Madagascar - Structural Adjustment Credit

 ICRR 10341 Report Number : ICRR10341 ICR Review Operations Evaluation Department 1. Project Data : OEDID : OEDID: C2937 Project ID : P001582 Project Name : Structural Adjustment Credit Country : Madagascar Sector : Other Non-sector Specific L/C Number : 2937-MG Partners involved : Prepared by : Michael R. Lav Reviewed by : John Johnson Group Manager : Ruben Lamdany Date Posted : 06/23/1999 2. Project Objectives, Financing, Costs and Components : Objectives : The specific objectives were to promote the Government's reform program by (i) underpinning a fundamental relaxation of controls and restrictions facing investors and tourists; and (ii) setting the stage for a resolution of the external payment problems of Madagascar (debt rescheduling at the Paris Club and mobilizing exceptional donor financing ). In addition, the project sought more generally to reduce poverty, engage and attract foreign investors, and redefine the role of the State . Components :(1) During project preparation the Borrower : (a) floated the currency, (b) eliminated rice and flour subsidies, (c) appointed independent administrators to two state-owned banks, d) lowered maximum tariffs from 50% to 30%, (e) reoriented public expenditures to primary education, health services, and social fund community projects, (f) invited a formally-constituted private sector group to participate in policy discussions and draft an incentives framework for private sector development, and (g) appointed an Independent Commission for Privatization to draft the privatization law; (2) As conditions of Presentation of Credit for Approval and Tranche Release the borrower was required to : (a) liberalize entry, work permit and residence requirements for investors, and visas for tourists and abolish exit visas for nationals and foreign residents, (b) grant foreign managerial and technical staff automatic work permits and rights of residence for their families subject only to a valid employment contract, (c) allow foreign investors access to land tenure through 99-year mortgagable leases, (d) remove requirement for prior authorization to invest and integrate fiscal incentives of the investment code into the tax code, (e) abolish prior approval for equity capital contributions by foreign investors (above a threshold of 20 percent of a company's authorized capital ), (f) appoint experienced negotiators to design and carry out the divestiture of the two state owned commercial banks, (g) end the monopoly in telecommunications and select at least one company based on an international competitive bid for cellular operation, (h) liberalize air access by allowing regional airlines to use all Malagasy airports, allow new airlines to operate on other international routes, cancel the designation of Air Madagascar as the sole beneficiary of Malagasy air traffic rights and open ground handling facilities for airlines to competition, (i) open the petroleum sector to competition and take necessary steps to allow at least one oil company to compete with SOLIMA, (j) adopt the legal framework for divestiture of remaining public enterprises, (k) reorient the 1996 budget and the 1996-1999 PIP to strengthen the contribution of Government expenditure to poverty reduction, (l) complete an independent audit on the satisfactory implementation of the social safety net, and (m) submit a signed letter of Development Policy . Financing : One tranche comprising Interim Trust Fund resources equivalent to $ 70 million, and an IDA Reflow of $0.6 million. The project was approved in FY97 and closed in December 1997, 9 months after effectiveness . 3. Achievement of Relevant Objectives : The project fully achieved many but not all of its objectives, and the ICR is unclear about others . There is no mention in the ICR of the outcome of the debt problem nor the extent to which the external payment problems of Madagascar have been resolved as foreseen in the SAR . The following addresses the specific objectives listed in the SAR as conditions for presentation to the Board, and listed in the box above as project objectives, items 2 a to 2m. Concerning the improved framework for private sector incentives, items a through e, have been achieved and sustained. The banking sector condition, item f, has been sustained and one bank has been sold, with a sales protocol issued for the other . Ending the monopoly in telecommunications item g, has been achieved . Liberalized air access (item h) has been achieved. Ending the monopoly in the petroleum sector (item i) has not been achieved. While the legal framework for public enterprise privatization has been adopted and sustained, progress in divestiture has been slow, and only a few enterprises have been sold (against a "hundred or so" as mentioned in the SAR and the 46 mentioned as the objective in the ICR . While steps have been taken to reorient the Public Expenditure Program (item k), only marginal progress has been achieved . The social safety net has been audited (item l). Regarding the more general objectives of adjustment, f iscal and monetary policies improved, the government maintained the floating exchange rate, tariffs were reduced and the trade regime enhanced . 4. Significant Achievements : The project played an important role in helping to stabilize the economy and move Madagascar further along towards a market economy and enabling it to use its comparative advantage in production and in tourism . 5. Significant Shortcomings : There was little ownership of important parts of the program by the government . Thus, there is little evidence that the quality of public expenditures was actually improved or has been substantially refocussed towards the social sectors in any sustainable fashion . Privatization has lagged. There is still no competition in the petroleum and much more is needed in telecommunications . There is little evidence of real ownership by the government (implementation of important parts of the program has lagged ), and there does not seem to have been any real monitoring of the program on the part of the government . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Negligible Modest The government has introduced substantial reforms affecting trade and private sector development. However, it has not yet implemented reforms to improve public investment, promote real competition in petroleum and telecommunications, and in general does not seem to own this part of the reform program. Sustainability : Likely Uncertain Lack of real ownership by the government, lack of monitoring by the government, and needed further progress in private sector development, public expenditure reforms suggest that an uncertain rating is appropriate, especially in view of the uneven track record of the government in sustaining reforms . Bank Performance : Satisfactory Satisfactory The overall rating of satisfactory is based on the wide-ranging achievements of the operation, despite some shortcomings . Borrower Perf .: Satisfactory Satisfactory On balance, weighing the improvements and shortcomings in performance, Borrower performance seems satisfactory, though with shortcomings . Macro performance and private sector development framework have substantially improved. Social sector improvements and poverty reduction have not been substantially improved, although the letter of conditionality has been met . Privatization has lagged. The petroleum sector monopoly has not been ended . Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : This is another confirmation of the need for ownership on the part of the government and broad popular support before engaging in adjustment operations . 8. Audit Recommended? Yes No 9. Comments on Quality of ICR : Overall, the rating is satisfactory. There are, however, several shortcomings. The ICR is deficient in not commenting on any improvements regarding external debt, and there are a number of inconsistencies with the SAR such as defining the project objectives. The Table on Bank Resources (Table 9) is incomplete, so it is not possible to evaluate the use of Bank resources, although the overall costs of staff inputs is given in Table 8. Note, however, that the ICR states that a large proportion of project supervision was in fact accounted for under ESW and other tasks, implying that Table 8 provides only a partial accounting of total costs .