . . . . . ....... . . . 15 (b) The Bank.. .............. . .... . 18 (c) Consultants . . . . . . . . . . . . .... . . . . . . 20 IV. RESULTS . . . . .... . . . . . . . . . . . . . . . . . . . . . . 21 (1) Accounting Legislation and Standardization . . . . . . . . 21 (2) Accountancy Training Center . . . . . . . . . . . . . . . . . 21 (3) The Strengthening of RINDRA's Activities . . . . . . . . . . 23 (4) Strengthening the Capabilities of Private Firms . . . . . . . 23 V. PROJECT SUSTAINABILITY .................... . . 24 VI. LESSONS LEARNED . . . . . . . . . . . . . . . . . . . . . . . . . . 27 .Aa IrI: INSCAE's comments . . . . . . * . . . ...... . . . . . . . 29 This document has a restricted distribution and may be used by recipients only in the performance or their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT PERFORMANCE AUDIT REPORT Accounting and Audit Organization and Training Proiect (Credit 1155-MAG) PREFACE 1. This is the Project Performance Audit Report (PPAR) on the Accounting and Audit Organization and Training Project (Credit 1155-MAG). This Credit totaled SDR 9.4 million (equivalent ;o US$11.5 million). and was approved on June 2. 1981. The closing date was June 30, 1989. one year and three months later than the scheduled date. The amount was almost entirely disbursed, and the unspent balance of US$12,130 was canceled. 2. The PPAR was prepared by the Operations Evaluation Department and based on the Project Completion Report (PCR)I (published in 1990 by the World Bank's Africa Regional Office), the President's Report, project documentation and discussions with Bank staff. This Report is also based on an in-depth study prepared by the Operations Evaluation Department as part of a broader study of technical assistance projects in Africa. An evaluation mission visited Madagascar and examined the effectiveness of the project, in cooperation with representatives of the Government and the business community. We wish to draw particular attention to their kind cooperation and assistance in preparing this Report. 3. The PCR gives a clear account of the manner in which the various project components were implemented, the results achieved and the roles played by the Bank and the Borrower. The PPAR identifies the main concerns that led to the granting of the Credit, and evaluates the progress made, together with the usefulness and effectiveness of the various conditionalities applied and the technical assistance forming part of the project. The Report then analyzes the key factors in the project's success, effectiveness and viability. Finally, it presents the main lessons learned from the project. 4. The PPAR has been forwarded to the Borrower for comments. The comments received from the Institut National des Sciences Comptables et de l'Administration d'Entreprise (INSCAE) is included as an Attachment in the PPAR. I/ Project Completion Report, Madagascar: Accounting and Audit Organization and Training Project, Report No. 9078, October 12, 1990. PROJECT PERFORMACE ADIT REPOIRT MADAGASCAR Accountinz and Audit Organization and Training Project (Credit 1155-MAG) BASIC DATA SHEET CREDIT POSITION (amounts in US$ million) As of March 31, 1992 Credit Original Disbursed CamqeAA Repaid Outstanding 1155 11.5 10.3 0.012 60.0 12.761/ CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY82 FY88 FY90 Appraisal Estimate (US$ millton) 1.20 11.50 11.50 Actual (US$ millioni - 9.90 10.30 Actual, as % of planned (%) - 86.1 89.6 Date of final disbursement November 10, 1989 PROJECT DATES Planned Date Actual Date Government application June 24, 1978 Appraisal June 1980 Negotiations June 1980 April 1981 Board Approval June 2. 1981 Signing June 11, 1981 Effectiveness October 12. 1981 May 6, 1982 Credit Closing March 31, 1988 June 30, 1989 11 The difference between this and the initial amount is due to the fact that the Credit was denominated in SDRs (SDR 9.4 million). Calculated in SDRs. 99.9% of the Credit was disbursed. - iv - PERSONNEL RESOURCES (in staff-weeks) LY.M E! fl fl83 fL LM LY LYff N88 fYR F.90 L.W2 IM Preparation 0.3 * * * * * - 0.3 Appraisat 25.8 38.6 - - - - - - " 64.4 Negotiations * 6.5 - * * - 6.5 Supervision - 1.8 16.5 17.5 12.1 17.2 18.2 7.3 4.0 3.5 - 96.0 Copletion CPCR) * * * *0.1 3.1 2.3 5.5 TOTAL 26.1 46.9 16.5 17.5 12.1 17.2 18.2 7.3 4.0 3.6 3.1 2.3 147.7 MISSION DT Item Sent by Month No. of No. of Staff Late of Year weeks persons weeks report identification EAPEG 1978-79' Preparation EAPEG 9/79 Appraseat EAPEG 6/80 4 3 12 5/11/81 Supervision I-A EAPEDV 11/81 2 2 4 11/25/81 Supervision I-B EAPEG 2/82 4 1 4 4/19/82 Supervision Il-A EAPED 11/82 3 2 6 12/17/82 Supervision II-B EAPEG 12/82 3 1 3 1/31/83 Supervision IIl-A EAPED 4/83 3 2 6 6/7/83 Supervision III-B EAPEG 5/83 2 2 4 6/23/83 Supe-vision IV EAPED/EAPEG 11/83 2 2 4 2/15/84 Supervision V EAPED/EAPEG 4/84 3 2 6 6/12/84 Supervision VI EAPED 10/85 3 2 6 12/17/85 Supervision VII EAPED 6/86 2 4 8 8/14/86 Supervision VIII AF3PH 10/87 2 2 4 10/25, '7 Supervision IX AF3PH 2/88 2 1 2 2/11/88 Supervision X AF3PH 2/89 3 1 3 The initial identification and preparation was carried out by several divisions. The work was done mostly as part of the on-going work of those divisions and, apart from occasional Back-to-Office reports, no formal reports were nrepared until the appraisal by EAPEG. The project was prepared by EAPEG but the Accounting Training Center fell under the supervision responsibility of EAPED while the remaining components were to be supervised by EAPEG. ThLs resulted in two separate supervision missions until the project was put solely under EAPED. This was the last independent supervision mission by EAPEG. The project came under the full control of EAPED, though EAPEG did assist on the next two supervision missions. After reorganization (1987). the project fell under the responsibility of AF3PH. OTHER PROJECT DATA Related Proiects Borrower: Covernment of the Democratic Republic of Madagascar Project: Accounting and Audit Training Credit No.: 1661-MAG Amount: US$10.3 million Approval: February 25. 1986 Planned closure: December 31. 1992 - vii - PROJECT PERFORMANCE AUDIT REPORT MADAGASCA Accounting and Audit Organization and Training Project (Credit 1155-MAG) EVALUATION SUMMARY INTRODUCTION 1. This is the Project Performance (ii) establishmert and operation of Audit Report on the Accounting and an accountancy training center, Audit Organization and Training including equipment. supplies Project, for which Credit in the and books; amount of SDR 9.4 million (equivalent to US$11.5 million) was approved in (iii) assistance for a nati3nal June 1982 (Credit 1155-MAG). Details auditing enterprige, prov'.ing of the circumstances leading to training and supervising its project approval are presented in auditing activities; paras. 1-12. The project was the first attempt made to deal with the (iv) assistance for p-ivate difficult problems of accounting in mnaaement consulting-firms -'d Malagasy enterprises, auditing, and a feasibility study for tYa the training of qualified accountants. establishment of a public It was followed in 1986 by a second management consulting agency accounting and audit training project (para. 15). financed by a Credit in an amount of US$10.3 million (paras. 1-12). PROJECT IMPLEMENTATION PROJECT OBJECTIVES 4. Implementation performance in the four components differed 2. The project had the following considerably. objectives: (i) the introduction of regulations requiring enterprises to i Accounting Leeislation and prepare audited accounts in accordance Standardizatio with precise modern standards; (ii) the upgrading of the professional 5. This component was delayed. skills of accountants and auditors in mainly because of the apprehensions of order to make management, planning and the Order of Expert Accountants. A financial control more efficient Decree of September 17. 1987 (i.e. six (para. 13). years after project approval) established a new accounting code 3. The project had the following (Plan Com3table), which was to be four mutually reinforcing components: compulsory from 1989. However, no financing had been provided for (i) preparation of requirements for disseminating information on the code enterprises to prepare audited among enterprises or for training accounts in accordance with technical teachers. As for specified standards and a legislation to govern the accounting national accounting code; profession itself, this is still being - viii - studied, particularly with regard to cDnaultarts was considerably exceeded access to the profession. Proposals (82%) because, instead of hiring have been submitted to the Ministry of teachers and a Director individually, Finance for opening up the Order the Bank decided that a consulting without inundating it with new firm should be used to hire a team, members; however, this is a and this proved to be much more legislative matter and the Goveriment expensive. The allocation for is now showing considerabile caution consultants had been used up by 1984, over this subject. The Order itself and part of the need for the second has yet to define its professional and Credit (1661-19AG; US$10.3 million) was ethical code (paras. 34-42). to ensure the project's sustainability (paras. 46-49). (ii) The Establishment and Operation of an Accountancy Training (iii) Stranathening the Activities of Center (CFC) RNR 6. Full-time courses began in 9. Difficulties arose at February 1983. one year after the date Directorate General level, and an planned, but the evening classes began expatriate Director General had to be in March 1983. one year before the replaced. This delayed implementation date recommended by the Bank. The of the assistance program. The first intake of students graduated results of a technical assistance from CFC in September 1987 with the contract signed with a Canadian firm Mattrise en Sciences Comptables (para. in 1982 were unsatisfactory. and it 43). was followed by a second contract with a French firm in 1985. These 7. Each year from 1983 to 1986, CFC contracts proved to be more expensive recruited an intake of about 100 than expected (paras. 50-53). students selected from between 700 and 1.100 applicants, which is evidence of (iv) Strengthening of the CaRabiliSy the reputation it had acquired. The of Management C evening classes were also highly successful. The graduates from these 10. Only two operations were initial intakes obtained very good financed, and this component's positions. Nevertheless, some allocation was mainly used to finance students were unable to complete their the cost overruns of CFC and RINDRA studies because of material problems (paras. 56-57). (a lack of fellowships, boarding arrangements . or tZansportation). ( Borrower. Bank and Consultant's However, the premises were quite practical and well maintal ad. One weakness in the system was. the slow 11. Overall, the Government showed a start-up to the training courses very firm commitment to the two main abroad for Malagasy teaching components (RINDRA and CFC). although personnel, since these had not this was less true of the other originally been included in the components. As regards CFC. which was project (paras. 44-45). a key element in the Bank's plan. there were three sources of 8. Although there was no overrun opposition: th6 University (which with respect to the planned total cost would have preferred CFC to be part of of this component (US$4.5 million), its own systeml, professional the planned cost of the expatriate accountants (who were suspicious of - ix - the "cult" of auditing and maintained ESULTS that regulation should have been the first issue to be settled), and some i Accountins Legislation and political groups (who were hostile to Standardizatio CFC's elitist aspirations to become a "grarde 6cole" and to its location in 15. No new law has been passed to the ca,ital city. In spite of this make the auditing of enterprises onslaught, the Government's attention mandacory, although -- fortunately -- to CFC's needs with regard to the auditing of accounts is premises, staffing and financial increasingly carried out. Because resources, was at all times INSCAE (the successor to CFC) and satisfactory (paras. 