Madagascar - Third Poverty Reduction Support Credit (PRSC 3) Project

Document of The World Bank FOR OFFICIAL USE ONLY ReportNo. 36416-MG INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAMDOCUMENT FOR A PROPOSEDCREDIT INTHE AMOUNT OF SDR26.9 MILLION (US$40MILLIONEQUIVALENT) TO THE REPUBLIC OF MADAGASCAR FOR A THIRD POVERTY REDUCTION SUPPORT OPERATION June 14,2006 HumanDevelopment3 Africa Region This document has arestricted distribution and may beusedby recipients only inthe performance oftheir official duties. Its contents may not otherwise be disclosed without Bank authorization.  CURRENCYEQUIVALENTS (as ofJune 7,2006) Currencyunit = Ariary US$1 =2169 Ariary FISCALYEAR January 1-December 31 WEIGHTS AND MEASURES Metric System ABBREVIATION AND ACRONYMS AAA Analytical and AdvisoryActivities AAP Africa Action Plan ACM Civil Aviation Agency ADER Agency for the DevelopmentofRuralElectrification AEPG Water Supply Program AEPP Water SupplyProgram AES Water Supply inthe South AFD FrenchDevelopmentAgency AfDB African DevelopmentBank AGOA The African Growthand OpportunityAct ARMP Agence de RCgulationdes Marchts Publics APL AdjustableProject Loan APMF Maritime, PortsandRiverAgency AR RoadAuthority ATC Agreement on Textilesand Clothing AT1 African Trade InsuranceAgency ATT Agency for TerrestrialSupport NEAP NationalEnvironmentAction Plan BIANCO BureauIndependentAnti Corruption CAF Cost and freight CAPE SteeringCommitteefor EnterprisePromotion CAS CountryAssistance Strategy CBM CentralBank ofMadagascar CDE CommittedExpensesMonitoring CEM CountryEconomicMemorandum CFAA CountryFinancialAccountabilityAssessment CGDIS GeneralCommission for Developmentofthe South CHD Hospitalat district level CHRR Hospitalat regionallevel CHU CentreHospitalierUniversitaire CIF Cost insurance andfreight CIFL Interministerialcommitteeon Local Revenues CISCO School District Agency CM1 CourseMiddle CNFA NationalCenter for AdministrativeTraining CNLS ComitCNationalde Lutte Contre Le Sida CNN NationalCouncilfor Malnutrition COMESA CommonMarketfor Easternand SouthernAfrica CSLCC ConseilSupCrieurde Lutte Contrela Corruption CP CoursePreparatory CPAR CountryProcurementAssessment Review CPGU Cellulede Prevention et de Gestion des Urgences CPI ConsumerPriceIndex CPIA CountryPolicy and InstitutionalAssessment CRESED Credit for Strengtheningthe EducationSystem in Madagascar CROCC TechnicalWorking Groupon Anticorruption CSAs Agricultural Service Centers .. 11  CSB Centre de Santk Base CSLCC Anticorruption Commission DEA Directorate of Water and Sanitation DFID Departmentfor International Development DHS Demographic andHealth Survey DMFAS Debt Managementand Financial Analysis System DOTS Directly ObservedTherapy System DPT Diphtheria, Pertussis, Tetanus DTP Diphtheria, Tetanuaand Pertussis EA Environmental Assessment EBFs Extra Budgetary Funds EFA Education for All ENAM MalagasyNational School for Administration ENMG National School for Magistrates EPM Household Survey EPZ Export ProcessingZone EU EuropeanUnion F A 0 World Food Program FERHA Irrigation MaintenanceFund FCE Concessioningofthe SouthernRailway FID Community Development Fund FDI ForeignDirect Investment FDL Local Development Fund FMG Malagasy Franc FNE National Fund for Electricity FOB FreeOn Board FRAM Student-ParentAssociation FSAP Financial SectorAssessment FTI FastTrack Initiative FY Fiscal Year GDP Gross Domestic Product GNFS Goods and non-factor services GNI GrossNational Income GOM Government ofMadagascar GTZ GermanTechnical Cooperation Agency GUIDE One Stop Shop for Investment andEnterprise Development HASYMA Cotton Company HIPC Highly Indebted Poor Countries HR Human Resources IBRD International Bank for Reconstruction and Development ICA Investment Climate Assessment ICT InformationCommunication andTechnology IDA International Development Association IFC International FinanceCorporation IFMS Integrated Financial Management System IFMIS Integrated Financial Management Implementation System IGE General Inspectoratefor the State IGF General Inspectoratefor Finances IG2P Integrated Growth PolesProject IMCI-C Integrated Managemento f Childhood Illness IMF International Monetary Fund INSTAT National Institute for Statistics JIRAMA Electricity and Water Company JSA Joint Staff Assessment LCU Local Currency Unit MAP MadagascarAction Plan MAEP Ministryof Agriculture, Livestockand Fishery MBB Marginal Budgeting for Bottlenecks MCA Malagasy Challenge Account  MDG Millennium Development Goal MDRI Multilateral Debt ReliefInitiative M&E Monitoring and Evaluation MECIE National Environment Impact Legislation MEFB Ministry o f Economy, Finance and Budget MEMDEA Ministry of Energy andMining/ Departmentof Energy and Sanitation MENRS Ministry ofNationalEducationand Scientific Research MENSUP Ministry of Higher Education METFP Ministry o f Vocational and TechnicalEducationand Training MFA Multi-Fibre Agreement MFN Most FavoredNation Status Agreement MGA Malagasy Ariary MICTSL MadagascarInternational ContainerTerminal Service Ltd. MIGA Multilateral Investment GuaranteeAgency MINESEB Ministry ofBasic and Secondary Education MINSAN-PF Ministry ofHealth and Family Planning MMR Maternal Mortality Ratio MOH Ministry ofHealth MOU Memorandum of Understanding MSME Micro, Small and MediumEnterprises MTEF MediumTerm ExpendituresFramework MTPT Public Works and Transport NEAP National Environment Action Plan NER Net Enrolment Rate NGO Non-Government Organization NNP NationalNutrition Policy NPV Net PresentValue ONG Non-Governmental Organization ONE National Office o f Environment ONN Office Nationalde Nutrition OPBP Operational PolicyBank Policy ORE Regulatory Agency for Electricity PAEPAR Water Project PADR Action Plan for Rural Development PARP Budget SupportProgram for PovertyReduction PASEC International Surveysby FrancophoneAfrica PB Project Brief PC Rice Platform PCR Primary Completion Rate PDD District PlanDevelopment PDIS IntegratedDevelopment Program for Health PDRH Human ResourcesDevelopment Pian PDSI Integrated Health Development Program PEFA Public Expenditure and Financial Accountability PER Public Expenditure Review PGDI Governanceand InstitutionalDevelopmentProject PIP Public InvestmentProgram PNAEPA National water supply and sanitation program PPP Public Private Partnerships PRGF Poverty Reduction and Growth Facility PRM ProcurementResponsiblePerson PRS Poverty Reduction Strategy PRSC Poverty Reduction Support Credit PRSP Poverty Reduction Support Paper PSI Population ServicesInternational PSIA Poverty and Social Impact Analysis PTA Annual Work Program QMM QIT MadagascarMinerals RA Road Authority iv  RMF RoadMaintenanceFund RMSP Risk Management and SocialProtectionStrategy ROC Regional OperationsCommittee RWSS RuralWater and Sanitation Supply SACU SouthernAfrican Customs Union SADC SouthernAfrican DevelopmentCommunity SAPM NationalSystemof ProtectedAreas SBD StandardBidding Documents SDB Small DisadvantagedBusiness SDP Sector DevelopmentProgram SEECALINE Nutrition Project SGS GeneralInspectionSociety SIGFP IntegratedFinancialManagementSystem SIRAMA Malagasy Sugar factory SNDS NationalStrategy for the Developmentof Statistic STA Technical Secretariatfor Adjustment STI Sexually Transmitted Infection SWAP Sector Wide Approach SY Schoolyear SYGADE Debt ManagementSystem and Analysis TA TechnicalAssistance TCSP Technical Committee on SocialProtection TELMA TelecomMalagasy TPI Court of FirstInstance TSA Treasury SingleAccount TVET Technical andvocationaleducation andtraining UAT Technical SupportUnit UNCTAD UnitedNationsConferenceon Trade and Development UNDP UnitedNationsDevelopmentOrganization UNICEF UnitedNationsChildren's Fund U S United States USAID United States Agency for InternationalDevelopment VAT Value Added Tax VHF Very Highfrequency VPM Vice Prime Minister WASH Water, Sanitation and HygieneCommittee WB World Bank WE31 World Bank Institute ZAP PedagogicalAdministrativeZone V  Vice President Gobind Nankani CountryDirector James Bond Sector Director Yaw Ansu Sector Manager Laura Frigenti Task Team Leader Stefano Paternostro The PRSC Team includes Stefano Patemostro (Task Team Leader), Benu Bidani, Nor0 Aina Andriamihaja (Macroeconomics); Guenter Heidenhof, Slaheddine Ben-Halima, Emile Louis Rene Finateu, D.Randriamanampisoa, Gervais Rakotoarimanana, Sylvain Rambeloson, (Public expenditure management and governance); Sajitha Bashir, Patrick Ramanantoanina(Education); Anwar Bach-Baouab, Montserrat Meiro-Lorenzo (Health); Claudia Rokx, Anne M. J. Bossuyt (Nutrition); Christophe Prevost, Patrice Rakotoniaina(Rural water supply); SusanneHolste, Noroarisoa Rabefaniraka (Transport); BienvenuRajaonson (Environment); Sofia Bettencourt, Ziva Razafintsalama (Rural development); Nadine T. Poupart (Social protection); Ganesh Rasagam, Josiane Raveloarison (Integrated growth poles), Aline Coudouel (Monitoring and Evaluation) Sarah Keener (PSIA) Jan Walliser (Advisor) Andrianina Nor0 Rafamatanantsoa and Jenny Rahamefy (overall support) and Gilles Marie Veuillot (Legal). Elisabeth Huybens (EACDF) and Sanjay Pradhan (PRMPS) are the peer reviewers. vi  THE REPUBLICOF MADAGASCAR THIRD POVERTYREDUCTIONSUPPORT CREDIT TABLE OF CONTENTS I. Introduction .......................................................................................................................................... 1 I1. RecentEconomic Developments.......................................................................................................... 2 A. Macroeconomic Performance.......................................................................................................... 2 B. MediumTermoutlook ..................................................................................................................... 4 C. Debt Sustainability........................................................................................................................... 7 I11. A. Madagascar's Poverty Reduction Strategy...................................................................................... 8 B. The Government's Strategyfor ReducingPovertyandits Implementation.................................. Poverty inMadagascar..................................................................................................................... 8 C. 10 D. Donor CollaborationinSupportingthe Implementationofthe PRSP........................................... World Bank Country Assistance Strategy and Supportto the Implementation ofthe PRSP.........12 15 16 Improving Governance................................................................................................................................ 25 PRSC4........................................................................................................................................................ IV. Poverty Reduction SupportCredits Program................................................................................. 24 A. Public ExpenditureManagement................................................................................................... 25 B. D. Customs.......................................................................................................................................... C. Justice............................................................................................................................................. 33 Fighting Corruption........................................................................................................................ 32 35 E. Decentralization............................................................................................................................. 36 F. Training andCapacity Building..................................................................................................... 37 Providing Human andMaterial Security..................................................................................................... 38 A. Education....................................................................................................................................... B. Nutrition......................................................................................................................................... 39 C. 41 44 D. RuralWater Supply........................................................................................................................ Health............................................................................................................................................. 48 49 StrengtheningMonitoring andEvaluation ofthe PRSP.............................................................................. E. SocialProtection............................................................................................................................ 51 V. Credit ImplementationandRisks....................................................................................................... 52 A. B. Credit Sdministration..................................................................................................................... 52 EnvironmentalAspects .................................................................................................................. 53 C. Risks............................................................................................................................................... 53 Annexes Annex 1Policy andInstitutional ReformMatrix........................................................................................ 56 Annex 2 Letter ofGovernmentPolicy........................................................................................................ 70 Annex 3 Status of actions for PRSC3 Policy Matrix ................................................................................ 81 Annex 4 Progress in SupportingBroad-BasedGrowth.............................................................................. 88 Annex 5 Madagascar at a Glance................................................................................................................ 93 Annex 6 Madagascar KeyEconomic Indicators ......................................................................................... 95 Annex 7 Monitoring Indicators................................................................................................................... 97 vii  Boxes Box 1Madagascar's DevelopmentVision and Strategy............................................................................. 11 Box 2: Lessons Learned. Implementationof PRSC 1and PRSC 2 .......................................................... 13 Figures Figure 1: The Three Year PRSC Program.................................................................................................. 17 Tables Table 1: Selected Indicators ofReal Sector Activity. 1997. ............................................................. 2011 4 Table 2: Exports 2004-2005.......................................................................................................................... 5 Table 3 Financing Requirements2006-2011............................................................................................... 6 Table 4 Macroeconomic Framework2004-2011......................................................................................... 6 Table 5: Analytical andAdvisory Activities............................................................................................... 14 Table 6 Broad-BasedGrowth-Key Policies............................................................................................. 19 Table 7: Status of Indicative Triggers for PRSC 3...................................................................................... 20 Table 8: Key Development Outcomes 2003-2006...................................................................................... 23 Table 9: Prior Actions for PRSC 3 andIndicative Triggers for PRSC 4 .................................................... 24 Table 10: Key Policy and InstitutionalReformsinGovernance since July 2005....................................... 25 Table 11:ExpectedResults ofthe EFA Program....................................................................................... 41 Table 12: Key IntermediateOutputsof the Nutrition Program................................................................... 43 ... Vlll  THE REPUBLICOF MADAGASCAR THIRD POVERTYREDUCTION SUPPORT CREDIT CREDIT SUMMARY Borrower: The Republic o fMadagascar Amount: SDR26.9million (US$40 millionequivalent) credit Terms: StandardIDA terms: 40-year maturity Description: Inline with the Bank's Country Assistance Strategy for Madagascar, a series of single tranche Poverty Reduction Support Credits (PRSCs), provided in the form o f budget support, is envisaged to support implementation of two of the three main axes of the PRSP: governance andproviding human and material security. PRSC 3 support to the strategic axis o f governance aims at consolidating and deepening reforms commenced with PRSC 1 and PRSC 2. This includes assistanceto the Government in continuing to implement its 2005 Priority Action Plan for public expenditure management reforms, and developing and implementingits 2006 Priority Action Plan. These reforms include improving the alignment o fthe 2006 budgetto the priorities of the PRSP, the reform o f the Treasury, the installation of a transitional integrated financial management system, taking steps to make the new procurement code operational, and the preparation o f draft budget execution laws (Projet de loi de rkglement). Following the operationalization o f the Anti-Corruption Agency (BIANCO), PRSC 3 deepens support for the Government's anti-corruption agenda. It also supportsthe implementation o f a reform program for customs. PRSC 3 consolidates support to the strategic axis o f providing human and material security, by supporting the Government's Education for All Agenda and improving service delivery in nutrition, health and rural water supply. A very large increase in primary school enrolments has been supported by key policy reforms which have included a continued increase inthe share o f the education budget, continued measures to decrease education costs for poor households starting with the school year 2002/2003 (suppression o f school fees, provision o f learning materials to all primary students), actions to increase access for students (through school construction, salary compensation for teachers paid by parents, teacher recruitment) and reinforcement o f management capacity at central and decentralized levels. PRSC 3 continues to support policy and institutional reform in the nutrition sector, following the establishment o f the National Council for Nutrition and the establishment of its secretariat (Office National de Nutrition). In rural water, PRSC 3 supports the implementation o f the water and sanitation strategy for all. In health, following the national policy on health and the development o f a Medium Term Expenditure Framework, the PRSC supports improvements in sector budgetingand fmancing as well as improved access and quality o f service delivery. An IDA-supported Technical Assistance Credit (Good Governance and Institutional Development), approved in November 2003, is assisting the ix  government in putting in place the systems to strengthen budget management, and finance technical assistance and capacity buildingneeds. The Country Financial Accountability Assessment (CFAA, 2003), the Country Procurement Assessment Report (CPAR, 2003), and the 2005 Public Expenditure Review (PER) provide the analyticalunderpinningsfor the public sector reform agenda o f the PRSC series. Updatedanalysis for the Educationfor All underpinsthe education reforms. A Health Sector Note has provided the foundations for the health policy reforms. Benefits: The proposed operation is the thirdPRSC inthe series and will continue to contribute to Madagascar reaching its development goals. The reforms supported will strengthen the institutional infrastructure neededto improve the public sector's capacity to carry out its role more effectively. Improved delivery o f public services is essential if the Government is to reach its goals for poverty reductionand improve the quality of life in Madagascar. In addition, strengthened monitoring and evaluation will lead to an enhanced accountability and results focus. Risks: The implementationof this operation continues to be exposed to risks, many of which were already identified in previous PRSC operations. The main risks include: (i) vulnerability to external shocks, particularly cyclones and changes in global commodity prices, such as oil and rice; (ii) political issues, particularly in an election year, present a risk; (iii)maintaining a stable macroeconomic environment, which is critical to the successful implementationo fthe PRSC and is a core area o f focus of the future poverty reduction strategy; (iv) the implementation of public finance reforms poses challenges and risks negatively impacting service delivery (v) capacity constraints also present significant risks to the effective implementation of the poverty reduction strategy. The Government and Bank are undertaking several measuresto mitigate risk.The Bank has finalized a Risk Management and Social Protection Review to assess risk prevention and mitigation strategies, and has modified procedures for its Community Development Project to rapidly respond to emergencies. On political issues the Bank continues to focus on transparency and anti-corruption, with the PRSC and the Governance and Institutional Development Project beingthe main instruments.On the macroeconomic environment and overall governance, the Bank is continuingto support reforms in the areas of public financial management and capacity building through ongoing investment operations, the PRSC series and the Governance and Institutional Development project, its AAA programs and W B I capacity buildingsupport. The Bank will also continue to- coordinate its support in these areas with the IMF in the framework o f the new PRGF program. On capacity constraints, the donor community has intensified efforts at coordinating assistance programs, harmonizing disbursements and procurement procedures and developingcommon programmatic approaches around the PRSP. The donor community is also increasing its level oftechnicalassistance and support for capacity building. Estimated Disbursement: SDR 26.9 million (US$40 million equivalent) will be disbursed in a single tranche following effectiveness. X  ProjectIDNumber: PO96102 xi   THE REPUBLICOFMADAGASCAR THIRDPOVERTY REDUCTIONSUPPORT CREDIT PROGRAMDOCUMENT I.INTRODUCTION 1. This Program Document proposes a third Poverty Reduction Support Credit (PRSC) for Madagascarfor US$40 million. This operation follows the first two PRSC operations approved by the Board on July 20, 2004, and July 12, 2005. It continues the implementationof the three-year policy and institutional reform agendaas first laid out inthe PRSC 1policy matrix. This operationis consistent with the Bank's Country Assistance Strategy (CAS) to support the implementation of the Government's Poverty Reduction Strategy Paper (PRSP). The objective of Madagascar's PRSP is to promote rapid and sustainable developmentto reduce poverty by half inten years. To attainthis objective, the PRSP lays out three key axes: (i)improving governance; (ii)promoting broad based growth; and (iii)providing humanandmaterial security. A cross-cuttingpillar ofmonitoring and evaluationunderpinsthe strategy. 2. The PRSC program for the first three PRSCs focuses explicitly on the strategic axes of governanceand humandevelopment, and includes specific policy actionsin these areas. The PRSC does not include any specific policy actions on the other PRSPpillar of broad-basedgrowth. While there is a policy dialogue in these areas as part of the PRSC, the Bank support for growth is through its significant portfolio of ongoing investment projects in infrastructure, environment, mining, rural development, the Integrated Growth Poles project and a new Irrigation and Watershed project being presentedat the Board inFY07. 3. The implementationof the programsupported under the first two operations (PRSC 1and PRSC 2) is satisfactory and the indicative triggers for PRSC 3 have been fulfilled. The program document reviews the progress made in implementing the poverty reduction strategy, with particular emphasis on the areas of focus of PRSC support (governance and human development). The reform program supported under PRSC 3 continues to assist the consolidation of reforms first commenced with PRSC 1 in fighting corruption, improving public expenditure management and customs, and in implementingthe Educationfor All and nutrition programs. Inaddition, reformsto expandaccess to safe drinking water, improve healthoutcomes andprovide protection from shocks have also advanced. 4. In 2005 Madagascar continued to make satisfactory progress in implementing its poverty reduction strategy, despite another difficult year marked by exogenous shocks. Madagascar has continuedto maintain its focus on implementing its poverty reduction strategy, with good results evident particularly in the implementationof the roads program, Education for All, nutrition and health reforms. However, addingto an alreadydifficult 2004 with two devastatingcyclones, in2005 Madagascarsuffered from the increase of world petroleum prices and the financial crisis of the electric parastatalJIRAMA which has had a disruptive effect on economic activity as production was negatively affected by the ensuingpower cuts and subsequent tariff increases. The Governmenthas respondedto this situation and has put in place a recovery plan for JIRAMA that is now being implemented. Inflation has slowed considerablyto 11.4 percent in2005 from a rate of 27 percent in2004 and the price of rice has started to 1  decline since March 2005 and has now stabilized. Measures to enhance exchange rate stability and secure an adequate level o f internationalreserves were also successful inensuringgreater stability ofthe market- determinedexchangerate 5. GDP growth in 2005 is estimated to be at 4.6 percent compared to the 5.3 percent recorded in 2004. The main sources of growth for 2005 have beenthe agricultural sector, particularly with higher rice production, tourism and public investment programs. Growth projections forecast an average growth rate of over 5 percent over the 2007-2010 period. After having reached the Heavily Indebted Poor Country (HIPC) Initiative Completion Point in October 2004, Madagascar will now benefit from the G8 Multilateral Debt Relief Initiative (MDRI), with significant debt relief and improved prospects to maintain sustainable debt levels in the medium term. Madagascar is also a recipient of the US Millennium ChallengeAccount (was the first country to become eligible). 