Madagascar - Community Development Project : additional financing

Document of The World Bank FOR OFFICIAL USE ONLY ReportNo: 36465 - MG PROJECT PAPER ONA PROPOSED ADDITIONAL FINANCING(CREDIT) INTHEAMOUNT OF SDR 12.2MILLION(US$18.0 MILLIONEQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR THE COMMUNITY DEVELOPMENT PROJECT June 23,2006 HumanDevelopmentI11 Country Department8 Africa Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective June 14,2006) Currency Unit = Ariary MGA 2,175 = USD 1 USD 1.49 = SDR 1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS ACORDS Appui aux Communes et Organisations Ruralespour le De'veloppementdu Sud (Support to Communes and Rural Organizations for the Development ofthe South) AGETIPA Agence d'Exe'cution des Travaux d'lnfrastructures Publiques dYntananarivo (The Public Works Executing Agency of Antananarivo) CAC Centre d'appui aux communes (Commune Support Centers) CAS Country Assistance Strategy CDD Community DrivenDevelopment CFAA/CPAR Country FinancialAccountability Assessment/ Country ProcurementAssessment Report CPGU Cellule de Pre'vention et de Gestion des Urgences (Emergency PreparednessandManagement Unit) EU EuropeanUnion FID Fonds d'Intewentionpour le De'veloppement (Community Development Fund) FIDEF Fe'de'rationInternationaledes Experts Comptables Francophones (International Federation of French-Speaking Certified Public Accountants) FMR Financial Management Report GD General Directorate GoM Government ofMadagascar GtZ Gesellschaftfur Technische Zusammenarbeit (German Agency for Technical Cooperation) ICR Implementation Completion Report IDA International Development Association IFMS Integrated Financial Management System IGF Inspection Ge'ne'raledes Finances (GeneralFinance Inspection) INTEC Institut National des TechniquesEconomiques et Comptables (National Institute ofEconomic andAccounting Techniques) ISR Implementation Status Report LDF Local Development Fund MAP Madagascar Action Plan  MDAT MinistBrede la De'centralisationet de I'Ame'nagementdu Territoire (Ministryof Decentralization andRegional Planning) MOP Memorandum ofthe President M&E , Monitoring andEvaluation NGO Non-Governmental Organization OPCI OrganismePublic de Coope'rationIntercommunale(Inter- Communal Public Organizations) PAD Project Appraisal Document PGDI Programme de Gouvernanceet de De'veloppementInstitutionnel (The Governance andInstitutional Development Program) PRSP Poverty Reduction Strategy Paper SIF Social InvestmentFund SOE Statement o fExpenditures UNDP The UnitedNations Development Program UNICEF The UnitedNations Children's Fund USAID The UnitedStates Agency for International Development 1 Vice President: Gobind T. Nankani Country Director: James P. Bond Sector Director: Yaw Ansu Task Team Leader: Nadine T. Poupart   REPUBLIC OF MADAGASCAR ADDITIONAL FINANCING FOR THE COMMUNITY DEVELOPMENT PROJECT CONTENTS Page I. Introduction.............................................................................. .2 11. BackgroundandRationalefor AdditionalFinancing .............................. ..3 111. ProposedChanges........................................................................ .6 IV. 10 11 ExpectedOutcomes ..................................................................... Appraisalof Scaled-upProject Activities ............................................. Consistencywith the Country Assistance Strategy(CAS) ......................... V. VI. .13 VII. BenefitsandRisks..............................................i................................................ 13 VIII. FinancialTerms andConditionsForthe AdditionalFinancing.................... 15 IX. Credit ConditionsandCovenants...................................................... .15 SCHEDULES ScheduleA: EstimatedProjectCost Source of Financing ScheduleB: FinancipgPlanandDisbursementSchedule ~ Allocations andDisbursementsof OriginalCredit, SupplementalCredit andAdditional Financing Schedule C: ProcurementArrangements ScheduleD: TimetableofKey Project ProcessingEvents Project Team ScheduleE: PerformanceIndictors ScheduleF: FinancialManagementandAssessmentReport ScheduleG: Country at a Glance MAP IBRDNo. 34897   REPUBLIC OF MADAGASCAR ADDITIONAL FINANCING FOR THE COMMUNITY DEVELOPMENT PROJECT PROJECT PAPERDATA SHEET Date: June 23,2006 Team Leader: Nadine Poupart Country: Madagascar Sector DirectorManager:Yaw Ansul Laura Frigenti Project Name: Community Development Country Director: James P. Bond Borrower: Governmentof Madagascar Responsible agency: Fonds d'Intervention pour le Developpement(FID) Current closing date: June 30,2008 Does the restructured or scaled-up project require any exceptions from Bank policies? oYes [XINO Have these been approved by Bank management? oYes [XINO I s approval for any policy exception sought from the Board? Revised project development objective/outcomes The development objective of the project has not beenrevised. For Additional Financing [ ] Loan [XICredit [ ] Grant For Loans/Credits/Grants: Total Bankfinancing (US$m.): 18.00 Proposed terms: Credit repayable in40 years, with a grace period of 10years. Financing Plan (US Im.) Source Local Foreign Total Borrower 0.00 0.00 0.00 IDA 17.50 0.50 18.00 CommunitiesiBeneficiaries 1.10 0.00 1.10 Total 18.60 0.50 19.10 1  I.Introduction 1. This Project Paper seeks the approval of the Executive Directors to provide an additional credit in an amount of SDR 12.2 million (US$18 million equivalent) to the Republic o f Madagascar for the Community Development Project (PO55 166) (Cr. 3498- MAG). This would be the second additional credit for this project. The closing date of the proposed additional financing i s June 30, 2008. The closing date o f the original project (Cr. 3498-MAG7 FYO1) and ongoing supplemental credit (Cr. 3498-1 MAG, FY04) i s June 30,2007. 2. The proposed additional financing would mainly finance the costs associated with the scaling-up o f the activities implemented by the social investment fund (Fonds d'Intervention pour le DCveloppment or FID), and supported by the project, until the future role o f the FID under the country's 2005 Deconcentration and Decentralization Policy i s defined. To a much lesser extent, the proposed additional credit would also allow for the completion o f the reconstructiono f infrastructure damaged duringthe 2004 cyclones, for whichthe government o f Madagascar (GoM) received a supplementalcredit inFY04that provedinsufficient due to: (i) inflationin2004 and2005 (13.8 %and strong 18.4% respectively); and (ii)slight underestimation o f the reconstruction needs. a 3. The development objective under the additional financing would be similar to that o f the original project, as amended on November 14, 2002 (see par. 7 below). The objective i s to improve the use o f and satisfaction with project-supported social and economic services provided amongst participatingrural and urban communities. 4. The additional financing would consolidate components and activities that were added over the life o f the original project. In addition, the additional financing would finance capacity building activities requested by the Ministry o f Decentralization and Regional Planning (MDAT) to support the implementation of the Deconcentration and DecentralizationPolicy. 5. The proposed credit would mainly finance: (i) transfer of funds to communities for the implementation o f 95 sub-projects (such as schools, health facilities, water supplies, and markets); (ii) transfer o f funds to communes for the implementation of 66 sub-projects; (iii)rehabilitationheconstruction o f 36 infrastructures damaged by the 2004 cyclones; (iv) capacity building activities for about 60 communes and 103 communities; (iv) equipment and operating costs of 8 "Commune Support Centers" (Centres d'Appui aux Communes or CAC), development o f training modules, training o f staff of 18 CAC and o f approximately 54 representatives o f deconcentrated services, surveys and studies; and (vi) FID operating costs. 2  11.Backgroundand Rationalefor Additional Financing Current Project Design 6. `The credit supporting the Community Development Project (SDR 85.2 million, US$I10 million equivalent) was approved on April 19, 2001, and became effective on October 23, 2001. A supplemental credit (SDR34.2 million, US$50 million equivalent) was approved on June 16, 2004, to cover the additional costs for emergency work incurredas a result ofthe cyclones that hitthe country from January to March2004. The cyclones damaged or destroyedmore than 5,700 social and economic facilities. To date, 90% of the original and supplemental credits have been disbursed. The balance (about US$17.3 million) is expectedto be disbursedover the coming year. 7. The legal documents of the original project have been amended four times during implementation, mainly to respondto changing country circumstances and urgent needs. The Jirst amendment, which was approved by the Board on November 14, 2002*, occurred following the six-month political crisis in 2002, when the entire IDA portfolio was restructured to respond to the urgent social and economic needs of the government. To do this, a component was added to the project to provide a permanent social safety net mechanism. The project was also expanded to include urban areas that were most affected by the crisis, thereby modifying the project development objective. In April 2004, the Development Credit Agreement and the Project Agreement were amended a second time to add a new component to the project ("Cyclone Emergency and Disaster Relief Activities"), allowing for financing o f emergency supplies (such as blankets, tents, andwater pills) following the passage ofthe Elitaand Gafilo cyclones inearly 2004. The development objective o f the project was not affected by this amendment. The third amendment was made on July 21, 2004 for the purpose o f implementing the FY04 supplemental credit. Finally, a reallocation of more than 5% of the credit proceeds was approvedinNovember 2005. 