Madagascar - Private Sector Development and Capacity Building Project

Document of The World Bank Report No. T-6874-MAG TECHNICAL ANNEX TO THE MEMORANDUM AND RECOMMENDATION (Report No. P-6874-MAG) ON A PROPOSED CREDIT OF SDR17.2 MILLION (USS23.8 MILLION EQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR A PRIVATE SECTOR DEVELOPMENT AND CAPACITY BUILDING PROJECT May 8, 1997  CURRENCY EQUIVALENTS Currency Unit Malagasy Franc (FMG) US$1.00 FMG 4,982.84 (4/30/97) MALAGASY FISCAL YEAR January I - December 3 1 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CIP Independent Privatization Commission CRC Competitiveness Review Committee EPZ Export Processing Zone ESAF Enhanced Structural Adjustment Facility ESN Economic Strategy Note FASP Private Sector Support FuLid FAC French Fonds cdAide et ce Cooperation FDI Foreign Direct Investment FID Fonds d'lntervention pour le Developpement ILO Industrial Labour Organization ITPAC Industry and Trade Policy Adjustment Credit MB Ministry of Decentralization and Budget MDSPP Ministry of Private Sector Development and Privatization MF Ministry of Finanice and Econiomy MMF Match-Makinig Fund NGO Non-Governmental Organization OED (World Bank) Operations Evaluation Department PFP Policy Frameework Paper PHRD Policy and Human Resources Development PSA Private Sector Assessment PSRDF Privatization Social and Regional Development Fund PSAC Public Sector Adjustment Credit PSSF Private Sector Seminars Fund PTF Privatization Trust Fund PVO Private Voluntary Organization SME Small and Medium Enterprise STA Technical Secretariat for Adjustment UNIDO United Nations Industrial Development Organization VAT Value Added Tax Vice President: Mr. Callisto Madavo Country Director: Mr. Michael Sarris Technical Manager: Mr. Thomas Allen Task Team Leader: Mr. Paul Ballard  Madagascar. Private Sector Development and Capacity Building Project i MADAGASCAR PRIVATE SECTOR DEVELOPMENT AND CAPACITY BUILDING PROJECT TABLE OF CONTENTS SECTION A: PROJECT DESCRIPTION I I. Project Design I II. Description of project components 2 Economic Policy Reform Program 2 Market Liberalization and Private Sector Incentives Reforms 2 Public Enterprise Divestiture Program 3 Tax administration reform 6 Private Sector Capacity Building Program 9 Private Sector Fund (PSF) 10 Improved Government/Private Sector Dialogue - Competitiveness Review Committee (CRC) 13 Private Sector Seminars Program 14 FDI Match-Making Scheme 15 III. Project Benefits and Risks 16 SECTION B: PROJECT COSTS AND ADMINISTRATION 18 1. Project Costs and Financing 17 II. Procurement 18 III. Disbursement 20 IV. Accounting and Auditing 21 SECTION C: IMPLEMENTATION AND MONITORING 22 I. Project Organization and Management 22 11. Implementation Schedule 22 IT. Key Indicators of Project Performance 22 IV. Monitoring and Progress Reporting 23 V. Supervision 24 TABLES Table 1: Estimated Project Cost 18 Table 2: Project Financing Plan 19 Table 3: Summary of Proposed Procurement Arrangements 19 Table 4: Estimated IDA Disbursements 21 Table 5: Disbursements of IDA Credit 22 ATTACHMENTS Attachment 1: Detailed Project Costs by Subcomponent + Financing Plan Attachment 2 Logical Frameworks - Tax Reform and Investment Incentive Component Privatization Program Component Business Services and Dialogue Support Components Attachment 3: Table of Key activities, Evaluation Criteria, Performance Indicators and Implementation Timetable Attachment 4: Speeding Up Export Diversification Through Matchmaking Between Foreign and Local Firms   Madagascar. Private Sector Development and Capacity Building Project SECTION A: PROJECT DESCRIPTION I. PROJECT DESIGN 1. The overall aim of the Project is to support accelerated export-led growth in Madagascar, by increasing private investment and productivity through reforms in the policy and business environment, upgrading of private firms' capabilities and global market knowledge and involvement, and attracting foreign direct investment (FDI). 2. Due to almost two decades of public-sector led economic policies in the 1970s and 1980s, Madagascar still needs to accomplish the transition to a modern market economy. Spurred by the economic liberalization measures adopted in 1987-91, a small but dynamic export-oriented private sector still comprising a "new breed" of entrepreneurs has emerged. Alongside this, the public sector and a large public enterprise sector dominate many major economic activities. Meanwhile, market institutions, including the rule of law, and a market culture based upon competition and transparency have yet to be firmly established. Market- based business services responding to private firms' needs are extremely limited. As a large island set apart from the African and Asian continents, Madagascar has remained for a long time closed in upon itself, and the Malagasy private sector has little experience or knowledge of world markets. Meanwhile, the Bank's operational experience has been that projects have been slowly and poorly implemented, particularly where active upfront involvement by beneficiaries in project design and preparation have been lacking. 3. The Project has been designed and prepared taking the above factors into account, and learning from past experiences in Madagascar and elsewhere: (a) considerable attention has been given to strong and early preparation of each project component; (b) transparent and competitive market-based approaches have been adopted not only for the policy reforms to be undertaken, but also for key processes of project preparation and implementation - such as recruitment of key project personnel and consultants; (c) emphasis has been given to client-led project preparation for each project component, with active involvement of private sector stakeholders as well as government officials; (d) private sector involvement has been based upon broad-based representation of the range of businesses by activity, size and region. 4. The philosophy underlying project design is based upon market principles and institutions: (1) the privatization program is designed to be implemented in a transparent and competitive market-based manner to ensure efficiency and sustainability in terms of popular support; (2) the market liberalization and private sector incentives and tax administration reforms are aimed at removing distortions and creating a level playing field for private investors, domestic and foreign, while recogniizing local sensitivities and the need to ensure strong local participation; (3) the private sector capacity-building components are all based upon catalytic and temporary programs to strengthen markets through private firms' capabilities and market institutions, avoiding creation of new and permanent bureaucracies, while opening up networks of market-based contacts between Malagasy private firms and foreign private partners in world markets. 5. The Project will contribute to the design and implementation of major reforms outlined in the Bank's country assistance strategy (CAS) - discussed by the Board in February 1997, and supported by the IMF ESAF - approved in November 1996. However, its contribution is principally technical rather than overtly policy-based. Alongside the immediate need to implement policy reforms under the CAS and the ESAF, at least equal priority is being given to building long-term capabilities (people,  2 Madagascar. Private Sector Development and Capacity Building Project institutions, infrastructure) and to supporting a debate on Madagascar's options for achieving accelerated growth with equity in the longer run. 6. The Government and the private sector's commitment to this approach are indicated by the upfront actions already taken before project appraisal and Board presentation. Nevertheless, the Project entails significant risks. It will require sustained political commitment to the Project objectives. Given the innovative approaches both for the Bank and the Borrower, it will call for an intensive supervision effort by Bank staff especially during the first year. II. DESCRIPTION OF PROJECT COMPONENTS 7. The Project will support the design and implementation of two programs: economic policy reforms and private sector capacity building. Economic Policy Reform Program Market Liberalization and Private Sector Incentives Reforms 8. Removing impediments in the business environment to expanded and more efficient private investment, including FDI, is key to generating a strong supply response as part of the Government's adjustment program. Following the initial measures undertaken in 1996, supported by the SAC, over 1997-99, further reforms will be designed and adopted with technical support funded by the Project. This will take the form of local and international expert assistance recruited by the Competitiveness Review Committee (CRC), Technical Secretariat for Adjustment (STA), or the concerned Government agency. 9. The principal reform measures to be designed and adopted, in accordance with the 1996-98 Policy Framework Paper (PFP), prospectively identified for support are: (a) simplification of company registration procedures; (b) removal of state and public enterprise monopolies and establishment of pro- competitive regulatory frameworks, where needed, in major economic activities, notably sugar, wheat flour, cotton ginning and marketing, raw meat, oil seeds, coastal shipping, ports, airports, water supply, insurance; (c) mining sector liberalization, and mining code reform to encourage expanded private investment and exports in a potentially major sector of the economy; (d) conclusion of double taxation avoidance treaties with at least 20 FDI-source countries to encourage expanded foreign private investment; (e) simplification and strengthening of "good" regulations (e.g., in forestry and fishing) to support expanded, environmentally sound private investment and exports. 10. A key focus of the incentives reforms will be measures to facilitate entry of foreign private investors into the Malagasy market, to greatly expand the flows of FDI. These could include inter alia further efforts - building upon the August 1996 land law reform - granting long-term leasehold access to foreign investors - to improve foreign investor landholding rights. The Project would support analytical studies and stakeholder workshops and seminars to facilitate a wider debate and fuller public understanding of the issues involved. 11. Measures designed under the Project would be presented to Cabinet, and where necessary to the National Assembly, for approval.  Madagascar: Private Sector Development and Capacity Building Project 3 Public Enterprise Divestiture Program 12. The Project will support preparation, implementation and performance monitoring of the Government's renewed privatization program, by funding in part the preparation and execution of divestiture transactions for individual Public Enterprises (PEs), design and adoption of pro-competitive sector regulatory frameworks and demonopolization measures as needed, as well as the creation and operation of key elements of the overall regulatory and institutional framework for privatization. The latter are defined in the August 1996 Privatization Law. The framework takes account of significant legal, regulatory and institutional problems encountered during the 1988-93 privatization program. It is designed to ensure transparency and efficiency in preparation and execution of transactions, equity of treatment between foreign and local investors, broad participation of local investors, small savers and the general public, and widespread and effective public awareness of the aims, instruments, process and progress of the program. 