58-66). private accounting consultants ha:;e begun to disieminate information on 12. The Bank's approach to project the 1987 4cc .Ants code, and because monitoring was very responsible and the country now pos,6ses a modern diligent. However, its dialogue with accounts code backed by the broadest the Order did not go smoothly. Aside possible consensus, it can be assumed from the Order's inevitable that the overall results of this conservatism, it may have been component have been positive. It is offended by certain lack of also to be hoped that positive results communication; a more understanding will finally be achieved over the attitude might have made it possible critical issue of access to the to gain considerable ti== and maintain profession (paras. 82-84). the consistency of the project (paras. 70-74). (11) The Accountancy-Training Center 13. The Bank's monitoring was also somewhat neglectful of the need for 16. CFC has undoubtedly been an evaluation and even criticism, and was educational success. The following more concerned with ascertaining that factors have contributed to this: the particular actions had been taken than quality of t facilities, the with assessing their significance. In definitely practical nature of the particular, there was a failure to education provided, and the "grande consider issues such as the cost- 6cole" approach (involving a very effectiveness of the education strict selection of students, the provided, the status of the teaching continuous evaluation of students and staff, the need for such generous teachers, and sound internal staffing, comparability with similar organization) (paras. 85-87). schools, the Government's capacity for assuming total financial 17. However, the financial problems nesponsibility, etc. (parr. 75). of CFC somewhat offset its educational performance. The Center had 14. The consultants performances expenditures totaling US$5 million were extremely uneven, some being good not to mention government subsidies and others being mediocre. In order over a period in which it had three to guide the Bank in its subsequent intakes of about L,0 students. selections, it should record the Moreover, rwenue from tuition and assessments of the consultants whom it related items are much too small to indirectly financed under this enable it to achieve financial category of the technical assictance equilibrium, and the Government will project (paras. 79-80). have to provide subsidies (paras. 88- 90). 18. CFC has been replaced by INSCAE. willing to accept innovations (para. and the latter continues to operate 99). satisfactorily, except as regards premises, which are still inadequate. 22. INSCAE (formerly CFC) is now The second IDA Credit (1661-MAG) is canable of generating rnvenue from still considerably underutilized both the public sector and the private because of the more generous bilateral sector as a result of its ongoing grants from which INSCAE has benefited training seminars and the university (paras. 91-92). fees paid !y students. In any case. however, the Government will have to (iii) Strenthening the Activities of make a substantial contribution to RIND INSCAE's resources and provide it with sufficient financing to maintain a 19. The objective that ultimately status comparable to an international- RTNDRA should have the same full level "grande 6cole" (para. 100). autonomy in technical spheres as regards auditing ane management that 23. RINDRA's future prospsets ars is enjoyed by auditing firms, was clo,;ed because of its unsusteinable achieved. However, it is suffering financial position and because its large losses as a result of the status as a government-controlled amortizatinn of the technical organization is no longer appropriate assistance it has received and its at a time when the economy is being long-term debt to the Governmen-, deregulated. It is to be hoped that which it is unable to service. Th, these problems will be solged by the only way these problems can be solved reorganization of public enterprises, is as part of an overall perhaps including privatization. reorganization of public enterprises Technically. RINDRA possesses the (paras. 93-97). necessary professional expertise and is well organized, and has acquired a (iv) Strengthening the Capability of reputation for professionalism. it Erivate Firms is, therefore, a viable and sustainable agency, provided that its 10. The objective of providing local financial problems can be solved firms with the necessary techniques through the adoption of a new for improving their management systems government policy toward the public has definitely not been achieved. sector (para. 101). Only two of them have utilized IDA financing, because information was not LESSONS LEARNED sufficiently disseminated (para. 98). PROj.ui SUSTAINABILITY lessons learned from this technical assistance project (para. 106): 21. Unquestionably, the project has been a success. CFC has trained over (a) A c sistent strategy is 300 well-qualified accountants, and necessary for the success of RINDRA now has considerable expertise technical assistance projects. in auditing, and its initial In this case, an initial operations in the field of management specific request that an consultancy have been good. The auditing agency's capability be profession has already made technical strengthened was turned into an progress, the country now has a modern integrated plan covering the accounting code, and the Order seems publication of a modern - xi - accounting code, the training of problems affecting CFC (which well-qualified accountants, the used up its six-year allocation strengthening of an auditing in three years). and especially service, the establishment of a RINDRA (whose financial position management consulting is untenable because it received department, and assistance for a subsidiary loan repayable over strengthening consulting firms. 10 years at a service charge of This overall consistent -r-roach 12% per year). A technical enhanced the management assistance project requires a capability of enterprises and long yeriod to come to maturity, raised che level of expertise in as evi?enced in the granting of Madagascar. a new Credit to CFC/INSCAE (1661-MAG). The financial (b) The real extcnt of the need for analysis process must carefully professionally qualified calculate short- and long-term accountants must be studied in needs for consultants, clearly depth at the project define their terms of reference, identification stage. The lack and identify the advantagej ard of such a study adversely disadvantages of using affected the direction taken by individual consultants CFj and the degree of assistance (university faculty, in this provided. case) or consulting finns. It should also be remembered that (c) A clear and frank dialogul must technical assistance is often be established with members of financed through grants, and the profession concerned, in attempts should therefore be this case the Order of Expert made to identify the various Accountants, in order to obtain financinz oRtions. in its support froi the very cooperation with other donors. beginning of project This was acknowledged at the preparation. The lack of appraisal stage of Credit 1661- support from the profession HAG, which was supported by prevented the project from bilateral French, Canadian and developing as the Bank wished, U.S. assistance. and thus prevented the project from being fully consistent in (e) The Government must recognize its in',tial stages. Even though the need to formulate a strategy 10 years have passed since the for adapting its financial project began, conditions for viability objectives. RINDRA entry into the profession -- can survive only if there is a which are so important for thorough financial RINDRA staff and INSCAE restructurin Similarly, the graduates - still do not appear Government must ensure it is at to have been completely all times aware of INSCAE's clarified. needs if the latter's status as a "grande 6cole" is to be (d) Financial analysis of a maintained. Similarly, as soon country's real technical as a mainly educational assistanca requirements must be assistance project such as this very thorough and consider the begins to be implemented, a long term. There was a complete government must realize that underestimation of the financial eventually i s own fundin must - xii - take the place of external measures for disseminatine financing. ina;io that will enable enterprises to make timely (f) A detailed training program must preparation for introducing the be drawn up at the appraisal new accounting procedures. The stage. The inadequate training lack of any precise policy on of Malagasy teachers is still a this subject delayed the general problem for INSCAE. especially application of the accounting in certain specialized subjects. code. Moreover, the need to continue training Malagasy personnel (h) A reamirement that accounts be abroad means that more expensive & should be standard for expatriate personnel have to be enterprises. If the necessary used in the meantime. Lack of legislation is not passed, such a training program in the enterprises will no doubt begin initial stages aggravated to have their accounts audited. CFC/INSCAE's financial problems. but progress may be slow and this may delay the dissemination (g) Legislative reform and the of the financial and economic introduction of new accounting data that those enterprises standards must be accompanied by generate. PROJECT PERFORMANCE AUDIT REPORT MADAGASCAR Accounting and Audit Organization and Training Project (Credit 1155-MAG) I. INTRODUCTION 1. Immediately after independence in 1960, management positions in Malagasy enterptises were still mostly occupied by French nationals. However, after 1972 the new Government made major changes in the country's economic strategy and many French managers and technicians began to leave Madagascar. Most of those remaining also decided to leave in 1975. when the major foreign- owned enterprises were nationalized. As a consequence, most of these lost their *op managers and accountants. The accounting services of these enterprises kept their Malagasy employees and middle-level managers, who were well trained, but in.many cases the upper-level managers and directors were replaced by officials without any experience of business accounting or by private-sector accountants lacking the necessary qualifications. 2. For its part, the accounting profession as a whole had hardly changed since the beginning of the 1970s. The Order (established in October 1962) consisted of only 36 members (six "accounting experts" and 30 "authorized accountants"). There were only about 40 other accountants in the country, and these had been trained abroad and were mainly employed by business enterprises. Although there was a demand for training in accountancy, nobody had been admitted to either of the categories of th- profession since 1971. because none of the higher-level educational or training institutions offered qualifications in either management or economics. 3. However, financial monitoring was an important factor in Madagascar's socialist system, in which the large commercial enterprises were government- controlled. The Government recognized this and, in the 1978 Charter of Socialist Enterprises, it clearly expressed its intention of improving the quality and increasing the reliability of financial statements. However, there were not enough accountants capable of preparing such statements or auditing them satisfactorily. It was decided that, once the Charter was completely in force and the auditing of both public and private enterprises was a legal requirement, the 150 government-controlled enterprises and the 350 corporations and limited liability companies with a turnover in excess of FMG 30 million would be obliged to have their accounts audited. Consequently, about 500 organizations would be requiring auditing services, although by the late 1970s there were only enough properly qualified auditors to deal with between 45 and 50 such organizations. 4. In 1976. the Minister of Economy and Commerce asked Peat, Marwick, Mitchell & Co. (PMM) and PA Conseiller de Direction to audit four large import- export enterprises, because he was concerned at the financial position of the parastatal sector. These audits revealed not only the poor financial position of the enterprises, but also the very unsatisfactory state of their accounting systems. - 2 - 5. In June 1978. the Minister furnished the Bank with the first draft of an ambitious program of assistance for enterprise managements, consisting of the establishment of a management consultancy agency (to be known as OMEGA) and a training center for managers (which was subsequently established in Antsirabe with EC assistance). 