6. Movingforward, the Government of Madagascar is in the processof elaboratingits second- generation poverty reduction strategy (called the MadagascarAction Plan MAP) which will be - completed over the course of this year. The Bank's new CAS for FY07-11 is currently under preparation and will serve as the Bank's program of support to the implementation of the MAP. It is expectedthat the CAS will be presented to the Board in January 2007 and that it will includethe proper mix of instrumentsbetween investmentand budget support. Inparticular, the CAS will outline the focus of the future PRSC series which will be the core element ofthe Bank's financial supportto the MAP. 7. A fourth PRSC that will be fully aligned with the first three PRSCs is proposedfor July - - 2007. The PRSC 4 will bridge the time-lag betweenfinalizing the MAP and the CAS and designingthe future PRSC series. It will ensure continued annual PRSC financing to Madagascar's poverty reduction efforts and will be fully harmonizedwith other donors' annualsupport. 11. RECENTECONOMICDEVELOPMENTS A. MACROECONOMIC PERFORMANCE 8. The macro-economic environment in 2005 was marked by several shocks, including an increase in world petroleum prices and a financial crisis at the electric parastatal, JIRAMA, which disrupted economic activity through power cuts and subsequent tariff increases. These shocks caused a reduction in the economic growth projections for 2005 to 4.6 percent. Growth came largely through improved performance in agriculture, especially higher rice production, higher tourism receipts, and continued public investments. Growth in the textile sector stagnated with the phasing out of the Most Favored Nation Status agreement (MFN). The textile sector is in a consolidation phase, with some closures, and some re-positioning to continue to benefit from low labor costs. Tourism arrivals in 2005 were 21 percent higher than in 2004. Growth in 2006 is projectedto be under 5 percent, with slower agricultural growth than in2005, due to the rain shortfalls inthe early part of the year which are likely to impact the rice harvest. 9. Despitesignificant inflationary pressures,inflationmoderated to 11.4 percent at year end in 2005 from a high of 27 percentat year end in 2004 linked to a tight monetary policy. Rice prices, which rose sharply from late 2004 through February 2005, started declining after March 2005 and have stabilized at around 900-1000 Ariary/kilo for local rice. Higher producer prices which gave a positive incentiveto farmers have contributedto higherlocal production andclear signals by Governmentto leave the rice market to the private sector have ensured that adequate rice imports were available inthe market during the lean season. The Government also reducedthe import taxes on rice to zero inJuly 2005. As noted above, world petroleum prices increased dramatically, further exacerbating inflationary pressures. 2  The Government's monetq policy was tight, with broadmoney increasingby only 2.8 percentyear-on- year in December 2005 and yields on Treasury bills increased from 17.4 percent at year end in 2004 to 18.6 percent in 2005. Year-on year inflation at end-April 2006 has declined further to 10.4 percent. Overall, higher than expected oil prices in 2006, are expected to result in inflation of around 11 percent for the year 2006 (at year end). 10. The measures adopted to ensure exchange rate stability and competitiveness,and secure an adequate level of international reserves were broadly successful with the market-determined exchange rate exhibiting greater stability in 2005. Foreign reserves also increased to 2.9 months of imports by year end in 2005 up from 2.8 months a year earlier. The guidelines adopted by the Central Bank for intervention in the foreign exchange market with the aim of directing Central Bank (BCM) interventionsto achieving its foreign assets objectives and at dampening sharp swings that would create uncertainty were broadly followed. The BCM has also received further technical assistance in exchange rate management from the IMF in early 2006. The continuous inter-bank foreign exchange market with an electronic trading system is functioning well, providing increased information to the operators and contributing to reducingthe volatility of the exchange rate. 11. The electricity parastatal's (JIRAMA) structural and financial difficulties had a negative impact on growth in 2005, but a recovery plan is now being implemented. JIRAMA presented this financial recovery plan inJanuary 2006 and receiveddonor support for its implementation.As part of the plan, JIRAMA has implementedtwo tariff increases for electricity of 30 percent and 35 percent in July and November 2005 respectively to bring tariffs more in line with production costs. Further tariff increases of 10 percent for electricity were implemented in April 2006. Measures to improve the efficiency of JIRAMA are also under implementation, as are measuresto reduce the dependenceon diesel generated electricity. JIRAMA is currently operating under a management contract which is due to terminate in April 2007. The Government has committed to a longer-term public-private partnership solution inthe form of an affirmage for JIRAMA after the current managementcontract is completed. 12. However, significant revenueshortfalls in customsand tax collections, linkedto weaknesses in administration, have led to a decline in the share of tax revenues in GDP from 10.9 percent in 2004 to 10.1 percent in 2005. The persistent problems in revenue mobilization have hampered the Government's ability to implement its ambitious poverty reduction strategy, with mid-year expenditure cuts implemented to maintain overall fiscal discipline. In 2005, year-end expenditure overruns also highlighted problems of expenditure management, and the Government is currently undertaking an audit of the expenditure commitment process, which will form the basis for improvementsto the system (see Section N A for a detailed discussion of the public expenditure reform program). The Government is implementing a customs reform program (see Section N, D for the details of the status of the reform program). 13. Overall, the macroeconomic situation remains fragile, especially as revenue mobilization remains weak. This is due to long term structural problems which the Government is committed to tackling, and the PRSC is supporting reforms to strengthen fiscal management. Given that achieving results is linked to deep institutional reforms, the reform program requires sustained engagement and support. The IMF has concluded discussionson a new Poverty Reduction and Growth Facility (PRGF) arrangement with the Government, and the new program is expectedto be presented to the IMF Board in July 2006. 3  B. MEDIUM TERMOUTLOOK 14. Despite adverse external shocks, growth has remained at respectable levels after the 2002 crisis and is expectedto remainat over five percentin the medium term. After a sharp decline of 13 percent in2002, growth rebounded to 9.8 percent in 2003, was 5.3 percent in2004 and is projected at 4.6 percent in 2005. The macroeconomic projections forecast an average growth rate o f around 5.6 percent over the mediumterm (2007-2010). Table 1: Selected IndicatorsofRealSector Activity, 1997-2011 1997- 2007- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 GDP growth 4.6 -12.7 9.8 5.3 4.6 4.7 5.6 5.6 5.6 5.6 5.6 5.6 Primary 2.5 -1.3 1.3 3.1 2.5 2.1 3.1 3.2 3.2 3.2 3.2 3.2 ofwhichagriculture 1.8 0.8 2.6 3.5 4.5 2.6 3.5 3.5 3.5 3.5 3.5 3.5 Secondary 5.8 -20.7 14.5 6.5 3.0 4.8 5.4 5.5 5.5 5.5 5.5 5.5 ofwhichEPZ 22.9 -40.0 76.0 25.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ofwhich mining -5.5 -34.0 10.0 7.7 4.4 3.7 5.0 5.0 5.0 5.0 5.0 5.0 Tertiary 5.3 -15.0 10.6 6.0 6.1 6.2 6.9 6.9 6.8 6.9 6.9 6.8 ofwhichconstruction 10.1 -15.1 30.0 29.0 18.8 20.9 17.5 17.0 15.0 15.0 13.0 15.5 of whichpassenger transportation(tourism) 11.2 -35.4 13.0 6.3 7.4 7.8 7.0 7.0 7.0 7.0 7.0 7.0 ofwhichtelecom. 9.3 -5.7 8.4 5.0 5.3 5.0 6.5 6.5 6.5 6.5 6.5 6.5 Source: Ministryo fFinanceand IMF Staffprojections, May 2006 15. The main sources of growth include tourism, mining, constructionand, most importantfor the poor, improvedgrowth prospects in agriculture. The EPZ sector is not expected to grow due to the impact ofthe expiration ofthe MFA. Tourism and relatedactivities are expectedto continue to grow further given the planned private investmentinhotels and the increasing number of tourists. Inmining, the recently approved ilmenite miningproject financed by Rio Tinto inthe Fort Dauphin region is under implementation. 16. Agriculture is projected to sustain the good performanceinitiatedin 2003 in the medium- term, with an annual growth rate of over 3 percent. Agriculture grew by about 4.5 percent in2005. The increase in producer prices in rice in 2004 provided incentives for producers which contributed to increased rice production. Growth in 2006 is projected to be slower, due to rain shortfalls, which has affected agricultural production. Overall, the implementation of the irrigation and roads program is designedto relax the constraints facing rural producers and continue to leadto improved growth prospects inthe sector, with reduced vulnerability to natural shocks. Thus, the improvedperformance is expected to be sustainedover the mediumterm with the emphasis on rural development inthe Government's vision "Madagascar Naturellement" (see Box 1) and with investments under the proposed IDA Irrigation and Watershed Management project and the Millennium Challenge Account program. 17. Investment levels needed to generate this growth are expected to average just under 23 percent of GDP and this is expected to be driven mainly by an increase in private investment. 4  Private investment in2005 was over 12 percent, compared to an average of 8.1 per cent of GDP between 1997 and 2001. Private investment is expected to average 12.4 percent of GDP over the 2007-11period. Foreign direct investment (FDI) is increasingand reached 1.9 percentof GDP in2005, and is projectedto increase to over 3 percent of GDP in2010. Investment intourism and mining and the investmentrelated to the implementationof the management contractsininfrastructure(airports, ports, electricity and water) will give impetusto an increase inFDI. 18. Exportsare projected to grow at over 6 percent per year over the forecast period. In2005, with the expiration of the Multi-Fibre Agreement, textile exports were almost of the same value as in 2004, and the value of vanilla exports was significantly lower due to the collapse of world vanilla prices. But tourism exports are expected to be higher. In the medium term, export growth is likely to come throughtourism, miningand a more diverse range of agricultural products. Export(Fob SDR millions) Textiles' Mining Shrimp Vanilla Total 2004 268.3 8.9 68.47 94.8 669.1 2005 251.9 10.6 50.00 27.4 569.0 In%ofTotalExports 2004 40.10 1.33 10.23 14.17 65.83 2005 I 44.27 1.86 8.79 4.82 59.74 Source:CentralBank of Madagascar and World Bank StaffMay 2006 'Includes EPZ 'Chrome and graphite 19. In the medium term, the balance of payments is projected to improve with the level of internationalreserves reaching the equivalent of 3.1 months of GNFS imports in 2011 higher than the 2004 levelof 2.8 months.Along with an improvementof the capital and financial account due to the net increase in FDI, the current account balance deficit, including grants, is projectedto decrease steadily from 10.8 percent of GDP in2005 to 10.1 percent of GDP in2011. 20. Government expenditures are expectedto average over 21 percentof GDP over the forecast period,with capitalexpenditures averaging over 10 percent of GDP versus 7.4 percent of GDP for the 1997-2001 period. Government expenditures on capital reflect the significant investments inroads, in irrigation and the planned investments under the Bank's IntegratedGrowth Poles Project on energy, water and sanitation investment in Nosy Be as well as additional infrastructure around the EPZ and information communicationandtechnology (ICT) parkso fAntananarivo. 21. Overall, foreign assistance, includingassistance under the enhanced HIPC and the MDRI, plays an importantrole in macro management and povertyreductionin Madagascar.The financing requirements shown in Table 3 are met through significant donor assistance, in the form of project and budget financing, and improved revenuemobilization. The Government is committed to implementinga program to increase tax revenues to support its development objectives and revenue mobilization is expected to reach 13.4 percent of GDP in 2011 up from 10.1 percent of GDP in2005. To this effect, the Government is implementingan ambitious customs reform program, which is finally beginning to show results (see section IV D). 5  Table 3 FinancingRequirements2006-2011 (% of GDP unless otherwise indicated) 2004 2005 2006 2007 2008 2009 2010 2011 Financing 5.7 4.3 -38.7 5.7 5.3 5.2 5.1 4.8 Foreign (net) 6.4 3.8 -35.7 5.0 4.5 4.4 4.3 4.3 Drawings 7.1 4.5 6.0 5.4 4.8 4.7 4.6 4.5 Budget 1.8 1.6 1.2 1.1 1.o 1.o 1.o 1.o Project 5.3 2.9 4.8 4.3 3.8 3.7 3.6 3.5 Amortization due 1 -2.3 -1.8 -41.7 -0.4 -0.3 -0.3 -0.3 -0.1 of which MDRIassistancefrom IDA -34.6 o f which MDRIassistancefrom A D B -6.0 Change inexternalarrears 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 External debtrelief 1.6 1.1 0.0 0.0 0.0 0.0 0.0 0.0 Domestic (net) -1.0 0.5 -3.1 0.6 0.8 0.8 0.8 0.5 ofwhich: Bankingsystem -2.6 -1.1 -3.1 0.4 0.6 0.6 0.6 0.3 of which MDRIAccount -2.8 0.3 0.3 0.2 0.2 0.2 Non-banking System 1.2 0.0 0.2 0.2 0.2 0.2 0.2 Privatizationreceipts 0.4 0 0.0 0.0 0.0 0.0 0.0 0.0 Memorandum items: NominalGDP (inbillions o f ariary) 8,156 10,095 11,795 13,722 15,686 17,580 19,513 21,664 Resourcesfreed by MDRIdebt relief 0.6 0.8 0.8 0.8 0.8 0.8 IMF 0.3 0.3 0.2 0.2 0.2 0.2 IDA 0.3 0.5 0.5 0.5 0.5 0.6 A D B 0.1 0.1 0.1 0.1 0.1 0.1 Sources: Ministryo fEconomy, Financeand Budget and Fund staff estimatesand projections, May 2006 Note: 'After MDRIrelieffrom 2006 onwards. 2006 numbersreflect accountingofMDRI. Table 4 MacroeconomicFramework2004-2011 ("hofGDP,unless otherwise indicated) 2004 2005 2006 2007 2008 2009 2010 2011 GDP Growth (% change) RealGDP growth 5.3 4.6 4.7 5.6 5.6 5.6 5.6 5.6 Consumer Price Index (period average) 13.9 18.4 11.2 9.9 8.0 6.0 5.0 5.0 Consumer Price Index (end ofperiod) 27.3 11.4 11.3 9.0 7.0 5.0 5.0 5.0 Investment 24.3 22.5 21.8 22.3 22.5 22.7 22.9 23.2 Government 12.5 10.3 11.5 10.7 10.4 10.3 10.2 10.1 Non-Government 11.8 12.3 10.3 11.5 12.1 12.4 12.7 13.1 Central GovernmentAccount Total Revenue(excluding grants) 12.0 10.9 11.7 11.9 12.4 12.9 13.4 13.8 of which: Tax revenue 10.9 10.1 11.0 11.5 12.0 12.5 13.0 13.4 Grants 8.2 5.7 49.5 4.2 3.9 3.9 3.8 3.7 Total Expenditure 25.1 21.2 21.9 21.5 21.4 21.7 22.1 22.2 Current Expenditure 12.6 11.0 10.4 10.8 11.0 11.4 11.8 12.1 Capital Expenditure 12.5 10.3 11.5 10.7 10.4 10.3 10.2 10.1 Domestic Balance -2.3 -2.2 -0.9 -1.7 -1.7 -1.7 -1.6 -1.4 Overall balance(commitment basis, excludinggrants) -13.9 -10.1 -10.6 -9.8 -9.2 -9.0 -8.9 -8.6 Overall balance(commitment basis, including grants) -5.7 -4.3 38.7 -5.7 -5.3 -5.2 -5.1 -4.8 Tradebalance Exports f0.b. 22.9 16.7 15.4 15.3 15.2 15.0 14.8 14.7 Imports c.a.f 39.0 33.4 30.4 30.6 30.0 29.6 29.0 28.5 Current Account (excluding grants) -13.1 -12.1 -11.6 -11.4 -11.1 -11.o -10.7 -10.6 Current Account (including grants) -9.3 -10.8 -10.5 -10.7 -10.5 -10.4 -10.2 -10.1 Gross oficialreserves (in months of imports ofGNFS) 2.8 2.9 2.9 3.0 3.0 3.0 3.0 3.1 Sources: Ministry o fEconomy, Financeand Budget and Fundstaff estimatesand projections May 2006 6  C. DEBTSUSTAINABILITY 22. Madagascar attained the Heavily Indebted Poor Countries (HIPC) completion point in October 2004, and is subsequently benefiting from debt relief under the Multilateral Debt Relief Initiative (MDRI).Madagascar's Net Present Value (NPV) of externaldebt at end-2004, after assuming full delivery of HIPC debt relief, was projected at about 186 percent of exports at the time of HIPC completion point'. Most Paris Club creditors have also granted bilateral debt relief beyond HIPC that together with the recently approved MDRI would further reduce the ratio to about 75 percent by end- 2006. 23. An assessment of Madagascar's riskof debt distresswill be presented inthe upcomingjoint IMFDDA DSA under the LIC framework. Although work on the DSA is still ongoing the main analytical features are presentedbelow. 0 Under the baseline scenario, Madagascar's external debt indicators remain well below the thresholds throughout the projectionperi0d.3'~The debt indicators drop sharply (by 50 percent) in2006 as result of the MDRI.After the initial decreasedueto the delivery ofMDRI, the debt burden indicators exhibit a hump reflecting relatively high new borrowing (albeit in concessionalterms) to finance needed investment expenditures. Given the highly concessional nature of the existing debt and new borrowing; the debt service ratio is well below the threshold level throughout the period but has a slightly rising trenddueto the accumulationofnew borrowing. 0 External debt indicators could deterioratewith inappropriatepolicies, and/or if confronted by adverse shocks Debt burden indicators deteriorate under most stress tests, but cross the indicative thresholds (although declining gradually towards the end ofthe period) only under the "most extreme stress tests''. 24. In conclusion,the debt situation seems sustainable but would be importantlyinfluenced by policies. Given the macroeconomic framework, the debt situation in Madagascar appears sustainable. However there is need for good implementation of policies and also a need for careful monitoring of borrowing policies and export performance. Given the forward looking nature of sustainability, the stress tests point to the debt becoming vulnerable to shocks to GDP and particularly to exports. The latter i s critical given the risks to Madagascar's exports. The termination of the ATC and AGOA renders exports highly vulnerable given the concentration of exports in textiles and clothing. The baseline projections assume that structural weakness inthis sector will be somewhat offset by a positive response to the large depreciation which has taken place in 2004 and from the increased exports expected from mining. Additional borrowing or borrowing at anything other than nonconcessionalrates could impose a burden for future debt servicepayments which would come due should exports weaken further. 25. Debt Data Management. The authorities have undertaken steps to improve debt data management. All the loans for which the Central Bank andthe Ministry of Financewere responsiblehad ReportNo29984-MG. The final results o fthejoint IMFNorldBank DSA will be available inJuly 2006. Madagascar is rated as a mediumperformer with regard to its policies and institutions according to the Bank's Country and Policy Institutional Assessment (CPIA) Index. As a mediumperformer, the indicative thresholds relevant for Madagascar are: (i) 150 percent for Net Present Value (NPV) o f debt-to-exports, (ii) percent for the 40 NPV o fdebt-to-GDP and (iii) percent for the NPV o f debt to fiscal revenues. The relevant debt service 250 thresholds are (i)20 percent o f exports and (ii) 30 percent o f revenues. Madagascar's risk o f debt distress is assessed inrelationto thesethresholds. The baseline scenario is built on key macroeconomic assumptions, the implementation o f sound macroeconomic and structural policies and external financing inhighly concessional terms. 7  been entered into the UNCTAD's (DMFAS) new database system (SYGADE) and an integrated data management system will be established between the Central Bank and the Ministry of Finance. In addition, the authorities have contacted relevant international agenciesto buildcapacity,on debt analysis. 111. MADAGASCAR'S POVERTYREDUCTIONSTRATEGY A. POVERTY INMADAGASCAR 26. Between1970and 2001, per capitaincomein Madagascar declined from US$409to US$257, and as a consequence poverty increased, especially during the 1980s. The long economic decline impacted adversely on people's quality o f life as demonstratedby the low levels o f many social indicators and access to basic utilities. With the resumption of sustained growth duringthe period 1997-2001, there was some progress in poverty reduction, but it was limited to urban areas. The results of the 2004/5 household survey have recently been released and this section presents the updated poverty profile based on this survey as well as trends inindicators wherever possible. 27. In 2004, the overallincidenceof povertystands at 72.1 percent, significantly lower than the 2002 crisis highof over 80 percent, but still higher than the 2001 poverty rate of 69.7 percent. The preliminary analysis from the 2005 household survey shows a continuation o f this trend, with the overall poverty rate declining to 68.7 percent. In2004, the intensity of poverty, which is sensitive to the distance o fthe poor from the poverty line, has declined from its 2001 level o f 39.8 percent to 34.8 percent in2004. The distribution o f income has also improved with the Gini coefficient declining from 0.468 to 0.385, with the declines mirrored inbothurbanandrural areas. 28. Poverty in Madagascar remains predominantly rural with 77 percent of the rural population being poor in 2004, the same levelas in2001, compared to 54 percent in urbanareas in 2004 higher than the 2001 levels of 44 percent. The preliminary 2005 household survey shows that rural poverty incidence is decreasing with a rate in rural areas o f 73.5 percent and urban poverty decreasing to 52 percent. This might be the result o f many factors: greater emphasis on rural development, the accelerated implementation of the roads program, and the higher rice prices which gave incentives to rural farmers. Another potential factor is that the nature o f the economic shocks (strong depreciation, high international oil and rice prices) in 200415 which affected the richer segments of society more adversely. 29. Education outcomes have improved between 2001 and 2004, with the percentage of the population 6 years and older without any education declining from 48 percent to 35 percent. Literacy rates remain different across urban and rural areas. While one in two individuals 15 years and older in rural areas is literate, about four in five in urban areas are literate. With the implementation o f the Government's Educationfor All program, which included the abolition of school fees, recruitment of teachers inrural areas, re-construction o f school establishments, payment o f FRAMteachers' salaries and distribution o f materials and supplies, there has been a dramatic increase in enrolments, with primary net enrolment rates increasing by 20 percentage points between 2001 and 2004. While the expansion in education has beenpro-poor, there remains a small difference inenrolment rates across quintiles, with the net primary enrolment rate for the poorest quintile at about 81 percent, in contrast to the richest quintile where the net primary enrolment rate is 91 percent. The differences are sharper at the secondary level, with the net lower secondary enrolment rate varying between 7 percent for the poorest quintile to 41 percent for the richest quintile. There are limited gender differences in enrolment rates, and also in promotion, repetitionand drop-out rates. 8  30. The overallincidenceof illness in2004 was 11percent,with fever and suspected malariabeing the most frequent causes of illness accounting for over 4 in 10 cases, and diarrhea being a distant second accounting for 12 percent of all cases. About 4 in 10people who are illvisit a health facility to seek care. Among those who do not seek care, halfdo not since the illness is not severe, but over one infour do not seek health care for financial reasons, and one inten because the facility is too far, the latter reasonbeing particularly important in rural areas. Over 4 in 10 people visit a Centre de SantB de Base 2 (CSBZ), and another 12 percent visit a CSB1, and about 2 in 10 visit a private doctor. The cost of consultation averages 1,080 Ariary per visit, with the cost at CSB2 only 200 Ariary. Inaddition, the cost of medicines averages 5,200 Ariary per visit, with the CSB2 costing 3,600 Ariary per visit. 31. Immunization coverage improved sharply between 2001 and 2004, with complete vaccination ratesimprovingfrom 36 percent in2001 to 63.4 percent in 2004, basedon the household survey. Immunization rates show that 63.4 percent of children between the ages o f 12 and 23 months have a complete set of vaccinations in 2004, ranging from 62.4 percent in rural areas, to 61.5 percent in the secondary urban centers, and 75 percent in big urban centers. But, there is wide divergence across provinces, with three provinces of Antananarivo, Fianarantsoa and Toamasina having rates well over 70 percent for complete immunizations, but Antisranana having a very low rate of only 31 percent, and Toliara and Mahajangaranging around 45 percent. 32. The rate of prenatalconsultation stands at 80 percent overall, rangingfrom 78.6 percent in ruralareas to 91 percentin bigurbancenters.The variation across provinces remains, with Mahajanga having the lowest rate (62 percent), and Toamasina the highest rate (88.6 percent). Over 6 in 10 people aged 15 years and older have knowledge o f family planning, with knowledge among 15-20 year olds the lowest (48 percent). Knowledge of family planning is significantly lower inrural areas (only 57 percent) compared to those living in big urban centers (88.4 percent). Almost 7 in 10 people aged 15 and older believe that family planning is useful, and there is no difference in this perception across urban or rural areas. Despite the belief in its utility, only 15 percent o f this age group use family planning, and the rate is lowest among 15-20 year olds (4.3 percent). The rate of utilization is particularly low in rural areas (only 13 percent) incontrast to bigger urbancenters (25 percent). 33. About one in three households had access to safe drinking water in 2004, and the differences remainvery sharp across urbanand ruralareas. The source of lightingvaries across poor and rich households. Electricity is usedby about 14 percent o f the population, with almost no one inthe lowest quintile usingelectricity and about 45 percent o f the richest with access to electricity. Incontrast, the major source of lighting is kerosene, with 4 in 5 people usingit. Almost all of the poor use this as their source of lighting. Wood collected by households is the primary source ofcooking fuel, with almost 96 percent o f the poor utilizingthis. Incontrast the richest quintile is likely to use charcoal (46 percent) and collect (42 percent) or purchase (10 percent) wood. There is very limiteduse o f gas or other fuels for cooking. 34. Households in Madagascarare vulnerable to a range of shocks (natural and economic). In 2004, almost all households (98.5 percent) faced at least one shock. Among the households that faced a shock, about 4 in 10 faced a climatic shock (mainly cyclone or flooding) and an equal number faced economic shocks (inflation primarily). Insecurity and health shocks affect 1 in 20 of the population. Rural households were more affected by climatic/environmental shocks, while urban households faced a higher incidence of economic shocks. In the face of these shocks, households responded by working more (adopted by 2 in 5 households), reducing food consumption (1 in 5), or doing nothing (1 in 5 households). Interms of the time taken to recover from the shock, only 6 percent had recovered a month after the shock, over a third (38.4 percent) had recovered between 1 and 12 months after the shock, and over half(55 percent) had still not recovered to their initial levels of welfare at the time o f data collection, indicatingthat shocks often have longer term effects. 