8. The project's current design is as follows: 0 Component I: Transfers of Funds to Community Associations, US$68.2 million (US$64 million for the original credit, and US$4.2 million for the FY04 supplemental credit): This component transfers funds to community associations to finance community requested sub-projects (investments) such as school buildings, health facilities, water supplies, feeder roads, markets, and slaughter houses. 0 Component2: Capacity BuildingActivities, US$ 12.5 million (US$I2 millionfor the original credit, and US$O.5 millionfor the FY04 supplemental credit). This activity trains community associations and communes in project management, accounting, and procurement. It also supports the preparation of participatory communal development plans. `Cf. MemorandumandRecommendationofthe President,ProposedPortfolio Restructuringin a Post- Crisis environmentinthe Republic o f Madagascar,October 22,2002, ReportNo. P7561-MAG 3  e Component 3: Transfers of Funds to Communes, USs20.5 million (US$ 20 million for the original credit, and US$0.5 million for the FY04 supplemental credit). This component transfers funds to communes to finance sub-projects which consist o f a priority investment intheir communal development plan. 0 Component 4: Project Administration and Supervision, US$ 14.8 million (US$14million for the original credit, and US$0.8 million for the FY04 supplemental credit). This component funds administration and operating costs, training o f staff, beneficiary assessments, impact evaluations, poverty studies, monitoring and evaluation, and financial and technical audits. e Component 5: Social Safety Net Activities, US$ 11.6million (US$ 6.6 millionfor the original credit, and US$ 5.0 millionfor the FY04 supplemental credit). The component finances social safety net sub-projects implemented by accredited faith and non-faith NGOs and associations, with the objective o f creating short- term employment and provide revenues for families that are most affected by climatic or other shocks. These demand-driven activities are inthe form o f food- for-work or cash-for-work under the minimumwage. a Component 6: Cyclone Emergency and Disaster Relief Activities, US$0.5 million (FY04 supplemental credit). This component aimed to improve the living conditions o fthe most affected households for six months after the 2004 cyclones, including reducing the risk o f malnutrition, ensuring availability o f potable drinking water, protecting affected households from risk o f disease outbreaks and supporting local health services. Statusof ProjectImplementation 9. Both the development objective and implementation progress are currently rated satisfactory. The FID continues to be a successful instrument both to support local development on a large scale and to respond to numerous climatic and other shocks that the country faces. To date, the project has financed close to 1,800 community sub- projects such as schools, health facilities, feeder roads, potable water schemes, small scale irrigation, and markets. It has also financed the rehabilitatiodreconstruction o f about 3,744 facilities following the 2004 cyclones. The 'Transfer-to-Communes' component successfully channeled funds to 120 communes which implemented 611 sub- projects. The FID has helped half o f all rural communes in the country develop Communal Development Plans through a participatory process. In addition, the 'Social Safety Nets' component has created approximately 16.2 million person-days o f temporary labor. An impact evaluation is expected to provide detailed evidence o f project outcomes. Recruitment o f a consultant to carry out the impact evaluation is due no later than November 30,2006. The project i s incompliance with its covenants. 4  RationaleandReasonsfor the AdditionalFinancing 10. The government has requested additional financing of US$18 million equivalent for the Community Development Project to scale-up the activities implemented by the FID until its future role under the 2005 Deconcentration and Decentralization Policy is defined. Under this policy, the government is establishing a Local Development Fund (LDF) as a means to harmonize and streamline support to local development within the government structure. The additional financing would enable the government to continue delivering services until such time as the LDF i s effective and is supported by sufficient resources, including IDA. To a muchlesser extent, the proposed additional credit would also allow for the completion of facilities damaged during the 2004 cyclones, for which the GoM receivedthe first supplementalcredit inFY04that proved insufficient dueto: (i) strong inflation in 2004 and 2005 (13.8 % and 18.4% respectively); and (ii)a slight underestimation of the reconstruction needs. 11. The Community Development Project is the fourth IDA-financed project that supports demand-drivenactivities implementedby the FID. During the last 13 years, the FID has gained extensive experience and built solid capacity in delivering community/commune-requested intervention in the education, health, water and sanitation and transport sectors notably, and in responding to large shocks faced by the country. Iti s currently the largestcommunity development program inMadagascar. 12. Inaddition to the FID, there are three other large programs in Madagascar that deliver some type of social and economic infrastructure and services to communes and/or communities: (i) the IDA-supported Rural Development Support Project; (ii) ACORDS (financed by the EU), and (iii) AGETIPA (now financed by the French government). In addition, much smaller donor programs have been providing support to communes and communities. These programs have often been acting relatively independently, and without a coherent framework. 13. InNovember 2003, the major donors supporting local development (the World Bank, the French cooperation, the Swiss cooperation, GtZ, UNDP, the EuropeanUnion, and USAID)agreed to harmonize their programs andprocedures. Soon after, the MDAT was created (decree of March 2005) and has since received support from various donors. The MDAT immediately took on this harmonization agenda and commissioned a feasibility study for establishing a multi-donor Local Development Fund (LDF) that would consolidatethe transfer o f resourcesto communes ina sustainable way, and would build their long term capacity. The LDF concept is a key element of the government Decentralization and Deconcentration Policy that was approved inDecember 2005. The policy aims at strengthening local governance (with civil society participation) in the 1,560 communes and 22 regions of the country to improve service delivery and economic development. 14. Early 2006, the MDAT commissioneda complementary LDFto further define: (i) what the LDF operating mechanisms and institutional framework should be; (ii) the how existing mechanisms (notably the FID) would fit into the LDF framework; and (iii) what 5  capacity-building arrangements should accompany the reform. The draft study that was circulated to the donors on June 7,2006 didnot provide, however, sufficient guidance on the second point. The MDAT intends, therefore, to carry out additional analysis on the integration into the LDF of the FID and other existing mechanisms, in terms of legal, administrative, and operational arrangements. The MDAT would like to start pilotingthe LDF mechanism, with a light administrative structure, as soon as the end of 2006. The legal and operational constitution of the FDL will take time. It is currently anticipated that the FDL will be operational mid-2007. 15. Inthe context of the ongoing discussions for the next CAS (scheduledfor Board presentation in January 2007), support to the LDF i s being considered either through budget support or through a larger FY08 CDD/decentralization project that would use a Sector-Wide Approach (SWAp), with possibly pooled donor funds. The proposed additional credit would therefore bridge the gap untilthe FY08 operation is effective. It would allow the FID to scale-up the delivery of basic services to communes and communities while its future role is being defined. 16. In addition, the proposed additional credit would allow the FID to rehabilitate and/or reconstruct about 36 facilities damaged by the 2004 cyclones and not included in past annualwork plans due to lack of funds. 17. The proposed scale-up does not create any implementation capacity issue. The FID has been able to disburse successfully much larger amounts annually. The new capacity building activities in support to the LDF (under Component 5-b, see below), wouldbenefit from the technical input ofthe MDAT. 18. The proposed additional financing would be made available under a new Financing Agreement subject to the General Conditions revised as of July 1, 2005, and a newProject Agreement. 