13. Privatization Framework. Key features of the framework under the Privatization Law are: (a) creation of a high-level Privatization Committee -comprising six members, two from the private sector - and reporting directly to the Prime Minister and the Cabinet - responsible for oversight and direction of the privatization program; (b) a small, lean Technical Secretariat to the Committee, to coordinate and supervise implementation; (c) delegation of preparation and execution of divestiture transactions to openly and competitively selected private investment advisers (consulting firms and investment banks); (d) an arbitration commission to provide speedy and effective legal recourse for dispute resolution; (e) a privatization trust fund to warehouse shares in privatized PEs for sale in blocks over time to local investors; (f) a privatization social and regional development fund, as a proxy for a voucher scheme, to enable broader popular participation in the divestiture program. A major public awareness campaign will be mounted initially and throughout the program's implementation. At Credit negotiations, it was agreed that a public enterprise transfer tracking system (PETTS) will be created by June 1997 in the Treasury in the Ministry of Decentralization and Budget to monitor progress in controlling and reducing budget transfers to PEs. 14. Early design and establishment of the above elements of the program have been supported by the project through funding of local and international consultants under the Project Preparation Facilities (PPFs). Following National Assembly approval and promulgation of the Privatization Law in August 1996, the Government's plan is that the key elements of the privatization framework will be legally established by May 1997. This should permit the first transactions to be undertaken starting in the second half of 1997. 15. Process and Phasing of Divestitures. Under the privatization program, preparation of divestitures will be delegated (contracted out) separately (a) to independent private consultants for sector regulatory design, enterprise audit and legal work, and (b) to private investment advisers for preparation and execution of divestiture transactions. Liquidations would be handled separately from privatizations, given the different skills involved and anticipated use of mainly local expertise. For privatizations, large PEs would be handled by individually recruited investment advisers and consultants. Meanwhile, to achieve cost saving, smaller and medium sized PEs would be handled in batches (of about 10 enterprises) by individual investment advisers. Of 120 remaining commercial and industrial PEs, it is anticipated that 20 large ones would be handled individually for privatization and 80 handled in batches, while 20 expected liquidations would be handled in batches by local liquidators. While the goal is to complete divestiture of all 120 PEs within 5-6 years, most contracts for handling divestitures would be let within the first 25-30 months to allow some flexibility in timing completion of individual transactions in light of market conditions.  4 Madagascar: Private Sector Development and Capacity Building Project 16. The remaining 120 PEs will be slated for divestiture in three phases of about 18-24 months each over 1997-2002. A "long list" of PEs will be drawn up and approved by the Cabinet for each phase. At least 10 large PEs would be included in Phases I and II. At Credit negotiations, it was agreed that the Phase I list will include the following large PEs: Air Madagascar (airline); RNCFM (railways); SECREN (shipbuilding and repair); SIRAMA (sugar production); SOLIMA (petroleum marketing and distribution); ADEMA (airports management); HASYMA (cotton ginning and marketing); SINPA, SOMACODIS and COROI (trading companies); and CMN (coastal shipping). In addition, about 35 smaller PEs would be included, including about five for possible liquidation. 17. Selection of PEs for divestiture in Phase I is based upon the following objective criteria: (a) maximizing private investment, output, productivity gains, and reduction in fiscal drain; (b) PEs in sectors slated for early market liberalization under Government's economic reform program as confirmed in the PFP; (c) lead-time needed to prepare and execute divestiture, especially for larger PEs; (d) mobilizing sales revenues to finance subsequent phases of the divestiture program; and (e) creating a positive market image of Madagascar's divestiture program vis-a-vis local and foreign private investors, through sale of major PEs in relatively problem-free fashion. 18. As agreed in the 1996-98 PFP, PEs representing 15% of the total PE sector in terms of aggregate sales and employment would be divested in 1997, 20% in each of 1998-99, 25% in 2000, and 20% in 2001. 19. Funding Divestiture Transactions and Use of Proceeds. Proceeds from divestiture transactions would be allocated, in descending order or priority, to: (a) defraying divestiture transaction costs; (b) allocation to servicing public debt; (c) funding the (reimbursable) trust fund for the Privatization Social and Regional Development Fund (see below). The Project would provide funding especially for preparation and execution of Phase I divestiture transactions (i.e., before any proceeds have been realized) and for major transactions where costs could be lumpy and sizable. As far as possible, however, transaction expenses would be met out of proceeds of earlier divestitures. For this purpose, a revolving fund would be established lodged with the Treasury, in accordance with the Privatization Law. 20. Project Support. The Project would support the main elements of the privatization program and the institutional framework: Privatization Committee. The project will support the setting up and operation of the Privatization Committee which had received from the Government the mandate to implement the privatization program. At Credit negotiations, the Government indicated that the composition of the Committee would be restructured and reinforced by including additional qualified private sector representatives. The project will also finance the setting up and the operation over a period of five years of the Technical Secretariat which, under the authority of the Committee, will plan, arrange, coordinate and supervise the work of the independent auditors, lawyers, economists and financial advisors who will be hired to execute the individual divestiture transactions and, where necessary, to prepare the individual sector reforms. Preparation of Divestiture Transactions. The remuneration of the financial advisors funded in part out of the IDA credit will in part be based on the proceeds from the sale of the shares in the enterprises privatized. The project will finance part of the upfront audit, consulting and legal costs of the independent advisors to the extent that they cannot be recouped from the proceeds of the privatizations.  Madagascar. Private Sector Development and Capacity Building Project 5 21. Privatization Trust Fund (PTF). The project will finance the setting up of a share warehousing scheme through the creation of a privately managed trust fund which will hold minority shares in the privatized PEs pending their sale to company personnel, the Malagasy public and Malagasy enterprises and institutional investors. Statutes establishing the PTF were approved by the Cabinet in September 1996, with technical modifications adopted in May 1997. Based upon technical preparation funded out of the PPF, the PTF is expected to be established and to begin operations by end 1997 in time for the first PE divestiture transactions. The PTF will be free to determine the PEs whose shares it will purchase based upon a market analysis of their potential viability and market interest. The PTF will be permitted to purchase up to 49 percent of a given PE's shares, but in practice will limit its holdings to around 30 percent, and will not exercise enterprise management responsibilities. The management of the fund will be delegated to a private manager selected after competitive bidding who will receive the mandate from the Government to manage the fund and to liquidate it over a period of five-seven years through sales to the authorized buyers mentioned above in accordance with a management contract. The objectives as set forth in the management contract will be to: (a) preserve and enhance the value of the shares held, (b) maximize the capital gain on the sale of the shares sold to enterprises and institutional investors; and (c) liquidate the share portfolio in accordance with a set time plan. The Project will finance the up-front costs of setting up the privatization trust fund and the initial fixed part of the management fees to be paid to the private manager of the fund. 22. Privatization Social and Regional Development Fund (PSRDF). Broad public participation in privatization programs is desirable to lend transparency and ensure popular support. However, in practice, in African economies, voucher schemes along East European lines are virtually impossible to undertake administratively. The aim of the PSRDF is to enable wide, mass involvement - albeit indirectly - in the privatization program for less privileged groups in society, notably the rural and urban poor, retrenched PE employees, and unemployed graduates. The PSRDF will be funded with a (modest) share of net PE privatization proceeds, and will provide limited amounts of credit, training and outreach assistance to support grass-roots level self-employment projects, channeled through effective NGO- based and private schemes (such as AGETIPA, FID, etc.). Statutes establishing the PSRDF were approved by the Cabinet in September 1996, with technical modifications adopted in May 1997. A portion of the proceeds from the sale of the shares to private shareholders will be transferred to a fund to be managed and supervised by the management and the board of directors of the FID (Fonds d'intervention pour le Developpement), a private non-profit association created with the support of IDA (under the Food Security & Nutrition II Project) in 1993 to finance basic infrastructure and employment- generating projects at the local community level. To avoid unnecessary overhead, no separate management team will be set up to manage the privatization social fund. However, it will have complete financial autonomy from the FID to ensure transparency and facilitate the monitoring of project implementation. The objective of the PSRDF is to ensure that all constituencies of the Malagasy population may receive tangible benefits from the divestiture of PEs. The proposed project will finance the costs of setting up and initial operation of the PSRDF. 23. Arbitration Commission. The objective of the Arbitration Commission is to facilitate a faster, more cost effective and pragmatic resolution than under the (still weak) formal judiciary system of legal disputes arising from the implementation of the privatization program. The project would finance the cost of setting up the commission. 24. Public Awareness Campaign. The Project will finance a public awareness campaign which will have as objectives to: (a) ensure public support by making Malagasy stakeholders aware of the need and advantages of the program privatization; (b) ensure transparency of the program through wide dissemination of the rules; (c) both abroad and within the country, announce and explain the PE  6 Madagascar: Private Sector Development and Capacity Building Project Divestiture Program in context of the structural changes necessary to improve the economic and business environment and enhance the economic competitiveness of the country. The project will finance technical assistance to plan, prepare, implement and monitor the results of the public awareness campaign. The public awareness campaign will be contracted out as a whole or in segments to specialist communications consultants. 