9  B. THE GOVERNMENT'SSTRATEGYFORREDUCINGPOVERTYANDITS IMPLEMENTATION 35. The main objective of the Government's PRSP is to promote rapid and sustainable development to reduce poverty by half in ten years. To attain this objective, the PRSP has three strategic axes (i) governance; (ii) good broad-based growth; and (iii)human and material security. A cross-cutting axis o f monitoring and evaluation underpins the strategy. In the area o f governance, the main elements o f the PRSP include the fight against corruption, improved public expenditure management, respecting democracy, establishing an equitable justice system, and implementing decentralization. The Government's strategy for broad-based growth is geared toward maintaining macroeconomic stability and achieving high annual growth through facilitating private sector development, accelerating the roads program, rural development, fostering public-private partnerships and greater opening up o fthe economy. Underthe strategic axis ofhuman and material security, the main objective is 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 interventionsinthis domain. 36. incorporate the longer term vision (to 2019,Madagascar Naturellement, which foresees a transition from The Government of Madagascarupdated its PRSP in mid-2005. The PRSP was updated to a subsistence economy to a market economy, to realize its potential through optimal use o f its resources, while respecting the environment. The vision puts an enhanced emphasis on rural areas, through improved productivity, increasedvalue added, improved infrastructure, technology and partnerships. 37. In 2005, implementationof the PRSP continued to be satisfactory. The Government prepares its PRSP Progress Reports (PRSP-PR) on a calendar year basis to correspond to the budget cycle, with a mid-year report on implementation in July to inform the budget preparation for the following year. The 2005 Annual PRSP Progress Report has been prepared in April 2006 and provides a comprehensive overview o f the results achieved, an analysis of the results, lessons learnt and challenges faced in implementing the poverty reduction strategy paper. This report provides an update on the poverty situation in Madagascar (with details on the decrease in poverty from 72.1% in 2004 to 68.7% in 2005) and summarizes that - on balance - positive progress has been achieved in the 15 PRSP priority programs. 38. The 2005 PRSP-PR concludes that there have been significant results achieved in human and physical capital. This is evidenced by the continued positive trend in human development indicators, e.g. the net enrollment rate remains at over 90 percent inthe 2005/06 school year. The report also provides details on the improvements in infrastructure, particularly the rehabilitation o f the road network, as well as progress on rural development. Section IV of this document provides further details of achievementsand outstanding challenges. 39. Nevertheless,the PRSP-PR also emphasizes that implementationof the strategy faces many constraints which have hampered progress. These constraints include weak progress on pro-poor growth with the relatively well-off parts o f the population mainly benefiting from the economic growth achieved. There has also been insufficient progress on governance reforms and limited private sector contribution to the country's development. The Government i s taking steps to address these constraints through renewing its focus on the governance agenda and stepping up efforts at private sector development such as focusing on improving the investment climate 40. The Government is in the process of formulating its second-generation poverty-reduction strategy, the Madagascar Action Plan (MAP), a five-year plan to produce a quantum leap in the 10  development process by mobilizing the Malagasy people and the international partners, to ignite rapid growth, reduce poverty and ensure that the country develops inresponse to the challenges o f globalization and inaccordance with the national vision -Madagascar Naturellement (see Box 1). 41. The Joint StaffAdvisory Note on the 2005 PRSP-PR, to be distributedto the BoardinJuly 2006, attests the good progress made in the implementation of the poverty reduction strategy and identifies key prioritiesto be addressedby the Governmentinformulatingthe new MAP. The main recommendations are: (i)identification and elaboration of the key structural and binding constraints to shared growth; (ii)alternative macroeconomic scenarios within a realistic medium-term framework consistent with the analysis o f sources o f growth and (iii) inclusion o f a policy reform matrix which outlines the sequencing and prioritization o f the key policy and institutional reforms to achieve the MAP results. Box 1Madagascar's DevelopmentVision and Strategy TheMadagascarAction Plan The Madagascar Action Plan (MAP) 2012 is the Government's new vision that sets out a "roadmap" for development. The purposeof the MAP is to produce a quantum leap inthe development process by having a five year planthat will mobilize the Malagasypeople and the country's internationalpartnersto ignite rapid growth, thus leadingto the reduction of poverty. Its goal is also to ensurethat the country develops in responseto the challenges of globalization and inaccordance with the national vision "Madagascar Naturellement" that was previously defined by the PresidentinNovember 2004 (and is described below). Madagascar Naturellement is the long-term vision for the country andthe MAP is the 5-year strategy that works towards achievingthis vision. Madagascar Naturellement is the statement of the country's development vision in 2015 that was defined by the Presidentof Madagascar in late-2004. It states that Madagascar will be a newly industrialized country with maximized competitiveness by 2020. The core of growth will be derived from the country's unique natural resources and from the transformation of its natural products. The vision aims to develop a diversified and rich natural resource base (agriculture, livestock, fisheries, and mining) that will contribute to the creation of products with high value added such as essential oils, agri-business, pharmaceuticals, and miningproducts. A broader impact of growth and a progressiveredistribution of its benefits will help reduce poverty substantially. Madagascar will be known worldwide for the beauty of its rich and well-protected biodiversity and its environment will be cherished and protected and used in a wise and responsibleway to enhance development. The Malagasy people, both in rural and urban areas, will be healthy and well-educated, will be active participants inthe development process and will be gainfully employed inagriculture, industry and the provision of services. Education and healthwill be accessible to the populationand infrastructurewill be developedallowing for free movementof goods and people. The MAP'S goals are ambitious targets that the Government is committed to achievingover the coming five years. It is recognizedthat these targets are challenging but, at the same time, it is expected that results will be delivered through the mobilization of the full array of the available resources (human, technical and financial), combinedwith strong leadership, hard work, creativity and excellentcoordination. The MAP outlines eight specific areas of focus; (i)good governance; (ii)educational transformation; (iii)health and family planning; (iv) infrastructure; (v) rural development; (vi) the economy and the private sector; (vii) environment; and (viii) national solidarity. There are quantifiable goals set out for each of these areas of focus to be achieved by 2012; these goals will be further refined, costedand clearly linked to the MDGs. The MAP is a direct follow-on from the PRSP and covers the five year period 2007-2011. The Government believesthat it has effectively implementedthe initial PRSP and intendsnow for the MAP to supersede the PRSP as the country's main developmentstrategy. The MAP will be finalized inOctober 2006 and presentedto Parliament together with the 2007 budget. La Politique Gknkrale de 1'Etat sets out the Government'sactions and desired results in 2006 that are critical steps towards attainingthe objectives of the MAP and MadagascarNaturellement in2015. There are 3-5 results by Ministry which form part ofthe results agreement betweenthe Presidentand his Cabinet. 11  C. WORLD BANKCOUNTRY ASSISTANCESTRATEGY AND SUPPORTTO THEIMPLEMENTATIONOFTHEPRSP 42. The Bank's support to Madagascar, as outlined in the Country Assistance Strategy of November 2003, supports the implementation of the PRSP, using ongoing and new investment lending and budget support, analytical work, and the services of the broader Bank Group (IFC, MIGA, and WBI). The FY05 program for Madagascar reflectedthe transition to programmatic lendingwith the first single-tranche annual Poverty Reduction Support Credit approved in July 2004. This was followed by the PRSC2, approved inJuly 2005. New investmentprojects in several sectors - supplementalcredits for the Health Sector ($18 million) and for the Community Development Project ($50 million) were approvedinFY05. InFY06, the IntegratedGrowth PolesProjectandthe second HIV/AIDS project were approved. For FY07, in addition to the PRSC 3, a new Supplemental Credit for the Community DevelopmentProject andan Energy Investmentproject are all plannedfor presentationto the Board at the same time. An Irrigation and Watershed Management project will be presented to Board in September 2006. 43. As noted inthe PRSC 1and PRSC2 ProgramDocuments,the CASalso outlines a program of analytical and advisory activities (AAA) to underpin the Bank's policy dialogue and programmaticlending. Furthermore, analytical and advisory work has been conducted or is planned beyond what was envisioned in the CAS to respondto Government needs (see Table 5). This year, key analytical reports completed include: the Investment Climate Assessment, the Financial Sector Assessment Programand the land tenure review; which will underpin the reforms under the growth pillar in subsequent PRSCs, as well as the Local Development Fund (FDL) feasibility study, led by the Government, which will form the basis for the operational design o f the new Government institution for local development. PRSC 3 continues to benefit from the integrative Development Policy Review on Sustaining Growth for Enhanced Poverty Reduction (FY05) which outlines the growth strategy and priorities for reform for Madagascar to achieve shared growth. The Public Expenditure Review (FY05), which providesrecommendationsonthe public expenditurereform agenda and specific recommendations for the transport, education and environment sectors, also helped underpin the key reforms for PRSC 2 and now PRSC 3. The findings of the Country Financial Accountability Assessment (CFAA, FY03) and the Country ProcurementAssessment Review (CPAR, FY03), as notedbefore, have also been critical in defining the reform programofthe Government. 44. The Government remains committed to monitoring progress in implementing its public expenditure reform program under the HIPC Public Expenditure Assessment and Action Plan. Madagascar was also a pilot country for the Public Expenditure and Financial Accountability (PEFA), which is a joint initiative of the World Bank, EU, IMF, DFID, France, Norway and Switzerland, to develop a strengthened approach to public financial management. The PEFA approach includes a country-led strategy on public financial management reforms, a coordinated program of assistance by donors and a performance measurement fiamework. Madagascar is just completing its first PEFA assessment of the public financial management system which will be used as a baseline to measure progress. Furthermore several analytical activities recently completed or on-going, support the Government inits efforts to completeits strategy for post-primary education. Inthe same vein, the health sector dialogue benefits from an array o f analytical work including recently completed surveys (the Demographic and Health Survey, and the Study of the efficiency and equity of health facilities Iand 11) and the National HealthAccounts study. 12  Box 2: LessonsLearned-Implementationof PRSC 1and PRSC 2 Overall Context: Almost two years since the first PRSC was approved, there has beentangible progressinsome areas, while others lag. The overall economiccontext inboth 2004 and 2005 continuedto complicate budgetmanagement and implementation. Three key factors were dominant. First, both 2004 and 2005 were uncertain economic years. 2004 was markedby a sharp depreciationofthe exchange rateand two back-to-backcyclones, which ledto unforeseenexpendituresand sharp inflation. 2005 was marked by high international oil prices, and a structuraland financial crisis inthe energyparastatal JIRAMA, which ledto unprogrammedbudgetaryoutlays. Second, the trend of signifcant revenue shortfalls in2004 continuedin2005 and into the first part of2006, impacting budget managementand the ability to deliver on the strategy, since expenditures adjustedto the reducedresourceenvelopes, with mid-year expenditure blockageslimiting sector ministries capacityto implement their programs. Third, the introduction of theprogram budgets complicated budget execution: The 2005 budget introduced program budgeting, a large-scalereform, without adequatepreparation, which complicated budgetexecution and stretchedlimited capacity. Response: Sustained donor co-ordination among budget support donors. Thejoint donor mission launched in October 2004 was followed by one in October 2005. Starting in 2006, two joint-donor missions are planned (in April and SeptembedOctober each year) and the first one was completed end-April 2006. The Partnership Agreement betweenthe Governmentand budget support donors was also signed by the African Development Bank (inaddition to the original signatures ofthe World Bank, EU and France, with the U S as participant but not signatory). Sustained co-ordination and harmonization especially inthe areas of public financial management, education, nutrition and health. In the education sector, two joint-donor missions a year monitor progress on the Education for All Agenda. In public financial management, ajoint-donor assessment of the public finance system -the public expenditure and financial accountability (PEFA) assessment was recently completed - underEU leadershipinApril/May 2006- and the report is being finalized. A joint donor round table on public financial management to discuss implementation issues and find real-time solutions for implementation problemsfor the priority action plan is being revitalized. Greater attention to capacity needs, especially in financial management and procurement, and longer term visionfor technical assistancefor priority ministries. In education, a two year technical assistance plan was prepared and is under implementation with the Ministry of Education, with financing from the PGDI, to provide assistanceinbudget formulation, execution and policy advice. A similar plan is under preparationfor nutrition and health. SimpliJication and greater preparation for the 2006 budget: The presentation of the 2006 budget was simplified, and more attention was paid to training responsible ministry staff upfront to facilitate budget execution in2006. Monitoring budget execution: The integrated financial management system is operational in Antananarivo and five principal provincial treasuries, covering about 80 percent of all expenditures. The Government is using this information and presenting this at 3 conferences each year to follow the execution of the Government's program. Moving forward Greater attention toprioritizing reforms and monitoring and learning in real time: The Ministryof Finance's reform agenda is wide-ranging, and the challenge remains greater prioritization and staying the course on implementing the reform program. While fine-tuning and adjusting is a critical element of a successfil program this needs to be balanced with the need to have stable procedures (changes each year complicate implementation). a Continue to support key ministries, extending capacityhraining to de-concentrated levels in key sector ministries (education and health). 13  Table 5: Analyticaland Advisory Activities Dverail Ytrategic Axis 1:< Public expenditure Country ProcurementAssessment Review PublicExpenditureReview(FY07) nanagement (CPAR, FY03) Country Financial Accountability Assessment (CFAA, FY03) Public ExpenditureReview( PERFY05) HIPCAAP Tracking (FY03, FY04) Public Expenditure and Financial Accountabilitv(PEFA. FY05) DecentralizationStudy(FY03) FDLfeasibility Study(FY06) Sources o fGrowth DevelopmentPolicyReview(FY05) ExportProcessingZoneReport(FY03) Tourism Sector Study(FY03) Private sector InvestmentClimate Assessment (FY06) development FinancialSector Assessment Program(FY06) Rural Rural and Environment Sector Review LandTenure Review (FY06) development and (FY03) and PER FY05 include a focus on environment environment. Transport PER FY05 includes focus on transport sector. Opening up to IntegratedFramework(FY03) Education Education and Training Report (FYOI, Schoolconstructionreview (FY06) FY02, FY03) Secondary educationandtrainingreview(FY06) PER (FY05) includes education chapter Current status, issues and strategic directions for and PSIA backgroundwork includesfocus TVET (FY06) on expenditure management and Evaluation of pilot reforms in primary education institutionalbottlenecks management(FY07) Human Resource Development plan Public ExpenditureTracking Survey(FY07) (FY05) Health HealthSector Note (FY05) NationalHealthAccounts (FY06) Poverty and Social Impact Analysis of Efficiency and Equity o f Health Facilities Survey reinstatement of cost recovery in health (FY06) sector (FY06) HumanResourcesDevelopmentPlan(FY07) Public ExpenditureTracking Survey(FY07) PERFY07includeshealthchapter ImpactEvaluationofnutritionprogram PERFY07 includesnutritionchapter. ~~ Nutrition InstitutionalAssessment (FY07) RuralWater Water Sector Review(FYOI) Public Expenditure Review on ruralwater (FY05) SocialProtection Risk Management and Social Protection Review (FY06) Poverty and Social Impact Analysis of oil price changes(FY07) Weather risk insurancefeasibilitystudy (FY07) Note: Thistableupdates Table6 in thePRSC2 Program Document. 14  45. At the time of the last CAS, it was expected that PRSC lending would account for a large part of the IDA envelope for Madagascar each year. However, with the decrease in the IDA-15 allocation for Madagascar, the distribution of available financing betweenbudget support and investment operations hadto be realigned within this allocation. Inaddition, the experience inthe implementationof the first two PRSCs, describedin detail below, and the fragile macroeconomicenvironment also called for a re-alignment between investment operations and budget support to assist Government in implementing its PRSP. These considerations, along with the new available resources from the MDRI have resultedina smaller financing amountfor PRSC 3 as compared to PRSC 1and 2. 46. Movingforward, the Government of Madagascar is inthe processof elaboratingits second- generationpoverty reduction strategy -the MAP- which will be completed over the course of this year. The Bank's new CAS for FY07-11 is currently under preparation and will serve as the Bank's program of support to the implementation of the MAP. It is expected that the CAS will be presented to the Board in early 2007 and that it will include the proper mix of instruments between investment and budget support. Inparticular, the CAS will outline the focus of the future PRSC series which will be one of the key elementsofthe Bank's financial supportto the MAP. 47. The MAP will outline the country's poverty reduction strategy for the next five years and will identify prospects for scaled-up assistance should additionalfinancing become available. The program in the new CAS will assist the Government in providing a suitable framework for absorbing additional resources to support a possible scaling-up: the proposedprojects in the CAS will be identified and preparedwith the intentthat they could be expanded should additionalresourcesfrom other donorsor the private sector become available (catalytic approach). To this end, the CAS will maintain a concerted focus on public expendituremanagement, institutional capacity buildingand sector-wideapproaches. 48. A fourth PRSC that will be fully aligned with the first three PRSCs - is proposed for - 2007. The PRSC 4 will bridge the time-lag betweenfinalizing the MAP and the CAS and designingthe future PRSC series. It will ensure continued annual PRSC financing to Madagascar's poverty reduction efforts andwill be fully harmonizedwith other donors' annual support. D. DONORCOLLABORATION INSUPPORTINGTHEIMPLEMENTATION OFTHEPRSP Cooperationwith the Multilateraland BilateralDonors 49. The donors are collaborating to support Madagascar in implementing its development vision, by providingfinancial and technical support in a coordinated way. A partnership agreement (Cadre de Partenariat) was signedbetweenthe Governmentandthe key budget support donors -European Union (EU), France (Agence Franqaisede DCveloppement, andthe FrenchCo-operation), andthe African Development Bank- to provide a framework and to lay out procedures and modalities for a multi-donor approach to budgetary support. This Budget Group initiated joint-donor missions in October 2004 to review the implementation of the PRSP and supervise their respectivebudget support operations. This is part of the overall effort to harmonizeassistance and reduce the transactions cost for the Government.A follow-up joint donor mission was held in September-October2005 to review the Annual PRSP Progress Report for calendar year 2004, and the draft budget for 2006. Starting with 2006, two joint-donor missions are envisaged in April and September/October of each year, the first of which was recently completedinlate-April2006. 15  50. In the joint supervision missions, common areas of support with the EU's program of budget support (Programmed'Appui BudgCtaire la RCductionde la PauvretC, PARP) includethe public sector reform agenda, education and health. The public expenditure reform agenda support is coordinated to support the Government's Priority Action Plan. The Government has convened meetings periodically with the key donors to inform them of progress on implementation. Key reforms in public financial management and fighting corruption are being supported by financing from IDA together with technical assistance from the EU, GTZ and the French Cooperation. Donor coordination around implementingcustoms reformshas also improved. Inhealth, the key donors are also coordinatingsupport and are .moving towards using a sector-wide approach. In addition, HIV/AIDS, transport, water, agricultural and environmental sector reforms and investment continue to be approached together with other partners. 51. The Ministry of Education(MENRS) has continued to lead the dialogue with donors in the education sector. The FTIprocess with the EFA National plan has strengthened the Ministry further in this role and has given a focus to the Donor Group. Regular donor meetings are organized and through this, a deeper sharing of information on appraisal missions, TA and studies. Whilst there are diverse support mechanisms, donors take a holistic approach and are concerned about the progress of the EFA Planoverall as well as individual projects. 52. Capacity constraints hamper Madagascar's ability to achieve its development objectives. The donor community is supporting Madagascar in strengthening capacity, through a range o f technical assistance grants and training initiatives designed to enhance the implementation of the PRSP. The key donors involved in supporting the strategic pillar o f governance, include the World Bank, European Union, UNDP, French Co-operation, the African Development Bank, GTZ, and USAID. A number of donors are very active in supporting education (UNICEF, French Co-operation, AfDB, AFD, Japan, USAID and World Bank). Donor coordination, to support capacity building efforts, is also being enhanced through the round table for public expenditure management reforms, and through the Budget Support Group. Coordinationwith the IMF 53. The Bank closely collaborates and coordinates activities with the IMF. The staff o f the two institutions conduct regularjoint assessments o f the PRSP implementation and also work closely together on (i)analysis and reforms in public financial management; (ii)other governance reforms, including customs; (iii)support o fthe privatizationprogram; and (iv) trade. 54. The IMF completed technical discussions for its new Poverty Reduction and Growth Facility (PRGF) arrangement with Madagascar in May 2006 and is expected to present the program to their Board in July, at the same time of the Bank Board discussion of the proposed PRSC 3. The Government has implemented measures to continue to adequately manage a fragile macroeconomic environment and reached agreement with the IMF for a new program. The staff o f IDA and IMF will continue to coordinate the content of the PRSC and PRGF to ensure that the instruments complement one another. Ingeneral, the structural and social benchmarks will be covered by the PRSC, while the PRGF will cover macroeconomic issues. IV. POVERTYREDUCTIONSUPPORT CREDITSPROGRAM 55. The first PovertyReductionSupport Credit (PRSC 1)approvedinJuly 2004 was the first of a series of annualsingle tranche developmentpolicy lendingoperations providedas budgetsupport for the implementation of key elements of the PRSP. The design o f the PRSC program, comprising 16  the first three PRSCs (see Figure l), based on discussions with the Government, the pace of the was reform agenda, the existing knowledge base and analysis o f development issues, other donor programs, and IDA resources. The objective o f the first three PRSCs (2004-2006) is to consolidate reforms underway in the public sector, fight corruption, improve transparency and accountability, and improve service delivery in education, health, water supply and nutrition. As outlined in the PRSC 1 Program Document, a set o f clear, well-defined milestones, policy actions or indicators have been defined to transition from PRSC 2 to PRSC 3. Figure1: The ThreeYear PRSCProgram Note: The striped blocks in the PRSC 1-PRSC3 rows indicatethat that it is an area of focus under the respectivePRSC. 