111.Proposed Changes 19. The development objective underthe additional financing would be similar to that of the original project as amended on November 14, 2002, and the additional financing would consolidate components and activities that were addedover the life of the original project. In addition, the additional financing would finance capacity building activities requested by the MDAT to support the implementation of the Deconcentration and DecentralizationPolicy. 20. Project components would be the same as those of the original project except for Component 4 ("Cyclone Emergency and Disaster Relief Activities"). This component was created to respondto the exceptional situation o f the 2004 cyclones that requiredthe Bank to intervene in relief activities. These activities are no longer needed. Instead, a new component 4 "Rehabilitation and Reconstruction in Response to Natural Disasters" would focus on disaster-related rehabilitation and reconstruction that were previously includedinthe first and second components of the original project ("Transfers of Funds 6  to Community Associations" and "Transfers of Funds to Communes" respectively). Under the additional financing, components 1 and 2 would address local development, components 2 and 3 would address shocks, and components 4 and 6 would deal with cross cutting issues. These changes are consistent with the recommendations o f the project's mid-term review (March 2005) that suggested a clearer institutional and administrative separation o f the FID's double mandate of: (i) supporting long term local development; and (ii) responding to shocks, a short-term and largely unpredictable activity by nature. Project components would now consist of: 0 Component 1: Transfers of Funds to Community Associations (US$6.3million) would remain unchanged. e Component2: Transfers of Funds to Communes: (US$4.8million) would remain unchanged. e Component 3: Social Safety Nets (Shocks) (US$0.4 million) would remain unchanged. This public workfare program would be activated after a shock has occurred (weather, price, lean season etc.). Sub-projects would preferably be those that would contribute to the prevention or mitigation o f future shocks. e Component 4: Rehabilitation and Reconstruction in Response to Natural Disasters (US$I.6 million). This component would finance the reconstruction and rehabilitation o f infrastructure damaged duringnatural disasters. Sub-projects would include health facilities, schools, rural water supply and sanitation, feeder roads, bridges, markets, and administrative infrastructure. These works would be implemented by community associations or communes, except for complex or large sub-projects that the FID would implement on their behalf, as described in the Manual of Procedures. Works would conform to the FID's regular anti- cyclone standards or standards that have received the prior approval ofthe FID (in the case o fNGO-executed contracts). 0 Component5: Capacity Building Activities (US$2.1 million). Underthis component, the additional financing would: a) scale-up original project activities; and b) finance new capacity building activities (US$1 million) requested by the MDATthat will contribute to the establishment o fthe LocalDevelopment Fund. These activities would include : (i) for the establishment support and operating costs o f eight Communal Support Centers (Centre d'Appui aux Communes or CAC), including training of staff for all o f the 18 pilot CACs planned nationwide; (ii)development o f training modules on various themes (e.g. participatory planning, budget management, collection o f fiscal revenues, monitoring and evaluation (M&E); (iii) training o f deconcentrated staff; (iv) development o f a LDF database and M&E system including a qualitative survey to measure the impact o f CACs; and (v) studies (e.g. a study to define legal procedures, 7  implementation manuals and allocation systems under the FDL; stocktaking o ftraining for local development). e Component 6: Project Administration and Supervision (US$2.8 million) would remain unchanged. The recruitment o f a M&E specialist (ongoing) and the planned impact evaluation are expected to respond to the shortcomings in the FID's M&E system identified under both the Third Social Fund Project (Cr. 2778-MAG), also implemented by the FID, andthe original project. 21. Inorder to better reflect the new institutional context, especially the creation in 2005 o f the MDAT, and to position the FID under the LDF, the governance structure o f the FID - including the composition o f its Board - will be changed prior to credit effectiveness. The Board could include representatives from the MDAT, the Ministry of Economy, Finance and Budget, the Unit o f Prevention and Management o f Emergencies (Cellule de Pre`vention et de Gestion des Urgences or CPGU), communes (mayors) as well as from the academic world (University and/or Research sector). ProjectCost and Financing 22. The total project cost, including taxes and duties, is estimated at US$19.1 million equivalent with the following breakdown: US$18 million provided by IDA, and US$ 1.1million provided through community and commune contributions. The breakdown o f estimated costs i s shown inSchedule A. ProjectImplementation,FinancialManagement,andProcurementArrangements 23. Implementation Mechanisms. These mechanisms would be the same under the additional financing as those o f the original project, as they are working well. The FID was created in 1993 and has successfully executed earlier social funds in Madagascar under IDA-financed projects (the FoodSecurity andNutritionProject, the Second Social Fund Project, and the Third Social Fund Project). It was established as a non-profit association for public service ("association ir but non lucratifreconnue d'inte`rztpublic"), and it i s autonomous. The FID will continue to operate on a decentralized basis through six inter-regional offices in accordance with the provisions o f its by-laws, and the Framework Agreement (Convention) between the FID and the government. The Framework Agreement will be updated, or a new one will be signed, to reflect the additional financing. 24. The FID's Manual o f Procedures clearly defines identification, preparation, appraisal, selection and implementation modalities for each type o f sub-project. Beneficiaries are expected to contribute a percentage o f the cost o f each sub-project in kind (materials and labor) or in cash. In April 2004, the Manual o f Procedures was updated. An additional volume ("Cyclonic Disasters") was added to guide the FID on the implementation o f the rehabilitation and reconstruction o f damaged infrastructure and emergency relief activities. Based on lessons learned with the implementation o f the response to the 2004 cyclones, this volume i s being revised and merged with the volume 8  dealing with "Safety Nets" to develop a new volume on "Response to shocks". The Manual o f Procedures i s also being updated to include some modifications in the allocation to communes, following the Mid-Term Review recommendations. Under the original project, US$5 per capita were allocated to selected communes each year under a multi-annual convention. This created large inequities between selected and non selected communes, and prevented lesser populated communes from financing meaningful investments. Allocation to communes will now be based on the cost o f the priority sub- project in the Communal Development Plan, with a cap o f US$lOO,OOO per sub-project. The system o f multi-annual conventions with selected communes will be replaced by annual conventions. The 66 new communes selected to receive a grant under the proposed additional financing respond a mix o f criteria that reflect their poverty and capacity levels defined in the Manual o f Procedure, as well as criteria linked to the sampling requirement for the planned project impact evaluation. Inthe future, the FDL targeting criteria should apply. 25. Regarding the capacity-building activities supporting the LDF (Component 5-b), implementation arrangements will be as follows. The FID will remain the implementing agency and will be responsible for ensuring that the procedures set up in the Manual o f Procedures, Financing Agreement, and Project Agreement are followed. The FID will therefore be responsible for procurement, disbursements, and financial arrangements. However, the MDAT will be technically responsible for this sub-component and will therefore approve terms o f reference as well as affix its signature as a third party observer to consultant contracts signed by the FID. Before effectiveness, the MDAT will designate a committee or a person who will be responsible, within the ministry, for the technical quality o f this sub-component andwill liaise with the FID on a regular basis. 26. The CACs will be constituted o f individual consultants (about 3) selected by a committee o f mayors o f the beneficiary communes. Each CAC will be legally attached to inter-communal public organizations (Organisme Public de Coope`ration Intercommunale, OPCI). The CACs will have a dual goal: (i) provide direct capacity to buildingto local governments in areas such as communal legislation, fiscal management and revenue administration; and (ii) match commune needs with (a) training service to providers and (b) investment funds channeled though the LDF. Each CAC will cover between 10and 15 communes. Duringthe first year, only 18 CACs will be established in the country as a pilot (of which 8 will be financed by the proposed credit, and 10 will be financed by other donors such as UNDP, UNICEF, the French cooperation, the Swiss cooperation, GtZ and USAID). If successful, this approach will be scaled up. Inthe medium term, it is expected that the CAC functions will be incorporated by the communes, and CACs will be phased out. The 8 pilot CACs supported by the project will be selected in a way to reach both very poor and wealthier rural communes in order to prepare for a balanced coverage o f recipients under the future LDF. Supervision will be ensured through FID's inter-regional offices. A CAC Manual o f Procedures will be prepared by the MDAT, as a condition for disbursement against sub-component 5-b (i), and shared with other donors to ensure a consistent implementation o f CACs nationwide. 