6. In July 1978. the Government officially applied for Bank financing for RINDRA (the auditing agency) and OMEGA, on the basis of two sets of documentation prepared by PMM and PA. This application was declined. 7. RINDRA Entreprise Socialiste was officially established as an auditing agency in April 1979. At that time it received assistance from PMM under a six-month contract, followed by a further contract for a period of 27 months. In June 1979. the Ministry of Finance and Planning applied to the Bank to provide financing for the 27-month contract with PMM, the amount requested being US$2.3 million. From the outset, the Bank had considered that the establishment of RINDRA was fully justified by the circumstances then prevailing in Madagascar, and that it should be supported by international technical assistance. However, it hesitated for a long period because of the following three problems: the financing would be retroactive (although the Bank itself had neglected to consider the application in a timely manner), it viewed PMM's fees as excessive, and RINDRA needed to spread the cost over a longer period. 8. As a solution, the Bank adopted the following measures: (a) Initially (Report dated October 12, 1979), it proposed a US$3.7 million loan that the Government would onlend to RINDRA over nine years to finance a renegotiated contract with PMM so that the latter could continue to provide assistance for 2% years. (b) Subsequently (Report dated July 17, 1980), and because no consensus had been reached in the Bank on the previous formula, it proposed to incorporate this assistance for RINDRA (working without PMM) into a broader project, which was to include not only auditing but also the organization of the profession, the training of accountants, and the preparation of a national accounting code. The total cost was to be US$14.2 million, and much of this was to be financed by an IDA Credit (US$11.5 million). The original plan to lend US$3.7 million had been left far behind. 9. In June 1981, the Credit received Board approval (as Credit 1155- MAG), subject to the following conditions: the establishment of an accountancy training center (CFC), the granting by the Government of a subsidiary loan to RINDRA, and the appointment of expatriate Directors to CFC and RINDRA. 10. Project preparation (which was comparatively simple, but for which there were no known precedents) took about three years, from June 1978 (first Bank mission) to June 1981 (Board Approval). It was as if it had taken two years to win over the staff and a further year to convince higher management; a period which, at the very least, reveals a certain amount of confusion. -3- 11. The pre-Idantification phase lasted 20 months, from September 1978 (initial contacts) to May 1980 (terms of reference for the appraisal mission). including - in September 1979 -- an initial attempt to appraise the project that was limited in scope and led to a report that produced no results. In fact, this long period was taken up with tentative considerations of the question rather than with any real identification process. For the first year, the Bank virtually "forgot" the application, or at least failed to respond to it. When the request was repeated on June 15. 1979. the Bank was still clearly nonplused by the project's unusual nature, since it seemed interesting but did not fall within the purview of any particular Bank Division. A financial analyst from the Energy and Water Division then offered to appraise the project when he visited Madagascar on iLnother mission; in fact, he was assigned responsibility for the appraisal when he was already in the field, but he was given no very precise instructions and his supervisors showed certain reservations toward the operation. His report (October 12, 1979). proposing that a US$3.7 million Credit be made available to the Government and onlent to RINDRA for nine years, raised many objections, but had the effect if making the Divisions gradually decide their positions on the subject. As a result of these deliberations, a letter was finally sent to the Minister of Finance on January 25, 1980 suggesting that the original proposal be expanded into a national accounting project that would cover not only auditing but also the organization of the profession, the preparation of an accounting code, and the provision of training. An appraisal mission took place in May 1980, and the structure of the final project was already (or finally) contained in the terms of reference. 12. It cannot be claimed, therefore, that a real pre-identification process took place, covering the assessment of needs, a diagnostic study of institutional constraints, and a consideration of alternative strategies or a prioritization of objectives; quite simply, the project slowly came to maturity as a result of an internal dialogue that made it possible to identify the main principles that would underlie the project, but did not engage in a very detailed analysis. At this stage, the problem was not so much that needs had to be assessed (because the consensus was that the need for accountants was undeniable, especially in the parastatal sector), but, at a more mundane level, to decide what sort of project currently in preparation (e.g. a line of credit for a bank, or a future education project?) this application should be incorporated into, since it was too small to be regarded as a full-fledged operation in its own right. Finally, it was decided to bring it up to the necessary scale by expanding its scope. II. PROJECT OBJECTIVES AND CHARACTERISTICS 13. The projects had the following objectives: (i) development of regulations requiring enterprises to maintain their accounts and have them audited in accordance with specific modern standards; -4- (ii) upgrading of the skills of accountants and auditors in order to increase efficiency in the management, planning and financial control of enterprises (Staff Appraisal Report, May 11. 1981. para. 2.01. 14. Basically, the Bank had reasoned quite simply that there was no point in establishing a national auditing agency unless enterprises were legally required - and had the necsssary human resources -- to maintain accurate and standardized accounts. Assistance for RINDRA should therefore be supplemented by legal and professional measures, the establishment of an accountancy school (CFC) and scope for providing assistance for consulting firms. Into the final formulation of the project, the legislation component was transferred from fourth to first place because of the logical desire to provide an overall regulatory framework in which to establish CFC and RINDRA. 15. The project consisted of the following four components, which were mutually reinforcing and provided for overall consistency: (i) preparation of requirements for enterprises to prepare audited accounts in accordance with specified standards and a national accounting code (20 staff-months; component A); (ii) establishment and operation of an accountancy training center, including equipment, supplies, books. etc. (279 staff-months; component B); (iii) assistance for a national auditing agency (RINDRA) through the provision of training for managers and supervision of its activities (156 staff-months; component C); (iv) assistance for private consultancy firms and a feasibility study for the establishment of a public management consulting organization (component D). (1) Accounting Legislation and Standardization 16. In Madagascar, the accounting profession had not developed, mainly because the relevant legislation on the presentation and auditing of financial statements imposed no standards for format or auditing on enterprises and auditors. The only regulations applicable to financial statements were those of the Tax Directorate, which required that companies with a turnover in excess of FKG 30 million (i.e. over US$150,000) submit statements which documented their tax returns in accordance with a given code of accounts. However, the 1867 law on corporations stipulated only that financial statements had to be submitted to shareholders after review by an auditor, whose qualifications and responsibilities were not specified, so that audits were often superficial. The 1925 law on limited liability companies was just as lacking in specificity. 17. Although the decree of February 7,. 1969 had introduced and adapted the French code of accounts of 1947 (revised in 1957) to the Malagasy context, it provided only the nomenclature for the various items to be included in the. -5- books, without any particularly precise rules on their usage, and did not regulate the financial statements themselves. 18. The new legislative measures were to require that: (i) organizations functioning as companies, particularly those in the private sector with a number of shareholders, maintain books of accounts, and prepare and publish in due time financial statements complying with a revised and more restrictive accounting code; (ii) these financial statements be audited by authorized independent auditors who should certify that they correctly provide a faithful and honest picture of the company's financial position, it being understood that this annual auditing requirement be applied gradually, beginning with the major corporations in the public sector; . (iii) the persons authorized to act as auditors have the minimum qualifications required; (iv) the Order of Professional Accountants and Auditors define accounting and auditing standards, keep them up-to-date, propose amendments to them as necessary, and investigate any violations thereof. 19. The Bank regarded these measures as essential; first, because the overall objective was to produce reliable and informative financial statements for effective management and planning; second, because the creation of a demand for persons with the necessary expertise would enable the latter to contribute to the progress and development of the profession. 20. Consequently, the project included 20 staff-months of consultant services for assisting the Government to prepare draft legislation. However, the Government had accepted only an outline schedule, and just how prudent it was can be seen from Section 3.07 of the Credit Agreement: (i) "By April 30, 1982 or such later date as may be acceptable to the Association, the Borrower shall complete the review under Part A of the Project and legislative measures shall be proposed to the Government and to the Bank [sic] [which shall] exchange views on the results of such review." (ii) "On the basis of this exchange of views, the Borrower shall [promptly] take all legislative and regulatory measures for the purposes of Part A of the Project, in accordance with a program agreed to between the Borrower and the Association, and it shall be understood that legislation shall be voted upon by July 31, 1982. [TN: Text in italics not included in Credit Agreement.]" 