25. Public Enterprise Transfer Tracking System (PETTS). The Ministry of Decentralization and Budget (MB) will establish a data system for tracking fiscal transfers to PEs (both direct in terms of budget support, and indirect in terms of taxes and debt service foregone) to be operated by the public enterprise monitoring unit in the Treasury. The PETTS will be the key means of monitoring progress of the PE divestiture program against a major goal of reducing and eliminating fiscal drain. It is needed because until now MB has had no integrated overall system for monitoring and controlling fiscal transfers to and from PEs in their various forms. It was agreed at Credit negotiations that the PETTS will be set up by end June 1997. 26. PE Employee Retraining Fund. In order to address work force changes, including potential layoffs that may occur during implementation of the PE divestiture program, a redeployment and retraining scheme is being prepared and will be adopted by the Government early on. Initial estimates are that, in Phase I of the divestiture program, about 7,000 out of a total work force of 30,000 in the concerned PEs could be retrenched and could need retraining assistance. The Retraining Fund would provide, where needed, redeployment and training assistance to enable retrenched PE employees to make the transition to new jobs. It will be based upon the following principles: (a) it will focus upon enterprise-specific needs rather than a generalized approach; (b) through retraining for redeployment, it will complement, as needed, legally due government-funded severance pay to laid-off workers; (c) it will aim at sustained increases in worker productivity and household incomes; (d) it will give priority to regions and sectors where immediate re-employment possibilities are limited; (e) it will work largely through existing programs and institutional mechanisms, including several successful PVOlNGO-based schemes as well as private placement services. Overall program coordination and management will be done by a small autonomous redeployment and retraining unit (RRU) with a lean and well qualified staff reporting to the MDSPP. The RRU will coordinate initial retraining activities, while preparing a broader redeployment program for the medium-term. The institutional and operating arrangements for the Retraining Fund are expected to be in place by September 1997. Tax administration reform 27. Madagascar's poor and declining tax performance is due to several factors: (a) excessive revenue dependence upon external trade taxes, resulting in revenue losses as they have been reduced and not replaced by effective non-protective indirect taxes; (b) a culture of pervasive ad hoc, discretionary exemptions since 1990 eroding taxpayer compliance; (c) a structurally limited tax base due to the high level of subsistence activities in the economy and a large non-performing (thus non-taxpaying) public enterprise sector; (d) an antiquated and neglected system of tax and customs administration with inadequate and declining staffing, material resources, and organization; (e) weak and outdated systems for most major taxes, including corporate, property, as well as indirect taxation. The poorly conceived indirect tax reforms of 1993, coupled with new ad hoc exemptions, further weakened tax administration and tax payer compliance. While comprehensive tax reform is thus needed, it cannot be undertaken all at once, given generally limited implementation capacity and the fundamental weaknesses in tax administration, which will further deteriorate greatly over the next few years if not addressed now.  Madagascar. Private Sector Development and Capacity Building Project 7 28. The strategy adopted by the Government, whose implementation will be supported by the Project, is to focus selectively on addressing key weaknesses in the tax system, giving priority to overhauling tax administration. The main problems to be addressed are: * Value Added Tax (VAT): Introduced in 1994, the VAT comprises a long list of exemptions iilnerited from the previous transaction tax and sales tax systems, on items normally subject to tax (notably services). The zero rate regime, which should be applied only to exports, is used to grant ad hoc exemptions. No turnover threshold exists below which the VAT is simplified for small entrepreneurs by applying a flat tax, while the tax administrationl, whichi has a weak computerized information system, is unable to track and inspect all firms subject to VAT. * Weaknesses of the fiscal administration: Tax administration organization is antiquated, cumbersome and complex, and is a key reason for poor tax collection. It is based on principles dating from before Independence: two separate directorates are responsible for revenue collection (Tax Directorate) and tax payer control (Public Accounting Directorate) creating many overlaps. Furthermore, the Tax Directorate is broken-down into three UllitS -- direct taxes; indirect taxes and registration taxes -- with little coordination between them. Coordination with customs is weak, and no single taxpayer identification number system exists. Staffing levels are inadequate, and will decline much further in the next four years wheni one third of the tax (and customs) inspectors will retire. X Weaknesses of the customs administration: The customs administration does not effectively monitor and check imports (notably in terms of value of goods) and its inspection of free- zone regime imports is inadequate. The customs information system installed is under- utilized compared with its capabilities. Finally, procedures are cumbersome and comprise too many, often ineffective, controls. The Project component objectives are, in the first phase (18-24 months): (a) VAT system modernizationi: (b) rehabilitation of tax administration; and (c) strengthening of the customs administration, and in the second phase: (d) simplification and improvements in taxation of small firms; and (e) selected improvements in corporate taxation. 29. Modernization of the VAT system. The system is rather simple being based upon a single (20 per cent) rate. To improve the efficiency of the tax administration, and widen the base upon whichi the VAT is applied, a threshold above which all enterprises will be subjected to VAT, regardless of their sectors of intervention and of their activities, needs to be introduced, and the list of goods zero-rated or exempted needs to be substantially curtailed. Collection needs to be improved substantially throughi better organization (especially in monitoring and inspecting large firms), increased taxpayer education and outreach, and simplification of procedures. A pilot unit dealing only with larger enterprise taxpayers will be created, and a single identification number system will be introduced. Finally, training will be provided to the tax and customs administrations and enterprises will be informed of the new rules. The rate level could theni be reviewed - and perhaps slightly lowered - if improved collections on a broader base can be achieved. 30. Rehabilitation of the fiscal administration. This rehabilitation will be conducted in two phases. Duriiig the first phase --1996/97-- a pilot unit ("centre fiscal pilote des entreprises", CFPE) will be created in Antananarivo, responsible for tax assessment of and revenue collection from the 60 largest enterprises, which account for 55 percent of the corporate tax and 45 percent of the VAT. The CFPE will use modern collection procedures supported by a computerized information system and will aim at  8 Madagascar. Private Sector Development and Capacity Building Project tax administration performance improvement and simplification of declaration forms. It is expected that its creation will dramatically improve the overall revenue collection performance of the tax administration. 31. During the second phase --1998/99-- the other departments of the Tax Directorate will be progressively reorganized. First, other CFPEs will be created, starting with the main provincial centers. Second, three or four Tax Centers will be created in Antanainarivo to set up a mode of taxation and a fiscal administration adapted to small taxpayers and entrepreneurs which are not dealt with by CFPEs. To complete the reform, other Tax Centers will be created around the country. 32. In parallel with the implementation of these two phases, the following actions will be taken: * the tax administration will be effectively computerized, starting with the CFPE; * an auditing program will be designed by the Tax Directorate with specific targets assigned to each division; * the two auditing squads will be merged giving priority to monitoring enterprises benefiting from tax exemptions (under the Investment Code and EPZ regimes); * a major tax and customs inspector recruitment program will be uindertaken, to strengtheni the tax service through replacement of retiring officers with well-educated new recruits; * a training program will be designed, which will comprise the initial training for newly recruited staff as well as the skill upgrading of the existing staff. 33. Customs Administration Strengthening. The following measures will be taken to strengtlhen the customs administration: * Up-date of the customs software in the two main customs offices (Antananarivo and Toamasina) with implementation of all the available features. Once this is in place, the computerization will be progressively extended to the other main offices. * Creation of a new office in Antananarivo to more effectively monitor all the free-zone enterprise operations. * Setting-up of a new organization both at the national and regional levels to ensure a good monitoring of operations. * Recruitment of new staff and, in coordination with the tax administration, tralining of the customs staff aimnig at reinforcing inter-departmental collaboration. 34. Project Implementation. To facilitate component implementation, a project group composed of two teams - a tax team and a customs team - was created in September 1996 within the General Directorate of Fiscal Resources (DGRF). The core of the CFPE staff is also part of the tax team which also comprises specialists in information systems and in VAT systems, initially assisted for a year by an internationally recruited tax administration expert. The customs team (to be set up later in 1997) will be composed of three high-level staff from the customs administration, and a specialist in the customs information system software, initially assisted for a year by an internationally recruited customs expert. 35. The tax team was created in September 1996, supported by an internationally recruited tax administrationi specialist seconded by the IMF. The team drew up and implemented over October 1996- March 1997 an initial program to revamp tax administration and design the VAT reform along the lines  Madagascar. Private Sector Development and Capacity Building Project 9 outlined in paras. 28-31 above. Initial urgent equipment and computerization needs were financed out of the PPF to help ensure effective early start-up of the tax reform program. Major changes in the tax administration were adopted in the 1997 Budget Law, including the introduction of a 3-5% advance payment of income taxes levied on importers against the cost of imported goods. The CFPE in Antananarivo was established and all domestic tax collection from larger firms above a given VAT threshold transferred to it from March 1997. The CFPE has adopted streamlined and simplified collection procedures for taxpayers working with it. Initial indications are that revenue collection performance has significantly improved as a result. Meanwhile, the Government has prepared the revamped VAT system which will be adopted as part of a revised budget law to be presented to the National Assembly for approval before August 1997. During Credit negotiations, it was agreed that: (a) an improved system of incentives bonuses linked to tax collections will be adopted for staff of the CFPE as well as of the tax and customs departments as part of the revised budget law for 1997; and (b) operating budgets adequate to achieve improved revenue collection targets would be allocated to the CFPE and the tax and customs departments in 1997-2002. 