9  27. Financial Management Arrangements. Financial management arrangements will be the same as for the original project as they are working satisfactorily. The FID has established an acceptable computerized accounting and reporting system for the project, which will continue for the additional financing. However, the update o f the current Administrative and Financial Manual will be needed to reflect the new Chart o f accounts and models o f Financial Management Reports (FMRs) required for managing and monitoring project activities. The format and the frequency o f periodic reporting have been agreed upon at negotiations and are described in the updated Administrative and Financial Manual which will be submitted to IDA prior to credit effectiveness. Independent auditors, acceptable to IDA, will audit the use of all funds available under the additional financing, including the designated account and the Statements o f Expenditures (SOE). Audit reports will be submitted to IDA no later than six months after the end o f the fiscal year. The auditors should be recruited prior to credit effectiveness. A new designated account will be used with an authorized ceiling o f US$ 4 million. Statements o f Expenditureswould be usedfor all expendituresunder contracts below the Association's prior review limits. 28. Procurement. Procurement o f goods and services will be carried out as stated in the Financing Agreement, the Project Agreement, and the FID's Manual o f Procedures and will be undertaken in accordance to World Bank Guidelines For Procurement o f Goods and Works under IDA Credits (as revised on May 2004) and World Bank Guidelines for Selection and Employment o f Consultants by World Bank Borrowers (as revised on May 2004). The following procurement methods will be applied to the additional financing: international competitive bidding, national competitive bidding, national shopping, and community participation for goods and works and quality-- and cost-based selection, least cost selection, single source selection, procedures set forth in paragraphs 5.2 and 5.3 o f Consultant Guidelines for the selection o f individual consultants andprocedures set forth inparagraphs 3.16 and 3.2 1o f Consultant Guidelines for the selection of NGOs and service delivery contractors for consultancy services and community activities. Procurement will be conducted in accordance with the 18-month procurementplanagreed upon duringnegotiations. 29. The closing date ofthe additional financing is June 30,2008. IV. Consistencywith the CountryAssistance Strategy (CAS) 30. InAugust 2003, the government finalized its Poverty Reduction Strategy Paper (PRSP), following a broad and inclusive participatory process. The overarching goal o f the PRSP is to cut the poverty rate by half in ten years, from 70 % in 2003 to 35% in 2013. To attain this objective, the PRSP has three strategic axes: (i) good governance; (ii)broad-based growth; and (iii) and material security. A cross-cutting axis o f human monitoring and evaluation underpinsthe strategy. Under the strategic axis o f human and material security, the main objective i s to enhance human capacity and strengthen individual assets, through education, health and nutrition. The PRSP views the commune as the main local service provider and the anchor for all interventions in this domain. 10  Implementation of the PRSP has been satisfactory as evidenced by the annual PRSP Progress Reports2. 31. The November 2003 CAS was designed to support the implementation o f Madagascar's PRSP. The CAS refocused the existing portfolio to better align itselfto the PRSP objectives and address the key constraints to broad-based growth. The CAS focused Bank interventions on creating a much larger impact on rural poverty, and aimed at protecting the most vulnerable against shocks. The Community Development Project i s a key element o f the Bank's support to the PRSP as it finances: (i)small-scale investment for improved basic service delivery in rural areas where 77% o f the population i s poor; and (ii)safety net activities to protect the most vulnerable. The G o M i s currently preparing its "second-generation" PRSP called the Madagascar Action Plan (MAP) that sets out the "roadmap" aiming to produce a quantum leap in the country's development process. Inparallel, the Bank i s preparingits new CAS which will support the implementation o f the MAP. The new CAS will reflect the GoM's focus on delivering services, especially inrural areas. The proposed additional financing i s thus a core element in the Bank's support to the M A P because it continues a successful and effective program for community development that i s having a real impact on the ground. V. Appraisalof Scaled-upProjectActivities 32. Although the project i s being scaled up, the program remains as originally designed and appraised. The economic, financial, technical, institutional, fiduciary, and social aspects of the activities to be undertaken with the additional financing remain the same as inthe original project, except for sub-component 5-b requested by the MDAT. Institutionaland TechnicalAssessments for sub-component 5-b 33. The additional financing will provide capacity building support to the MDAT for the establishment o fthe LDF, which constitutes a new activity. Although the MDAT i s a new Ministry, it i s a dynamic institution that receives technical support from several donors. It i s also a busy Ministry, which led IDA to request the formal designation o f a committee or focal point to be responsible for the technical quality o f this sub-component before credit effectiveness (see section VI1on Benefits and Risks). 34. O n the technical side, the preparatory work for the LDF i s o f good quality, and should lead to an adequate design o f the Fund. Yet, the CAC concept i s not as well developed, and supporting the pilot CACs constitute a project risk (see section VI1 on Benefits and Risks). It is however felt that Bank support to the CAC will help bring a more structured and harmonized implementation of this new mechanism to reinforce local governments' capacity. Report No. 30036-MG and Report of June 2005 for which no reference number is available. 11  FinancialAssessment 35. The FID is responsible for implementing the project and managing the credit funds. The overall project coordination is undertaken by the FID General Directorate (GD) headed by a General Manager. The latter is assisted by six inter-regional directors and five managers respectively in charge o f financial management, operations, quality, capacity buildingand response to natural disasters. The Director o f Finance, at the central level, i s in charge o f the overall aspect o f the project financial management including budgeting, maintenance o f records and accounts for all transactions related to GD, consolidation and production o f the project financial statements and quarterly FMRs, and administration o f the designated account. The inter-regional offices manage disbursements from the sub-designated accounts, maintain records and accounts for all transactions under their responsibilities send on a monthly basis the balance sheet to the GD for consolidation and prepare financial and other basic information on project management/monitoring as required by the GD. The OPCI will receive from the FID a specific allocation (per the budget agreed with the MDAT) to be used for the payment o f operating costs o f the CACs (component 5-b.(i)). The OPCI will keep a simplified accounting system satisfactory to IDA and will prepare also financial and technical reports as required by the FID. 36. In accordance with Bank policy and procedures, the financial management arrangements of the FID responsible for the implementation o f components/activities to be supported under the additional financing, have been reviewed to determine whether they are acceptable to the Bank. Details o f the full review can be found in Schedule F. This review is an update since the FMsystem o f this entity has already beenassessed in the context o f the ongoing Community Development Project. The conclusion o f this review rated the project's FM system "globally satisfactory". However, some improvements are needed to provide, with reasonable assurance, accurate and timely information as requiredby the IDA for managing and monitoring project activities. The recommended improvements include: (i)the update o f the current Administrative and Financial Manual to reflect the new Chart o f accounts, and the models o f Project Reports to be produced under this additional financing. This should be completed prior to credit effectiveness; and (ii) the recruitment of an additional internal auditor (ongoing). 