21. This component of the project was always considered to be a high priority. Its content had an impact on a significant propo. .n of all the other components (PCR, para. 4.06). -6- (2) Establishment and Operation of CFC 22. CFC's fundamental role was to teach accountancy. Several basic conditions were agreed for meeting this objective. (i) CFC was to provide full-time courses in accounting for future accountants, evening courses for persons already employed as accountants, and training for its own teaching personnel. (ii) In accordance with the 1978 higher education law, the full-time courses were to consist of the following: * a first cycle lasting two years for the accounting technician's diploma; * a second two-year cycle for a master's degree in accountancy; * a third one-year cycle, followed by a two- to three-year training session in an enterprise, for the expert accountant's diploma. The program of studies was prepared in outline by the Bank's appraisal -ission, and was to be worked out in detail with representatives of the accounting profession and the business community. (iii) The full-time courses were to begin on January 31, 1982, or such later date as would be acceptable to IDA, while the evening courses would begin one year later. (iv) During the project period, CFC was to open no more than two first- year classes, and no class was to have more than 50 students. (v) The Ministry of Economy and Commerce was to act as the administrative supervisor of the institution, which was to be located in Antananarivo in leased premises. The organization effectively put in place was somewhat different and can be described as follows: * A first three-year period before a Diploma in Accounting (Dipl8me Sup6rieur Sp6cialis6 en Sciences Comptables, DSSC) is awarded; * A second one-year period before obtaining a higher Diploma in Accounting (Dipl8me d'Etudes en Sciences Comptables approfondies, DESCA). A training period (stage) takes place at the end of the second year and before the start of the third year. A dissertation (m6moire) has to be prepared before the higher Diploma (DESCA) can be awarded. -7- (vi) CFC was to be managed by a Board of Directors with, in addition to its Director, representatives of the three ministries concerned (Finance, Higher Education and Commerce), the future Higher Accountancy Council, the Order of Acc9unting Experts, and the business community. (vii) First-cycle students were to be selected from among graduates of secondary education, and access to the second cycle was to be open to graduates of the first cycle and to certain university graduates. (viii) In order to plan its subsequent development, CFC was to carry out a survey by December 31, 1983 of the country's requirements for accountants and auditors over the next 10 years, in light of the planned new legislation. (ix) The cost of equipping and operating CFC over the project period was calculated to be US$7.4 million, with US$3.6 million in foreign exchange. IDA financing was set at US$6 million, and the Government's contribution was to be US$1.4 million (local currency expenditures). The annual cost per student was assessed at US$4,900 for the 1983-86 period, falling to US$2,000 from 1989, when the teaching staff would consist entirely of Malagasy nationals. (3) Strengthening the Activities of RINDRA 23. RINDRA began to operate on October 1, 1978, and officially became a socialist enterprise in April 1978 [sic]. It then 7igned a 27-month assistance contract with PMM, which was to assist it in hiring auditors, establishing training programs, and supervising the work of the auditors. 24. Before long, RINDRA's financial position deteriorated (with over US$1 million of cumulative losses as of June 30, 1980), its relationship with PMH became difficult, and its Director General had no working experience in a professional auditing office. 25. The Bank's May 1980 appraisal mission deemed PMM's services satisfactory as regards the training of Malagasy personnel and the quality of its auditing, but less effective as regards the preparation of internal management methods. The mission considered that RINDRA had successfully achieved the following: (i) persuading the managements of large commercial enterprises of the necessity and importance of keeping their accounts in accordance with the rules and having their accounts audited by independent and impartial specialists; (ii) establishing selection and hiring criteria for its own auditors; (iii) training its personnel in the generally accepted standards of accounting, auditing and other professional criteria, and in the practical application of these standards; -8- (iv) in its services, applying straightforward methods of time recording and audit planning. 26. However, it seemed that for five years RINDRA would still need the assistance of a qualified team, including -- to begin with -- an expatriate Director General to take complete responsibility for day-to-day management and auditing activities. Consequently, the project included a five-year on-the-job training program consisting of 156 staff-months of acc>unting consultants' services. The consultants were to be hired in 1981. This program covered various aspects of the accountancy and auditing services offered to clients, particularly the study of internal auditing and monitoring methods, the detailed examination of documentation, the organization of special surveys, tax iss"es, the rules for preparing and auditing financial statements, and the principles governing the preparation of reports. In order to improve internal procedures, the program also covered the hiring and training of personnel, promotion of the enterprise and relationships with clients, together with planning, organization, personnel deployment, supervision, monitoring and the execution of auditing activities and other professional work, the setting of fees -- in cooperation with clients -- and the principles governing billing and the recovery of fees. 27. The Bank finally decided that, provided that RINDRA increased its activities (in particular, by reducing its fees), it would be able to repay the Government a loan of US$3.7 million at an interest rate of 12% over seven years, after a grace period of three years. At the end of this period (i.e. in 1990), RINDRA would not only have amortized its technical assistance costs, but also reestablished its financial equilibrium. (4) Strengthening the Capability of Consultancy Firms 28. In addition to calling for assistance for the national auditing agency, Madagascar's July 1978 application requested the Bank's cooperation in establishing a public management consultancy agency that it was intended to call OMEGA (Organisatlon Malgache d'Etudes ot de Gestion AdmInIstrative; the Malagasy Studie-, and Management Organization). 29. Before making its views known regarding this application, the appraisal mission noted that, in addition to RINDRA, there were half a dozen private auditing and consultancy firms providing enterprises with services in the fields of management and financial procedures. However, the capacity of most of these firms was limited, and they were obliged to call upon foreign assistance, which was less and lesar accessible to them because of foreign exchange constraints. 30. However, consultancy advice to enterprises wishing to improve the quality of their accounting and their procedures so that their management operations could be better directed and monitored was an important factor in the success of the project, particularly as regards the following points: (i) the study of the accounting methods used to determine the budget, purchases, turnover, payrolls, payments, loans and their recovery, inventory control, construction, manufacturing, preparation of reports on operations, and internal management; -9- (ii) the evaluation of such methods in ovder to determine whether they would enable internal controls to be applied and operational and financial data to be collected; (iii) if necessary, the preparation and application of more appropriate methods. 31. To overcome the foreign exchange problem, the project provided the firms with US$1 million to use (subject to approval) for financing the training and assistance necessary for upgrading their qualifications. 32. This allocation was also to finance a feasiblity study of OMEGA, as called for by the Government (an amount of US$100,OOC was set aside for this purpose). III. PROJECT-IMPLEMENTATION 33. Project impiementation differed widely from one component to another. (1) Accounting Legislation and Standardigation 34. More than three years elapsed between the preparation of the first short list of consulting firms (in June 1981) and the signing of a contract with a French firm selected in December 1984. Objections were raised to the first short list by the Order, which wanted to participate in the preparation of the list and to have Malagasy firms included. In April 1983, the call for bids was finally issued, and the Order was excluded because "the Bank felt that the Order had neither the experience nor the necessary skills to undertake by itself the study of the relevant legislation and the accounting code, and, as both judge and defendant, would lack the required independence." (PCR, para. 4.07). 35. In November 1983 an auditing firm was selected, and a contract was signed in December 1984 for 15 staff-months of services, compared with the 20 staff-months originally planned at appraisal. 36. The project developed more positively beginning in 1985, but only partial results were obtained. In June 1985, the consultant submitted the reports: three volumes of analysis and proposals for accounting legislation and standardization and education in accounting. The legislative proposals were based on the new French accounting code (1982). The responses from the Technical Committee responsible for studying the report and from the Bank were very favorable. The modified report, which took account of the many comments that had been received, was not submitted to the Government until May 5, 1987. 37. At the end of 1986, an informal drafting c-mmittee for the new accounting code and an annotated guide to it was established. These documents, based on the consultant's study, were published as a decree on September 17, 1987. (In particular, this was partly because of pressure from the Bank, which had made it a condition for the approval of Credit 1661-MAG, signed in April 1986 as an extension of Credit 1155-MAG.) Application of the accounting code was to - 10 - be compulsory from 1989, but the project included no financing either for disseminating information to enterprises or for training teachers of technical subjects. 38. As regards regulation of the accounting profession, the proposals are still being studied, particularly those measures relating to special paths for entry into the profession, as well as normal access. Proposals have been submitted to the Ministry of Finance for opening up the Order without inundating it with new members; however, this is a legislative matter, and the Government is now showing considerable caution over this subject. Moreover, the Order itself has yet to define its dIligences normales, i.e. its professional and ethical code. 39. Paradoxically, therefore, it was the component regarded by the Bank as deserving of the highest priority, both logically and chronologically (at least according to the final formulation), that suffered the longest delay, for widely differing and complex reasons. No doubt the personalities involved account for some of the problems, but the repercussions have been unfortunate for the project as a whole. 40. First, it is clear that the profession, with its French-oriented training and free-enterprise tradition, and represented by an Order that is inclined to be conservative, was bound to be wary -- in such a very "statist" and socialist-leaning context -- of the establishment of a "national auditing agency" which -- with or without a monopoly -- might well deprive it of much of its commercial goodwill. It therefore advocated both a broadening of the project and change in priorities (which it obtained) and also the close involvement of the Order in project implementation, which it was also starting to obtain, because the President of the Order participated in the April 1981 negotiations with the Bank. 41. However, after obtaining this concession from the Government and the Bank, the Order once again felt that it was being disregarded, and once again relations became strained, not only with the Government, but also with the Bank, whose unflattering judgements, support for the Anglo-Saxon approach to auditing and tendency to resort to Canadian consultants and teachers for CFC and RINDRA, it viewed unfavorably. In such a context, it is not surprising that some time had to elapse before the atmosphere became less tense. Policy discussions became less radical, a professor of accounting was chosen to act as a Bank's interlocutor, and a French firm was selected for the study of legislation, providing a more familiar context in which to review possible innovations. 42. However, the enormous delay that had been caused was very harmful in the following ways: for the project's overall consistency, because the cart had been put before the horse; for RINDRA, because its m.st competent managers could not always become members of the Order and thus legally audit accounts; for CFC (later INSCAE), which needed information on the new standards to be taught and the openings available for its graduates. - 11 - (2) The Creation and Operation of CFC (a) Timetable 43. The Credit Agreement was signed on June 11, 1981, bidding began for the hirirg of the management team on Novembei 15, CFC was created by decree on December 14, and prospective candidates (one Canadian firm and one French firm) were interviewed in March 1982. The Director was appointed in April, and arrived on July 4 with two professors from a Canadian university. Extensive work was necessary in order to adapt the three floors provided for CFC in the "House of Products," adapting the program of studies (which was deemed too theoretical), and -reparing for the first intake. The latter was in January 1983, i.e. 12 months after the date planned. There were 635 applicants for the 100 places. Full-time courses began in February, but evening classes began on March 14, without the one-year interval called for by the Bank. The first group to obtain the Master's Degree in Accounting Sciences graduated in September 1987. (b) Pedagogical Aspects 44. The Canadian team (the Direztor in office from 1982 to 1984, together with two teachers in the first year and four fLom 1983) organized the school and its courses in accordance with the agreed requirements for quality and efficiency (relating to selection, supervision, discipline, continuous assessment and evaluation, and practical work). The Director was an excellent organizer. His successor maintained the standard of quality, but his eagerness to diversify set him at odds with the Canadian consulting firm that had entered into the contract with CFC. Despite the Bank's opposition, the firm suddenly replaced him in May 1985 with one of his subordinates, who devoted his main efforts to obtaining an extension of the contract. 