36. The Project will finance: (a) equipment, including computers and computer software, for both Tax and Customs Departments; (b) services of internationally recruited long-term tax administration and customs experts; (c) short-term specialist consultanits to assist in specific aspects of the program, including VAT and informations systems design; and (d) training for tax and customs officials. Private Sector Capacity Building Program 37. Madagascar's formal private sector remains limited in scope and size, with monopolies or oligopolies in many sectors, and is highly concentrated regionally (in and around the capital Antananarivo). Until recently, most of the formal indigenous private sector consisted of firms involved in import-substitution and traditional trade. With the contraction of the domestic market and the decline in volume and prices of the traditional exports (vanilla, cloves, coffee) and their poor long-term outlook, these firms are faced with the need to fundamentally restructure themselves. Due to decades of being isolated from world markets and sources of foreign investment, much of Madagascar's private sector conitinues to be handicapped by inadequate market knowledge, technological information and skills, as well as management and internal capacity constraints. 38. Recent Bank studies measure the effect that this type of isolation has on the technical and management capabilities of firms. Using firm-level data collected in Ghana, Kenya and Zimbabwe over a three-year period, one study finds that althiough each of these economies is undergoing extensive structural reform programs, the overall technological capabilities and firm-level efficiencies remain low in these countries relative to the rest of the world. Both studies identify the weak or non-existent connections with such international sources of technology transfer as techniical experts, buyers and suppliers as a major contributing factor and conclude that a broad range of individual and collective expert support services is required to accelerate the supply response to structural reforms. They also illustrate how foreign direct investors can contribute to a rapid improvement in technological capabilities through joint venture and sub-contracting arrangements with local partners. 39. Demand Study. In a March 1996 demand study, 298 companies throughout Madagascar were surveyed on their potential demand for expert support services. Covering all major industrial sectors as I World Bank Technical Paper Number 288: 'Technological Capabilities and Learning in African Enterprises'. Biggs. Shalh. Srivastava, Dec. 1995; and Yung Whee Rhee and Therese Belot, Export Catalysts in Low-income Countries: A Review of Eleven Success Stories, World Bank Discussion Papers # 72, T he World Bank, 1990.  10 Madagascar. Private Sector Development and Capacity Building Project well as tourism, transport and artisanry, these companies range in size from small artisans to manufacturers employing close to 1000 people. Of these companies, 180 are located in the capital city region, with the other 109 in I I other regions of the country. The vast majority of these firms expressed an unmet need for some form of expert assistance; together they formulated a total of 328 specific needs for support services including firm-level technical assistance in marketing, product development and manufacturing management; feasibility and market studies; on-site training of manufacturing and maintenance personnel; computer training and information sessions on new technologies and quality norms and standards. 40. More than two thirds of the firms surveyed expressed a willingness to contribute to the costs of the services if this would give them access to higih quality expertise. Only a small portion of the firms had received expert assistance so far, most firms acknowledging that a perceived lack of locally available expertise had kept them from seeking outside assistance. 41. The same study assessed the capacity of local consulting firms to provide support services. A total of 95 firms and their portfolios were surveyed and the study found that between 50 and 70 percent of their market traditionally has been financed by donors. The study found that local capacity was available in general mianagement related fields but practically absent in more technically oriented areas. Siginificantly, only 4 percent of the assignments analyzed had been performed by a local-foreign partnership. These results confirm the findings of several previous studies (including the 1988 ILO labor skills assessment, and the 1995 Bank Private Sector Assessment) indicating a wide range of technical and business skills shortages, as well as shortages of experienced technicians and skilled workers in many industrial and service fields, including tourism, mininig, agri-business, and information services. Private Sector Fund (PSF) 42. The project would provide partial funding (on a limited time, matchinlg grant basis) for a broad range of expert support services to Malagasy small and medium firms and business associations to encourage productivity improvements. The PSF would not directly provide technical services to the private sector but would act as a catalyst and intermediary between firms and associations of the private sector that need assistance, and local and international suppliers of business services. It will finance improved access to private support services (management, marketing, information and technical experts and consulting firms) provided wherever possible by local providers to strengthen the local market for such services, but also importantly by international private providers where needed. 43. The PSF would also fund (on a similar basis) development of information, advisory and support services by well-established private sector associations and groups of firms to their members. 44. This component would be managed by a private, non-profit company ("association privee a but non-lucratif'). Its general manager has been recruited from the private sector through an international and competitive process. A Malagasy national, he has spent the last three years in the international financial sector with IFC's APDF in Ghana, before which he managed the venture capital company in Madagascar - Fiaro. 45. The PSF operations are governed by a detailed procedures manual. This manual specifies the following eligibility criteria for PSF's assistance. Eligible for support by the FASP would be wholly private sector owned enterprises, groups of enterprises and business associations. To be eligible for matching grant finanicing, the business or business association would have to specify how the proposed support service would improve its productivity or that of its membership. Specific support services that  Madagascar. Private Sector Development and Capacity Building Project 11 would be eligible for matching grant financing would include expert assistance and training programs in product development and quality improvement, installation of new technology and manufacturing methods, market research and prospecting trips abroad, visits by strategic buyers to Madagascar, and creation of business networks and joint ventures. Specifically excluded from FASP support would be the financing of equipment and regular operating expenses. 46. The procedures manual will include transparent and competitive procedures for hiring consultants and supervising and evaluating the services that they would provide. It will also specify the cost sharing formula that will be applied. This formula will be designed to (a) not exclude small enterprises from the support of PSF; and (b) ensure that entrepreneurs "graduate" over time and accept to bear the cost of expert services that they need. It will be designed along the following lines: The amount of the matching grant would be calculated based on the total cumulative cost of all the support services received by a single beneficiary firm and partially subsidized by FASP during the life of the project, according to the following formula: Total Cumulative Cost Beneficiary % Matching of Support Services (US$) Contribution Grant 0 - 6,500 20% 80% 6,501 - 20,000 35% 65% 20,001 - 50,000 50% 50% Over 50,000 70% 30% 47. The total amount of matching grants per beneficiary firm would be capped at US$50,000. This formula would allow smaller firms to gain access to high quality support services while at the same time providing a strong incentive for larger firms, whose needs for expert support are likely to be more substantial, to participate. 48. Experience with matching grant schemes elsewhere (Kenya, Mauritius, India) indicates that the average grant size will remain well below the maximum amount and is likely to amount to approximately US$15,000 per firm over the 3-year life of the project. 49. The PSF will establish and maintain a roster of approved technical experts, consultants and consulting firms both domestic and foreign. This roster will be classified by category of service and updated regularly to include new consultants or exclude unsatisfactory ones. To be eligible for PSF support, beneficiaries will select or invite consultants to bid on the basis of a short list generally but not exclusively drawn from this roster. The PSF will conduct an extensive public awareness campaign nationwide to inform the business community of its services and raise awareness among private entrepreneurs that benefits from expert support services can outweigh their costs. 50. To adequately design the functioning of the PSF, a survey has been carried out to assess the demand within the private sector for and supply of expert support services. In addition, a study has been commissioned with a local consulting firm to develop the legal and organizational framework and accounting system for the PSF and a detailed procedures manual. Based oii the two studies, the corporate legal statutes and organizational and financial set-up were drawn up and discussed with IDA during Project appraisal, and will be finalized and adopted by the Borrower before Credit effectiveness.  12 Madagascar: Private Sector Development and Capacity Building Project 51. The procedures manual includes detailed step-by-step descriptions of such procedures as: (a) criteria for selection of beneficiaries; (b) how to develop and maintain a roster of expertise and support service providers; (c) how to assist the beneficiary in selecting a service provider; (d) the cost sharing formula to be applied; and (e) how to monitor and evaluate the service assignment. The manual includes sample documents for application to the fund, procurement of the service provider, the contract to be used between the beneficiary and the service provider, and evaluation formats. 52. During project appraisal, a project implementation planning workshop was held with representative private sector beneficiaries and stakeholders to: (a) reach a consensus on the objectives of the PSF; (b) formulate a work program for the initial period; and (c) define key performance indicators and evaluation criteria. 53. Under this component, IDA funds in the amount of US$4.5 million equivalent will be made available as a grant by the Government to the FASP. They will also finance, on a cost-sharing basis, consultancy, technical assistance and training services for eligible enterprises and business associations of the private sector. These funds will finance over a period of three years salaries of a small professional staff, office equipment and operating expenses of the FASP in addition to a public awareness campaign. 