56. The PRSC program for the first three PRSCs focuses explicitly on the strategic axes of governance and human development, and includesspecific policy actions in these areas. The PRSC does not include any specific policy actions on the other PRSP pillar o f broad-based growth. While there is a policy dialogue in these areas as part o f the PRSC, the Bank support for growth is through its significant portfolio of ongoing investment projects in infrastructure, energy, environment, mining, rural development, the Integrated Growth Poles project and a new Irrigation and Watershed project being presented to the Board in FY07. Annex 4 summarizes the main elements o f the reform agenda and the Bank's program inthe PRSP pillar o f broad-based growth (PRSP strategic axis 2). Table 6 outlines the key policies for Growth under implementation and Bank portfolio supporting Government efforts. In particular, the new operations in Energy and Watershed management will reinforce support to broad- 17  based growth assisting Government in restructuring the electricity parastatal JIRAMA and in improving rice and agricultural prod~ctivity.~ 57. The implementationof the program supported under the first two operations (PRSC 1and PRSC 2) is satisfactory and the indicativetriggers for PRSC 3 are broadly fulfilled. As specified in Table 8 below, there is just one trigger in the area o f procurement where the original plan has not been fully implemented and the final trigger has thus been revised. Delays still persist in the final implementation of the new Procurement Code, although progress inthis regard has been notable. Inthe area of public finance reform, the implementation o f the 2005 Priority Action Plan was satisfactory overall; progress has been made in improving both budget preparation and execution. The EducationFor All initiative continues to be implemented steadily with enrolment rates remaining high and well above the original expectations. Government's focus on improving quality of service is also starting to show positive results. Delays however still persist in school construction. The elaboration o f a post-primary education strategy is also advancing and should be completed inthe next year. The institutional structure for delivering nutrition services has been further strengthened and delivery has improved in the last months. Government has also launched a new review o f the current institutional structure for nutrition to assess ingreater detail its efficiency and identify additional improvements as needed. The Government is making progress to transitiontowards programmatic support inthe health sector. Capacity at the Ministry of Health for budget planning and execution is being strengthened. Work on the National Health Accounts is now nearing completion and costing for the health MDGs, using a marginal bottlenecks approach, is beingfurther refined. Plans are also inplace to elaborate a health services financing strategy and to update the medium expenditure framework (MTEF) for the health sector, first prepared last year. The rural water supply program is also progressing well as the Government has implemented all the recommendations set out in the 2005 sector review. Annex 2 provides greater details on progress on all the actions originally envisioned for PRSC 3. Other donors also supportgrowthenhancing measures with dedicatedoperations. Most notablythe EU, the largest donor engaged inbudgetsupport after the World Bank, providesdedicatedfinancingto a largeroadprogramand ruraldevelopment. 18  Table 6 Broad-Based Growth -Key Policies Broadbased World BankProjectSupport Actions Growth Creatingconditions 1 IntegratedGrowthPoles Increase investmentpromotion: the Economic for growth 1 Transportprogram (APL2 and DevelopmentBoard ofMadagascar (EDBM) is APL3) being set up as aprivate-public partnershipto 1 Private Sector Development be the premier agency for investment Project promotion and investor facilitation. 1 MiningProject RemoveAdministrative barriers(creationof 1 ProposedIrrigationand GUIDE) Watershed Management FosterDialogue with private sector to identify project (FY07) and remove bottlenecks 1 ProposedEnergy project Increase service delivery intelecom, transport (FY07) (airports and ports), water and electricity, cotton and sugar production throughthe reform ofthe public enterprises Restructurepublic utilityJIRAMA Improve Madagascar's imagethrough marketing campaigns, active participation in trade fairs Improve performanceof large-scaleirrigation schemes through integratedpackageof investmentsat watershedlevel. Address political risks concerns through provision of guarantees Improve access to finance through provision of leasing services, SME finance Improve trade links with strategic partners (Agreement on Textiles and Clothing (ATC), SADC and COMESA trade agreements) Making growth Transport program (APL2 and Improve supply chains through rehabilitation of inclusive APL3) national and regional roads IntegratedGrowthPoles Rehabilitation ofports (Toamasina, Nosy Be) Environment project Construction of new port in fort Dauphinto Rural development project support mining and agricultural exports Microfinance project Upgrading airports Community Driven Focus on decentralizing growth through Development project. creation of growth poles aroundtourism, ProposedIrrigationand industrial zones, agri-businessand mining Watershedmanagement Improve productive assets ofpoor rural project(FY07) householdsthrough matching grants for ProposedEnergyproject demand-drivenagricultural investments. (FY07) Captureeconomic benefits associatedwith natural resource conservationthrough investmentsinprotected areas, naturalforest protection and community management transfers. Delivery o f socio-economic infrastructureto communes and communities Notee:UpdatesTable 7 in 'RSC 1ProgramDocument. 19  Table 7: Status of Indicative Triggers for PRSC3 Governance ublic Financial Satisfactory Satisfactory The trigger is fulfilled Ianagement implementation of implementationof Priority Action Plan Priority Action Plan for 2005. for 2005. udget Budgetfor 2006 Budgetfor 2006 The trigger is fulfilled.The 2006 Budget ormulation allocatesadequate allocatesadequate allocates 20 percentto education, 18 percentto resources to PRSP resourcesto PRSP infrastructure,7.1percentto health, 5 percentto priority sectors. priority sectors. agriculture, and 1.3 percentto justice. udget Monthly accounts Monthly accounts The trigger is fulfilled. xecution producedby the 15" producedby the lSh o fthe following ofthk following month inthe five month inthe five regional treasuries regionaltreasuries and central treasury and centraltreasury where the transitional where the transitional financial financial management system managementsystem i s fully operational. i s fully operational. rocurement New Procurement (i) Implementing (i)Adjusted prior action is fulfilled. Code applied, rules and regulations Implementing rules and regulations havebeen Procurement together with submitted and already approvedby Cabinet in Oversight Institution, Standard Bidding May 2006. The SBD will automatically adopted procuremententities Documents(SBD) by MEFB following cabinetapproval ofthe inthe sector submittedby MEFB implementing rules and regulations. ministries, and the for Cabinet approval. Appeal system (ii)Adjustedprioractionisfulfilled. Based operational. (ii) personnel Key on the decree establishingthe ARMP which was (head and directors) passed inMay 2005 government has begunthe for the Procurement staffing process. The General Director and the Oversight Institution board have alreadybeen nominated.For the nominatedby MEFB other director positions, nominations have been on an interimbasis made on an interimbasis by the Minister o f until final approval Finance. by Cabinet. (iii)Adjustedprioractionisfulfilled.Every (iii) Procurement ministry has identified staff to whom all entities in key procurementmattershave been delegated in ministries (education, accordance with the provisions ofthe new health, agriculture procurementCode. Key ministries (education, and transport) health, agriculture and transport) have put in operational. place procurementmanagement units. These units are operationalandtheir performancewill be assessed after aperiod o fone year. Additional unitswill be establishedinother ministries in2006 20  ecentralization Increaseresource Increase resource The trigger is fulfilled; albeit increaseof allocation for the allocation for the allocationsto the commune inthe budget2006 communes. communes. is modest (the allocation increasedby 3.6%) ustoms Satisfactory Satisfactory The trigger is fulfilled. implementationof implementationof customs actionplan. customs action plan. erialSecurity ~ ducation Implementation of Implementation of The trigger is fulfilled .Thejoint donor the National the National assessment of April 2006 endorsed the revised Educationfor All Educationfor All EFA preparedby Government inMarch2006, (EFA) ontrack. (EFA) on track following the EFA FTIsecretariatguidelines. rater Supply The Ministry and its The Ministry and its The trigger is fulfilled.The MEM/DEA and its main partners begin mainpartnersbegin main partners have implementedall the implementationof implementation of recommendationsofthe 2005 sector review. the recommendations the recommendations Keyactions include i)creation ofanew ofthe sector review ofthe sector review department inthe DEA dedicatedto the inthe program inthe program preparationand monitoring ofthe program budget2006-2008*. budget2006-2008'. budget; ii)definition of criteria to select communitiesto be included inthe program; iii) Advertisement ofbidding documents for works, goods and services at the provincial and regional levels iv) disseminationto all stakeholdersofthe national manualofproceduresfor implementing and managingwater systems and sanitation facilities. *Duetoatyp inthe PRSC2 document ;relevantperiodwas erroneouslyreportedas 2007-2009. 58. While overall program implementation is satisfactory there are areas where progress has been mixed. Reforms initiated in several areas need more time to consolidate than originally envisioned. As discussed below, inthe last twelve months advancements inanti-corruption andjudiciary reforms have been lingering. Similarly, customs reform is proceeding slower than expected. Moreover, while progress in public expenditure management is encouraging, significant challenges still persist, particularly inbudget preparation, and execution. Nevertheless it is important to note that the governance framework in Madagascar remains well above the Sub-Saharan average. Furthermore, the commitment shown and the actions taken by the new Government since 2002 are in stark contrast with the previous administration's hesitantpace o freforms inthis area. 59. The experience accumulated with the first two PRSCs is providing valuable lessons for the way forward. Box 2 provides an overview o f the main lessons learned to date from PRSC implementation. As discussed in section I1above, the implementation o f the first two PRSCs took place duringyears o f unanticipated adverse macroeconomic shocks. The resulting pressures on the budget in both 2004 and 2005 had a clear adverse impact on the implementation o f the two operations as Government was faced with the management of difficult events. On the resources side, the revenue collection was below expectation and donor aid flows were delayed. The Government had to adjust through a curtailment of expenditures, including freeze of commitments in March 2005, a reduction in expenditures, and a shortened expenditure cycle. In addition to this overall budgetary constraint, limited capacity for budget execution within the sector ministries was manifest and contributed to the execution delays observed in most sectors. Budget execution was further complicated with the transition to the program budgets without adequate preparation or training o f ministry staff. 21  60. As the Government made good progress in implementing the policy and institutional program, reformstook in general longer to accomplishthan originallyanticipated. The mainreasons include over-optimism at the design stage, insufficient prioritization of actions, and under-estimationof the capacity constraints and implementationleadtimes. This was particularly true for measures aimed at strengtheningthe procurement framework and the accountability and transparency of budget execution. This situationhas been further exacerbated by the initial lack of understandingofthe PRSC instrumentin sectors accustomed to investment projects. For example, starting with PRSC Ithe nutrition program transitionedto budget support, but while to date it has resumed a good level of service delivery, it took over two years to create a functioning institutional setting and reach an acceptable level of budget implementation. 61. Despite these shortcomings budget support remains central to Bank assistance in Madagascar as it has nonetheless proved an effective instrument in fostering a much more concerted focus on key issues such as public expendituremanagement and institutional capacity building. The next CAS will clarify the areas of focus for the next series and will provide the new proposed mix of budget supportandinvestmentoperationsto support the MAP. 62. Basedon the data availableto date, the Government's strategy is deliveringresults. Despite the challenges described, the Government is using its budget in line with its strategic priorities - roads and education command large shares. These resources are being translated into results on the ground. More children are in school today than ever before (over 90 percent), and a larger percentage are likely to completeprimary school. With the implementationof the roads programinrural areas, the percentage of the rural populationwith reliable access to transport has increasedfrom 46 percent in2003 to 57 percent in 2005. The condition of the main road network has also improved; in 2004 and 2005, the Road Maintenance Fund (RMF) contracted for the maintenance of 6,800km and 7,OOOkm respectively. Rice productivity has increased from 2.3 tonshectare in 2003 to 2.4 tonshectare in 2004, and is now 2.57 tonshectare. This increase is however lower that originally planned6. Access to safe drinking water in rural areas has also improved with an increase in access from 14 to 16 percent between2004 and 2005. Immunization rates have remainedstable andmore women give birth inhealthcenters thanbefore. Infant and child mortality rates have declined'significantly between 1997 and 2003/04, with the child mortality rate declining from 163.9 to 94 per 1000over this period7.A recent evaluationofthe nutrition program, is also showing a positive impact of such interventions. Table 8 reviews progress in achieving the key development objectivesthat were establishedfor the PRSC series at the time of PRSC 1. ~ At the time ofPRSC 1preparationthe available2003 figure for the average rice yield was 1.88 tonsha, which led to set the target outcome for 2006 at 2.4. As the 2003 figure was subsequently revisedto 2.33, the increase in productivity over time has therefore been lower than originally anticipated. Furtherwork i s howeverunder way to validate the actualscale ofimprovementsinchild mortality. While still remarkable, data revision might leadto a lower improvement. 22  Table 8: KeyDevelopmentOutcomes2003-2006 - Key Monitoring Indicators 2003 2004 2005 Expectedoutcomes in 2006 as originally set inPRSC 1. Poverty reduction 73% 12 1% 68 1% - 68% - ~Good Governance ,. 3 out of 15 4 out of 16 6 out of 16 10out o f 16benchmarksmet ~Budget management benchmarks met - as defined inthe HIPC AAP benchmarks benchmarks. benchmarks* (including reforms inthe Treasury, Auditor General, budget execution, and procurement) Budget (2004-2006) includes proper Budget planning Budget for 2004 led Budget for 2005 led Increasedallocationofpublic planning and monitoring for public processfor 2004 to increased to increased resourcesinline with strategic spending in high poverty relevant ledto increased resourcesfor key resourcesfor key objectives of the PRSP areas allocationfor key PRSPsectors PRSP sectors PRSPsectors (education, health, (education, health, (education, health, infrastructure, infrastructure, infrastructure) drinking water and drinkingwater and nutrition). nutrition). Government has introduced and No standards Developmentof Implementationof Transparency and service published service delivery standards service delivery service delivery delivery significantly improved in key services with a large public- standardsinjustice standards injustice as evidencedby independent privateinterface and education and education audits commences. Broad-basedGrowth _=.__ Percentage of the (main) roads in 47% 53% 59% 80%' good and fair condition Percentage of rural population with 46% 48% 57% 65% reliableaccessto transport Increasingrice productivity (average 2.33 tonsha 2.4 tonsha 2.57 tonsha 2.4 tonsha rice yield) Human and material security P Primarynet enrolmentrate' 82%' 97% 98% 97% primaryschool completionrate' 39.5% 47% 60% 60% Number of textbooks per primary 1 book per 3 0.9 TBD school student students HIV prevalencein sex workers', n.a. ma. n.a. DTP3 vaccination rate of children 85.8% 75.1% 86.6%4 80% below 1year' Skilled attendance at birth in Centre 28% 26.1% 19.7% Santk Base (CSB) and Centre Hospitalierde District(CHDl) ' Utilizationrate inCSB'. 0.57 0.49 0.45 Reduction in child underweight rate 43% (1997) 35% N/A 30% (MDG indicator) Percentage of people with access to 13% 14% 16% 20.8% ~ safe drinkine water inrural areas Note: ' - These are indicators that are commonwith the EUbudget support operation 'ARP)and the level of ldicators and objectives are based on the revised numbers producedby the Government for the PARP in May 06; 'annual survey will be conducted starting with 2005, TBD means 'to be determined'; '2003 refers to school year 2002/2003; 2004 refers to school year 2003/2004 and so on; Based on Anthropometric surveys by INSTAT for 2004 and2007; totalnumber of curativeoutpatient visits out ofthe total population. *TheHIPC benchmarks are now being replacedby PEFA indicators, thereforeassessment ofprogressin2005 was abandoned. The preliminaryPEFA report does however assess goodprogressinbudgetmanagementbetween2005 and2006. 23  PRSC 4 63. A fourthPRSC is envisaged which would bridge the time-gap betweenthe conclusion of the first PRSC series (PRSCs 1,2 and 3) and delivery ofthe second PRSC three-year series, which itself depends onthe finalizationof the MAP.The PRSC-4 will be aligned with the first PRSC series and will thus continue to support the Government inthe areas o f Governance and Human and Material Security. Inaddition, itwill proposea newpolicy reformmatrix andresultsframework for the next series aligned with the MAP and consistent with the strategic support proposed in the new CAS. A number o f core monitorable actions are proposed as indicative triggers (Table 9) which are aligned to the previous triggers of the first three PRSCs. For the area o f improving governance they reaffirm Government commitment for reform particularly in the areas where progress has recently been slower such as in procurement, customs, decentralization, and anticorruption. Under human and material security the proposed triggers maintain the emphasis on ongoing reforms and, in the case o f health, accompany the Government towards the envisaged SWAP approach for the sector. The Government has also completed the update o f the PRSC policy and institutional reform matrix (see Annex 1) to identify the key actions for the next twelve months in line with progress to date and consistent with the original objectives o f the PRSC program. Table 9: Prior Actions for PRSC 3 and IndicativeTriggers for PRSC 4 PRIORACTIONS FOR PRSC3 TRIGGERS FOR PRSC 4 Satisfactory implementation of Priority Action Plan Satisfactory implementation of Management for 2005. Priority Action Plan for 2006 Budget Budget for 2006 allocates adequate resources to Budget for 2007 allocates adequate Formulation PRSP priority sectors. resources to PRSPMAP priority sectors. Budget Monthly accounts produced by the 15th of the All sector ministries submit budget Execution following month in the five regional treasuries and execution reports based on an central treasury where the transitional financial economic classification to MEFB managementsystem is fully operational. within four weeks after the end ofthe referenceperiod (every four months) Procurement (i)Implementingrules and regulations submittedby Procurement Audits are carried out MEFB for Cabinetapproval and StandardBidding by or under the oversight of the Documents(SBD) readyfor MEFB adoption ARMP in at least 3 key ministries (ii)Keypersonnel(GeneralDirector anddirectors) (education, health, transport) to for the Procurement Oversight Institution assess compliance with new rules nominatedby MEFB on an interim basis untilfinal and regulations. approvalby Cabinet (iii) Procurement entities in key ministries (education, health, agriculture and transport) operational. Decentralization Increaseresourceallocation for the communes. Government adopts new regulations on fiscal decentralization to be reflected bythe 2007 Budget Law. Corruption Develop and adopt conflict-of- interestregulations I Education Implementation of National EFA (EFA) on track. Plan on track. Health Prepare and validate the Health Sector Development Program. 24  INutrition I Elaborate nutrition institutional assessment, validate it sectorI and implement its recommendations. Water Supply The Ministry and its main partners begin The Ministry and its main partners implementation of the recommendations of the implement the recommendations of sector review inthe programbudget2006-2008. 2006 joint donorslgovernmentsector review in the program budget 2007- IMPROVINGGOVERNANCE 64. PRSC 3 will continue to support the first strategic axis of the PRSP, and consolidate reforms initiated under PRSC 1,in public finance, anti-corruptionand strengtheningthe judiciary. Assistance by the Bank will also focus on deepeningreforms in the areas of customs, decentralization, and capacity building. The reform program is based on strong analytical underpinnings, inparticularthe 2005 PER and the budget notes for 2005 and 2006. The IDA-supported Governance and Institutional Development Project (PGDI), which became effective in March 2004, is providing technical assistance for the implementationofthese reforms. A. PUBLICEXPENDITUREMANAGEMENT 65. In 2005 Madagascar has immersed itselfin important budgetaryreforms by passing a new budget law that introduced a Medium Term Expenditure Framework (MTEF) and Program Budgeting (PB) at the same time. The reforms aim to improve the macroeconomic stability of the country and the effectiveness and efficiency of public resource use. Madagascar did make significant gains in the process, but it also faced several challenges, particularly with regard to coordination and sequencing of the many reforms that are going on in parallel. These reforms and their implementation status are summarized in (Table 10) below. They constitute an ambitious and far-reaching reform program that addresses existing problems and bottlenecks in all important areas of public expenditure management. Table 10: KeyPolicyand InstitutionalReformsinGovernancesinceJuly 2005 Overall Satisfactorily implemented2005 Priority Action Plan for public finance reforms. implementation Developed2006 Priority Action Planfor public finance reforms. Joint preparation ofthe PER 200617 by the Governmentand the World Bank Budget Continued supportto severalPRSP priority sectors in2006 budgetrelative to 2005. Formulation Strengthenedthe capacity of three sector ministries (Education, Transport, Public Work, and water and sanitation) on their 2006 Program Budget as well as regular budget preparation. Budget Streamlining of expenditureprocedures Execution Rationalization of administrative procedures (merger of the previous positions of the "sous-ordonnateur" and the credit manager that were replaced by the "ordonnateur secondaire) Consolidatedthe introduction o fthe regulations for supporting documents ("nomenclature despi2cesjustijicatives) Training and capacity building Prepared "support packages" including a pool of international consultants that were 25  available for the specific needs of a sector ministry on budget executionand planning over a two year period (applied on a pilot basis to Education, a similar program is being preparedfor Health and thento Transport) Strengtheningof the treasury 0 Made operational the IFMS in all six provincial treasuries (Antsiranana, Fianarantsoa, Toamasina, Mahajanga, Antananarivo, and Diego) Strengthened internal control by improving the operational efficiency o f the Treasury Brigade Procurement Submitted for Cabinet approval the implementing rules and regulations for the new Procurement Code. Standard bidding documents are ready and will be automatically adoptedafter Cabinet approval of implementingrules and regulations. Establishmentofthe ProcurementOversight Institution: Basedon the decree establishing the ARMP which was passed in May 2005 government has begun the staffing process. The General Director and the board have already been nominated. For the other director positions, nominationshave beenmade on an interimbasisby the Minister of Finance. Begunbuild up ofprocurementcapacity insector ministries: every ministry has identified staff to whom all procurement matters have been delegated in accordance with the provisions of the new procurement Code. Key ministries (education, health, agriculture and transport) have put in place procurement management units. These units are operational and their performancewill be assessed after a period of one year. Additional unitswill be establishedinother ministries in2006 Accountability Submittedfinal accounts for 2000,2001,2002 and 2003 to the Cour des Comptes. Loide Rhglementfor 2000 and 2001 voted by Parliament Loi de Reglement for 2002 and 2003 examinedby Cour des Comptes and will be sent to ParliamentbeforeJune 2006 66. While overall implementationprogressof the reform program is encouraging a number of key issues continue to pose significant challenges: 0 The fiscal framework (2005-2007) was hastily prepared - delays in the macro framework preparation resulted in unilateral cuts by the MEFB o f budget proposals submitted by sector ministries. The framework is also not fully aligned with the PRGF macro and fiscal framework. For example, the growth rate o f 64 percent for the 2006 budget projections and a drop o f the overall budget envelope by 22 percent in 2007 is not supported by a sustainable macroeconomic framework. The 2005 framework overestimated revenues resulting in revenue shortfalls during the first semester which caused significant budget cuts inmid2005. 