37. The project financial statements will be audited annually by independent and qualified auditors acceptable to IDA, in accordance with International Standards of Auditing. The auditors should be recruited prior to credit effectiveness. The audit report will be submitted to IDA no later than 6 months after the end o f each fiscal year. It is important to mention that no major issues have been encountered so far interms o f audit covenants: the Community Development Project and all other Bank-financed projects in Madagascar have always submitted their audit reports within the timeframe. EnvironmentalAssessment 38. The environmental classification o f the ongoing project is Category B. The additional financing would fund community sub-projects similar in scale and scope to 12  those implemented under the original project. As part o f the preparation for the supplemental credit to the Community Development Project, a missionwas undertakenin M a y 2004 to identify possible environmental and social safeguard risks associated with sub-projects funded under the project and to evaluate the capacity o f the FID to address the World Bank's safeguard requirements3. The environmental assessment produced by the mission determined that the capacity o fthe FIDto implementsafeguard requirements was weak and required strengthening. Furthermore, it was found that the recommendations provided inan environmental assessment study carried out in 1999 for the Third Social Fund Project had not been implemented satisfactorily. In order to address these issues, several measures were undertaken including: (a) each inter-regional office o f the FID was assigned an environmental specialist; (b) the Manual o f Procedures was revised to comply effectively with new World Bank safeguard policies (a separate volume on environmental procedures was produced); and (c) additional training was provided to the FID staff and implementing partners on safeguard compliance. Implementation o f these measures was supervised in June 2005, and found to be overall satisfactory. The team i s therefore confident that future activities to be financed under the proposed additional financing will comply effectively with the Bank's safeguard policies andthe national requirements. 39. The proposed scale-up does not involve any exceptions to Bank policies. VI. ExpectedOutcomes 40. Key outcome indicators for the project and output indicators for each component have been defined and are presented in Annex 1 o f the original Project Appraisal Document (PAD). A set o f output indicators was added under the FY04 supplemental credit. All these indicators will continue to apply and are presented inSchedule E. VII. Benefitsand Risks 41. Benefits. Benefits remain as described in the PAD. The project will benefit people who live inrural areas by: k Increasing their access to basic social and economic services and by improving the quality o fthe services; P Increasingproductivity and income over the medium and long-term, as economic investments in infrastructure such as feeder roads improve the profitability o f agriculture, and as social infrastructure in health and education improve labor productivity; and k Building the capacity of community associations and commune authorities to plan, implement andoperate development sub-projects. "Evaluation de la Conformitk am Directives de Sauvegardes du Projet de Dkveloppernent Communautaire", Banquemondiale, ERMIAQUATERRE.July 27, 2004. 13  42. The project also provides Madagascar with an efficient instrument to respond to the major shocks that the country faces on a recurrent basis through: (i) rehabilitation and reconstruction of damaged or destroyed infrastructure; and (ii)labor-intensive public works (safety nets). 43. In addition, the additional financing will also contribute to the establishment of the multi-donor LDF through sub-component 5-b. 44. Risks. The critical risks mentioned in the PAD remain valid, except for the risk that the government will not provide counterpart funds on schedule, since the proposed credit would finance 100% of expenses including taxes (as per the Country Financing Parameters approved on May 12, 2005). In addition, the following four risks should be mentioned: 9 The FID staffmay start leaving the institution (a substantial risk) because they feel their job is threatened by: (i) lack o f clarity on the future of the FID under the the LDF; and (ii) donor commitment on the LDF. Measures to mitigate this risk unclear include: (a) the finalization and dissemination o f the complementary LDF study that should present options on the role o f the FID; and (b) additional analysis on the integration into the LDF o f the FID and other existing mechanisms, interms o f legal, administrative, and operational arrangements. It will also be important that the Bank clarifies its willingness to support the institution in the context of the ongoing CAS discussions. k Partnership between the FID and the MDAT is not effective (a moderate risk). The FID has been set up to operate relatively independently for many years. The recent government's commitment towards decentralization and empowerment o f communes, however, calls for a stronger integration o f the FID's activities into the government's structure. This collaboration will be particularly necessary for the implementation o f sub-component 5-b. To clarify the role o f the FID and the MDAT for the implementation o f this sub-component, a Memorandum o f Understanding should be signedby October 31,2006. k TheMDATS busy agendadoesnot allowfor an eficient implementation of CACs (a moderate risk). This risk i s mitigated by the designation o f a committee or a focal person who will be responsible, within the ministry, for the technical quality of sub- component 5-b and who would liaise with the FID on a regular basis. 9 Thefinancial sustainability of CACs remains uncertain (a substantial risk). The MDAT expects CACs to be phased out within 4-5 years, at which point communes are expected to pay for the services they purchase. However, the ability o f communes, especially the poor ones, to raise local revenue remains unclear in such a timeframe. Because the CACs are being implemented as a pilot initiative their design will partly be drivenby a process o f "learning by doing". A thorough monitoring and evaluation system as well as a detailed Manual ofProcedures will guide implementation. 14  VIII. FinancialTerms and ConditionsFor the AdditionalFinancing 45. The additional financing will be provided as an IDA credit. The Country Financing Parameters allow for up to 100% project financing, including taxes. The financing parametersalso allow for recurrent cost financing where required, providedthat the implications of recurrent cost financing on Madagascar's fiscal situation and debt sustainability are taken into consideration. IX. CreditConditionsandCovenants (i) ConditionsForEffectiveness a. The relevant legal texts regulating the FID have been updated in a manner satisfactory to IDA and members of its Board of directors have been appointed. b. The MDAT has nominated staff with appropriate experience and qualifications to be responsible for the technical supervision of sub- component 5-b. c. The recruitment of external financial auditors i s acceptableto IDA. d. The FID has updated its Administrative and Financial Manual to reflect the new Chart of Accounts and models of Project Reports in a manner satisfactory to IDA. (ii) ConditionsFor Disbursement a. Disbursement of funds for sub-component 5-b-i i s subject to submission for IDA review of a CAC Manual of Procedures setting forth its legal status, composition and rules o f operation, administration and finance, including a proposedwork plan and amonitoringand evaluation plan. (iii) Covenants a. Recruitment of a consultant to carry out a project impact evaluation no later than November 30,2006; and b. ProductionofProject Reports on a six-monthly basis. 15  SCHEDULE A Page 1or 1 REPUBLIC OF MADAGASCAR ADDITIONAL FINNACING FOR THE COMMUNITY DEVELOPMENT PROJECT ESTIMATED PROJECT COSTS (in US$million equivalent) Category Local 1 Foreign Total Foreignas % of total ( 1) Goods, Works, Consultants' services and Grants for sub-projects a) under Part B 2(a) ofthe project (component 5-b) 0.50 0.00 18.60 1.60 I 19.10 1.60 SOURCE OF FINANCING (in US$million equivalent) Local Foreign Total Percentageof ForeignExpenditures IDA 17.50 0.50 18.00 2.70 Communities and Communes 1.10 1.10 0.00 Total II 18.60 II 0.50 II 19.10 II 2.60  SCHEDULE B Page 1of 2 REPUBLICOF MADAGASCAR ADDITIONAL FINANCING FOR THE COMMUNITY DEVELOPMENT PROJECT FINANCINGPLAN(by ProjectComponent) (in US$million equivalent) COMPONENT ~1 Community Total and Communes 1, Transfers of finds to community associations 2. Transfers of funds to communes 4.80 0.50 5.30 3. Social safety net activities 0.40 I 0.40 I 4. Reconstructioninresponse to natural 1.60 1.60 disasters 5. Capacity building activities 2.10 2.10 I 6. Proiect administration and suDervision I 2.80 2.80 Unallocated 0.00 Total Baseline Cost 18.00 Physical Contingencies 0.00 Price Contingencies 0.00 TotalProjectCosts I I Interest during Construction DISBURSEMENT SCHEDULE (in US$ million equivalent) FY 2007 2008 Annual 10.00 8.00 Cumulative 10.00 18.00  SCHEDULE B Page 2 of 2 ALLOCATIONS AND DISBURSEMENTS OF ORIGINAL CREDIT, SUPPLEMENTAL CREDIT, AND ADDITIONAL FINANCING (in US$million) Category OriginalCredit (Cr. Supplemental Credit YOofexpenditures 34980-MAG) (Cr. 34981-MAG) to be financed Amountas amended Amount as amended inNovember2005 inNovember 2005 ~ (1) Grants for sub-projects 100% o f amount of (a) under Part Eof the project 3.00 ;rants disbursed (b) under Part F o fthe project 0.00 (c) other 82.10 46.30 (2) Technical assistance, training, 8.50 0.50 100%o f foreign expenditures and 85% o f local expenditures for initial financing; 85% o f foreign expenditures and 75% o f local expenditures for consultants' services (including audits) and 100%o ftraining expenditures for additional financing (3) Vehicles, equipment, 1.70 1.oo 100 % o f foreign furniture, materials expenditures and 80% oflocal expenditures (4) Operating cost 5.90 0.30 90% ource: Client connection, June 8,2006. ~ Category Additional YOof expendituresto Financing be financed Amount (1) Goods, Works, Consultants' Services and Grants for sub- projects 100% (a) Under Part B 2(a) o fthe 0.50 project4 - -(b) Other 17.50 Sub-component 5-b.  