54. The FASP will maximize synergies with other donor-funded and private support service and outreach programs to ensure its cost-effectiveness. During project preparation it was determined from discussions with other multi-lateral and bilateral aid donors active in this area, that the FASP would be strongly complementary to their efforts (which are more often based either upon direct service provision by long-term expatriate advisers and/or assistance to arrange bank credit for project finance). In several instances, most notably the European Union-funded PRIDE program, which is to fund support to private firms in the four Indian Ocean Commission countries to encourage inter-regional trade, strategic alliances are being worked out to coordinate activities and develop a pool of common, jointly funded services. An operational service agreement ("protocole d'accord") may also be concluded to this effect between the FASP and PRIDE, based upon the conclusions of a joint EU-Bank mission in May 1996. 55. Electronic Commerce for Information and Market Access. Due to weaknesses in Madagascar's telecommunications infrastructure (one of the least developed in Africa), and its isolation from world markets, Malagasy private entrepreneurs have little access to or experience of international markets and the range of information services currently available. Only one or two Internet Service Providers (ISPs) are established in Madagascar on a very small scale, serving only limited academic and business needs. Establishment of more widely available electronic commerce (including Internet) services to private business could greatly enhance the productivity and competitiveness of Malagasy private firms at very low cost. The Electronic Commerce (including Internet) systems could inter alia: (a) provide access to data bases and information services available internationally in a range of technical and business-related fields; (b) connect Malagasy private firms with potential suppliers and business partners abroad; (c) inter-connect private firms across different regions of Madagascar and create new markets and business opportunities by improving information of demand and prices; (d) improve nationwide access to locally available business support services; (e) greatly reduce communications and data-transmission costs locally and internationally (compared with fax and other far more costly services); and (f) create a strong private sector constituency for communications sector liberalization and reform. The FASP will not substitute for current and potential new ISPs in terms of hardware and software services. Rather it will act as a catalysi to enhance private sector awareness of potential commercial uses of Internet services, to use the Internet to enhance its own services, and to enable small firms (initially unable to purchase their own equipment) to have access to the Worldwide Web and a  Madagascar. Private Sector Development and Capacity Building Project 13 national network on a retail, fee-for-service basis. The FASP will encourage and support existing and new ISPs in Madagascar to provide services to Malagasy private firms. 56. Specifically, the Project will support: (a) private sector awareness building seminars to disseminate information about available electronic commerce services (including via the Internet); (b) development and adaptation of existing and new ISPs to better serve private sector needs in terms of software, equipment and information services; (c) interconnection of FASP via the Internet with a network of available international business information services to enhance its own expertise roster and data base; (d) establishment of fee-based access to these Internet services for Malagasy private firms; and (e) definition, as needed, of a legal and regulatory framework in Madagascar for electronic document transmission and business transactions. The Project would fund, as needed, training, local and international expert services, limited equipment upgrading and software matching grants, and creation of a dedicated private network for FASP. The Project will undertake these activities in close coordination with the Infonet system being developed by the Indian Ocean Commission in connection with the PRIDE program to avoid duplication and ensure maximum synergies between the two. Improved Government/Private Sector Dialogue - Competitiveness Review Committee (CRC) 57. The project would support the activities of the CRC, created in September 1995. Since then, the provisional organization of the CRC has already been very active in contributing to the design of the Government's adjustment program, most notably in preparation of the private sector incentives reforms adopted by the Cabinet in May 1996. In December 1995, it appointed as a full-time Coordinator a Malagasy professional with strong experience in both private sector and govemment. The CRC has already created a network of active regional chapters in nine regions throughout Madagascar, and, with their help and with a consultant, has undertaken a preliminary stock-taking of key bottlenecks facing private sector operations. Since formal establishment in September 1996, the CRC has begun to work as an independent advisory body with a mandate to: (a) identify and analyze policy and other business environment constraints to private sector competitiveness; (b) develop detailed proposals for policy change; and (c) submit these proposals for consideration by the highest levels of Government through the Prime Minister's Office. 58. The CRC is composed of knowledgeable senior government officials from key agencies (participating in an individual expert capacity) and business people representing the various sectors, business sizes and regions of the country, participating on a voluntary basis. An experienced local consultant was recruited to advise on the formal organizational set-up for the CRC, the most appropriate form of leadership and how to organize its relationship with the Government, recognizing that the CRC needs to retain its independence but at the same time needs to enjoy strong commitment from and access to the higher levels of the Government to be effective. On this basis, the CRC was established as a private non-profit association ("association priv6e a but non-lucratif') in which private sector and government representatives are members on an equal footing. In addition, a convention ("protocole d'accord") was concluded (in October 1996) between the Govemment and the CRC recognizing its status as a prime interlocutor between the Government and the private sector on competitiveness policy issues, and formally committing the Government to take into account the CRC's recommendations for change. 59. In October 1996, the CRC members elected a strong and influential private sector President, with a reputation for integrity and credibility with both the public and private sectors, who would serve on a "pro bono" basis elected by the members of the CRC.  14 Madagascar. Private Sector Development and Capacity Building Project 60. During project appraisal, the members of the CRC conducted a project planning workshop to: (a) reach a consensus on the priority themes for the policy dialogue during its first year; (b) prepare and agree upon a detailed work program; and (c) develop an implementation plan and criteria for evaluation of results. 61. The CRC will be responsible for analyzing specific areas of the business environment. The CRC will: (a) elicit from participants different perspectives on competitiveness issues; (b) commission experts, when necessary, to conduct diagnostic studies and formulate alternative policy options; and (c) invite individuals with appropriate expertise from Madagascar and abroad to present their experiences. The general assembly will review their proposals, reach a consensus on recommendations and submit these to the Government. The CRC will gather and provide members with relevant information and, as necessary, contract experts to carry out studies to support the deliberations. 62. The CRC will conduct a continuing public awareness campaign to disseminate its findings and conclusions on reforms needed in the business environment for the development of the private sector. 63. The Project will finance, over a period of three years: (1) salaries of CRC's professional Coordinator, a small support staff, supplies and other operating expenses; (2) consultants' services to carry out policy diagnostic studies; (3) the public awareness campaign; and (4) international expert visits to disseminate lessons learned and best practices from elsewhere. Private Sector Seminars Program 64. Due to weak communications and media, there is a major lack of up-to-date information and knowledge in Madagascar on international trends in markets and technologies, and on policy and other factors contributing to poor local economic performance. Improving public and especially private sector awareness through wide dissemination of these and encouraging debate among different economic groups nationally and regionally would help open up Madagascar's economy to world markets, contribute to capacity building in the private sector, and build consensus for policy reform. Since late 1994, with support from the Bank's Economic Development Institute (EDI), a program of seminars, organized and sponsored by Malagasy private sector voluntary groups, on major national economic policy issues (anti- competitive practices in December 1994, export strategies in July 1995), have successfully sparked national debate, generated consensus on actions needed, and improved knowledge and awareness. 65. The project would expand this effort by funding a three-year program of seminars on competitiveness issues involving a representative cross-section of public and private sector participants, as well as representatives of Parliament, NGOs and the labor unions. (See Attachment 3 for details.) These seminars will be locally held in Antananarivo and other regional centers across Madagascar. They will serve as fora where private sector stakeholders and policy makers jointly identify and find practical solutions to public policy impediments to private sector activities, or, alternatively, are exposed to international market developments, trends, and approaches and technologies, management and marketing techniques relating to important export and other activities for Madagascar. The seminars' conclusions will serve as inputs for the CRC and for the FASP. Study tours would be organized on a selective basis to expose Malagasy private sector and other participants to good practices abroad, both in policy reform, technology developments and firm upgrading. 66. The project will finance the preparation and conduct of at least three seminars, and one study tour, each year. The seminars will be demand-driven, and highly participatory - focusing on topics  Madagascar: Private Sector Development and Capacity Building Project 15 identified by the private sector stakeholders, and prepared and organized by local organizations in the private sector, NGOs, and in government. The FASP will manage and administer a Seminars Fund for financing the seminars program, with support from EDI to help ensure good pedagogy and exposure to other countries' experiences through international resource persons. Eligible organizations will apply to the Seminars Fund for partial financing to prepare and organize seminars on topics of broader national interest in terms of private sector competitiveness, and would need to demonstrate they have the capacity to do so and have identified an audience. Seminars would be at least partially self-financing from registration fees, and sponsoring organizations'contributions. On a half-yearly basis, the Seminars Fund would invite applications from local organizations, including the CRC. A tri-partite selection committee comprising the Presidents of the CRC and STA, and the General Manager of the PSF will adjudicate applications and award seminar grants. FDI Match-Making Scheme 67. The Foreign Direct Investment (FDI) Match-making Scheme will act as a catalyst for private sector, market-based promotion of increased FDI inflows to Madagascar. It will address information imperfections (about business potential in Madagascar) in prospective FDI supplying countries (in East Asia, Europe, the Americas), by giving incentives to private intermediaries to use their existing information networks to bring together local and foreign firms in collaboration arrangements. The Scheme is patterned after similar successful endeavors in other African and East European transitional economies, and is based upon a model developed by the Bank's Private Sector Development Department. 