0 Overall budget execution inparticular o f non salary recurrent and capital expenditures was relatively high, reaching 93 percent for non salary recurrent expenditures and 105 percent for investment expenditures by the end o f 2005. PRSP priority sectors benefited only partially from the high execution rate (55 percent inhealth, 77 percent ineducation, 99 percent intransport). The execution rate of HIPC expenditure was 80 percent. Main reasons for the continuing execution problems are (i) cumbersome procedures for budget reallocations, (ii) delays in the nominations o f key spending agents, and (iii) revenue shortfalls in the first six months o f the fiscal year resultinginthe freezing o f expenditures. Government had to cut on average one fifth (about 22 percent) o f the available budget for non salary recurrent and investment expenditures but excluded priority sectors such as health, education, agriculture andjustice. Though applied in general, sector ministries faced substantial problems in applying the new program budget structure (e.g. line item budgets are often not consistent with the program activity they 26  intended to support and the new nomenclature is complex resulting in wrong imputations and duplications o f codes). Training and capacity buildingneeds at the nationaland sub-national levels of government were initially seriously underestimated. The training program set up by the Government subsequently addressed some of the major execution problems but further significant investments in training and capacity buildingare requiredto fully conceptualize and institutionalizethe new program budget structure. 0 Reform coordination remained a key issue in 2005. The difficulties by sector ministries in implementing the new program budget structure forced the MEFB into almost constant crisis management with little time for strategic reformmanagement. 0 Efforts to improve monitoring and evaluation yielded little results for the 2005 budget year. Lack of clarity regarding monitoring responsibilities among the executing agents (e.g. procedural manuals were not adequately distributed to the periphery) as well as a poor selection o f indicators (too numerous, often little reliable andwithout benchmarks) constrained the monitoring o f expenditures. ReformProgram 67. The Government's 2006 priority action plansustainsthe continuation of public expenditure reforms by building on the successful implementationof two priority action plans launched since 2004. Followingthe difficulties inthe 2005 programbudget implementation, the 2006 priority actionplan reflects more interventions neededto ensure a better implementationof the 2006 program budget and the 2007 program budget preparation. Compared to 2005, actions have expandedto include capacity building and training of sector ministries, a strategic plan to address expenditure arrears and a more transparent accounting system. The 2006 priority action plan aims to: (i)strengthen reform coordination and implementation capacity, (ii) improve the efficiency of budget preparation and execution, (iii) strengthen controls and reporting on budget execution, and (iv) improve performance of the fiscal and customs administration. The 2006 plan also integrates several key recommendations of the PER such as the development o f a budget framework paper, the improvement of the budget preparation calendar, the preparation o f budget execution reports and the financial evaluation of state owned enterprises and communities. 68. Government's public finance reform agenda is mainly supported by the World Bank Governanceand InstitutionalDevelopmentProgram(PGDI)and by severalother donors (e.g. IMF, EU,AfDB, France, and the GTZ). The donor community also signeda partnership agreementto better coordinate aid and missions. A first joint mission was conducted in October 2005. Following the benchmarking o f Madagascar's public finance reform program by the Joint Secretariat on Public Expenditure Management and Financial Accountability (PEFA -Secretariat) in 2005, a first (joint) review of the PEFA-benchmarks is programmed for May 2006. 69. The PRSC 3 builds on the reforms started under PRSC 1 and PRSC 2 and continues to support the Government's public reform program in line with the implementation of the priority action plan.Progressunder PRSC 3, is presentedbelow and summarized inTable 9 above: (0 Co-ordination of the Reform Program 0 The Government satisfactorily implementedthe priority action planfor 2005. 0 The Government developed a priority action plan for 2006 to sustain the reforms started in2004 and 2005. 27  0 Reform coordination in MEFB was further strengthened: the reform coordinator, nominated by the MEFB to coordinate and monitor the implementation of the public finance reform, received support through the recruitment of an international consultant by the MEFB. To harmonize the support to Government and to facilitate reform coordination the Government signed a partnership agreement with the donor community. The strategic coordination o f the multiple reforms, however, was negatively impactedby the problems arising withthe implementationo fthe programbudget. (ii) Enhancing Budget Formulation 0 The 2006 Loi des Finances continues to put emphasis on several key PRSP priority sectors (education, agriculture, justice and environment). The education sector takes the largest share of the budget (19.3 percent) but its envelope increased only marginally by 0.3 percent between 2005 and 2006. The second important sector continues to be transport (18.2 percent o fthe total budget), though its budget envelope dropped slightly by 0.5 percent in 2006 compared to 2005. Whereas the budget envelope o f most priority sectors increased in real terms, their share o f the budget, with the exception o f environment, declined (all together from 49.5 percent in 2005 to 44.3 percent in 2006), mainly at the benefit of the Ministry of Finance and Ministry of Energy. Some of the higher allocations of resources to both ministries can be attributed to the management o f the Millennium Challenge Account (MCA) andthe restructuringo f public electricity company JLRAMA. 0 To rectify problems encountered during the 2005 fiscal year of program budget under PRSC 11, the Government set up a task force to assist priority sectors in the preparation o f the 2006 and 2007 budget. This task force streamlined the program budget for 2006 with a particular focus on a more simplified presentation and a better alignment of the program budget with the sector ministries' budget. The revised program budget was applied on a pilot-basis to three sector ministries (education, transport and public works, and water and sanitation) in their 2006 budget. In 2006, the task force intends to expand its assistanceto more sector ministries, particularly on budget execution inthe healthandagriculture sectors. 0 For the 2006 budget the MEFB applied a revisedpreparation schedule which aimed at improvingthe quality o f the submissions by the line ministries. First attempts were also undertaken to develop a budget framework paper with macro-economic projections and a definition of the expected spending envelope. It is also envisaged to further strengthen the quality o f the budget preparation process for the 2007 budgetpreparation. (iii) Strengtheningbudget execution 0 Followingthe increasing dissatisfaction by line ministries with the quality o f the training program for the new program budget structure (not customized to the specific needs of the ministries and too short), the Government beganto prepare training "support packages" including a pool of international consultants that are available for the specific needs of a sector ministry on budget execution and planning over a two year period. In 2005 the Ministry o f Education was the first to benefit by technical assistance provided by the pool o f consultants. A similar program is beingprepared for the health and the transport sectors. A technical team, nominated by MEFB, will assist line ministries to overcome budget implementationdifficulties. 0 The Treasury continues to implement the recommendations o f an independent audit conducted in 2003. In2004/2005 treasury accounts were updated and the final accounts (comptes de gestion) for the year 2000, 2001, 2002 and 2003 have been submitted to the Auditor General. The accounts for 2004 will be submitted by the end o f June 2006 and the accounts for 2005 in December 2006. The Treasury agents benefitedfrom significant training and capacity building(e.g management guidelines for the staff were distributedin2005) which contributed to improving its operational effectiveness. 0 In 2005, the integrated financial management system (IFMS) was deployed to six treasuries (Antananarivo, Toamasina, Mahajanga, Antsiranana, Fianarantsoa, and Toliary). Though there are some differences in the use of the system across various local and operational units (the fiscal, 28  custom, budget and CDE administrationsandthe treasuries agencies), efforts are underwayto address the IFMS challenges with aparticularfocus on customs. The introduction ofthe systemhas improved timeliness and quality of information. In 2006, the IFMS introduction will be consolidated and extendedto other administrations. It is envisaged that by the end of 2006 the CentralBank, some key line ministries and big urban centers will be connected to the SIGFP. Additional attention will be given to (i) developing standardizedreportingformats for strategic and monitoring purposes and (ii)a substantial revision of budget execution procedures by the MEFB and their integration in the new system. Progress in applying the new ProcurementCode which was adoptedby Parliamentin2004 is mixed: (i)thedevelopmentofthestandardbiddingdocuments(SBDs),andoftheimplementingrulesand regulations has taken much longer than expected due to difficulties in finding suitable consultants. Eventually, drafts of the implementingrules and regulations were deliveredby the consultantAawyer in late 2005. A workshop to validate the texts and carry out sensitization training was held in Antsirabe in January 2006. Subsequently, draft standard bidding documents have been finalized taking into account comments by the Government. SBDs are automatically validated following the ratification of procurement rules and regulations by the Cabinet which took place in May 2006. Training and capacity building activities for the new procurement regulations are also under way. These activities focus on conceptualizingthe new regulatory framework; they intend to pave the way for the full application of the regulations. (ii)work on the institutional framework is ongoing. The decree establishing the new Procurement Oversight Institution known as A M P (Agence de RCgulation des MarchCs Publics) was issued in May 2005. Based on this decree the Government began the selection process of the key staff. This process took more time than expectedbecause the Government wanted to ensure that the most qualified people were recruited for the respective positions. The head and board of directors have been nominatedby the Cabinet in May 2006 along with the interim appointment by the minister of Finance of the other directors It is presently envisaged that the ARMP (including the Appeals System) is fully operational in June 2006. (iii) Activities are under way to strengthen capacity and quality of procurement in line ministries. Every ministry has its PRM (procurement responsible person) to whom all procurementmatters have been delegated in accordance with the provisions of the Code. Key ministries (education, health, agriculture, environment, transport) have put in place procurement management units. They are operational andwill be assessedafter a period of one year. The assessment will determine quality and level of performance. The establishmentof similar units inother ministries is planned. (iv) StrengtheningAccountability Progress with regard to the improvement of the internal and external control functions has been equally mixed: 0 A General Inspectorate for Finances(IGF) was established in 2004, as the principal controller of the Ministry ofFinance, inline with the recommendationso fthe CFAA. Problems indefining the role of the IGF vis-a-vis other internal control bodies, inparticularthe InspectionGBnkrale de 1'Etat (IGE), continue to delay the beginning of the work of the IGF. Inthe interim phase, the internal control function has been ensured by the IGE. In 2005, the Brigade du TrCsor, the internal control mechanismofthe Treasury, was transformedto a Directorateto be more independentand sufficiently autonomous vis-a-vis the other Treasury services. The Directorate was strengthened by recruiting additional staff, by specializedtraining to enhance their accountingcapacities, andby modernizing its operations. 0 The oversight function of Parliament has been further strengthened through capacity building and training of the Public FinanceCommittee. 0 The Auditor Generalhas cleared the backlog of accounts and examined draft budget execution laws ("projet de loi de rbglement") sent by MEFB for the years 1998 until 2003. The 1998 law has been examined by Parliament and the draft budget execution laws for 1999 until 2001 have beenvoted by 29  Parliament. The Auditor General has also examined the draft budget execution laws for 2002 and 2003, and these drafts will be submitted by the Government to Parliament during the first session of 2006. Voting by Parliamentis expected before the end of June 2006. The draft budget execution law for 2004 will be sent by MEFB to the Auditor General inJune 2006. It is presently envisagedby the Auditor Generalto finalize the examination ofthe draft budget executionlaws for 2004 by September 2006. (v) Results Focus: Introductionof basicperformance management under way. 0 The Government has continued to strengthen the results focus for all ministries and departments. Basedon an'evaluationofthe "Politique GCndrale de 1'Etat pour 2005" anew one-year actionplanfor 2006 ("la Politique GCndrale de 1'Etat pour 2006") has been developed to improve results-focus and performance orientation of the administration. This plan is derived from a strategic framework that presently consistsof two documents, the PRSP andthe strategic vision for Madagascar ("Madagascar Naturellement"). It is envisaged to replace the PRSP with a new 5-year strategic framework that sets out the main focus areas for the development o f Madagascar (the MAP). Work has also continuedto integratethe differentactivities into a coherent results-basedmanagement framework. Under such a system policy-related information is systematically collected at all levels of Government, consolidated by a well-functioning mechanism at the Prime Minister's Office and scrutinized for potential follow-up. The system should generate regular reports about the status of the implementation of the Government program, which should be sent to the Cabinet for discussionand strategic decision-making. 70. The indicative triggers for the PRSC 3 for public expenditure management include the satisfactory implementationof the priority action plan for 2005. The overall implementation is satisfactory as the majorityof the intendedreforms are well underway. The implementation status of the other public expendituretriggers are as follows: 0 Budgetfor 2006 allocatesadequate resourcesto PRSPpriority sectors. Fully accomplished. 0 Monthly accounts produced by the 15th of the following month in five provincial treasuries and the central treasury office where the transitional integrated financial management system (SIGFP) is operational. Fully accomplished as execution reports can be produced in real time in the treasuries where SIGFP is operational. 0 Implementing rules and regulations as well as Standard Bidding Documents issued. Procurement OversightInstitution, procurement entities inthe sector ministries andthe Appeal systemoperational. The activity is in progressand almost completed. Implementing rules and regulationssubmitted by MEFB for Cabinet approval and StandardBidding Documents(SBD) ready for MEFB adoption. The recruitmentfor the personnelfor the ProcurementOversightInstitution (including the Appeal system) is almost complete. The General Director and the board have already been nominated. For the other director positions, nominations have been made on an interim basis by the Minister of Finance. Procurement entities in line ministriesare operational. The final trigger for PRSC 3 has been revised accordingly. ExpectedResults 71, At the endof the PRSC 3, the expectedresults include: 0 An increase in the number of HIPC AAP benchmarks met from four in 2004 to ten in 2006. The HIPC benchmarksare now being replaced by PEFA indicators, therefore assessment of progress in 2005 was abandoned. The preliminary PEFA report does however assess good progress in budget managementbetween2005 and2006. 30  Budget Formulation: 0 The budget is aligned to the strategic priorities of the PRSP including an increase in budgetary allocations to tangible poverty reduction programs. This activity is in progress. As the PRSP is beingreplaced by the Madagascar Action Plan (MAP) the budget will be aligned with the objectives andprioritiesofthe MAP. 0 Budget preparationprocess adjustedto allow for better strategic decisionmakingand implicationof the sector ministries, and ensure greater consistency betweenrecurrent and investmentbudgets.This has been partially accomplished with a budget calendar which allows for more meaningful discussionsbetweenthe MEFBandsector ministries. 0 Preparationprocesses for the recurrent andthe investment budgets alignedand integratedto improve consistency o fthe budget. This is outstanding. 0 Budget execution rate increasedfrom 80 percent in 2003 to 90 percent in2006 On track to be Fully accomplished as the 2005 execution rate was 93 percent for non salary recurrent expenditures and 105percentfor investmentexpenditures. Budget Execution 0 The treasury provides accurate andtimely information.Partially accomplished for the six treasuries where the IFMISis fully operational; this representsroughly 80 percentof alltreasury operations. 0 Improvement of the treasury's operational efficiency. Activity is ongoing based on the recommendationso fthe independent audit ofthe Treasury in2003. 0 Treasury produces monthly accounts by the 15thof the following month. Accomplished for the six treasuries where the LFMIS i s fully operational. 0 Treasury submits quarterly accounts no later than four weeks after the close of the previous month. Not yet accomplished as this requires a further improvement of the informationexchange between the capitalandthe periphery. 0 Treasury submits final accounts within the statutory timeframe to the Auditor General. Not yet accomplished.The submission is however envisagedwithinthe statutory timeframe. Procurement 0 New ProcurementCode in line with internationalstandards. Fully accomplished.New Procurement Code passedby Parliament inJuly 2004. Applicationdecreesand SBDs are almost complete. 0 Institutionalframework put in place. In progress with establishment of ARMP and some sectoral procurementunits. 0 Adequate capacity to implement new procurement regulations exists. In progress, with commencementofthe capacitybuildingprogram. StrengtheningAccountability 0 Internal and external control functions (IGF, Brigade du TrCsor, Auditeur General) significantly strengthened. In progress as the efficiency of the Brigade du TrCsor and the Auditor General has significantly improved. At the same time, role andfunctions of IGF/IGEremainunclear. Inaddition, the commitmentcontrol(CDE) remainsdysfunctional;an audit ofthe CDEis plannedfor 2006. Accountability and transparency of budget execution 0 Monitoring of budget execution by the administration and the Cabinet has improved. Not yet accomplished;preparationofreportingformats andstandards is plannedfor 2006. 0 The treasury hadproducedaccounts withinthe legaltimeframe. Notyet accomplished. 0 Applicationofregulations inatransparentandequitable manner.Notyet accomplished. 31  Timely examination of accounts by theAuditor general 0 The Projets de lois de reglement are submitted to parliament within the legal timeframe to allow (( )) the National Assembly's control of public accounts. In progress, with Auditor General clearing backlog o f audited accounts. B. FIGHTINGCORRUPTION 72. Progress in the fight against corruption has been mixed. The 2004 WBI governance indicators continue to confirm that Madagascar is well above Sub-Saharan African average in all examined areas and in particular in the control o f corruption, regulatory quality as well as voice and accountability. At the same time, progress is slower than expected as confirmed by the Transparency International Corruption Perception Index of 2005: Madagascar was ranked 97th out o f 158 countries (its previous rankings were no. 82 out of 145 in 2004, no. 88 out o f 133 in 2003 and no. 98 out of 102 in 2002). It seems that the governancereforms initiatedby the Government needtime to consolidate despite continuedhighexpectations by the citizenry and the development partners. The Government continues to emphasize that corruption is one o f the main reasons for the lack o f progress in the socio-economic development of the country. The key issues include: 0 Pervasive corruption in a number of sectors (Le. mining,judiciary, forestry) and public services (i.e. customs, medical services, traffic police), which severely affects overall efficiency and delivery of services. 0 Problems with conflict-of-interest o f public and elected officials. 0 The lack of ethical standards inthe public services with widespread non-application of formal rules andregulations by public servants. 0 Informal and/or corrupt behavior remains by-and-large unpunished. ReformProgram 73. Reforms started under PRSC 1 and 2 have been deepened and extended, with important improvements in the public awareness about causes and incidence of corruption. The Anti- corruption Commission (Conseil SupBrieur de Lutte Contre la corruption, CSLCC), which was established in 2002 to raise awareness about corruption and co-ordinate all governance and anti- corruption efforts, focused its activities in 2005 mainly on a public information campaign to address corruption ingovernment services and on the preparation of the independent anti-corruption survey which i s being implemented with support from WBI. The preliminary results from this survey confirm widespread corruption inthe above mentioned services but also indicate a somewhat declining interest in corruption issues. This is mainly due to preoccupation with the economic situation which is considered by the population the most important issue that should be addressed by Government. The survey also indicates significant regional differences in the incidence o f corruption. It is envisaged to publish the results of the survey widely (in June 2006) and to initiate a comprehensive debate about the findings of the survey. InMarch2006, the mandateofthe Anti-Corruption Commission was enhancedto include the development o f a national integrity framework; the Commission was transformed into the national Integrity Committee (ComitB pour la Sauvegarde de l'IntBgrit8). The implementation o f the revised regulations for the declaration o f assets by public and elected officials is progressing reasonably well. In 2005, the majority o f the administrative andjustice personnel submitted the requested declaration which constitutes a major improvement over 2004. At the same time, the compliance rate remains weak insome key areas (e.g. police, memberso f Parliament, mayors). The new law regulatingpolitical parties and their financing that was submitted to Parliament in 2005 is stalled, mainly due to the unwillingness o f the political establishment to restrict party financing in the run-up to the general elections. A decree to regulate recruitment into the public sector was approved in 2005. A legal framework governing access to 32  information is being prepared. It is envisaged to develop an application decree specifying the rules and regulations concerning conflict-of-interest issues in2006. 74. The key instrument to fight corruption, the independent Anti-CorruptionAgency (Bureau IndCpendant Anti-Corruption, BIANCO) became operational in October 2004. Since its inception BIANCO has focused on three areas (i) examination o f corruption complaints (the office has received the 7492 complaints in 2005, the majority o f which deal with the police, the judiciary, land titling and forestry. Based on the BIANCO investigations 214 people were arrested), (ii) prevention, in particular training and sensitization o f public servants o f the police, tax administration, health, education and land titling services. In this context, BIANCO has also provided support to manage several recruitment processes into the public sector; and (iii)further investigation. This includes the implementation o f independent audits of public services (in2005, the audit for the land titling service as well as independent procurement reviews for the transport program and for the education-for-all program were completed; discussions are under way with the respective sectors to address the findings and recommendations o f the audit reports). Additional audits are planned for 2006 for the forestry and miningsectors. 75. Moving ahead, in 2006, the government intends to introduce the concept of labeling of public services ("clean"/ "not clean"), to pilot citizens' report cards for suitable public services, to address corruption inthejudiciary as well as to strengthen the activities inthe area o f `grand corruption'. Expectedresults 76. The main results at the end of PRSC 3, and their current status, include: 0 Adopt sectoral anti-corruption strategies and begin implementation- this activity is under way: a general anti-corruption strategy has been validated which includes the establishment o f an independent anti-corruption agency (BIANCO). Sectoral strategies have been developed to complement these activities. 0 The regulatory framework for the fight against corruption improved - this activity i s under way; a new anti-corruption and money laundering legislation has already been passed; next steps include regulations concerning conflict-of-interest and the financing o f political parties 0 Independent audits and evaluations have been commissioned to address corruption in targeted sectors/public services -this activity is underway. 0 An anti-corruption survey confirms a reduction o f corruption inMadagascar -this activity is under way. A baseline survey will be published shortly; it is envisaged to review the prevalence o f corruption every two years. C. JUSTICE 77. While the Government continues to emphasize the importance of judicial reforms as a criticalelement of its overall governancestrategy overall reform progress has beenextremelyslow. Main reasons include a lack o f a consistent implementation strategy for legal andjudicial reforms as well as lack o f funding to implement more comprehensive reforms. To support justice reforms the European Union is preparing a 5-year program with an overall envelope o f EUR 25m. The main issues that would need to be addressed inthejudiciary include: 0 Lack of credibility of the judiciary The credibility o f the judiciary has been seriously undermined by widespread corruption and inefficiencies. The new anti-corruption survey confirms that the judiciary is considered one o f the most corrupt services. The Government put under investigation a number ofmagistrates because o fcorruption charges; some o fthem have been sanctioned. 