45. In spite of this contretemps, over the four-year period CFC recruited annual intakes of about 100 students each (100 in 1983, but only 83 in 1986) selected from among 700-1,100 applicants each year, this being evidence of the reputation acquired by the institution, which quickly came to be known as "the Canadian School," or even "the Bank's School." The evening classes have also been a definite success (averaging 550 students per year from 1983 to 1986). The graduates from the first three intakes (numbering 51, 73 and 72) have obtained very good posts, although this was more difficult in the case of the third group (because of declines in standards and/or demand), so that fewer students were recruited in 1986. Nevertheless, many students do not complete their studies because of material problems (i.e. the lack of fellowships, obliging students to enroll for courses in the university so that they can obtain fellowships, housing and transportation). A further reason is that the examinations are difficult. Although, ea is to be expected, the Canadian programs of studies do not always match the Malagasy context, they can be adapted to it fairly easily during the teaching process. Cond tions for study (i.e. comparatively well-appointed and well-maintained premises, a library consisting of 30,000 works and 3,000 titles, and -- since 1986 -- a data processing workshop equipped with 15 PCs) provides a contrast with the poorly equipped university. The personnel was completed by the appointment of a Malagasy coordinator in January 1984. The main weakness likely to be experienced in the future is the training of the Nalagasy teaching staff, because of the late start-up to the courses abroad, which were not - 12 - originally included in the project. (Only six faculty members took courses in Canada before INSCAE was established, three of whom returned to CFC.) (c) Financial Aspects 46. Financial performance for the six years from 1982 to 1987 was as follows: Personnel Consultants Local Supplies/ staff equipment loal Projected cost (SAR) 1,900 1,400 1,200 4,500 (US$ thousands) Allocated in Credit 1,630 0,660 0,900 3,190 Agreement (1155-MAG) (SDR thousands) Reallocations (April 1986) 3,440 0,265 0,900 4,605 (SDR thousands) Disbursements as of 12/16/88 3,462 0,282 0,826 4,570 (US$ thousands) 47. The above shows an absolute degree of slippage (+US$1.562 million, i.e. 82%' for consultants (since the initial allocation was completely used up by October 1984). In contrast, there were considerable savings on local staff (US$1.118 million). 48. There were the following reasons for this slippage: (i) Basically, a change of approach. The Bank staff responsible for appraisal had calculated the total cost of CFC on the basis of individual hiring (one Director and four teachers) as averaging US$7,200 per person per month. When the Agreement was signed, the minister responsible had also proposed that various specialized uriversities be consulted (Louvain, HEC Lausanne and ESSEC Paris). However, before long the Bank staff responsible for implementation suggested that a team should be hired through a single consulting firm. This new decision immediately swelled the initial costs by 82%, with US$10,000 per month for the Director and US$8,500 for the teachers, together with traveling and moving expenses, etc. The three-year contract entered into with the Canadian firm on June 30, 1982 (totaling US$2.1 million) in itself exceeded the entire allocation for six years. Subsequent changes brought the final cost to over US$3.3 million. - 13 - (ii) The following had a secondary impact: * the appreciation of the dollar, which reduced the equivalent of the Credit (denominated in SDRs) from US$11.5 million in 1981 to US$9.9 million by October 1985; * the training abroad of Malagasy teachers, which had not been planned at appraisal; * the delay in starting courses, which increased the number of staff-months necessary for completely covering three academic years (the Canadian contract being extended from two years to three years and three months). 49. Overall, these first three years cost US$2 million more than the allocation for six years, i.e. two thirds of the unallocated funds and, in spite of the reallocations, the CFC financing was used up by 1984. A second Credit (1661-MAG; US$10.3 million) was necessary to ensure continuity. (3) Strengthening the Activities of RINDRA (a) The Directorate General 50. The subsidiary credit and the appointment of the Director Geteral were among the conditions for the effectiveness of Credit 1155-MAG after signature of the Agreement on June 11, 1981. The subsidiary agreement was made on January 25, 1982, and the Director, a Canadian national, was hired in March, appointed in April, and arrived in July. He had previously been in charge of the Professional Standards Division of the Canadian Gover:ment's Auditing Services Bureau. 51. The expatriate Director General's demeanor and incompetence very soon antagonized the staff, who called en masse for his resignation in a long memorandum dated February 7, 1983. Initially, the Bank felt that it should not give way, but some months later agreed to his departure. The Government finally replaced him on April 14, 1984 with a Malagasy national, who proved to be very dynamic and effective (in spite of the Bank's initial impression of him). Nevertheless, these two years of external management and technical assistance had been somewhat wasted. (b) Technical Assistance for the Audit Department 52. An initial assistance contract was signed in March 1982 with a Canadian firm (US$1.6 million for two years) and extended to December 31, 1984 (with US$253,300). Because the results were unsatisfactory (particularly with regard to data processing), a second contract was signed in April 1985 with a French firm, first for 28 months (F 11.12 million), and then for 44 months (F 11.43 million, equivalent to US$1.9 million), i.e. until December 31, 1988. 53. As a result of these contract, on July 18, 1986 the subsidiary credit agreement was amended so that unallocated funds could be used to increase RINDRA's allocation from SDR 3 million to SDR 4.150 million, with repayments - 14 - being extended from June 1988 to December 1994. As of May 31, 1988, the financing had been almost completely utilized. (c) Technical Assistance for the Management Consultancy Department 54. It was initially intended to examine the possibility of establishing a Public Management Consultancy AgenGy (OMEGA), and provision was also made for a feasibility study in component D of the project. 55. In the end, OMEGA was not established, because, from the second half of 1983, the Government undertook the gradual creation of an accounting and financial management consultancy department within RINDRA. The application for financing for the feasibility study was officially forwarded on March 7, 1984. The Bank signed somewhat reluctantly, on the express condition that these activities should not interfere in any way with auditing operations and that the two Departments would be completely separate. In fact, in 1985 the Management Consultancy Department wts accommodated in premises at some distance from the Audit Department, with the assistance of the Canadian firm that had, in 1982, signed the first technical assistance contract with RINDRA's Audit Department. On this occasion, the firm's performance was entirely satisfactory (especially that of its local representative); moreover, the contract was extended until June 1988 and made to include systems and computer management. Commercially, the start-up to this activity was slow, and most of the time and assistance was devoted to staff training (with ine staff member even being sent to Canada to take a special MBA on SMEs). Initially, the impact of this on RINDRA's financial performance waa to some degree negative, but has now become positive. The cost of assistance was US$859,000. (4) Strengthening the Capacity of Private Firms 56. In spite of the Bank's insistence, private firms did not come forward to make use of the facility provided. It may also be the case that the initial intention in certain government circles was to earmark the financing for the establishment of OMEGA. The fact remains that only the following two operations were executed, involving the two major firms in Antananarivo: (a) On October 12, 1984, a US$320,000 contract was signed between a Malagasy firm and a French firm for the provision of assistance to a local commercial bank in the areas of personnel management, inventory management and monitoring procedures. The operation was completed in 1986, and was judged to have been very beneficial by the local firm, one of whose members had received all the necessary training to become a member of the personnel management council. (b) On April 13, 1985, a US$64,500 contract was signed between another Malagasy firm and another French firm for the provision of assistance to an industrial bank with regard to its strategy for computerizing all procedures within between 5 and 10 years. Also included were an analysis of management monitoring procedures and the preparation of short-term recommendations for their improvement. This cooperation with the French firm (which concluded in September 1986) was very beneficial for the Malagasy firm, which is now in a - 15 - position to provide the same consultancy services without external assistance. 57. More recently, this firm also wished to carry out another operation (personnel training), but unfortunately it submitted its application after the unspent balance had been reallocated to other components. This is a regret-table consequence of the overruns in the CFC and RINDRA components, since the financing for component D (private firms) was reduced from SDR 820,000 to SDR 395,000 as a result of the general reallocation in April 1986. (5) Borrower. Bank and Consultants' Performances (a) Borrower 58. On the Malagasy side, the project was monitored by a coordinator appointed by the supervisory ministries, which were, in turn, the Ministry of Economy and Commerce, the Ministry of Industry and Commerce, and finally (since the end of 1983) the Minister Appointed to the Office of the President of the Republic and Responsible for Financial and EconomIn Affairs. The first coordinator played a very active role in project start-up, and participated in the negotiations and in the interviewing and selection of consultants. He was subsequently hired by the Bank itself (IDE). The second coordinator had less time to devote to the project and his role was mainly administrative (relaying telex communications, maintaining copies of agreements and other documentation, etc.). His contact with the Directorate of the Treasury (which was located close by) was good, this latter agency being responsible for submitting applications for credit withdrawals. 59. The Government showed sustained commitment to the two main components (RINDRA and CFC), but less toward the others. As we know, the project grew out of a specific request on the part of the Borrower (for US$2.3 million in assistance for the National Auditing Agency), and it was the Bank that considerably expanded this by adding the establishment of a school for accountants, reforms in legislation and the accounting profession, and assistance for private consultancy firms, resulting in a US$14.2 million project. 