SCHEDULE C Page 1of 1 REPUBLIC OF MADAGASCAR ADDITIONAL FINANCING FOR THE COMMUNITY DEVELOPMENT PROJECT PROCUREMENT ARRANGEMENTS (in US$million equivalent) I Category ProcurementMethod I I 1 0.50 1 0.50 I  SCHEDULE D Page 1of 1 REPUBLIC OF MADAGASCAR ADDITIONAL FINANCINGFOR THE COMMUNITY DEVELOPMENT PROJECT TIMETABLE OFKEYPROJECT PROCESSINGEVENTS Milestone Available Date Time takento prepare: 5 months Preparedby: Government with assistance o f World Bank Staff Appraisalblegotiations : May/June 2006 EstimatedBoard date: August 3,2006 Planned Date of Effectiveness: November 2006 Project Completion: December 31,2007 Credit Closing: June 30,2008 We proposethat this additional financing be processedfollowing streamlined procedures. Project Team: The preparation team included: Messrs./Mmes. Nadine Poupart, Sr. Economist and Team Leader (AFTH3); Gilles Veuillot, Counsel (LEGAF); Sylvain Rambeloson, Sr. Procurement Specialist; Lova Ravaoarimino, Procurement Analyst (AFTPC); Gervais Rakotoarimanana, Sr. Financial Management Specialist (AFTFM); Wolfgang Chadab, Finance Officer (LOAG2); Asmara- Lua Achcar, Consultant (AFTH3); Frank-Borge Wietzke, Consultant (AFTH3); Paul-Jean Feno, Environmental Specialist, Consultant (AFTS1); Anne Anglio, Seraphine Nsabimana and Astania Kamau, Program Assistants (AFTH3); and Jenny Rahamefy, Temporary (AFC08). Ms.Laura Frigenti i s the SectorManager.  g b . 4 z 0 0 . 0 . . % % 0 0  Y 0 .;; El c b? 0 .. r4  s d c V C c cc rr yr U E x 0 i$ s a h  SCHEDULE F Page 1of 9 REPUBLIC OF MADAGASCAR ADDITIONAL FINANCINGFOR THE COMMUNITYDEVELOPMENT PROJECT FINANCIAL MANAGEMENT ASSESSMENT REPORT 1. ExecutiveSummary 1. Inaccordance withBank policy andprocedures, the financial management arrangements o f the FID responsible for the implementation o f components/activities to be supported under the additional financing, have been reviewedto determine whether they are acceptable to the Bank. This review is rather an update since the FM system o f this entity has already been assessed in the context o fthe ongoing Community Development Project. The conclusiono fthis reviewrated the project FM system "globally satisfactory". However, some improvements are needed to provide, with reasonable assurance, accurate and timely information as required by the IDA for managing and monitoring project activities. The recommended improvements include: i)the update o f the current Administrative and Financial manual to reflect the new Chart o f accounts, and the models o f FMRs to be produced under this additional financing; ii)the recruitment o f an additional internal auditor. These remedial actions should be completed prior to credit effectiveness. 2. The project financial statements will be audited annually by independent and qualified auditors acceptable to IDA, inaccordance with International Standards o f Auditing. The auditors should be recruited prior to credit effectiveness. The audit report will be submitted to IDA not later than 6 months after the end o f each fiscal year. It's important to mention that no major issues have been encountered so far in terms o f audit covenants: the Community Development Project and all other Bank-financed projects in Madagascar have always submitted their audit reports within the timeframe. 2. Countryissues 3. The World Bank's Country Financial Accountability Assessment/ Country Procurement Assessment Report (CFAAKPAR), completed in 2003, and some diagnostic works carried out over the last three years by the Bank and other donors, identified a range o f weaknesses and issues hampering the performance of Madagascar's budget and expendituremanagement system. To address these issues, the government has developed in2004 and 2005, inconjunction with all key development partners, a priority action plan for public finance reform. The main achievements encountered so far include: i)adoption o f a new organic public finance law; ii) introduction o f program budgetsto improve the presentation ofthe budget and its alignment with policy priorities o f the government as specified in the PRSP; iii)reinforcement o f the Treasury internal control systemby recruiting additional staff and improving the operational efficiency of  SCHEDULEF Page2 of 9 the "Brigade duTrCsor"; iv) simplification o fthe expenditure management process by integrating the functions o f "sous-ordonnateurs'l and credit managers; v) creation o f an internal control mechanism (IGF: General Finance Inspection) at the level o fthe Ministryo f Finance; vi) review o f the legal framework for the control institutions (IGF, Brigade duTrCsor, Auditor general) and implementation o f capacity buildingmeasures to improve their efficiency; vii) development and implementation o f a computerizedintegrated financial management system insix main treasuries, capturing the different phases o fthe expenditureprocess. The reinforcement o fthe Treasury internal control andthe implementationo f the integrated financial management system (IFMS) insix treasuries have improvedtimeliness and quality o ffinancial information. 4. The Auditor General has also cleared the backlog o f accounts and completed the examination o f the draft budget execution laws for the years 1998 until 2003. The oversight function o f Parliament has been strengthened through capacity building and training o f the Public Finance Committee. 5. While overall implementation progress o f the reform program i s encouraging, significant efforts remain to be done, including the followings: i)improvement o f budget execution rate in priority sectors; ii)reinforcement o f the capacity o f the line ministries in public financial management, especially in the implementation o f the new program budget structure; iii) strengthening o f cash management; iv) production o f the treasury accounts within the legal timeframe; and v) reinforcement o f control over State owned companies and national public institutions. The strategic coordination o f the multiple reforms and the monitoring & evaluation systemneedalso to be improved. To mitigate risks inpublic expenditure management, the World Bank, through the Governance and Institutional Development Program (PGDI), and a number o f donors continue to support govemment's public finance reforms reflected in its annual priority action plan for 2006. 6. Regarding the accounting profession, some positive developments have been noted over the last three years through assistance provided by the FIDEF ('&d&ration Internationale des Experts Comptables Francophones) and INTEC (Institut National des Techniques Economiques et Comptables). However, a number o f local accounting firms continue to operate below the international standards due to the lack o f proper auditing standards, clearly defined guidelines and procedures for systematic peer reviews, quality control mechanisms to harmonize methodology. To improve the capacity and the competitiveness o f local auditing firms, the following measures have been taken while auditing Bank/IDA financed projects: i)obligation for local auditors to enter into partnership with international accounting firms; ii)effective participation o f the international accounting firm in audit fieldworks and submission o f audit report jointly signed by the local and international audit firms. An accounting and auditing Report on the Observance o f Standards and Codes would be certainly helpful to identify clearly issues and actions to be taken to strengthen the capacity o f the accounting profession in Madagascar.  SCHEDULEF Page3 of 9 3. FinancialManagement RiskAssessment and Mitigation 7. The following table identifies the key risks that the project management may face, and provides the measuresto be taken to mitigate these risks: Risks Risk RiskMitigation Measures Condition of rating Negotiations, Board or Effectiveness Country Level The audit may not be conducted in Recruitment o f an international auditing Effectiveness condition. compliance with international firm acceptable to IDA to auditthe auditingstandardsdue to the weak project financial statements. capacity o f the accounting profession in Madagascar. Entity Level Project Level 2- CONTROLRISK _____ Budgeting L Accounting New activities under component 5-b M ' Review o f the Chart o f accounts andthe Effectiveness condition. to be implemented underthis models o f FMRs to reflect new activities additional financing are not and components to be implemented under reflected neither inthe current Chart this additional financing. Update o fthe o f accounts nor inthe current Administrative and Financial Manualto models o fFMRs. include these changes. Internal control The OPCI may not have adequate M Elaboration o fthe CAC Manual, and No. capacity to managethe funds organization o f users training to ensure allocated to finance the CAC consistent application o f procedures by operating costs. the OPCI (or the elected Commune) accounting staff. Carrying out regular internal audits to ensure the use o f funds for the purposes intended. No. Funds flow: Lack o f counterpart funds. M Use o fthe new Country Financing No. Parameters which allow IDA to fund 100% o fthe project costs. Auditing (See comments above regardingthe S (See comments above on audit). Effectiveness audit). Condition.  