68. Results of 'pilot" Program. To test the approach, a "pilot" FDI match-making program was conducted over December 1995-July 1996, by a team of three foreign and three local private investment brokers, with the support of Bank staff, and under the sponsorship of the Ministry of Industries and Artisanry (MIA). The "pilot" scheme focused upon encouraging collaboration agreements between private firms in Madagascar and in four East Asian countries - Indonesia, Korea, Malaysia, and Japan. The three local private investment brokers were recruited by open, competitive selection from the Malagasy private sector by a committee of private sector representatives. 69. The investment brokers team pre-identified over 100 Malagasy firms interested and capable of entering into collaboration with foreign partner firms, and, on visits to the four East Asian countries, accompanied by a senior MIA official, they pre-identified about 60 small-medium Asian private firms seriously interested in considering investing in Madagascar, and who were a sectoral match for the local firms. The Asiaii entrepreneurs were invited to visit Madagascar to prospect for partners and also to give feedback directly to the private sector and government officials about the Malagasy business environment and improvements needed. 70. Under the "pilot" scheme, some 60 East Asian entrepreneurs visited Madagascar over April-July, with logistical assistance and support from the investment brokers' team. As noted in the MOP para.3 1, the "pilot" has confirmed in a number of important respects the potential for setting up a fully fledged FDI Match-making Scheme along market lines. Specifically, it succeeded in: (a) attracting foreign entrepreneurs to visit Madagascar by better informing them of opportunities; (b) generating foreign-local partnerships where they would otherwise not have occurred; (c) improving Malagasy private entrepreneurs' exposure to foreign investors; (d) building a small pool of Malagasy, and also foreign, private investment brokers to undertake such promotion activities in future; (e) obtaining valuable direct feedback on improvements needed in Madagascar's business environment.  16 Madagascar: Private Sector Development and Capacity Building Project 71. FDI Match-Making Scheme. Based upon the positive results of the "pilot", it was decided to include an FDI Match-making Scheme in the Project. Under this component, funding will be made available to facilitate export-oriented collaboration between Malagasy private firms and small and medium private businesses in developed and high-perfornance developing economies. Promoting export-oriented FDI and joint ventures is a key ultimate goal. However, as an initial step, the Scheme will focus mainly upon promoting export-oriented international subcontracts, technical marketing agreements, and turn-key plants. 72. Match-Making Fund (MMF). Under the Scheme, linkages will be established with small- medium scale foreign private partner firms who would provide local potential exporters with: (a) access to the external market network and market information for export products; (b) access to export production know-how; and (c) access to the external market network and information on input sourcing. Private local matchmakers, as well as foreign private investment brokers overseas, would identify potential foreign collaborators, broker information on business opportunities in Madagascar, and use their information network to link foreign collaborators with potential local partners. Matchmakers who succeed in brokering a contract between local and foreign partners will receive a performance fee based on the size and the nature of the contract. The payment of matchmaking fees will be shared between: (a) the Matchmaking Fund to be established under this component; (b) the foreign partner; and (c) the local exporter. (See Attachment 4 for details) 73. The Project will finance over a period of three years the Matchmaking Fund which would provide performance-based incentives to private business brokers and in the process, accelerate the creation of a commercial market for this type of service; and further training to strengthen the pool of local private investment brokers. The Match-making Fund will be managed by the FASP on a contract basis. m. PROJECT BENEFITS AND RISKS 74. Project Benefits. The Project is projected to yield substantial economic benefits (as noted in MOP para. 42) many of which are non-quantifiable, given the qualitative nature of the Project activities and their impact. However, the following assessments can be made for individual Project components: (a) Privatization. Expost quantitative estimates of economic returns to PE divestitures in other countries (notably in the Galal et al. study of Chile, Malaysia, Mexico, and UK) indicate positive economic welfare gains exceeding 10 percent in the majority of privatized PEs, with even stronger gains in some 2 cases in terms of expanded private investment and output and returns to innovation . In Madagascar, in potentially viable activities, economic gains can be expected to be greater than in these cases, due to the depleted capital stock in many PEs coupled with the public investment constraint, as well as the correspondingly greater scope for productivity improvements. Consumer surpluses should be substantial in cases (e.g., telecoms, ports, shipping) where new entrants improve service and competition reduces prices. (b) Tax Reform. The tax administration overhaul is expected to yield major improvements in terms of tax collections (from 7.7 percent of GDP in 1995, to about 11 percent of GDP in 1999), in efficiency of tax administration (in terms of tax collections per tax service employee), and in scope created for reduced fiscal deficits and thus increased public savings and reduced private sector borrowing costs. (c) Private Sector Fund Matching Grant Scheme. Other countries' (e.g., India, Kenya) experiences indicate output gains of ten times the cost of productivity upgrading activities funded by participating firms with matching grant program support. Rapid expansion of EPZ export activities in 2 Ahmed Galal, et al.: Welfare Consequences of Selling Public Enterprises, 1994, World Bank.  Madagascar: Private Sector Development and Capacity Building Project 17 Madagascar over 1990-94 suggest similar gains are feasible. (d) FDI Match-Making Scheme. Based upon experiences elsewhere, the Scheme is expected to generate expanded foreign direct investment of US$30 million over the life of the Project and an increase in annual exports of US$100million by the end of the Project. SECTION B: PROJECT COSTS AND ADMINISTRATION I. PROJECT COSTS AND FINANCING 75. The proposed project is estimated to cost, over a five year period, US$35.5 million equivalent. Base costs calculated on the basis of December 1996 prices, are estimated at US$33.2 million and physical and price contingencies have been calculated at 2.5 per cent per annum and are estimated at US$2.3 million (7.0 per cent of base costs); the foreign exchange component would amount to US$17.4 million. The estimated cost of the five-year economic policy reform program would be US$17.8 million equivalent; the cost of the three-year private sector capacity building program is estimated at US$12.7 million. Project preparation costs funded by the PPF amount to the equivalent of US$2 million. 76. The project would be financed by an IDA credit of US$23.8 million equivalent, contributions from the Government (US$6.1 million), and beneficiary private enterprises and associations (US$5.3 million). A contribution of US$0.4 million is also anticipated. The detailed cost estimates and financing plan that are in Attachment I are summarized in the following tables. Table 1 Estimated Project Cost (in US$000's) Local Foreign Total % % Total Base Costs Economic Policy Reform Program 9,584 8,260 17,844 46.3 53.7 Privatization and PE Divestiture Program 7,947 6,310 14,257 44.2 42.9 Tax System and Tax Administration 1,437 1,650 3,087 53.4 9.3 Reform I Investment Incentives Reform 200 300 500 60.0 1 .5 Private Sector Capacity Building 6,115 6,569 12,684 51.8 38.2 Program Comite de Reflexion sur la Competitivite 638 620 1,258 49.3 3.8 Private Sector Seminars Program 540 306 846 36.2 2.5 Fonds d'Appui au Secteur Prive 3,315 4,677 7,992 58.5 24.1 FDI Match-Making Scheme 1,622 966 2,588 37.3 7.8 Project Monitoring and Audits 360 315 675 46.7 2.1 Refund of PPF Advance 850 1,150 2,000 57.5 6.0 Total Base Costs 16,909 16,294 33,203 49.1 100.0 Price and Physical Contingencies 1,184 1,140 2,324 49.1 7.0 Total Costs 18,093 17,434 35,527 49.1 107.0  18 Madagascar: Private Sector Development and Capacity Building Project Table 2: Project Financing Plan (in US$000's) Local Foreign Total |_%_| IDA 13,529 10,229 23,758 66.9 Government 2,167 3,901 6,068 17.1 Private Sector 2,397 2,876 5,273 14.8 Other 0 428 428 1.2 Total 18,093 17,434 35,572 100.0 II. PROCUREMENT 77. Procurement will concern mainly consultant services, equipment and vehicles, and incremental operating costs of the project institutions. The table below summarizes the project elements and their estimated costs and proposed method of procurement. Table 3 Summary of Proposed Procurement Arrangements (in US$000's) Total Costs Project Element Procurement Method ICB NCB Other NBF Goods * Vehicles 260 46 54 360 (306) * Office Equipment 738 130 152 1020 _________ (868) Consultant services * Consultancies 9,968 6,566 16,534 (9,968) * Technical Assistance 1,801 725 2,526 (1,801) * Training 2,261 680 2,941 (2,261) * Communications Services 694 694 (694) * Audits and Implementation Evaluation 925 925 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _______ _ ________(9 2 5 ) Other * FDI Match-Making Fund 1,187 1,188 2,375 (1,187) * Operating Expenses 2,194 1,634 3,828 (1,744) * PPF Refund 2,000 2,000 (2,000) TOTAL 998 1,619 19,587 10,999 33,203 Note: Amounts in parenthesis are amounts financed by the Credit. Operating Expenses include miscellaneous expenses such as office supplies, utilities, etc. All costs are net of duties and direct and indirect taxes. NBF means non-Bank financed.  