60. In the case of RINDRA, the Borrower's initial commitment never diminished, in spite of personnel changes. Evidence of this can be seen in the financing of the initial six-month contract with PMM (financed through a budget appropriation), the submission of a second application to the Bank after receiving no response for a full year, the willingness to replace the Malagasy Director by an expatriate (even though expatriates were looked upon with great disfavor at the time), the willingness to allow this expatriate to complete his contract, even though it was obvious that a bad choice had been mrde, the appointment of qualified Malagasy Directors and the head of thN State inspectorate to lead the Management Committee, and finally the extension of the Management Council's activities in 1984 and the granting of a new subsidiary credit (SDR 1.15 million) for this purpose. Government support could scarcely have been greater, unless RINDRA had been granted a monopoly of the parastatal sector (which would not have been a healthy thing to do) or allowed to renegotiate the conditions of its indebtedness, a development that is still to be hoped for. - 16 - 61. CFC -- a key element in the Bank's plan -- faced opposition from the outset from the following three sources: the university (which would have preferred CFC to be part of its own system), the profession (which regarded the "cult" of auditing with suspicion and maintained that the initial priority should have been the regulatory framework), and certain political groups (who were hostile to CFC's "elitist approach" and its location in the capital city. In spite of this onslaught, the Government adopted the following measures: * accepting the establishment of the school in accordance with the various conditions called for by the Bank (an expatriate Director, student selection and small class size); * providing the necessary premises (at the last minute, admittedly, and without them having been adapted to the purpose); * accepting the use of a consulting firm to hire expatriates (in spite of the cost), completing the hiring process promptly, and providing support for the new team; * calling for evening classes to be initiated in March 1983, i.e. one year before the date proposed by the Bank; * finally, providing regular budget allocations which, although modest and uneven, were certainly praisworthy in light of the overall state of public finances, this being further evidence of the Government's consistent support. 62. In contrast, and in spite of pressure from the Bank, the Government was much more guarded with respect to the other two components: * In the case of the US$1 million allocated to private firms, it probably harbored a few reservations that led it to put off action until the Bank itself was obliged to reallocate part of the Credit. * In the case of "Accounting Legislation and Standardization" (introducing measures that affected several existing laws), it clearly sided with the profession rather than with the Bank. 63. Nevertheless, the Government provided very sound support overall for this unusual project, and thi3 was particularly the case with CFC once the Bank had persuaded it to establish the Center. 64. Aside from commitment and financial contributions, the project made few demands on the Borrower since its objective was not to implement major administrative reforms (except for component A); at all events, nothing was called for that a country like Madagascar could not provide. As a result, no problems of "capacity" arose with respect to: * the availability of managers for RINDRA and CFC once the technical assistance specialists had left; - 17 - * the availability of local consultants, since strengthening their capability was itself one of the chief advantages of the project. 65. Similarly, there should be no serious problems in finding ways to use the project's "products," since it was kept to a reasonable scale: * RINDRA's management operations have got off to a goed start (with a turnover of FMG 240 million for the fourth year), and in fact will have to take care not to make excessively rapid progress. * CFC found no difficulty in finding positions for its first graduates at the beginning of 1986. 66. INSCAE (which absorbed CFC in July 1986) did encounter problems in 1988 in placing the third group of accounting graduates, but the following factors should help improve the situation: (i) some reduction in intake; (ii) a more aggressive placement policy (as applied -- in practice -- by all "grandes dcoles"); (iii) the inevitable opening up of the profession. 67. Conditions of effectiveness: The establishment of CFC and the appointment of an expatriate Director, a subsidiary loan agreement with RINDRA and the appointment of an expatriate Director, and ratification of the Credit Agreement. These conditions were fulfilled by May 5, 1982, 11 months after the approval (June 2, 1981) and the signature (June 11) of the Agreement. 68. Local currency contribution: Because of self-financing, the project required only a reduced government budget allocation (US$1.6 million, or FKG 320 million), this being earmarked essentially for CFC (US$1.4 million, compared with US$2.4 million from IDA): IDA Credit (US$11.5 million) - 81% of total requirements, including US$2.4 million equivalent in local currency for CFC Government (FMG) - 11% of total requirements; US$1.4 million for CFC and US$0.2 million for the study of legislation Self-financing (FMG) - 8% of total requirements; US$0.8 million for RINDRA and US$0.3 million for private firms Total in local currency - US$5.1 million, or 36% of total requirements - 18 - 69. Government contributions to CFC after 1982 totaled FMG 811 million at current prices, but there is no point in comparing this figure with the FMG 320 million that was planned, since the dollar appreciated from US$1 - FMG 200 in April 1981 to the present level of US$1 - FMG 1,500. Moreover, no comments have ever been made regarding these contributions in any of the monitoring reports. The ad hoc provision included in the Credit Agreement (Section 4.03c) was certainly very vague: "the Borrower shall provide, promptly as needed, the funds, facilities, services and other resources required for the operation of CFC and for the maintenance of its buildings, furniture and equipment and make annual budgetary allocations as necessary for the purpose." In practice, CFC (and subsequently INSCAE) received whatever allocations the budgetary situation (which was always under strain) would permit. In fact, the only time it faced serious cash flow problems was in 1984, when it had to obtain bank overdrafts. (b) The Bank 70. Monitoring was performed very dependably and diligently, and was entirely the responsibility of the Headquarters staff, with, at the outset, a somewhat strange and expensive division of functions between two Divisions (Energy and Water, and Education). This was hardly in keeping with the overall unity of the project, and somewhat tiresome for the interlocutors. Moreover, assigning responsibility for the CFC appraisal and monitoring to two different Divisions with different approaches had serious consequences. For two years, the project was visited by two missions each half-year, one from EAPEG and one from EAPED (which was responsible for monitoring CFC-related activities). When EAPED assumed sole responsibility at the end of the third year, it arranged for the cooperation of a professor of accounting who could engage in a professional dialogue with the Order and with the representatives of the foreign universities involved in the project. Because the resident mission was established after the project began, it played practically no part in monitoring. 71. The SAR provided for one monitoring mission every half-year (for each of the two Divisions). This rate was maintained until April 1984, and then slowed over the 1985-89 period, although during this interval there had been identification and appraisal missions for the INSCAE project (Credit 1661-MAG). 72. Monitoring appeared to focus very much on the actual events of implementation, and little on the evaluation of the results. Progress was very carefully monitored, first in order to speed up implementation, and then to solve the many incidental problems (some arising from the personalities involved) that arose. Missions usually lasted about 10 days, with a full schedule, a worthwhile series of visits, prompt decisions when required, polite yet firm aide-m6moires, and full, accurate and practical reports. 73. Many important decisions were made during the project, for example: the use of a consultant for hiring the CFC expatriates, the agreement that RINDRA's expatriate Director General should leave, the establishment of a special RINDRA Department instead of OMEGA, the identification of bilateral sources of financing for CFC, and the preparation of the INSCAE project. On the other hand, other decisions merely had to be accepted; for example, the appointment of a - 19 - Malagasy national as RINDRA's Director General in 1984 and the dismissal of CFC's Director by the Canadian consulting firm in 1985. 74. The Bank's judgment of individuals was sometimes less discerning (being favorable to RINDRA's expatriate Director and unfavorable to his successor), but it did not hesitate to change its opinion. On the other hand, for a long time it was unable to enter into any real dialogue with the profession, which, aside from its natural conservatism, may have been offended by the lack of communication with the Bank. A more understanding approach would have made it possible to save considerable time, and also maintain the project's internal consistency. 75. In contrast, the evaluation of the results seems to have been less satisfactory, because of the la'k of time and also perhaps because of a lack of the necessary expertise. Although there are quite regularly overall judgments of the performances of the various consultants, there is very little information on the standard of the CFC students, the real student-per-year cost, the technical standards of RINDRA staff, the views of the business community, etc. In general, therefore, the Bank's monitoring somewhat neglected the need for evaluation, or even criticism, and gave more attention to facts than to what they signified. In the case of CFC-INSCAE, this was noted explicitly (albeit tardily) in an internal memorandum dated September 24, 1987, which in particular deplored the lack of any consideration of issues such as the cost-effectiveness of the courses, the position of the teaching personnel, the need for such a staffing level, comparisons with similar schools, the prospects for eventually transferring responsibility to the Government, etc. 76. It would be rash, of course, to attempt to form a judgment of the Bank's organization on the basis of this modest project. Nevertheless, a number of the observations recorded above should be noted; i.e. the initial neglect shown by the Programs Department, which "forgot" the application for a year, the hesitation shown by the various projects Divisions toward this application (which fell within the particular purview of none of them), the assignment of the application to the Energy Division (where the Chief was not interested in it, but had an available, and interested, coworker) instead of the Agriculture Division (which simply wanted it, with no special justification), the laborious dialogue between programs and projects, which slowly brought forth a coherent project, the sharing of responsibility for monitoring with the Education Division (which adopted other options), this being an unexpected arrangement which led to only two noticeable conflicts before it was terminated in 1984. 