0 Low performanceof the judiciary: This is due to procedural and institutional inefficiencies as well as lack o f performance orientation o f the existing staff. This problem affects all areas o f the judiciary 33  and has ledto a significant backlog o f cases, inparticular at the lower courts. A key reasonis the lack of service standards and evaluation methods to examine judicial work. In many areas the case load handled by magistrates and other personnel is not in line with international standards. In areas that require specialization such as commercialproceedingsnot enough trained magistrates are available to deal with existing cases. 0 Human rights concerns. There are also serious concerns about the conditions in the prisons and about the rights o f the accused. International organizations working in this area consider the prison conditions in Madagascar among the worst inthe world. It is presently estimated that about 14,000 prisoners are awaiting trail and prosecution. The regulatory framework for temporary detention of people under criminal investigation is not in line with international human rights standards as it does not limit the time a prisoner can be held in detention. A new law with new standards for temporary detention is being prepared and is expectedto be approved by Parliament inlate 2006. ReformProgram 78. As noted in previous PRSC documents, the Governmenthas identifiedfive broad priority areas which form the basis for its reform strategy: (i) fight against corruption, (ii)expedition of proceedings, (iii)reform o f business laws, (iv) rehabilitation o f court and prison infrastructure, and (v) humanization of detention facilities. The reforms intend to further deepen previous reforms and to consolidate the achievements, in particular in the areas of training, capacity building and codification of texts and regulations. The needs of the private sector are a major consideration in the legal and judicial reform strategy. 79. The implementationof this strategy is severely hampered by budgetary constraints; after 2005 the year 2006 is the second year that has seen a net reduction of the (already low) recurrent budget of the Ministry of Justice which raises concerns about feasibility and sustainability o f the government strategy. The Government intendsto increase funding for thejudiciary inthe revised budget law 2006 whichwill be presentedto Parliament inthe thirdquarter o fthe year 2006. 80. PRSC 1 and 2 supported the development of the reform strategy which would form the basis for the implementationof the reform program. The implementationof this strategy has seen mixed resultsin2005/2006. To address deficiencies at the level o fthe commercial sections o fthe courts a number o f magistrates were trained in commercial proceedings. The Ministry has also continued the work to establish "model courts" inAntananarivo and Ambatolampy which would serve as a reference for the reform o f other jurisdictions. The program to reduce the existing backlog o f cases which was successfully completed in the capital Antananarivo has been expanded to other jurisdictions o f the country (Fianarantsoa, Tamatave, Antsiranana). Since the inception of this program more than 41,000 pending cases were processed. The extension of the program to three additional jurisdictions (Ambatondrazaka, Farafangana, Toliary) is planned for 2006. 81. The introduction of service standards, however, which is seen as a key instrument to improve individual performanceand the performance of the jurisdiction has made little progress. The service standards for the lower courts that were developed in 2005 are still awaiting validation. Standards for the higher courts are still outstanding. Key problems include difficulties to conceptualize service standards, resistance inthejudiciary as well as lack o f reliable statistical data which could serve as the basis to systematically monitor and evaluate performance. It is presently envisaged to introduce the new standards on a pilot basis in two jurisdictions (TPI Antananarivo, Ambatolampy) before June 2006. In addition, the technical assistance provided to improve internal control of the Ministry of Justice has yielded very little results. An area o f concern remains the fight against corruption in the judiciary: the anti-corruption survey confirms the continued prevalence o f corruption; the disciplinary commission in 34  the Ministry o f Justice has not been able to effectively address this issue and to improve ethical standards inthejudiciary. Efforts to revampthe commission (to make it more effective) appear to be stalled. ExpectedResults: 82. The expectedresults at the endofPRSC 3 andtheir current status include: Backlog o f pendingcourt decisions reduced-this activity is inprogress.The year 200415 has seen a net reduction o f the backlogo f cases of more than 41,000 inthe targeted courts. The program i s being expanded to otherjurisdictions. Significant increase of outputs inthejudicial systemwith the introduction of service standards -this activity is in progress. Pilot introduction of service standardsintwo lower courts is planned for June 2006. Reduction o f corruption as confirmed by an independent anti-corruption survey - not accomplished yet. Anti-corruption survey confirms continued prevalence of corruption. Establish financial and administrative tribunals in the provinces - Fully accomplished. Tribunals exist inall six provinces since June 2005. D. CUSTOMS 83. Despite some progress in 2005/2006 customs reforms is still lagging behind expectations. Key problems include revenue generation -still significantly below projections- as well as the perception that corruption has not yet been effectively iiddressed. In addition, service standards (i.e. time for the clearance of shipments) are not systematically enforced. ReformProgram 84. There has been some progress in the functioning of customs since July 2005. A customs strategy and action plan designed to improve revenue generation, introduce service standards and reduce corruption, was adopted in June 2005. To monitor the implementation of the strategy a coordination mechanism (cellule de suivi) was put in place in 2005. A long-term technical advisor from the World Customs Union will be hired in 2006 to support the coordination of the reform program. The following reforms have been undertaken: The tariff system was simplified with the merger of the customs and import duty in the 2005 Loi des Finances. The customs regulations were modernized, including the elimination o f the customs duties credit (crddit de droit); institutingmandatory payments o f the customs duties through the banking system since April 2005; and abolishing the immunity of customs agents from enquiries and prosecution. The customs administration is also expanding the coverage o f its automated data processing system (SYDONIA) to improve operational efficiency. The new system has been installed in all main customs offices, in particular in Tamatave and in Antananarivo. A roll-out to additional customs offices is planned for 2006. Pre-shipment inspection continues to be done by the private company SGS. A pre-shipment inspection report is now requiredfor customs clearance and a system of valuation of imports based on the PSI company's (rather than customs) valuation has been in put in place. Government is also introducing a comprehensive customs management system (TRADENET) which is expected to be operational in the main port Tamatave in September 2006. According to statistics produced by the customs service the time for customs clearance of containers has been reduced from an average o f 10 days in 2002 to 48 hours in 2004 in the main customs office in Tamatave. To address corruption more effectively, the customs directorate is working closely with the Anti-Corruption Agency (BIANCO) with activities focusing primarily on training, sensitization, as well as applicationo f administrative sanctions (i.e. regular rotation o f customs agents). These measures have had a positive impact in increased customs receipts and there has been a notable increase of satisfaction 35  among private sector operators. B U N C O is also involved in monitoring the recruitment process into the customs administration. The agency is presently reviewing the asset declarations submittedby customs officials. In 2005, 10 customs agents were suspended because o f fraud and corruption charges, an additional 20 agents are under investigation. Under the Loi des Finance 2006, the Government has further simplified the tariff structure, with three non-zero rates of 5, 10 and 20 percent, and an un-weighted average rate of 13.6 percent. The Government is also addressing tax administration weaknesses and efforts are ongoing to broaden the tax base. A major area of focus is currently on clearing its existing arrears on VAT refunds and improvingthe system o fVAT refunds in2006 and beyond. 85. At the same time, revenue generation by the customs directorate remains fragile. In 2005 customs was able to generate innominal terms 86.5 percent of the revenues projected inthe budget -this performance is significantly better than in 2004 but still below expectations. The customs directorate generated 86.2 percent of projected revenues in January 2006 and 91.2 percent in February 2006. Main reasons include stagnating imports, the implications of the changes of the customs tariffs, and continuing governance problems inthe customs directorate. To address existing problems the Government intendsto further streamline customs operations as well as to intensify the collaborationwith the pre-shipment agent and the port authorities. It is also envisaged to shift the authority to exemptions from the Minister of Finance to the Cabinet. 86. The implementationstatus ofthe trigger for the PRSC 3 is as follows: 0 Implementsatisfactorily the customs reform action plan, in particular consolidate the introduction of Sydonia ++and extend the system to the customs office inAntananarivo. Fully accomplished as the new system i s fully operational inTamatave and Antananarivo. ExpectedResults: 87. The expected results at the end ofPRSC 3 andtheir current status include: 0 Overall quality o f customs services improved, more revenue generated, and corruption reduced. Not accomplished yet as revenues are still weak and governance issues continue to negatively impact customs performance. E. DECENTRALIZATION 88. In2005, the Governmentcontinuedto strengthenthe new regionswhichwere establishedin 2004 and have become (togetherwith the communes) the second operational levelbelow the central government. The main functions o f the regions are to facilitate commune development and to represent the central government. The legal framework for the regions also stipulates that the de-concentrated services of the central government report to the regional chiefs. The implementation o f these regulations is uneven with significant regional differences. Major problems include the relationship between line ministries, their de-concentrated services, regions and communes as well as the lack o f resources at the regionaland communal levels. In2005 most regions prepared Regional Development Plans. 89. Public finances in Madagascar are heavily centralized with about 95% of revenues and expenditures managed by central authorities.Financial capacities at the communal and regional levels are constrained by insufficient and poorly targeted transfers and a regulatory framework that leaves the collection o f most local revenues inthe hands o f inefficient deconcentrated state agents. Comparedto the 2005 budget, the increase o f allocation to the communes is small with an overall increase o f only 3.7%, reaching 29 billionAriary. This modest increase is due to the fact that the Government also has to ensure some transfers to the regions. However, a significant step has been made because the budget foresees for the first time allocations (4bn Ar) to the new Local Development Fund (FDL) which is expected to be 36  operationalin late 2006. The Governmentconsiders the FDL as the principle instrumentto channel funds to the sub-nationallevels. The main objective of the FDL is to integrate supportto the communes bothby the Government and the donor community under a single mechanism and with harmonized procedural and institutional arrangements. Inparallel the Government wants to strengthen the resources base at the commune level, inparticular by improving revenue collection. 90. The Governmentis addressingthe existingshortcomingsthrough four major interventions: (i)preparinga local governmentfinance law (loi sur la fiscaliti) that would regulate sources and modality of funding of regions and communes including the transfer system and formula; (ii)scaling up of pilot experiences with decentralized tax collection; (iii)establishing the FDL to provide block-grants to communes for local investments and capacity building and (iv) reinforcing communal capacities and create synergies between communes by supporting the creation of inter-communal associations and regional training andresource centers. . 91. The implementation status of the trigger for the PRSC3 is as follows: 0 Increase resource allocation to the communes. Fully accomplished. However, allocations to the communes increasedonly modestly inthe 2006 budget. Another key issue remainsthe actualtransfer which in2005 was significantly below the budgetary allocations. ExpectedResults: 92. The expectedresults at the end of PRSC 3 andtheir current status include: 0 Resource allocation to the communes increased by at least 20% - this activity has not been accomplished. 0 Capacity of the communes to deliver services strengthened. This activity is under way and is expectedto be supportedthroughthe FDLand the new local government finance law. F. TRAININGANDCAPACITY BUILDING 93, The implementation of the governance reform program continues to require substantial investments in training and capacity building, in particular in the areas of public financial management, planning, change management and monitoringand evaluation. In collaboration with the World Bank, the Government is implementing an innovative capacity building and change management strategy that consistsofthe following elements: 0 Cabinet retreats focus on better defining the overall vision and implementationstrategy. In 2004, the first retreat took place with participants from all over the world who commented on the Government strategy, as well as shared experiences and best practice. The results from these events were used to refine the Government program. The second retreat focused on improving service delivery. A third retreat, held inMay 2005, was designedto foster cross-sectoralcollaborationwithin the government ministries, and included a focus on using a rapid results initiative to improve implementation (see below). Another retreat is planned for May 2006 and will focus on the implementationof the new Madagascar Action Plan. 0 Leadership training for the senior management level within government is aimed at strengthening consistency and cohesion of the core government leadership team (President, Prime Minister, Vice Prime Minister, Ministers and Permanent Secretaries) as well as to strengthen their ability to manage and direct rapid change. Complementary leadership training has focused on enhancingthe capacity of the Regional Chiefs. In2006, additional training is programmedto assist senior government officials in implementing complex changes. This program will be directed by a 37  change management team which is led by Prof. Dean Williams, a leadership expert from Harvard University. Additionalcapacity buildingactivities will target the middlemanagementinthe public sector to improve overall performance orientation and the link between political decision making and administrative implementation. The basis for the training will be the results framework developed by the Presidency (`Politique GBnBralede 1'Etat'). To improve cross-sectoral collaborationand the focus on tangible results the Government has decided to extendthe applicationofthe "rapid results" approachto other areas, in particularin the health sector. A first exercise, launched in early 2005, focused on the production, importation and distribution of rice. Cross-sectoral teams were created who worked out `rapid results action plans'. The results o f this work are encouraging as the methodology has proven effective to overcome the existing administrative bottlenecks and the lack of coordination within the Malagasy administration. As a consequence, the Government intends to apply this methodology in other high priority areas, inparticular inthe health sector. The government teams will continue to be supported by internationalexperts for the `rapid results' methodology. To better institutionalizethe significant changes in the area of public finance a comprehensive support package has beendeveloped to support the bigspendingministries. This packagehas been developed by a task force which was set up by the Ministry of Economy, Finance and Budget (MEFB) in2005 to organize professional training for the public finance personnel at the central and deconcentrated levels o f Government. The package comprises initial training in the context of the introduction of public finance reforms, coaching and change management support to institutionalize the new rules into the existing business process as well as institutional development support to strengthen the capacity of the relevant directorates inthe line ministries. The Ministry o f Education has pilotedthis approach which is beingrolled out to other priority ministries (e.g. health, transport). In parallel the Government continues to strengthen quality and effectiveness of local training institutions, in particular in high priority areas such as development planning, public financial management and monitoring and evaluation. The two professional training institutions for the public sector (Centre National de Formation Administrative, CNFA, and Ecole Nationale de 1'Administration Malgache, ENAM) have received substantive support to modernize their curricula and equipment as well as to improve quality and quantity of their trainers. The Government intendsto establish a NationalLeadership Institute to provide high-quality training for future senior managers in the public andthe private sectors. The Institute is expected to be operational inJune 2006. ExpectedResults: 94. The expectedresults at the endo fPRSC 3 andtheir current status include: 0 Effectiveness of the Government leadership team enhanced; consistency between political decision making and administrative implementation improved - this activity has been partially achieved; additional activities are planned for 2006 and2007. 0 Capacity incritical areas incore government services strengthened -training and capacity buildingis ongoing in the areas of public financial management, development planning, change management and monitoring and evaluation. 0 Capacity and quality o f local training institutions improved-this activity i s ongoing; it is anticipated that capacity and quality o fENAMand CNFA will be significantly strengthenedby the end of 2006. PROVIDINGHUMANAND MATERIAL SECURITY 95. The three PRSCs will support the third strategic axis of the PRSP on human development through a sequencedand gradual process. PRSC 1supported the implementation o fthe Government's 38  Education for All (EFA) program and improved service delivery in nutrition. PRSC 2 has deepened the engagement by supporting policy and institutional reforms in health, rural water supply and social protection. PRSC 3 continues to consolidate the reforms started under the previous two operations. A. EDUCATION 96. Basic education is an important priority of the Government and has recently received additionalgrant financing from the multi-donor EFA-FTI Catalytic Fund. The PRSP commits the government to allocating 25 percent o f the domestic budget to education. In 2003, the Government prepared a Strategic Plan for the Reform and Development o f the Education Sector along with a detailed plan o f action for Education for All (EFA), which covers the first nine grades of school (called "Education Fondamentale"), with concrete proposals for achieving the target of universal completion of the primary cycle (grades 1-5). Followinglocal donors' endorsementofthe updatedEFA National Action Plan in April 2005, the Steering Committee of the EFA-Fast Track Initiative (FTI) secretariat agreed to provide interim grants from the Catalytic Fundto bridgethe financing gaps for three years on a multiyear additional fund for Madagascar (US$lO million for 2005, US$25 million for 2006 and US$25 million 2007). These additional grants are provided on the understanding that government will continue to increase its budgetary allocations to through the EFA catalytic funds to primary education (using own resources and aid from budgetary support programs/HIPC funds) and are not meant to substitutefor them. 97. Primary completion rates have improved but an important proportionof children do not complete yet the primary cycle. Since the suppression of school fees in2002, the Net Enrollment Rate registered an increase of 16 points, shifting for 82% to 98% between 2002/2003 to 2004/20058. The surge o fenrolments in2002-03 associatedwith this has now stabilized; new intakes into class 1 decreased around 9% between 200415 and 2005/6. Efforts have beendeveloped in order to reduce the repetition rate from 30% in 2002 to 19% in 2005 and positive impacts are expected on the student retention rate. The Primary Completion Rate (PCR) improved significantly from about 30% in 2002 to 60% in 2005(which means that 40% of children inprimary school do not yet complete the primary cycle). 98. A major issue remains the poor quality of primary education and this will take concerted action on a number of fronts over several years to show results. According to the results from the PASEC test in2003/04 students registered lower scores incomparison to 1997/08, inparticular inFrench and in general for grade 5. The decline in the repetition rate is largely the result of administrative measures on the suppression o f repetitions in CP and in CM1. As a result of the huge increase in student enrollment, despite the high number o f new teachers (about 2,000 per year) the pupil-teacher ratio stagnates around 60. Although recruitments o f regular teachers are on track, redeployment and recruitments in remote areas remain a challenge. As o f end October 2005, out o f the 7,500 FRAM teachers' posts, only 5,800 have been trained and recruited. The provision o f school grants and student learning materials are still facing some delays due to difficulties in budget execution; school budget as well as school supplies are not deliveredtimely at the beginningo f the school year. The objective of one textbook per student per subject is not yet met 99. Concerns also persist on the shortfallin construction of additionalclassroomsfor primary schools. The target of building2,000 classroomsper year is not yet met: Only 375 classrooms were built * The2004 Household surveys (EPMs) showed an increase o f 14 points o f the NER for the same period; from 72% in2002/2003 to 86% in2004/2005. Differences between both sources are noted because MENRS' calculations are based on projections from the 1993 population census, while EPMs figures are from direct calculation from household data. Nonetheless, the significant increase o fthe NERduring the period is valid. 39  in 2004 and 885 in 2005. Long delays in classroom installation are the main reason for the shortfall; against a target o f 1,400, only 823 have been completed. Moreover, quality issues have also been raised. Delays inthe execution of some externally assistedprojects have also slowed down constructionactivity. Apart from the shortfalls inphysical progress, concerns were raised inthe April 2006 joint donor review of EFA implementation about the adequacy of financial management procedures to oversee such a large construction program. The Ministry is however fully committed to address the situation and, under its leadership, has proposed, to carry out a full financial andtechnical audit of its constructionprogram. Reform Program 100. The Ministry has carried forward its reform program for primary education and begun elaborating a strategy for post-primary education. A major achievement inmanagingthe program is donor alignment around the EFA plan, the creation o f structures within the Ministry to provide leadership to EFA implementation and manage the additional funds for EFA, the institutionalization of a process of joint donor reviews conducted bi-annually and government leadership both for the plan and for donor coordination. The World Bank has provided leadership for initiating and sustaining these processes, including the supervision of the Catalytic Fund grant. The MENRS is initiating a process in order to develop a strategy for post primary education and technical assistance is provided mainly by the World Bank. 101. The April 2006 joint Government EFA review noted major progress on areas of concern identified by the previous year's review. The review positively endorsed Government progress, further confirming the mid-term review o f November 2005. Teaching conditions are improving with the implementation o f the 2005'06 teachers recruitment plan, the increase of FRAM teacher remunerations and the arrangements for a closer teacher-salary payment mechanism. On quality, many actions are underway, namely the introduction o f bilingual textbooks, the launching o f a competitive grants program to develop local initiatives, the introduction of innovative supports to teachers such as distance learning and the creation of resources centers. Efforts have been made to rationalize the human resources management and about 2,000 posts are being reutilized by the MENRS. Measures to improve the education system management are being implemented as the creation of the regional directorates with increased responsibilities for the implementation o f key activities faced delays duringthe year 2005. At the central level better management is observed with the Steering committee and the Technical Management Unit for the EFA, which work closely with the district level. Appropriate management tools such as annual and comprehensive workplans are developed at all levels o f the education system and better donor coordination is observed inpractical terms. 