SCHEDULEF Page 4 of 9 4. Strengths and Weaknesses 8. The FID has strong experience in managing World Bank funds as it has been in charge o f implementing the Community Development Project as well as previous IDA-financed projects (cf. par. 23). The accountinghudgeting system i s adequate and the internal control procedures appropriate. It has also a qualified and trained accounting staff which is very knowledgeable with Bank procedures. However, to further strengthen the project financial management system, some measures need to be taken. The following table provides relevant measures to address main deficiencies identifiedinthe FID financial management system: Significant weaknesses Actions Date Responsible Due by 1- Chart of accounts not Review o f the chart o f accounts to reflect 06130106 FID: reflecting yet the new new componentslactivities eligible under Administrative and activities (in component 5-b) this additional financing to satisfy Financial Director. to be executed under this reporting requirements. additional financing. 2- Administrative and Update of the accounting manual o f 06130106 FID: Financial Manual not being procedures to facilitate adequate record Administrative and updated to include the new keeping o ftransactions, and satisfy Financial Director. chart o f accounts and the reporting requirements. models o f FMRsreflecting new activities (in component 5-b) to be implemented under this additional financing. 3- Weak capacity o f the OPCI Elaboration o f a CAC manual that will 07131/06 MDAT incharge ofthe management provide clear guidance to OPCI o f hnds to finance the CACs accounting staff, and organization of FID:General operating costs. users training prior to transfer o f funds to Director, OPCI. Administrative and Financial Director , Carrying out regular internal audits to Internal auditor(s). ensure the use o f funds for the purposes intended. 4- Inadequate number o f Recruitment of an additional internal 07131/06 FID: General internal auditors. auditor in conformity with Bank Director. procedures. 5- Auditors incharge of the review o fthe project accounts Recruitment of an accounting firm within the context ofthis acceptable to IDA to carry out the audit 0813 1/06 FID:General additional financing have not o fthe project accounts. Director. beenrecruitedyet.  SCHEDULEF Page 5 of 9 5. Institutionaland ImplementationArrangements 9. FIDis responsible for implementingthe project andmanagingthe credit funds. The overall project coordination i s undertaken by the FID General Directorate headed by a General Director. The General Director is assisted by six inter-regional directors and five managers respectively in charge o f financial management, operations, quality, capacity building and response to natural disasters. The Director o f Finance, at the central level, i s in charge o f the overall aspect o f the project financial management including budgeting, maintenance o f records and accounts for all transactions related to GD,consolidation and production o f the project financial statements and FMRs, administration of the designated account. The inter-regional offices manage disbursements from the sub designated accounts, maintain records and accounts for all transactions under their responsibilities send on a monthly basis the balance sheet to the General Directorate for consolidation and prepare financial and other basic information on project management/monitoring as required by the GD. Inter-communal public organizations, OPCIs, are in charge with managing support to Commune Support Centres under component 5-b (i) (Capacity building activities in support to the LDF). The OPCI will receive from the FID a specific allocation (per the budget agreed with the MDAT) to be used for the payment o f operating costs o f the Commune Support Centers (component 5-b (i)). The OPCIs will keep a simplified accounting system satisfactory to IDA and will prepare also financial and technical reports as required by the FID. 6. Staffing 10. The FID's accounting staff is qualified and have relevant experience to be completely successful in carrying out their functions. With regard to the OPCIs, the CAC Manual of Procedures will be prepared by the FID and the MDAT and specific training will be provided to strengthen OPCIs' accounting staff capacity and ensure consistent application o f procedures. These actions should be completedprior to credit effectiveness. 7. Budgeting 11. Budgeting arrangements for the project are described clearly in its Administrative and Financial Manual. The accounting software in place can adequately cater for the budgeting arrangements o fthe project. 8. AccountingPoliciesand Procedures 12. The computerized accounting system in place i s in compliance with generally accounting standards and IDA requirements, and capable o f recording and producing in a timely manner all financial reports required for managing and monitoring project activities. It operates on a decentralized basis with six inter-regional offices and uses standard book accounts (journals, ledgers andtrial balances) to enter and summarize transactions. Yet, the Chart of accounts needs to be reviewed to reflect new activities (in component 5-b) to be financed under this additional financing. This update should be completedprior to credit effectiveness.  SCHEDULE F Page6 of 9 9. InternalControlandInternalAuditing 13. The FID internal control system i s globally satisfactory: proper authorization to initiate and execute transactions, budgeting system, adequate measures for safeguarding assets. An Administrative and Financial Manual is also available. ' However this manual needs to be updated inorder to include the new Chart o f accounts, and the content and format o f new FMRs to be preparedunder this additional financing. 14. Inaddition, to ensure consistent application o f the procedures and efficient use o f funds by executing agencies (inter-regional offices, OPCI) the mission considers more appropriate the recruitment o f an additional internal auditor in conformity with Bank procedures. This recruitment i s currently underway and will be finalized prior to credit effectiveness. The close collaboration between internal auditors, the M&E inter-regional staff and the agents incharge o f components i s also highly recommended to strengthen the project internal control. The nature, extent and strength o f controls depend on factors such as the nature o f operation and the degree o f risk. All issues identified during internal audit should be addressed quickly to improve the project performance. 10. FundsFlow andDisbursementsArrangements 15. The flow of funds from IDA and the government i s presented as follows: (Credit) .t Project Implementation Unit (FID) (Designated account) 4 FID:RegionalDirectorates I I Communes/Communities/OPCI Contractors, Suppliers of goods and services  SCHEDULEF Page7 of 9 16. For the implementation of this project a designated account will be opened in a local commercial bank under conditions satisfactory to IDA. The account will be denominated inUS$. Disbursementsfrom the IDA credit will be deposited onthis account to finance the project. 17. Funds deposited in this account will be used to ensure timely payments o f all executing agencies (inter-regional offices, OPCI), contractors and suppliers o f goods and services. To facilitate the operations of FID's inter-regional offices and CACs, and to ensure prompt payment o f contractors and suppliers operating in the regions, the "designated account 90-day advance procedure" will be used. Under this procedure, FID will advance funds sums covering no more that 90 days estimated expenditures (in local currency) to regional FID accounts, as well as to accounts o f beneficiary communes, communities and OPCIs based upon submission o f satisfactory budgeted work plans. FID inter-regional offices and OPCIs will submit monthly expenditurereports indicating sources and uses o f funds, and accompanied by reconciled bank statements. FID will then aggregate this data, and prepare replenishment applications accompanied by the bank statement for the main designated account. All documents supporting executing agencies expenditures will be retained by these entities and made available for review by the FID internal auditor, Bank supervisionmission and external auditors. The project Manual o f Procedures and Administrative and Financial Manual describe indetails all procedural aspects regarding financial management (payments, replenishment, reporting, internal control) as well as the designated account 90-day advance procedure. 18. Method of Disbursement. The project would follow the transaction-based disbursements procedures (traditional mode) outlined inthe Bank's DisbursementHandbook. The use o f report- based disbursements could be possible thereafter if requested by the borrower and if the following criteria are met: i)the FM rating has been maintained at satisfactory level; and ii)the submissionof at least three quarterly satisfactory FMRsthat could be relied upon for purposes of disbursement. Detailed disbursement procedures will be described in the project's Administrative and Financial Manual. 