77. These vicissitudes and problems are fairly clear evidence of the unsuitability of the form of organization in existence at that time for dealing with technical assistance projects. In contrast, the current form of organization provides for an overall approach to each country (instead of the separation between programs and projects), and this, together with the establishment of a Public Sector Management Division within the Technical Department, has produced a system that is generally better able to deal with this type of project, even though there may still be problems of personnel deployment or specialized expertise. A possible solution to these would be a greater involvement of resident missions, or the use of specialized consultants. - 20 - (c) Consultants 78. As far as can be ascertained, the consultants were selected with care and in accordance with the relevant Bank guidelines, which assign more importance to qualifications than to cost. Aside from the legislation component, their terms of reference were not prepared by the appraisal mission, but by subsequent agreement between the Government and the Bank. In general, the Bank assumed an important role in the hiring operations, almost to the point of involving itself in them directly (i.e. preparing short lists and interviews). A great deal of time was taken over this aspect of the monitoring; i.e. the examin&+ion and discussion of bids, proposals and contracts. However, the Bank's observations were generally very useful. Considerable time was also taken up by a supply contract (for CFC's computers), because the Bank encountered problems with the approval of the bidding procedure. Contractual conditions were also monitored carefully, particularly those relating to: (a) the production of semiannual reports by the consultants; (b) the yearly submission of audited accounts by the beneficiaries (RINDRA and CFC). Strangely (for organizations of this type), this basic accounting requirement continued to pose problems for a long time; in the case of RINDRA because of the Director General, and in the case of CFC because of the lengthy technical work that had to be performed by the Government's Inspectorate General. In each case, the Bank won the day, but the processes took so long that the resulting documents became increasingly irrelevant, and the Bank scarcely referred to them when considering their subject matter. 79. In spite of these precautionary measures, the consultants' performances were very uneven: * They were good in the cases of the French consultant responsible for RINDRA's Audit Department and the other French consultant responsible for preparing the study of legislation (component A). * They were mixed in the case of the Canadian consultant that was first given responsibility for RINDRA's Audit Department (mediocre) and, subsequently, RINDRA's Consultancy Department (good). * They were also mixed in the cases of the two Canadian consultants responsible for CFC, depending on which period is considered; they were acceptable at the beginning, and subsequently poor (although this did not prevent the Bank from extending their contract on two occasions). 80. The Bank. should keep a record of the evaluations received by each of the consultants (which it indirectly financed), in order to guide its selections in the future. - 21 - IV. RESULTS 81. The results obtained in each of the four components are analyzed below. (1) Accounting Legislation and Standardization 82. The legislation component was greatly delayed, but a new code of accounts was finally published in a decree of September 17, 1987, supplemented by an annotated guide. However, it is unfortunate that: (i) the belated publication of the annotated guide to the accounting system (formalizing the method by which accounting was to operate and the evaluation rules to be applied), and (ii) the lack of any national policy on dissemination of the 1987 code of accounts did not make it possible for enterprises to prepare themselves in time for introducing the plan in 1989 as had been intended. As emphasized in the PCR (para. 9.04), the requirement to apply the code does not provide for any penalties, and these should be included in a revised tax law. No new law has been passed as regards mandatory auditing for enterprises, although fortunately the auditing of accounts is increasingly frequent. 83. In light of: (i) the gradual dissemination of the new code of accounts by INSCAE (the successor to CFC) and by accounting firms, and (ii) the modern accounting code that the country now possesses, and which has been supported by a very broad consensus, the conclusion can be drawn that the overall results of this part of component A (legislation) have been positive. 84. In March 1991, the Government forwarded to the Bank for comment a draft regulation relating to the organization of the professions of accounting and financial expert, and authorized accountant, together with the reorganization of the Order, made up of members of these professions. In January 1991, the Bank was invited to participate in a discussion of the regulation. Progress at these meetings was promising, and it is therefore hoped that positive progress will finally be made over the critical issue of access to the profession. For over 10 years, the Bank had drawn attention to the harm done to the Malagasy economy by the obstacles to entry into the accounting profession. Restrictions on access meant that the supply of accountants was less than demand, thus reducing competition and considerably increasing the cost of services. This situation was all the more harmful because, as the economy was increasingly liberalized, the number of enterprises seemed likely to increase substantially, and currently there are only three accounting firms for the whole country. (2) Accountancy Training Center (CFC) 85. CFC has been an undoubted educational success, thanks to the Canadian team (particularly the first Director), EAPED (in cooperation with EAPEG), and the support of the Government (in spite of the reservations shown by certain members of the university and the accounting profession, and certain political circles). The following have been contributing factors: the standard of facilities and equipment (which could not be criticized for being too lavish, except in the case of the data processing equipment), the decidedly practical nature of the instruction (in spite of its "imported" elements), and the "grande - 22 - 6cole" approach (with selective admission, continuous monitoring of students and teachers, and sound internal organization). 86. With the university in a difficult situation, the school immediately gained an excellent reputation, both among families ("a substitute for studying abroad") and within the business community, with the following results: (i) strict selection of candidates (with between 700 and 1,300 candidates applying for a maximum of 100 places; this also poses difficult logistic problems); (ii) the complete or partial training between 1983 and 1988 of about 300 accountants (other than in evening classes); (iii) the placement of graduates without great difficulty (including posts in accounting firms), at least in the case of the first two years. Problems did appear for the third intake (which entered at the beginning of 1985 and graduated at the beginning of 1988). Ir 1988 about 84% of graduates found posts. However things improved again in 1989-91 when 100% of graduates found posts. 87. The survey of requirements over the coming 10 years that was planned for December 31, 1983 (assigned successively to CFC and RINDRA, and to be used for information only) has never been carried out, the reason advanced being that it is necessary to wait to see the effects of the changes in the regulatory and professional framework. From the viewpoint of methodology, it is to be regretted that no market study (however approximate) was ever made before this somewhat expensive enterprise was initiated and carried through. Nevertheless, INSCAE intends to perform a market study to ascertain both quantitative and qualitative accounting requirements so that these can be taken into account in its student education and teacher training. 88. The management of the Credit revealed a similar attitude; i.e. that simply taking action can be a substitute for planning. Spending the financing allocated for a five- or six-year period in only three is not usually a sign of sound management, even if one has started from a poor initial assessment of the situation. 89. CFC's financial problems somewhat offset its educational performance. Since the beginning of the courses (February 1983) and the beginning of 1986 (when its financing was used up), the school had three intakes each of 100 students. The first of these received three years of training, the second two years, the third one year. Over the same period, CFC's expenditures totaled about US$5 million, not counting government subsidies. 90. The objective of reducing the cost per student to US$2,000 by 19. was more or less achieved. However, the overall cost of the institution seems high (about FMG 1 billion per year). Revenue from tuition and related fees is much too small to enable the school to achieve financial equilibrium, and it will obviously have to receive government subsidies (PCR, para. 9.12). - 23 - 91. INSCAE took over from CFC. A second IDA Credit (1661-MAG) previded the necessary financial resources to enable CFC to continue its activities. CFC was renamed INSCAE to reflect the increased breadth of subjects taught, because INSCAE also provides MBA-level studies in business management. 92. INSCAE continues to operate satisfactorily. In particular, educational programs md administrative procedures have improved. Consequently, in the short term INSCAE needs to solve the problem of facilities, since this would make it fully efficient. The solution would be to lease additional space, but in the longer term the only definitive and permanent solution to the space problem would be the construction of new premises. (3) The Strengthening of RINDRA's Activities 93. The objective of ensuring that RINDRA would ultimately have complete autonomy as regards technical competence and management of an auditing office has been achieved. 94. Personnel in the Audit Department number 47 persons, including 35 senior staff, and in the Consultancy Department there are 23 persons, including 14 senior staff. With the staff of the Directorate General, RINDRA personnel total 85 persons, including 58 senior staff. 95. The number of audits conducted rose from 64 in 1982 to 154 in 1988, while consultancy operations increased from seven in 1984 to 22 in 1988. 96. At this stage, it is the agency's financial and legal problems that give cause for concern. Financially, RINDRA has a gross operating profit, but it is suffering large losses because of the need to amortize the initial technical assistance (classified as start-up costs) and its long-term debt to the Government, which it is unable to service (contrary to the assumptions contained in the 1980 appraisal, which were based on overoptimistic projections). In the absence of any form of reorganization, the only solution to the agency's virtual bankruptcy would be an overall restructuring of public enterprises. 97. Legally, RINDRA has demonstrated that its links to the Government have not affected its independence of judgment, although not everybody is convinced of this. However, its senior staff are currently unable to become experts comptables, which would qualify them to audit the accounts of enterprises, or become partners in their own agency, because of its status as a "socialist enterprise." Obviously, this situation is not conducive to personnel stability. It is to be hoped that the Order will permit them to become members, thus finally solving the probiem. (4) Strengthening the Capabilities of Private Firms 98. Two firms made limited applications for financing for strengthening their capabilities. Nevertheless, one of the initial objectives of the project, which was to provide local enterprises with suitable techniques for improving their management systems, is far from having been achieved, as enterprises have not come forward to take advantage of this facility, because of their lack of sufficient information (PCR, para. 9.45). - 24 - V. PROJECT SUSTAINABILITY 99. Unquestionably, the project has been a success. CFC has trained over 300 well-qualified accountants, and RINDRA now has considerable expertise in auditing and its initial operations in the field of management consultanzy have been good. The profession has already made technical progress, the country now has a modern accounting code, and the Order seems willing to accept innovations, although some decisions on how this is actually to be done have yet to be made. 100. INSCAE is now capable of generating revenue from both the public sector and the private sector as a result of its ongoing training seminars and the university fees paid by students. INSCAE should perhaps increase its tuition fees for all programs, in line with inflation rates over recent years. In any case, however, the Government will have to make a substantial contribution to INSCAE's resources in order to ensure that its financing is stable and adequate and that it can maintain a status comparable to an international-level "grande dcole." 