102. Looking forward the EFA Review identified areas where further efforts are needed: (i) endorse the ministry proposal to undertake a financial and technical audit of the government financed primary classroom construction program (ii)produce an action plan to enhance national classroodschool capacity and which would refer to the recommendations provided by the January 2005 construction study, that would be prior conditions to include construction expenditures in the 2006 and 2007 Madagascar additional grants from the FTIcatalytic fund, (iii) the progress made on solving pursue the problem of "postes budg6taires", (iv) evaluate options regarding linguistic policy, (v) improve budget preparation, presentation and reporting for 2006 and using effectively related budget management tools (cash flow and procurement plans), (vi) agree with the MFB on a global waiver to commit more than 40 percent of the allocated amount for specific budget items and (vii) improve the training program particularly for `in service' training for FRAMteachers. The FTIprocess has enabled the MENRS in its role o f donors' coordinator. For the implementation o f the EFA Plan, the "Unit6 d'Appui Technique - UAT" has been created inside the MENRS and it will managethe domestic and external additional funds for the EFA plan. 40  103. The status o fthe education trigger for the PRSC 3 is as follows: e The implementation of the EFA remains on track as assessed by the joint donor reviews of November 2005 and April 2006. The next review is scheduled for November 2006. The Trigger is fulfilled. ExpectedResults 104. As noted above, there has been significant increase in enrolments and quality is also improving, but some of the other expected results have not yet been fully achieved. However, as assessedby the April 2006joint Donor assessment, the expectedresults for the EFA plan, which underpin those of this PRSC series, are likely to be achieved and Madagascar has already been granted additional financing from the FTICatalytic Fundfor 2005,2006 and 2007. Table 11: ExpectedResultsof the EFA Program Note: The numbersinthe table correspondto the updatedEFA planofApril 2006. B. NUTRITION 105. Ongoing nutritioninterventions show that successfulreductionof malnutritionrates among young children is possible in Madagascar. An impact-evaluation of the community-based nutrition program, which is implemented in 62 districts, demonstrates a 10%-point reduction in underweight malnutrition in the poorest areas of Madagascar where the program intervenes for at least two years. Despite this reduction, national level malnutrition rates remain high and more is needed, especially to reduce chronic malnutrition rates, or stunting. Decreasing stunting takes long-term commitment and intensified attention towards pregnant women in order to reduce low birth weight. Impressive improvementshave beenmade concerningexclusive breastfeedingof children under six months (from 43 percent in 1997 to 67 percent in 2003/04 based on the DHS) and Vitamin A supplementation among children under five (from 4 percentto 76 percent over the same period). However, iron-deficiency anemia among young children remains very high, with more than two-thirds of children under the age of five suffering from anemia. In addition, seasonal short-term hunger among school-aged children has been 41  highlightedas a major impedimentto learning. Deworming o f school-aged children and supplementation with iron to the same age-group has been successfully carried out inthe last 5 years in Madagascar, but again inthis area, more remains to be done. 106. In recent years efforts are madeto improvethe quality of nutritionservices, the integration of basic health services at the community-level, and to strengthen the referral system for severely malnourished children, but more attention is required to address the remaining challenges - iron deficiency anemia among young children, seasonal hunger, systematic nutrition surveillance, the nutritional status o f pregnant women and the collaboration with the health sector. Improving quality and extension o f services to the national level is neededto attain the MDGfor nutrition in2015. 107. The reversal of the negative trends and improvements in the nutrition situation in Madagascar are the results of years of Government investment in community based nutrition activities, improved quality of nutrition services, and more recently the strengthened capacity to develop policies as well as increased attention to institutionalizationof nutrition and allocationof budget for nutrition services. However, further progress is needed to consolidate capacity and coordinate within the key-sectors, such as health and agriculture. The recently created National Nutrition Office (ONN) should take on these extra efforts and should be encouragedto continue the use of existing implementation capacity in Madagascar, particularly the executing unit SEECALINE, the former implementing agency o f the community based nutrition programs. More work needs to be done to consolidate the institutional set up of Nutrition, such as the further integration o f SEECALINE in the ONN, guidelines on the collaboration with the other sectors and - most o f all - getting the National NutritionCouncil operational, as it was officially createdtogether with the ONN, but is not functional yet, while the final definition o f its role, responsibility and constitution has been postponed at several occasions. ReformProgram 108. The Governmentis committed to continuing the reductionof malnutritionas evidenced by the adoption of the first NationalNutrition Policy in April of 2004 under PRSC 1and the creation of the NationalCouncilfor Malnutrition (CNN) and its secretariat, the Office Nationalde Nutrition (ONN) in November 2004 to lead the implementationo f the Nutrition Policy and programs. A National Nutrition Action Plan was developed and validated in March 2005 and is being implemented. The Government o f Madagascar and Parliament also demonstrated a political commitment by approving increased budget-allocations for nutrition programs in 2005. On the other hand, the Council is not functional yet, while the 2005 budget for Nutritionwas only made available at the end o f the year, which created major implementation issues. Furthermore, the 2006 budget has been severely reduced, which may lead to significant problems not only with the implementation o f projected extension of the number of nutrition sites inpoor districts, but also to maintainthe current school and community basedactivities. 109. Locallevelsupport is strongly committed to maintainingthe nutritionprogramand there is high demand for extension. Despite financial delays o f more than 8 months in2004 and 2005 the field based activities o f the program continued to function due to a high local commitment (beneficiary- communities, NGOs and local government). Maintaining current efforts and extending efforts to more communities are crucial to ensure the attainment o f the MDG for nutrition. At present the 3600 sites continue to function and an additional 1800 community sites would be functional by the end of 2006. All sites will progressively adopt the new approach which decentralizes implementation responsibility to the local government level with supervision o f quality still maintainedby the central level. 110. The comprehensive school nutrition and health program is reaching almost 2 million school-aged children in the program areas and will maintain current interventions. Projected 42  extensions have been cancelled due to budget cuts. Efforts to provide seasonal school-feedingprograms to address the short-term hunger problem during the lean period in food-insecure areas continue. More work is neededto developa comprehensiveSchoolHealth andNutrition Policy. 111. The integrationof the implementingagency SEECALINE into the ONN and the pilotingof the new approach (decentralized responsibility to local government) in 22 communes are both in process. The ONN has integrated SEECALINE as its operational branch which is mandated with the implementation of the community-nutrition program, but the process is not yet totally finalized. Many institutional issues remain unclear while the whole set up needs further reflections and political commitment in final decision making. For example, it remains to be clarified how SEECALINE staff will be absorbed into the ONN structure once the projectwill close. Progress has also beenmade with the preparationofthe pilot of the new approachofthe community-basednutrition program, the PNNC, in22 communes and 110 sites. The communes have been selected and awareness about the program is created, the NGOs (first-line implementers) have been selected and contracted to start interventions when financing will be made available (estimated aroundJuly 2006) inJuly 2006. Training manuals have been developed and training of trainers and implementers is ongoing. The actual activities in the pilot sites were delayed due to the lack of financing in early 2005. The pilot will be closely supervised and evaluatedfor possiblefurther extension. ExpectedResults 112. The mainexpected resultsat the end ofPRSC3 and their currentstatus is: 0 The main overall outcome is a reduction in the child underweight rate of 20 percent between 2004 and 2007, basedon the results of anthropometricsurveys (2004 & 2007/8). The available information suggests that there is progresstowards meetingthe objective. 0 In addition, the institutionalization of nutrition and the implementationof the National Community NutritionProgramwould lead to sustainedcommitment and investment innutrition for the longterm at the national, regional and commune level (integration of nutrition indicators in the Regional and CommuneDevelopmentPlans). Table 12: Key IntermediateOutputsofthe NutritionProgram I I 2002 I 2003 I 2004 I 2005 I 2006 I 2007 Children 0-3 years in 344,000 I 2001 I 493,000 I 625,300 I650,000 1650,000 I 987,900* I 1,200,000* * Most intensiveinterventionsare for childrenunderage 2. 43  C. HEALTH 113. The sector continues to make steady progress in improving access to and quality of maternaland child healthservices. Despite changes inorganization andpersonnel within the M O H and insufficient medical specialists and paramedical staff, the sector retains its focus on reform to improve governance and service delivery, and to reduce the vulnerability of poor households to health risks. Coverage of high impact interventions such as immunization, vitamin A supplementation and impregnated bed-net distribution is expanding along with efforts to further improve the quality and access to health care at primary and first level referral facilities and the promotion o f health insurance schemes and solidarity mechanisms built around user fees and cost recovery for drugs. The number o f skilled health workers posted in rural areas is also increasing albeit at a slower pace than expected, and the associated approaches of community workers and social marketing is also having positive impacts notably on the use o f modern contraceptive methods 114. The maternal mortality ratio (MMR) has remained stable since 1997 around 470 jeopardizing the likelihood that Madagascar will reach this MDG by 2015. While antenatal care has increased to 80 percent and the presence of skilled staff at birth has increased from 47 percent to 54 percent, the full benefit o f skilled attendance at birth can only be realized if the referral system, comprising all of the essential elements of access to the whole spectrum o f obstetric care including emergency services, is fully functional. Some progress has been achieved under PRSC3 inaddressingthis challenge through the setting up o f better communication networks between primary and first level referral facilities using solar based VHF radios; the strengthening o f blood banks at district level, provision of ambulances and obstetric care equipment and the rehabilitation and re-equipping of some district and referral facilities. However, efforts for more systematic improvements inreferral services and emergency obstetric care, particularly in rural areas, will be intensified. Moreover, deaths due to abortion are likely to contribute significantly to the MMR(40 percent inrural areas, and approximately 52 percent in Antananarivo alone), thus improved access to family planning would considerably improve maternal healthinthe mediumterm. 115. Madagascar had been making some headway on the control of malaria, tuberculosis and leprosy; howeverthese efforts seem to have beenlosingsome ground due mainly to delays in access to resources, and the deterioration of the existing surveillance system. Madagascar has secured sizable resources for the control o f Malaria, tuberculosis and HIV/AIDS treatment mainly through the Global Fund grant facility. Recently however, delays in implementation have occurred due lengthy processes in defining appropriate strategies (i.e. malaria) or delays in access to the funds available. Nevertheless, social marketing o f highly subsidized permanently impregnated bed nets increased mother and child prevention in the coastal regions. Diagnosis and treatment of tuberculosis improved with the expansion of DOTS (directly observed therapy system) and increased drug availability nationwide. 116. With the prevalence rate of pregnant women testing positive for HIV at 0.93 percent nationwide, the HIVIAIDS epidemic could be contained if major Governmentand donor efforts are continued. While occurring later than in most of its neighbors in Africa, the Madagascar HN/AII)S epidemic has increased. Highrates of Sexually Transmitted Infections (STIs), together with risky sexual behavior, represent major vulnerability factors for a quick spread o f the virus. In 2005 an estimated 180,000 persons were living with HN. Since the establishment o f the ComitC National de Lutte contre le Sida (CNLS) to implement the HIV/AIDS program, a SWAP approach has been put in place with the main partners (World Bank, Global Fund, ADB, USAID, GtZ, UNICEF, UNAIDS, etc.) to implement numerous activities (information, education, mass media communication, cinemobiles in villages, distribution o f STItreatment kits, etc.). While knowledge o f HN/AIDS satisfactorily progressedbetween 1997 and 2003/04 fiom 69 percent to 79 percent for women, and to 88 percent for men, behavior change has lagged behindamong high-riskgroups inhot spot areas as well as among the general population. The 44  CNLS i s rightly reorienting its strategy to: (i)concentrate activities on behavioral change and inthe most high risk zones; (ii) strengthen mass and peer communication on STI, HIV testing, and reduction of stigma; (iii)develop routine testing, and voluntary counseling; and (iv) strengthen public private partnerships as a way to address the weakness o f public health services. ReformProgram 117. The M O H is continuing implement initiatives to prepare the sector for the transition to programmaticlending.The first round ofthe National Health Accounts is completed and dissemination will be done shortly. Several studies to measure the effectiveness and efficiency of public health service provision have also been initiated. Inaddition to the activities completed inthe last few years, this work will further strengthen the analytical background necessary for M O H to transition to programmatic lending. 118. Under the new sector policy, which was adopted in June 2005, emphasis is placed on the need to re-orient health resourceallocations to underserved areas and improvepublic expenditure management. Prevention and treatment of malaria and other major communicable diseases are also among the key priorities. Moreover, the policy seeks to achieve closer integration and coordination of health sector interventions with other activities that impact health status such as water and sanitation, nutrition, transport, and rural development, and aims to expand the coverage of risk-coping strategies such as mutual health insurance schemes and solidarity mechanisms. To implement the policy, the M O H is planningto adopt a sector wide approach (SWAP) and has initiated the preparation of a comprehensive sector development program (SDP). The process will require an increased leadership from MOH and includes an assessment of the human resources and financial inputs required to sustain policy implementation over the next five years, along with specific health improvement targets to be attained in order for the country to achieve the health-related MDGs. The M O H expects to organize a review of the SDP and its accompanying medium term expenditure framework (MTEF for 2007-2009) by June 2006, and to finalize both documents soon afterward. 119. To estimate the sector's investment needsover the next ten years, a processof analyticwork was initiated using the Marginal Budgetingfor Bottlenecks (MBB) programmingtool. The analysis has highlighted the importance o f adequate investment both in human resources development and in infrastructure - especially referral facilities. The analysis is based on a dynamic path characterized by various growth scenarios including linear increases in service delivery and/or frontloading for infrastructure and equipment supply. Preliminary estimates from the modeling exercise indicate that significant resources would be necessary to enable Madagascar to meet the health-related MDGs by the target date of 2015. The planned expansion o f essential health services, including enhanced clinical referral capabilities for neo-natal and obstetric care, would require additional resources over the short to medium term to set the country on a dynamic path toward realizing the MDG. The first base scenario calls for an increase of US$3.80 per capita and aims at progressing steadily towards the child mortality, malnutrition, malaria and HIV MDG targets through increased use o f well known high impact health interventions such as immunization, family planning, use o f impregnated bed-netsand social marketingof health and sanitation products including oral re-hydration therapy. The other scenarios call for a tripling to quadruplingo f spending on healthto support a significant expansion o f clinical services which will be necessary to make progress on the maternal mortality MDGs. 120. The MOH intends to organize a consultation around the SDP to ensure predictable and sustained financing of the program. The IDA Health Sector Project will close on December 31,2006 and further Bank support to the health sector, in addition to the PRSC, is now being explored in the context o fthe new CAS via other instrumentspossibly within a SWAP approach. 45  121. Health system management at the local level is also improving although budget management capacity remains a major challenge. The planning, programming and monitoring functions of regional and district health management teams have been strengthened. All regions and districts have adjusted their budgetingprocess to the new budgetlprogram format, and some have begun to introduce performance-based planning using management tools and technical support from various partners. The performance o f the district managementteams has started to improve as a result of technical support and staff recruitment. All but a few o fthe districts are now able to formulate their three year plans and develop annual work programs along clear norms and criteria. However, implementation of those annual plans is still weak due to poor implementation capacity, insufficient resource flows to the regions and districts and low capacity for procurement o f the large quantities o f commodities and equipment needed to expand health services. Furthermore support from regional and communal administrative authorities is still weak. This situation is in part due to substantial limitations at central level. For instance, budget management functions remain weak and require increased efforts to strengthen the administrative and managerial capacity of the health system. The M O H budget execution in 2005 has remained deceptively low. The focus under this PRSC is on continuing efforts aimed at developing capacity at central, regional and district levels and at devoting increased attention for more systemic support and monitoringof budget distribution and implementation. 122. Regardingimprovementsin health care services, progress has been moderate inthe key areas o f hospital reform, defining and validating service standards and in finalizing the inventory of maintenance systems and testing different options to set up a national maintenance system. On the other hand, the pharmaceutical policy was reviewed as planned 123. On hospital reform, while the quality of basic health care is acceptable, the health system performs poorly at hospital level, limiting referral to urban areas and, only then, when it is not further compounded by financial barriers. The quality o f services at hospital level is affected by the lack of proper medical specialists, equipment, maintenance, proper drugs and consumables, etc. However, the creation of the health regions has significantly modified the set up o f district health facilities and reference hospitals. With support from WBI and in partnership with other donors, hospital level services are being reviewed and should lead to a reorganization o f the referral system and a transformation of the role and mandates o f district and regional hospitals for more effective and efficient service delivery. The program o f creation of essential services particularly in surgery and emergency medicine and the re-equipment and rehabilitation o f health facilities is progressing well and will continue. However, the overall reform program for hospitals is somewhat delayed if compared with the initial chronogram proposed for PRSC 2. 124. On human resources reform, although limited, the appointment and redeployment o f general practitioners and paramedical staff has contributed to improve the functioning of existing facilities. The Ministry has prepared a training plan for human resourceswhich it expects to finalize shortly. The human resource development plan and health infrastructure development plan currently under preparation, including an assessment o f bio-medical equipment and maintenance requirements, will help assess resource requirements and inform the development of a sustainable medium-term hospital expansion program, andthe neededhumanresources redeployment. 125. Adequate supply of drugs was restored with the reintroductionof cost recovery in January 2004 (after a period of free distribution during the 2002 crisis), and the 35 percent markup on generic drugs is among the lowest in Africa. However, this low level o f mark-up does not leave much room for additional resources to improve quality. While the Government has succeeded in maintaining low drug prices through subsidies to compensate for the high devaluation during 2004, it will have to carefully manage the restoration o f prices reflecting drugs' real cost in the near future. Moreover, a substantial number of drugs and products (mainly the ones with the highest externalities) distributed in 46  the public as well as in the private sector are highly subsidizedg. Given that drugs and consumables are cheap, free or highly subsidized at first contact level, health care is affordable for most o f the people at the periphery, allowing for a relatively simple exemption system. Inaddition, special services have been organized for the poor in several areas, including free nutritional rehabilitation services for severely malnourishedchildrenandmothers in35 hospitalsnationwide(contracted out to NGOs). 126. Cost-recovery was reinitiated at health center level, but with accompanying exemption policy measures for the poor at this level. Despitethe documentedhigh prevalence of poverty among the general population and the introduction of payment mechanisms to assist those who have been identified as poor to have access to basic health services vonds d'iquite`), the small number of persons who claim to be indigent indicates that there may be significant cultural barriers to identifying oneself publicly as poor or indigent. Similar measures have been gradually introduced in hospitals, given the impoverishing effects of hospitalization, where most surgical and other consumables are not available and must be purchasedinprivateoutlets, endingup inunreasonablyexpensivebills. 127. Madagascar's effortsto provide services to the poor focus on increasing the availability of quality services and ensuring the financial accessibility of these services. The MOH commitment to assess funding mechanisms for health centers and hospitals remains strong. The program of piloting equity funds at regional and districts hospitalswhich is proceedingas plannedwill continue over the next year. The organization of pilot mutual health insurance schemes is advancing a bit slower than planed with only 12 out o f 20 districts having developed such a scheme. An evaluation of the results so far is expected before the end of the year and the lessons learned will help with identifying a more realistic schedule. The first roundof the nationalhealth accounts study completed in2005 should help improve the data base on private andpublic expendituresand contribute to better budget allocations. Preparationofthe 2007-2009 MTEF is initiating andthe process of developingsustainablehealth care financing projections is currently underway and will help determine the financing framework required for Madagascar to achievethe MDGs. 128. There is still a significant need to improve the monitoring and evaluation of the health sector. The health information system is not fully functional and most importantly the data collectedare not effectively usedto manage the services, monitor and evaluate policies or alert authorities of potential epidemics. 129. Overall, there has beensubstantialprogressonPRSC3 planedactions,althoughsome areas remain weak, namely, budget execution and management, as well as the capacity of the MOH to translate the overall policy into an operational plan that would be financially sustainable. In addition to actions that address these issues the proposedactions for the next twelve months will continue to focus on activities to increase access to health services by the poor, further reduce existing financial barriers to access to basic services, and delivering preventive services to remote populations. Achieving these goals requires an increase in the overall financial allocations to the health sector (both as a percentage of the government budget and as additional donor funding), as well as a close monitoring of how those resources are spent andthe results achieved ExpectedResults: 130. The main results expected at the end of PRSC3 and their current status include the following: Vaccines, prenatalvitamins andmalariachemoprophylaxis, TB and leprosydrugs, malariatreatment for children; plaguetreatment, STItreatmentkits, permanentlyimpregnatedbednets, contraceptives. 