19. Minimum of Application Size. The minimum application size for direct payments, to be withdrawn directly from the Credit Account, and special commitments is 20% o f the amount advanced to the related designated account. 20. Use of Statements of Expenses (SOEs). Withdrawals are to be made onthe basis o f SOEs for the following cases: P Contracts for works inanamount inferior to US$100,000; P Contracts for equipments andgoods inan amount inferior to US$100,000; P Contracts for consulting services, training by firms oflessthanUS$ 100,000; and P Contracts for consulting services, training by individual o fless than US$ 50,000 andall incremental operating expenses.  SCHEDULEF Page 8 of 9 21. DesignatedAccount. To ensure that funds will be available when needed, one designated account in US$ will be established in a local commercial bank under conditions satisfactory to IDA.This designated account inthe amount of US$4 million will be opened inthe name o fthe FID. This amount has been estimated to cover about four months o f expenditures and would be withdrawn from the credit account after effectiveness. 22. The designated account would be replenished on the basis o f documentary evidence o f payments required by IDA, made from the designated account, eligible for financing under IDA Credit. All SOEs supporting documentation will be kept by the executing agencies and made available for review by bank supervision missions and external auditors. 11. FinancialReporting 23. To monitor project implementation, the FID will produce the following reports that should be prepared incompliance with international accounting standards: (i)AnnualFinancialStatements. Theyinclude: (a) asummaryofsourcesandusesof funds (by components/project activitiedcredit category and showing all sources of funds); and(b) the Project Balance Sheet. (ii)FMRs. The FMRs includes financial reports, physical progress reports and procurement reports to facilitate project monitoring. The FMRs should be submitted to IDA within 45 days of the end o f the reporting period (six-monthly basis). The form and content o f FMRs have been agreed at negotiations. Models o f these reports will be presented inthe project's Administrative and Financial Manual. 12. Auditing 24. The project financial statements will be audited annually by an international private accounting firm acceptable to IDA, in accordance with International Standards o f Auditing and the new FM. The auditors will provide: i)a single opinion on the annual financial statements, stating whether the financial statements fairly present the financial transactions and balances associated with the implementation o f the project, and if the expenditures financed by the credit were appropriate; ii)a management report outlining any recommendations for the improvement of the internal control procedures. The auditors will be also required to carry out, on a sample basis, the audit o f subprojects, the direct transfers to Communes and funds allocated to finance CAC operating costs. The audit report will be submittedto IDA not later than six months after the end o f each fiscal year. The auditors should be recruited prior to credit effectiveness. The terms o f reference o f the audit will be reviewed by the financial management specialist o f the Bank/IDA to ensure the adequacy o f the audit scope drawing special attention to particular risk areas identified duringproject preparation or implementation.  SCHEDULE F Page9 of 9 Audit Reports DueDate 1. FID financial statements. Within six months after the end of each financial year. 2. Project consolidated financial statements. Within six months after the end of each financial year. 3. Selected Communes financial statements. Within six months after the end of each financial year. 4. Selected subprojects financial statements. Within six months after the end of each financial year. 5. Selected OPCI financial statements. Within six months after the end ofeach financial year. 13. Conditionality (i)EffectivenessConditionsRelatedtoFinancialManagement P Submission of updated Administrative and Financial Manual to IDA to reflect the new Chart o f accounts and models o f Project reports; and P Recruitment ofexternal auditors acceptable to IDA. (ii)FinancialCovenants P ProductionofProjectReports ona six-monthly basis. 14. SupervisionPlan 25. A supervision mission will be conducted at least once every year based on the risk assessment o f the project. The mission's objectives will include ensuring that strong financial management systems are maintained for the project throughout its life. A reviewwill be carried out regularly to ensure that expendituresincurred by the project remain eligible for IDA funding. The Implementation Status Report (ISR) will include a financial management rating for the component.  Madagascar at a glance 6/23/06 sub- POVERTYand SOCIAL Saharan Low- Madagascar Africa income Developmentdiamond' 2005 Population, mid-year (millions) 18.6 726 2,343 GNI per capita (Atlas method, US$) 290 600 510 Life expectancy GNI (Atlas method, US$ billions) 5.4 437 1,188 Average annual growth, 1999-05 T Population(%) 2.8 2.3 1.9 Labor force (%) 3.1 2.4 2.2 Gross primary Most recentestimate (latest year available, 199405) capita enrollment 1 Poverty ("7of population below nationalpoverty line) 71 Urban population (% of totalpopulation) 27 37 31 Lifeexpectancyat birth (years) 56 47 58 Infant mortality (per 1,000live births) 76 101 79 Child malnutrition ("7of childrenunder 5) 42 43 Access to improvedwater source Access to an improved water source (% of population) 31 58 75 Literacy (% ofpopulation age 154 68 60 61 Gross primaryenrollment (% of schooCagepopulation) 134 93 100 I I-. Madagascar Male 136 98 105 Low-incomegroup ~ Female 131 87 94 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1985 1995 2004 2005 GDP (US$billions) 2.9 3.2 4.4 5.0 Gross capital formatiorVGDP 8.5 10.9 24.3 22.4 Exportsof goods and services/GDP 12.2 24.1 32.6 25.6 Trade Gross domestic savings/GDP 0.3 3.6 7.8 7.7 Gross national savingdGDP -0.2 0.4 13.5 11.1 I T Current account balance/GDP -8.2 -8.4 -10.8 -11.3 Interest payments/GDP 2.1 Domestic 0.6 0.7 0.8 ----I Capital Total debt/GDP 88.2 136.2 79.5 70.3 savings formation Total debt service/exports 38.1 7.1 5.6 9.6 Presentvalue of debt/GDP 50.9 I Presentvalue of debt/exports 195.0 Indebtedness 1985-95 1995-05 2004 2005 2005-09 (averageannual growth) GDP 1.o 2.8 5.3 4.6 6.7 -Madagascar GDP per capita -1.8 -0.1 2.4 1.8 4.0 Low-incomegroup ~ Exportsof goods and services 4.4 0.8 1.5 8.1 11.9 STRUCTURE of the ECONOMY I (% of GDP) Agriculture 35 1 267 288 281 IndustN 133 9 2 160 159 Manifacturing 113 7 9 142 141 20 Services 51 5 641 552 560 0 -20 Householdfinal consumption expenditure 900 899 82 7 84 2 --- .40 General gov't final consumption expenditure 9 8 6 7 9 6 8 1 Importsof goods and services 205 31 7 492 403 GCF e G D P 1985-95 1995-05 2004 2005 (averageannual growth) Growthof exports and Imports(%) I Agriculture 2.2 2.0 3.1 2.5 Industry 1.o 2.7 6.5 3.0 40 Manufacturing 0.4 3.5 6.1 5.8 20 Services 1.o 2.8 6.0 6.1 0 -20 Householdfinal consumption expenditure 0.6 4.4 8.1 9.2 -40 Gross capital formation 1 7 104 57 6 2 3 ~- I Exports -Imports Note: 2005 data are preliminary estimates. The diamonds show four keyindicators inthe country (in bold)compared with its income-groupaverage. If data are missing, the diamond will be incomplete.   Madagascar PRICES and GOVERNMENT FINANCE 1985 1995 2004 2005 Domesticprices (% change) Consumerprices 49.0 14.0 18.4 ImplicitGDP deflator 10.4 45.2 14.3 18.3 Government finance ("7of GDP,includescurrentgrants) Current revenue 13.7 9.0 16.0 12.3 Currentbudgetbalance 7.0 -1.6 3.4 1.4 - I Overall surpluddeficit 1.o -7.9 -9.1 -8.7 I GDPdeflator *CPi I TRADE 1985 1995 2004 2005 (US$ mi/lions) Exportand import levels ( U S mill.) Total exports(fob) 291 566 997 7aa 2 . m T Coffee 22 59 47 26 Vanilla 44 41 140 34 1,500 Manufactures 42 296 737 671 Total imports(cif) 466 739 1,634 1,733 1,m Food 50 67 83 79 500 Fueland energy 85 ai 204 253 I Capitalgoods 9a 141 300 293 0 00 Export price index (2000=100) 104 119 176 125 69 01 02 03 04 05 Importpriceindex (2000=700) 72 107 103 106 Exports 8Imports Terms of trade (2000=700) 145 111 170 i i a BALANCEof PAYMENTS 1985 1995 2004 2005 (US$ millions) Current account balance to GDP (%) Exportsof goods and services 350 a03 1,423 1,291 0 Importsof goods and services 569 992 2,143 2,030 2 Resource balance -219 -1a9 -720 -739 4 Net income -112 -158 -79 -84 Net current transfers 98 ao 330 249 -8 Currentaccount balance -233 -267 -470 -568 8 Financingitems(net) 217 328 488 569 -10 Changes in net reserves 16 -61 -1a -1 -12 Memo: Reserves including gold (US$millions) 49 110 489 495 Conversion rate (DEC,local/US$) 132.5 853.6 1,871.a 2,005.7 EXTERNAL DEBTand RESOURCEFLOWS 1985 1995 2004 2005 (US$ millions) Composition of 2005 debt (US$ mill.) Total debt outstanding and disbursed 2,520 4,302 3,462 3,536 IBRD 28 12 0 0 IDA 316 1,110 2,269 2,485 F:59;: 23 Total debt service 150 5a 81 127 IBRD 3 5 0 0 IDA 3 15 27 48 Composition of net resourceflows Officialgrants 60 102 251 Officialcreditors 133 70 484 154 Private creditors 5 -4 -4 -10 Foreign direct investment (net inflows) 0 10 0 PoMolioequity (net inflows) 0 0 0 World Bank program Commitments 73 65 260 A- IBRD E Bilateral Disbursements 58 76 31 a 227 B. IDA D Other multilateral - F Private Principal repayments 2 11 10 30 C IMF --- ~ G Short-term Net flows 56 65 307 198 Interest payments 4 9 16 18 Net transfers 52 56 291 179 Development Economics 6/23/06   IBRD 34897 45