Madagascar. Private Sector Development and Capacity Building Project 19 78. The PSF will be responsible for the procurement of the goods and services of all the private sector capacity building components (matching-grant fund, CRC, FDI scheme and Seminars). The Privatization Committee Technical Secretariat will be responsible for the procurement of goods and services for the PE Divestiture component. The Ministry of Decentralization and Budget will be responsible for procurement for part of the tax administration reform component, the IMF being expected to be executive agency for this component. Procurement of goods (computers, equipment and vehicles) will be made according to local shopping procedures, based on three quotations, for any single contract totaling US$30,000 or less, in accordance with IDA's guidelines of January 1995. Contracts for goods equal to or above US$30,000 will be procured in packages of at least US$100,000 whenever possible, through International Competitive Bidding (ICB). Contracts for goods, whose cost will be equal to or above US$50,000 will be subjected to prior review by IDA. Consultants' services (for studies and technical services) which represent the bulk of IDA financing (US$9.97 million) will be contracted in accordance with IDA's guidelines for the Use of Consultants (New Guidelines). All consultant contracts, whose cost will be equal to or above US$50,000 for individual consultants and equal to or above US$100,000 for firms, will be subjected to prior review by IDA; contracts below these thresholds will be subject to ex-post review by the Association. 79. Technical Assistance to be financed by the PSF. Eligible private enterprises and associations will be assisted by the PSF in contracting directly the expertise they need. The statutes and the Manual of Procedures of the PSF will specify that, to be eligible for financing, beneficiaries may select: (a) for projects with total costs of less than US$5,000, individual consultants directly from the roster, or other sources through the comparison of at least three CV's based upon terms of reference specifying qualifications using a points scoring system; and (b) for projects with total costs of over US$5,000, through competitive procedures acceptable to IDA. In both cases and for each assignment, the concerned beneficiary will select or invite consultants to bid on the basis of a short list drawn from a roster prepared by the PSF, or other sources. PSF's roster will be updated twice a year to include new consultants or exclude unsatisfactory ones. The Manual of Procedures of the PSF was agreed at IDA credit negotiations and its adoption was made a condition of credit effectiveness. Standard Letters of Invitation to Bid that the beneficiaries of the PSF will use were agreed upon with IDA during appraisal. The carrying out by PSF's beneficiaries of procurement procedures satisfactory to IDA is an eligibility criterion to PSF's financial support. 80. To ensure that procurement will be carried out adequately, AGETIPA, an agency which hias a well-established track record of efficient procurement strictly following IDA guidelines, hias been contracted to act as the procurement agency for the PSF and the CRC components of the project until Project effectiveness. During this period, AGETIPA will train the concerned personnel of PSF in procurement. 81. Tax Administration Reform. The Borrower will invite the IMF's Fiscal Affairs Department- (FAD) to act as executing agency for this component of the Project (condition of disbursement). It is expected that a technical assistance agreement would be signed between the Ministry of Decentralization and Budget and the IMF-FAD to formalize this arrangement. In addition to one long-term tax administration expert already funded by the IMF and in place since September 1996, a second long-term expert in customs administration would be hired iiiitially for one year. The IMF will also be responsible for short-term missions and the training program, while the Ministry of Finance will handle procurement for goods.  20 Madagascar: Private Sector Development and Capacity Building Project III. DISBURSEMENT 82. The IDA Credit is expected to be effective by June 1997; the privatization and tax administration components of the project will be executed over the following five years, while the private sector incentives and capacity building components will be executed over the following three years. Based upon other developing countries' experiences, implementation over five years seems reasonable given the size of the Malagasy privatization program. On the other hand, the capacity building components are not expected to last more than three years. The success todate in implementing these types of components elsewhere and the already well-advanced state of preparation of each component indicate that their objectives can be met during this length of time. The following table gives the disbursement schedule of the project which is supposed to be closed in June 30, 2002. Table 4: Estimated IDA Disbursements (US$000's) Disbursement Profile FY98 FY99 FY00 FY01 FY02 FY03 Annual 8,500 7,000 5,000 2,000 1,000 258 Cumulative 15,500 20,500 22,500 23,500 23,758 Percentage 36% 65% 86% 95% 99% 100% 83. Disbursement will be made on the basis of 100 percent of total expenditures free of direct or indirect taxes and duties for IDA's share of the cost of goods and consultant services. 84. The percentages have been based on the average of tax and duty rates and are calculated to exclude local taxes and duties. The Project will refinance the PPF advance upon Project effectiveness. As in the case of procurement, the FASP will act as disbursement agency for all goods and services financed by the IDA Credit for the private sector capacity building components, while the Ministry of Finance will disburse for the policy reform components, with the exception of services under the tax reform component which will be under the IMF's responsibility. Disbursement will be fully documented except for the payment of contracts of less than US$100,000 equivalent for goods and consultant firms, US$50,000 for individual consultants and all operating costs, which will be made against certified Statements of Expenditure (SOEs). Documents for withdrawal under SOEs will be retained by the FASP and the Ministry of Finance and made available for independent auditors and for review by IDA during supervision missions. 85. The IDA Credit is expected to be disbursed for the categories shown in Table 5 below over a period of five years, following Project effectiveness. 86. To expedite project implementation, two special accounts will be opened at a commercial bank acceptable to IDA and maintained and operated on terms and conditions also acceptable to IDA by: (a) the GOM for the privatization, incentives reform and tax reform components; and (b) the PSF for all other components of the project. The Special Account administered by the GOM will be in the amount of US$300,000. The special account for the private sector capacity building component will be in the amount of US$600,000. The Association will make an initial deposit in the Special Accounts upon credit effectiveness. Upon effectiveness, the borrower could claim one half of the authorized allocation as the initial advance to the special account. The remainder would become payable as a supplementary advance once one-third of the credit has been disbursed. Replenishment requests will be submitted  Madagascar: Private Sector Development and Capacity Building Project 21 monthly and will be accompanied by proof of eligible expenditures acceptable to IDA, by up-to-date bank statements and reconciliation of the concerned Special Account and will be fully documented except for expenditures below US$100,000 for goods and services from consulting firms, and US$50,000 for services of individual consultants, for which the borrower will be allowed to submit claims on the basis of SOEs. Documentation used for SOEs will be retained and made available for independent auditors and for review by IDA during supervision missions. 87. To ensure timely provision of local counterpart funds, the Government will open and maintain in a commercial bank on terms and conditions satisfactory to IDA an advance account, into which an initial advance of the equivalent in FMG of US$50,000 will be made, and which will be periodically replenished at that level. Table 5: Disbursements of IDA Credit (US$000's) Category of Disbursement Amount Percentage of expenditure financed 1. Goods * Policy reform components 1.064 1 00%/r of foreign expenditures and . Private sector capacity building 110 o 85% of local expenditures components 2. PSF sub-projects 3,400 100% of amount paid by PSF 3. Consultants Services * Policy reform components 6,860 100% . Private sector capacity building 2,089 100% components . Training Fund 3,300 100%/0 4. Operating Expenses 2,194 100% of foreign expenditures and 85% of local expenditures 5. FDI Funds . Match-making Fund 1,187 100% 6. Refunding of PPF Advances 2,000 100% 7. Unallocated 1,554 .- Total 23,75838_ IV. ACCOUNTING AND AUDITING 88. The borrower possesses the ability to process and maintain SOE documentation in a manner satisfactory to the Bank, and appropriate accounting and control systems are in place for the expenditures for which reimbursements would be claimed under the SOE procedures. All project accounts including the two special accounts and SOEs will be audited annually by independent auditors acceptable to IDA. These auditors will be recruited by the PSF and by GOM on a pluri-annual basis in accordance with the terms of reference already used in Madagascar and short lists acceptable to IDA. The audit report will be submitted to IDA no later than six months after the closing of the fiscal year in Madagascar. In addition  22 Madagascar. Private Sector Development and Capacity Building Project to the financial audit, the PSF will be subject to bi-yearly operational audits including review of procedures and impact on client enterprises, during the first two years of operations. SECTION C: IMPLEMENTATION AND MONITORING I. PROJECT ORGANIZATION AND MANAGEMENT 89. Economic Policy Reform Program. Responsibility for the procurement, disbursement and accounting for the three components of the policy reform program will be with the Ministry of Finance. Specific responsibility for implementing the privatization and tax reform programs will be delegated to the Privatization Committee and the General Directorate of Fiscal Resources respectively, the former attached to the Ministry of Private Sector Development and Privatization (MDSPP), the latter attached to the Ministry of Decentralization and Budget (MB). Meanwhile the market liberalization and private sector incentives reform component will be managed by the Technical Secretariat for Adjustment (STA), in close coordination with the CRC. The tax administration component is expected to be implemented with the IMF-FAD as executing agency, arranging technical assistance, and undertaking overall supervision and support. 90. Private Sector Capacity Building Program. The PSF would act as the executing agent for the private sector capacity building program carrying primary responsibility for the procurement, disbursement and accounting for all four components. The CRC would be responsible for substantive management of the competitiveness review dialogueue. The PSF will manage the Match-Making Fund for the FDI Match-Making Scheme. The operational status of the PSF will be based on an official Framework Agreement ("Convention") between the Government and the organization, ensuring its operational independence and accountability. A local work group composed of representatives of the business community has overseen the preparation of the legal and organizational framework for the PSF and coordinated recruitment of its managing director. L. IMPLEMENTATION SCHEDULE 91. The implementation schedule of the project was agreed during negotiations. The project will be implemented over a five-year period following effectiveness which is expected on June 30, 1997. The credit is expected to be closed in December 2002. Detailed implementation timetables for the economic policy reform program and the private sector capacity building program are included in Attachment 3. III. KEY INDICATORS OF PROJECT PERFORMANCE 92. Key performance indicators for all Project components have been defined by implementing organizations and beneficiaries during Project appraisal, and confirmed at Credit negotiations. For the FASP and CRC components, these were outputs of the project planning workshops, which also finalized implementation plans and timetables, and evaluation criteria, to ensure broad-based stakeholder ownership. Agreed performance indicators are presented in Attachment 2. 