101. RINDRA's future prospects are clouded because of its untenable financial position and because its current status is no longer appropriate at a time when the economy is being deregulated. It is to be hoped that these problems will be solved by the reorganization of public enterprises (perhaps including privatization). However, these issues affect not only RINDRA, but the entire Malagasy public sector. Technically, RINDRA possesses the necessary professional expertise, is well organized, and has acquired a reputation for professionalism. It is, therefore, a viable and sustainable agency, provided that its financial problems can be solved through the adoption of a new government policy toward the public sector. 102. In spite of the reservations that have been expressed at various times during the evaluation of the components, it must be acknowledged that the project overall had many merits: (a) First, it was attractive at an intellectual level for the followinj reasons: * This technical assistance project showed originality not only because SDR 8,225,000 out of the total SDR 9,400,000 was devoted to consultants' services, but also because, instead of dealing with the conventional categories of government activities (Planning, Finance or Agriculture), it dealt with the full range of activities: organization, training and the upgrading of a profession that is seldom regarded as a priority. It was therefore a pilot project both for the country and for the Bank, and this explains some of the incertitudes that arose. * It was a project that addressed the following two issues, which are high priorities for the Bank: - 25 - (i) Upgrading the management capacity of countries, a problem that many regard as the major challenge thay face. This concern underlay the project from its starting point (with auditing being viewed as a mechanism for achieving sound management) to its completion (with the establishment of a National Management Institute). (ii) Developing the country's own expertise, mainly through the provision of assistanne to RINDRA and to private firms. * The project was consistent (in spite of its diversity), it matured over a long period (even though some of its stages were characterized by a certain confusion), and it was timely politically, because, at a time when the Bank was involved in only agricultural or road projects, the operation provided it with a good opportunity for entering into a dialogue with groups that regarded it with some caution, enabling it to emphasize discreetly the importance of those management and training problems that can now be more freely dealt with in Madagascar, where many now acknowledge that the 1975-78 reforms could have been better implemented if a larger number of good managers had been available at that time. (b) Second, the sUccesses can also be seen in the field: * CFC began its courses in January 1983, and has maintained its standing as a "grande dcole," in spite of internal tensions. It wholly or partly trained about 300 well-qualified accountants (not counting its evening class students) before its activities were taken over by INSCAE. * In spite of two or three years characterized by indecision, RINDRA now has a sound auditing capability (with a Department of 47 persons), its initial operations in management consultancy have been good (with a Department of 23 persons), its internal organization is sound, and it has a reputation for professionalism. * In spite of the scarcity of foreign exchange, the two major private firms were able -- on at least one occasion -- to take advantage of erzernal assistance. This enhanced their qualifications in the area of management consultancy. * The profession has already developed technically, the country now has a modern code o" accounts, and the Order seems willing to be more open. 103. While this overall picture is very positive, certain shortcomins must also be acknowledged, primarily: - 26 - * the lack of support from the profession, which prevented the project from developing as the Bank wished, and thus adversely affected the operation's initial consistency; * the lack of financing for CFC, which -- because of changes in the Bank's planning -- used up its financing in three years, whereas the objective had been to turn it into a financially viable institution over six years. 104. Details of the weaknesses or shortcomings in each component can be summarized as follows: (a) Accounting Legislation and Standardization * Aside from a new accounting code and sour4 proposals, the legislative framework has not been revised, in particular as regards the obligations incumbent on companies. * The profession does not seem to be completely open, and there is still no detailed information on either the exceptional or the standard conditions that wiil be applied in the future to candidates for access to the Order. (b) The Accountancy Training Center (CFC) * It has suffered financial failure. * The training of the teaching staff is inadequate (although INSCAE has prepared a training program). * The placement policy is still weak. (c) RINDRA * Its status is outmoded, particularly in this period of economic deregulation, and this calls the agency's independence into question and may discouraje its senior staff. * Its financial position has become untenable, precisely because of the Bank's financing. * Its commercial management is somewhat uninspired, and it must be more active in seeking out clients. * Financial management has been somewhat wasteful because the allocation was too large. - 27 - (d) Strengthening of the Capability of Consultancy Firms * The Credit was underutilized. At first, the Bank attempted to reverse this situation, then confirmed it by reducing the allocation. 105. Some of the weaknesses are technical in nature, therefore, but most are financial; for example, RINDRA's debts are too large because the appraisal was unrealistic, and CFC is now short of financing because of subsequent ill- advised actions. It is difficult to reach an equitable judgment because, although attention must be drawn to RINDRA's technical success, CFC's educational success, the beginnings of change in the profession, and the assistance provided for consultancy firms, it must also be acknowledged that by closure (June 30, 1989) this original and attractive project (which had posed so many problems for the Bank) had not fully achieved all its objectives. Nevertheless, the project overall is a success, but at a high price, and it has therefore left the overnment with two serious problems: RINDRA's financial position and the transfer of responsibility for CFC-INSCAE to the State. VI. LESSONS LEARNED 106. The following are the main lessons learned from this technical assistance project: (a) A consistent strategy is necessary for the success of technical assistance projects. In this case, an initial specific request that an auditing agency's capability be strengthened was turned into an integrated plan covering the publication of a modern accounting code, the training of well-qualified accountants, the strengthening of an auditing service, the establishment of a management consulting department, and assistance for strengthening consulting firms. This overall consistent approach enhanced the management capability of enterprises and raised the level of expertise in Madagascar. (b) The real extent of the need for professionally qualified accountants must be studied in depth at the project identification stage. The lack of such a study adversely affected the direction taken by CFC and the degree of assistance provided. (c) A clear and frank dialogue pust be established with members of the profession concerned, in this case the Order of Expert Accountants, in order to obtain its support from the very beginning of project preparation. The lack of support from the profession prevented the project from developing as the Bank wished, and thus prevented the project from being fully consistent in its initial stages. Even though 10 years have passed since the project began, conditions for entry into the profession -- which are so important for RINDRA staff and INSCAE graduates -- still do not appear to have been completely clarified. - 28 - (d) Financial analysis of a country's real technical assistance requirements must be very thorough and consider the long term. There was a complete underestimation of the financial problems affecting CFC (which used up its six-year allocation in three years), and especially RINDRA (whose financial positicn is untenable because it received a subsidiary loan repayable over 10 years at a service charge of 12% per year). A technical assistance project requires a long period to come to maturity, as evidenced in the granting of a new Credit to CFC/INSCAE (1661-MAG). The financial analysis process must carefully calculate short- and long-term needs for consultants, clearly define their terms of reference, and identify the advantages and disadvantages of using individual consultants (university faculty, in this case) or consulting firms. It should also be remembered that technical assistance is often financed through grants, and attempts should therefore be made to identify. the various financing options in cooperation with other donors. This was acknowledged at the appraisal stage of Credit 1661-MAG, which was supported by bilateral French, Canadian and U.S. assistance. (e) The Government must recognize the need to formulate a strategy for adapting its financial viability objectives. RINDRA can survive only if there is a thorough financial restructuring. Similarly, the Government must ensure it is at all times aware of INSCAE's needs if the latter's status as a "grande dcole" is to be maintained. Similarly, as soon as a mainly educational assistance project such as this begins to be implemented, a government must realize that eventually its own funding must take the place of external financing. (f) A detailed training program must be drawn up at the appraisal stage. The inadequate training of Malagasy teachers is still a problem for INSCAE, especially in certain specialized subjects. Moreover, the need to continue training Malagasy personnel abroad means that more expensive expatriate personnel has to be used in the meantime. Lack of such a training program in the initial stages aggravated CFC/INSCAE's financial problems. (g) Legislative reform and the introduction of new accounting standards must be accompanied by measures for disseminating information that will enable enterprises to make timely preparation for introducing the new accounting procedures. The lack of any precise policy on this subject delayed the general application of the accounting code. (h) A requirement that accounts be audited should be standard for enterprises. If the necessary legislation is not passed, enterprises will no doubt begin to have their accounts audited, but progress may be slow and this may delay the dissemination of the financial and! economic data that those enterprises generate. - 29 - INSTITUT NATIONAL DES SCIENCES COMPTABUES ar DE L'ADMINtSTRATTON D'rNTItEItISES Maisnéi duo Piroduitc 67 Ha - T41. : .8444 .n. e......... ......... . (Tna conns are gakan aco TULICOP 1I De : RABORO Raymond FAX : 261 2 308 95 Président du Conseil d'Administration A : Monsieur MARK BAIRD FAX : 202 473 8107 Chef. de Division Banque Mondiale . Finance 0ErM : 'rojet d'organisation et formation en Comptabillté et réviion (crédit 1155-MAG) Monsieur le Chef de Division, Faisant suite b votre rapport d'évaluation rétrospective, nous avons pris connaissance du document er nous aimerions faire les observations suivantes : I. Le cursus ae rormazzons elleutive na. et Wl... OjUua da 4&?asaion en Comptabilité (CFC) n'a pas suivi celui Lniti.alement prévus cité en page*6 Art. 22 (Ii). Effectivement, ce cursus se décrit ainsi : - un premier cycle de 3 ans pour le dipldme de DSSC (Dipl&m Supérieur Spécialisé en Sciences Comptables) - un second cycle d'un an pour le di3ldme de DESCA (DiplOme d'Etudes en Sciences Comptables Approfondies Un stage pratique est intégré entre J. auxieme et -a o&u.Un=t 4AAcc et un mémire de fin d'études est soutenu pmr l'obtention du DESCA II.Page 21, Art. 86 (1ii) Placement Le placement des gradués 1988 a 4té de 1 ordre de 84 %. La situation s'est rétablie car 100% des gradués de 1989-1990-1991 ont été placés. Outre les deux points cités ci-dessus, nous n'avons pas d'autre remarque. vous - euulahem. 6gt ttI,..»A Y8us peitas dlappdor, gonsieur le Chef de Division, l'assurance de notre haute considération. P. Le Président du Conseil d'Administration et p. La Direct néral