93. Economic Policy Reforms. Based upon the log-frame matrices in Attachment 2, proposed key performance indicators (agreed at negotiations) are as follows: (I) Privatization Program: (a) increased productivity, output and investment in privatized PEs and in new private entrants into privatized PE sectors; (b) reduction in net budget transfers to PEs; (c) increased local private shareholding in  Madagascar: Private Sector Development and Capacitv Building Project 23 privatized PEs; (d) volume of PE divestiture transactions (privatizations and liquidations) completed annually compared to agreed target; and (e) public awareness of, and support for, privatization program. (II) Tax Administration Reform: (a) tax collections as % of GDP; (b) improved efficiency of VAT collections and reimbursements to exporters; (c) increase in taxpayers registrations, in average taxpayer tax payments, and in tax returns per tax official; and (d) increased taxpayer perception of transparency, equity and accessibility of tax system. (IlI) Private Sector Incentives Reforms: (a) accelerated pace and increased level of private investment due to removal of regulatory barriers-to-entry and procedural bottlenecks; (b) increased level of foreign direct investment (FDI) due to relaxation of land access and other barriers; (c) level of private investment in former state monopoly sectors; and (d) improved private investor confidence in the business environment. 94. Private Sector Capacity Building. Based UpOIn the log-frame matrix (Attachment 2), proposed performance indicators for the four components (CRC, FASP, PSD Seminars, FDI Scheme) -- agreed at Project negotiations -- are as follows: (a) expanded exports and output in assisted firms as % of total export and output growth; (b) improvement in productivity and technical and managerial capabilities of assisted firms compared to intemational norms; (c) expanded range of services and productivity of participating local business support service providers; (d) consideration and adoption by Government of at least four CRC recommendations a year; (e) expanded FDI and exports by firms participating in FDI Scheme; and (f) increased private sector awareness of PSD policy reform issues, and international market trends and requirements. The indicators in (a) - (f) are to be compared to relative performance of a control group of firms not benefiting from the Capacity Building Program, the key performance criterion being accelerated achievement by assisted firms as compared to non-assisted ones. 95. Tracking and Measurement of Performance. As indicated in the log-frame matrices in Attachment 2 annual sample surveys will be undertaken of: privatized PEs; private enterprises (including foreign investors); taxpayers; and other stakeholder groups, in order to assess performance against initially agreed targets, and against baseline-Year zero data. Funding for these limited-scale, stratified sample surveys has been included in Project Costs. IV. MONITORING AND PROGRESS REPORTING 96. The action plans and tables of key activities, evaluation criteria and performance indicators, prepared during Project appraisal and agreed at credit negotiations, for each of the components (Attachment (2) will serve as a basis for monitoring and evaluating the effectiveness of the respective work programs. Three months before the end of each calendar year, the Government, private sector project beneficiaries and IDA will convene an annual review meeting to review the results achieved under each of the project components and prepare a detailed work program to be carried out during the next year under each component. Finalization of the annual work programs for the CRC and the FASP will be based on the results of project planning workshops which will be held prior to each review. Two IDA-Government reviews of the project, in lieu of one mid-term review, will be carried out about one and one half years and three years following the date of credit effectiveness to measure progress accomplished against targets and define adjustments that may be required to ensure that the objectives of the project will be achieved. 97. Each of the project institutions will report quarterly on the results achieved with regard to the component(s) for which they are responsible no later than one month after the end of the concerned quarter. These reports would describe actual progress against agreed output targets, indicate existing or potential difficulties that might affect project progress, provide a financial statement of project expenditures, list the contracts concluded during the period and will give updated projections and plans  24 Madagascar: Private Sector Development and Capacity Building Project for future activity. The Borrower will submit to IDA a project completion report no later than six months after the closing date of the Credit. V. SUPERVISION 98. The seven components included in the project will require intensive supervision initially, estimated at about 25 staff weeks (sw) per year excluding IMF staff during the first two years and about 15 staff seeks/year thereafter. Africa Region Private Sector Development and Finance staff, as well as staff from the FPD Vice-Presidency and EDI will be involved in the supervision and implementation process. Supervision missions will be fielded three times a year for the first two years, and semi- annually afterwards. 99. The IMF plans to assist the Bank Group in supervising the substantive aspects of the tax system and tax administration reform program. The Bank Group would retain overall supervision responsibility, including procurement and disbursements.  Madagascar: Private Sector and Capacity Building Project Attachment I Page 1 of 3 Detailed Project Costs by Subcomponent and Financing Plan Local Foreign Total Foreign % of Exchange Total _ _ _ __(%) Base Cost Economic Policy Reform Program Privatization and PE Divestiture Program Privatization Committee Equipment 80 0 80 0.0 0.2 Public informnation campaign 200 400 600 66.7 1.8 Operating expenses 1,492 0 1,492 0.0 4.5 Audit 125 0 125 0.0 0.4 Project management 125 0 125 0.0 0.4 Total Privatization Committee 2.022 400 2A22 16,5 7.3 Technical Assistance for exec. of div. program Sector studies 200 400 600 66.7 1.8 Legal and regulatory consultants 100 73 173 42.2 0.5 Implementation of divestitures (inv. advisers) 900 5,085 5,985 84.9 18.0 Liquidation of PE' s (liquidators) 200 0 200 0.0 0.6 General studies 50 0 50 0.0 0.2 Total Execution 1.450 5.558 1,008 79.3 21.1 Privatization Trust Fund (PTF) Management fee 825 0 825 0.0 2.5 OTC market study 50 52 102 50.9 0.3 Total PTF 8-S 52 927 5.6 2.8 Privatization Social Fund Management fee 200 0 200 0.0 0.6 Total Priv. Social Fuind 200 II 200 0A.0 01.6 Arbitration Commission Equipment 30 0 30 0.0 0.1 Operating expenses 370 0 370 0.0 1.1 Total Arbitration Cummission 400 0 400 U.(l 1.2 Retraining Fund l Consultancies 3,000 300 3,300 9.0 9.9 Total Retraining Fund 3,000! 300 3,300 9.0 9.9 Total l'E Divestiture Program 7 ,947 6,31( 14,257 44.2 42.9 Tax System and Tax Administration Reform Tax Administration Reform Equipment 83 300 383 78.3 1.2 Long-term advisers and consultants 0 400 400 100.0 1.2 Incremental operating costs 946 0 946 0.0 2.8 Total Tax Administration Reform 1,029 700 1.79 40.5 11 5.2 Customs Reform Equipment 210 500 710 70.4 2.1 Long-term advisers and consultants 0 300 300 100.0 0.9 Incremental operating costs 30 0 30 0.0 0.1 Total Cuistum Administration Refornm 240 800 1.040 i 76.9 I 3.1  Madagascar: Private Sector and Capacity Building Project Attachment I Page 2 of 3 Local Foreign Total Foreign % of Exchange Total (%) Base Cost Training Equipment 47 0 47 0.0 0.1 Trainers and preparation of materials 121 150 271 55.3 0.9 Totai Training 168 IS0 318 47,2 1.0 Total Tax Reform Program 1i437 1,650 3,087 53.4 . 9.3. Investment Incentives Reform Consultancies 200 300 500 60.0 1.5 Total Investment Incentives Reform . 200i 300 5n00 60.0 1.5 Total Economic Policy Reform Program 9,584 8,260 17,844 46.3 53.7 Private Sector Capacity Building Program Competitiveness Review Committee (CRC) Consultants for policy studies 230 500 730 68.5 2.2 Public awareness campaign 45 0 45 0.0 0.1 Project planning workshops 20 40 60 67.7 0.2 Equipment 12 0 12 0.0 0.1 CRC staffing & operating costs 331 80 411 19.5 1.2 Total CRC 638 620 1,258 493 3.8 Private Sector Seminars Program Trainers and resource persons 0 306 306 100.0 0.9 Seminar expenses 50 0 50 0.0 0.1 Participants costs (subsistence, materials) 328 0 328 0.0 1.0 Preparation of seminar materials 162 0 162 0.0 0.5 Total Private Sector Seminars Prograin 540 306 846. 36.2 2.5 Fonds d' Appui au Secteur Prive (FASP) Matching Grant Fund: Firn-level support services 2,000 3,500 5,500 63.6 16.6 Support for business associations 300 1,000 1,300 76.9 3.9 Public awareness campaign 49 0 49 0.0 0.2 Project planning workshops 10 30 40 75.0 0.2 Equipment 28 0 28 0.0 0.1 Operating costs 757 75 832 9.0 2.5 Electronic commerce/Internet 55 60 115 52.2 0.3 Equipment for regional offices 78 12 90 13.3 0.2 Operating expenses for regional offices 38 0 38 0.0 0.1 ......T.. EE lP -1 .. .. ... FDI Match-Making Scheme Match-making fund 1,500 875 2,375 36.8 7.2 Follow-up training 40 41 81 50.6 0.2 Operating costs 82 50 132 37.9 0.4 Total FDI Match-Making Scheme 1,622 966 2.588 37.3 7.8 Total Private Sector Capacitv Building 6,115 6,569 ! 12,684 51.8 38.2 Prograni Project Monitoring and Audits Financial audits 75 0 75 0.0 0.2 Management audits 0 225 225 100.0 0.7 Monitoring and evaluation 285 90 375 24.0 1.2 Total Project Mionitoriug and Audits 360 315 675 46.7 2.1  Madagascar: Private Sector and Capacity Building Project Attachment I Page 3 of 3 Local Foreign Total Foreign % of Exchange Total (%) Base Cost Refund of PPFAdvance 850 1,150 2,000 57.5 6.0 Total Base Costs 16,909 16,294 33,203 49.1 100.0 Price & Physical Contingencies 1.184 1,140 2,324 49.1 7.0 Total Costs .18,093 .17,434 35,527 49.1 107.0   Madagascar: Private Sector Development and Capacity Building Project Attachment 2 Page I of 4 MADAGASCAR PRIVATE SECTOR DEVELOPMENT AND CAPACITY BUILDING PROJECT LOGICAL FRAMEWORK TAX REFORM AND INVESTMENT INCENTIVE COMPONENT NARRATIVE SUMMARY PERFORMANCE INDICATORS MONITORING & SUPERVISION ASSUMPTIONS & RisKs Impact Level of tax revenue as a * National accounts a Continuing government * Increased tax revenue in terms percentage of GDP * Periodic reporting of the commitment to undertake the of percentage of GDP pilot division tax and custom adminstration * More equitable and * EPZ records reform transparent fiscal regime * Foreign and local private * More attractive investment investor confidence sustained climate for foreign and local by equitable and open investors regulatory framework * More attractive investment * Reform can be achieved climate for foreign and local without major salary revision investors Outcomes * Increase in number of * Survey of entrepreneurs * People will start to pay tax if * Increase of taxable base coverage and private tax * Reports of tax and custom level of taxes and tariffs is * Lowering of tax rates offset by payers administrations lowered, procedures are more increase of efficiency in * Evolution of tax rates and transparent and the revenue collection tariffs administration is more effective * More flexibility in access to * Number of VAT land ownership for foreign reimbursement applications investors * Perception of equitability and transparency of the tax and customs systems Outputs * Public perception of simplified * Survey of private . More efficient tax and custom and more transparent entrepreneurs administrations procedures * Publication in the Official