47  DPT3 vaccination rate of children below 1year, not to decline below 80% in2006. DPT3 vaccination among under one year olds, is currently about 86 percent. The objective hasbeenaccomplished. The Sector's financial framework guarantees: a) the provision o f drugs and medical material at the level o f the health centers and district hospitals; and b) financial accessibility o f a basic package o f services for all. This is anongoingprocess Increased percentage of deliveries at health services. The situation has not improvedyet despite the increasepercentage substantial o fprenatal consultations. MTEFvalued as a programmingtool for MINSAN-PF and partners. This now an on-going activity as the first MTEFwas completed last year and will now be updated. Increased access to health services. The government has increased the number o f health facilities particularly in previously underserved areas; progress is still needed in improving quality at the hospitallevel D. RURALWATER SUPPLY 131. The provisionof drinking water services figures prominently in the PRSP as part of the objective to promote Human Development in particular for the poor and is among the top five priorities of the agenda in "Madagascar Naturellement". Access to improved water supply and better sanitation accompanied by effective hygiene education are critical to reach the MillenniumDevelopment Goals, because o f their complementary role in improving both health and productivity and providing increasedopportunities for education and employment, especially for women and girls. 132. Access rate to potable water in rural areas has increased from 13% to 16% between 2003 and 2005. In 2005, an additional 245,000 persons living in rural area gained access to potable water against 220,500 in2004. Reaching the MDG, i.e. providing 52 percent of the rural population with access to potable water by 2015, will require providing 6.6 million additional people with potable water, or about 660,000 people per year. That will necessitate increasing significantly the overall sector capacity through improved activities planning, increased responsibility for service delivery at deconcentrated and decentralized levels and increasedpublic expenditures efficiency and sector financing support. ReformProgram 133. The Government has continued to make significant progress in setting up the necessary building blocks to move to programmatic approach and enhanced budget support for the rural water sector. InJune 2005, the Government endorsed the national water supply and sanitation program (PNAEPA) aimed at reaching the MDG for the water and sanitation sector. The Directorate of Water and Sanitation (DEA) of the Ministry of Mine and Energy (MEM) has definitively adopted in 2005 the program budget approach to plan and monitor all sector activities. A manual o f procedures for implementingand managing water and sanitation projects was disseminated to all sector stakeholders in order to standardize technical norms and practices all over the country. A water point computerized database is in place at the DEA for measuring sector progress. The DEA has recruited 13 staff to strengthen its central and deconcentrated capacity. Finally, annual water and sanitation review has been institutionalized in 2005 to offer the opportunity to review through a participative approach sector performance, past DEA program budget execution and address key sector issue and make recommendation to remediate sector weaknesses. About one hundred people participated in such event, from the government, donors' community, NGO's, private sector, mayors, and chef o f region. The first one was organized inJune 2005 and the second one inApril 2006. 134. Total budgetfor the DENMEMhas continuedto substantially increase over the past years, but remains still insufficient to expect to reach the MDG's. Expenditures increased from US$10.6 48  million in 2004 to US$13 million in 2005, with domestic funding representing 45 % of the total 2005 budget o f the DEA: 87% of the budget was dedicatedto rural water, 11% to urban water and 2% to rural sanitation. DEAMEM 2006 budget is estimated at US$ 19.5 million, representingan increase of 33 %, which is coherent with the GOM PRSP priorities. However, it is estimated that about US$ 31 million would be neededannually to reach the MDGtarget for rural water supply. 135. The overall implementation of the national water supply and sanitation program (PNAEPA) continues satisfactorily. Buildingon the positive trend and results of last year, DEAMEM continues to lead the work o f the sector wide approach (SWAP) in close collaboration with other donors (AfDB, EU, JICA, WaterAid, UNICEF, USID) to increase its absorptive execution capacity. More specifically, on-going activities support the sector: 1) strengthening the medium term results oriented program budget planning process in order to increase sector execution capacity, public expenditures efficiency, and monitoring and evaluation; 2) harmonizing stakeholders' approaches; 3) increasing responsibility and resources to deconcentrated levels as well as to regions and communes in decision making for programming and supervising o f service delivery; 4) increasing support to sanitation and hygiene promotion to maximize health benefits for the population and 5) promoting innovative water service delivery mechanism using local Public Private Partnership, where half o f the capital investment is provided to local governments (mostly by supplying pipes, equipment and meters) and where private operators and community/local government provide the remaining 50% and sign a medium term management contract for the service. 136. The PRSC3 trigger for the rural water sector is fully met. The MEMDEA and its main partners have implementedas expected all the recommendations ofthe 2005 sector review inthe program budget2006-2008. Key actions taken include the following : i)Creation o f a new department inthe DEA dedicated to the preparation and monitoring o f the program budget; ii)Definition o f criteria to select communities to be included in the program; iii)Advertisement of bidding documents for works, goods and services at the provincial and regional levels; iv) Dissemination to all stakeholders o f the national manual of procedures ; v) Setting up of new procedures for collecting data to update the DEA water points database; vi) Recruitment of a consultant to operate the computerized national water points database; vii) Agreement with INSTAT on data to be collected for water in national surveys and viii) Increased allocationfor sanitation in2006 DEA budget. ExpectedResults 137. The mainresultsat the end ofPRSC3 andtheir current status are as follows: e Increase in overall sector capacity. As discussed above, a number o f actions have beentaken by the DEA to increase sector capacity, as recommended by the stakeholders duringthe 2005 sector annual review. This is now an ongoing activity e The Program budget o f the DEA is the reference framework for strategic and operational programmingandthe monitoringand evaluation of all sector activities. This is now a going activity e Access to safe water will increase from 13 percent in 2003 to 18 percent at the end o f 2006 in rural and semi-urban areas. Available data suggest that this resultwill likely be achieved. E. SOCIAL PROTECTION 138. Seventy two percent of the populationlives in poverty and shocks are widespread. Interms of natural disasters alone, more than 30 cyclones, 6 droughts and 2 famines have hit the island nation since about 1970. Madagascar's on-going risk and vulnerability analysis finds that other shocks, 49  including human disease, locust infestation and livestock disease, are widespread, if less visible than natural disasters. 139. Existing safety net programs are ill-adapted to effectively managing these risks. The current system of safety nets has evolved in response to various crises. As a consequence, much of today's spending appears to be crisis-driven, to the detriment o f longer term strategic aims. Moreover, beneficiary groups have not beenrigorously definednor prioritized. Although social protection spending comes to about 1percent o f its GDP, the lack of a clear definition and prioritization of vulnerable groups creates the risk that these resources will be spread across broad beneficiary populations, to little effect, rather than concentrated on the neediest groups. Inorder for Madagascar's social protection resourcesto achieve maximum impact, a greater portion of resources need to be invested further upstream, in risk prevention and mitigation instruments; ina more coordinated fashion, with less overlap between different partners' activities; and fot the benefit o f well-defined, agreed-upon vulnerable groups. 140. In 2002, the Government created a Technical Committee on Social Protection (TCSP) to address the issues raised above, through development o f a comprehensive RiskManagement and Social Protection (RMSP) Strategy. Though the TCSP has been effective in this role (the RMSP Strategy is expected be completed inFY06), it is not a permanent Government body, and its mandate does not extend to implementing the strategy nor undertaking social protection reforms. Madagascar now needs a permanent institutional framework for social protection, with a mandate to implement the RMSP Strategy, to lead social protectionreforms, and to guidekoordinate future investments inthe sector. Reform Program 141. The TCSP has prepared a Social Protection Policy Note that was validated in May 2005, and has produced a draft RMSP Strategy that was presented for international peer review at a workshop on the development of social protection strategies in Africa (Tunis, June 2005). Final comments by the Bank and donors are being integrated. The strategy will help Madagascar to set clear objectives, reform goals, and cost-effective interventions. They will be based on an assessment o f the priority areas o f vulnerability, and will take into account the need to balance short-term, risk-coping instruments with long-term, growth-enhancing social protection interventions. The Strategy provides the analysis necessaryfor social protectionreforms envisioned under PRSC3. 142. The TCSP has also done initial research on the creation of a permanent institutional framework for social protection. Because resources are over-invested in emergency management and response, it i s critical that the mandate of this social protection agency/committee/secretariat encompass management o f all welfare-harming risks, and not only highly visible natural disasters and other emergencies. Expected Results 143. At the endofPRSC 3 the expected results andtheir current status are as follows: 0 The Finalization and validation o f the Risk Management and Social Protection Strategy is ongoing will be completed by July 2006. 0 Implementationof social protectionreform program, and accompanying interventions. This activity is delayed as it is contingent on the validation of the Strategy. 50  STRENGTHENINGMONITORINGAND EVALUATIONOF THE PRSP 144. The PRSPlays out the objectives,institutionalframeworkand operationalmodalitiesof the Monitoringand Evaluation(M&E) system. The objectives of the system are to monitor inputs, outputs and outcomes, and evaluate impacts. The system, anchored in the Secretariat Technique a l'Ajustement, has producedregular reports and updates o f the strategy. However, it suffers from the limitedcapacity o f some o f its actors, in particular some o f the sector ministries. In addition, the analytical content o f the reports i s limited, as the links between activities/expenditures and outcomes or impacts are not systematically establishedor analyzed. 145. The institutional arrangements for the monitoring and evaluation system are a critical element of the results-based MadagascarAction Plan. A clear logical framework for the Madagascar Action Plan is essentialto ensure that monitoring and evaluation can become a tool for greater evidence- basedpolicy making. The structure ofthe monitoring and evaluation system is currently beingrevised. In particular, the government plans on simplifying and harmonizing the reporting requirements for its agencies, clarifying the roles and responsibilities of all actors, as well as developing a clear calendar of activities aligned with the decision-making processes, which will improve the analytical content and provide meaningful feedback into the policy making processes. Once the system is clearly established and its work program identified, these can form the basis for the coordinationof donor support. 146. As part of the framework for M&E, the Government is currently elaborating a national strategy for the development of statistics (Strategic Nationale de Developpement de la Statistique, SNDS). This framework will help strengthen the statistical capacity, coordinate and rationalize the statistical system, improve the quality o f the statistics, ensure greater access and use o f data for policy making, update the legal framework, and coordinate external assistance. The Government prepared the road map, which outlines the process for the elaboration of the SNDS, in September 2005 (with representation from the PARIS 21 secretariat and key donors, including the World Bank, European Union, UnitedNations system, IMF and France). The diagnostic, expected by endJune 2006, will form the basis for the elaborationofthe strategy and a detailed action plan. 147. The PRSCs are promoting the M&E of the PRSP to improve the results focus of the strategy, the alignment of the programs to the PRSP, and data quality and accessibility. This includes the development of a concrete plan for strengthening the M&E system, supported also by an Institutional Development Grant. It also includes the elaboration and implementation o f the national strategy for the development o f statistics, through direct guidance, the Institutional Development Grant, and the Accelerated Data Program. The PRSCs have also supported the improvement o f statistics and indicators inselectedsectors, among which education, health, and infrastructure. Finally, the PRSCs have supported the elaboration and analysis o fthe 2004 household survey. Povertyand SocialImpactAnalysis 148. The proposedPRSC 3 does not support any reforms that are expected to have significant distributionalimpacts. The Government however remains committed to understand the distributional impact of key policy reforms and economic events. Ex-ante poverty and social impact analysis (PSIA) has beenundertaken inthe past or is planned inthe coming months to inform critical policy issues. Inthe last two years distributional analysis has been conducted to understand the impact o f the reduction in rice tariffs of 2005 and the implementation o f land tenure securitization. To date, PSIA is ongoing to understand (i)the poverty and social impact of health care and the poor by investigating Government efforts to meet the health care needs o f the poor inthe context of the reinstatement o f cost recovery for drugs and (ii)the impact of oil price increases; following the 2004 fuel price liberalization and the 51  subsequent sharp increase in world oil prices in 2005, is essential to investigate the impact that such changes are having inMadagascar, including their effect on householdspendingpatterns V. CREDIT IMPLEMENTATIONAND RISKS A. CREDIT ADMINISTRATION FiduciaryAspects 149. Foreign exchange system: an IMF safeguards assessment was completed in March 2006 and identified continued weaknesses in the BCM's system of internal controls, financial reporting, and legal framework. The assessment made recommendations to address the observed vulnerabilities, which included (i)an annual external audit report on the BCM's transactions with the government and their compliance with the central bank law; (ii)quarterly reviews by the BCM's internal audit function o f monetaryprogramdata reportedto the Fund; (iii) adoption of International Financial Reporting Standards as the BCM's accountingframework; and (iv) measures to strengthen the quality of the BCM's external audit. An agreed action plan with the Central Bank authorities has been developedby the IMF to ensure adequate and timely implementationof these recommendations.A previousassessmentwas completed in November 2001. While some recommendationsto strengthenthe safeguards framework ofthe BCMhave been put in place, others required more time and are now being addressed in the context of the new assessmentand includedinthe above mentionedactionplan monitoredby the IMF. 150. Public Finance Management System: the World Bank's CFAAICPAR, was completed in 2003. Other diagnostics carried out over the last three years by the Bank and other donors, identifieda rangeo f issues hamperingthe performanceof Madagascar's budget andexpendituremanagement system. To address these issues, the Government has developed since 2004, an annual priority action plan for public finance reform which have been successfully implemented.Details of implementationfor 2005 are provided insectionIV A above alongwith the challengesahead. Disbursement,ReportingandAuditingArrangements 151. The proposedcreditwill follow the Bank's disbursement procedures for developmentpolicy support. Credit proceeds will be disbursedagainst satisfactory implementationofthe developmentpolicy program and not tied to any specific purchases or be subject to procurement requirements. Once the credit is approved by the Board and becomes effective, the proceeds of the credit will be disbursed in compliance with the stipulated single tranche release conditions. Once the Bank's Board approves the credit and at the request of the Borrower, IDA will disburse the proceeds of the credit into an account designated by the Borrower that is part of the country foreign exchange reserves account at the Central Bank ofMadagascar. The Borrower shall ensure that uponthe deposit ofthe Credit into saidaccount, an equivalent amount is credited in the Borrower's budget management system, in a manner acceptable to the Bank.Based on previous experience, the execution of such transaction from the Central Bank to the Treasury (Ministry of Finance) doesn't require more than four days. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited in local currency to the budget management system. While no external audit will be required it is expected that this written confirmation will be signed off by both the Accountant General and the Auditor General, and will be supported by a credit note from the Central Bank. If the proceeds of the credit are used for ineligible purposes (i.e. to finance goods or services on the standard negative list), as defined in the Financing Agreement, IDA will requirethe Borrower to promptly upon notice from IDA, refundan amount equalto the amount of saidpayment to IDA. Amounts refundedto the Bank upon such request shall be cancelled. The administrationof this credit will be the responsibility of the Ministry of Finance. As requiredby law, 52  the Auditor General will carry the audit of public accounts and submit the annual report to the Parliament prior to the date of its first sessionfollowing the year of the review ofthese accounts by the General Audit Office. IDA will have access to this report. IDA will also receive a copy of the annual financial statements o f the Central Bank audited by an international audit firm in accordance with International Auditing Standards, withinsix months after the endof eachfiscal year. Implementation 152. The responsibility for implementing the PRSC program in Government rests with the Ministry of Economy, Finance and Budget. The Government has continued to take the lead in updating the program policy matrix, and the Ministry of Economy, Finance and Budget is coordinating inputs from all the relevant ministries to update the policy matrix. The updated policy matrix will be discussed duringpre-appraisal mission inApril 2006. B. ENVIRONMENTALASPECTS 153. The proposed PRSC 3 is a development policy credit insupport of a broadprogram of policy and institutional reforms, for which the environmental requirements of OPBP 8.60 apply. The PRSC 3 program does not pose any significant environmental impacts. The Bank's overall strategy has focused on further strengthening of the Government's legislative and institutional capacity to address environment andnaturalresourcemanagement. C. RISKS 154. The implementationof the poverty reduction strategy inMadagascar continues to be exposed to risks, many o f which were already identifiedinprevious PRSC operations. The mainrisks include: (a) Madagascar remains vulnerable to external shocks, particularlycyclones and increases in global commodity prices, such as oil and rice. As detailed earlier, these shocks impact negatively on growth and poverty reduction. The Bank has now finalized a Risk and Social Protection Review to assess risk prevention and mitigation strategies. Initial steps have been taken to investigate the feasibility o f specific options for risk mitigation to the external shocks faced by Madagascar (e.g. weather risk insurance schemes). The Bank has also modified procedures for its Community Development Project (FID IV) to allow the project to respond to emergencies rapidly; the supplemental IDA credit for the FID project in FY05 was delivered in response to the two cyclones o f 2004. In addition, the construction of schools, and re- construction o f damaged infrastructure have been greatly improved to withstand the effects of cyclones. The Cellule de Prevention et de Gestion des Urgences (CPGU) is operational and is charged with managing programs to prevent crises and mitigate their impacts when they do occur. Finally, the Government has made rice an important policy focus, with an emphasis on the entire rice value chain (production, distribution, marketing), and is also looking at policy options to better stabilize prices. (b) Political issues, particularly in an election year, present a risk The political situation in Madagascar is relatively stable, especially compared to many countries in sub-Saharan Africa. elections - scheduled for the end o f 2006 - will likely lead the policy agenda this year and carry The President's popularity remains high and his political party is dominant. The Presidential the main riskthat they could distract focus from reforms. There are also some concerns that the Government's ambitious and initially fast-moving efforts on fighting corruption have stagnated recently. However, at the same time, the elections also present an opportunity as they place extra 53  pressure on the Government to deliver results to the population in 2006 which could ensure renewedvigor inimplementingreforms and poverty-reductionprograms. The political leadership has a clear vision of reform and is strongly committedto moving the PRSP agenda forward. The initial draft ofthe MAP is a testament to such Governmentcommitment. The Bank's focus inthis regard continues to be on issues of transparency and anti-corruption, with the PRSC and the Governance and Institutional Development Project being the main instruments of IDA support, andWBI playing a key role through various governance and capacity programs. (c) Maintaining a stable macroeconomic environment remains critical to the successful implementationof the PRSPand is a core area of focus of the future MAP. The Government has already made significant progress in 2005 in managing the high inflation in the face of continuedhigh internationalprices. Nevertheless,further inflationary pressures caused by world price volatility will continue to present a challenge. The successful completion of the restructuringplan ofthe electric power utility,JIRAMA, is also essentialfor the maintenance of a stable macroeconomicenvironment given the negativerepercussionson the whole economy that another crisis, as experiencedinmid-2005 would have. The recent agreement with the IMF on a new PRGF programis akey aspect inmanagingthese risks. (d) The implementation of public finance reforms poses challenges and risks negatively impactingservice delivery. As detailed earlier, Madagascar has carried out an ambitious set of budgetary reforms that are already yielding results. Nevertheless, a number of key issues are worrisome such as a weak fiscal framework that over-estimatedrevenues, unpredictable budget execution, capacity weaknesses in applying the new program budget structure and poor reform coordination and M&E. The Governmenthas recognizedthese issues and has laid out a priority action plan for 2006 that continues and deepensthe reform program. Successful implementation of this priority action plan will be critical to ensure real impact on service delivery and poverty reduction. The Bank continues to support the reforms proposed in the areas of public finance, budget programming, procurement, institutional development and capacity building through the PRSC and the Governance and Institutional Development Project. The Bank's on-going investmentportfolio also focuses on institutional strengthening, training and capacity building at the sectorallevel. (e) Capacityweaknesses present significant risks to the effective implementationof the poverty reductionstrategy. As noted above, to mitigate this risk the Bank is supporting institutional strengthening, training and capacity building. In particular, the on-going portfolio of IDA investment operations focuses on building capacity at the sectoral level, as well as building capacity among development actors such as the private sector, community and farmers organizations and NGOs. WBI is also active in building capacity within Government for managingthe PRSP. (f) Reachingand maintainingthe economic growthtargets laid out inthe PRSPand the MAP- while feasible will be difficult. Sustainable poverty reduction depends on maintaining growth - at high levels, attractingprivate investment into the labor-intensivemanufacturingsector and into agro-businesses. The erosion of trade preferences and the expiration of the MFA have already impactedthe growth of the textile sector inthe EPZ (textile exports in2005 were almostthe same as for 2004). Providing a favorable investment climate is crucial in this regard in order to attract higher levels of FDI. The recently-completedInvestment Climate Assessment (ICA) outlines a set of recommendations for mitigating this risk including accelerating reforms to improve ICA, the 2005 Development Policy Review and the up-coming CEM - focuses specifically on competitiveness and attract private sector development. IDA'SAAA program - including the growth issues to assist the Governmentprioritize and implementreforms. 54  MADAGASCAR THIRD POVERTYREDUCTIONSUPPORT CREDIT ANNEXES Annex 1Policy andInstitutional Reform Matrix.......................................................................... 56 Annex 2 Letter of Government Policy .......................................................................................... 70 Annex 3 Status of actions for PRSC 3 PolicyMatrix ................................................................... 81 Annex 4 Progress inSupporting Broad-BasedGrowth................................................................ 88 Annex 5 Madagascar at a Glance .................................................................................................. 93 Annex 6 MadagascarKey Economic Indicators ........................................................................... 95 Annex 7 Monitoring Indicators ..................................................................................................... 97 55  c .C Y s8a P> 00 0 a + 0 E m 0 a 0 c\1 .9 Y G 8a 4i5&E W M c- 3e Q Q 0 -s% 0 .A 9 0 !% .ec cu P 0 a zs al c) .e a B  - I 0 l- 0 c1 a2 c zI 1 W 0 0 c1 z h I W 0 0 c1 7 I v) 0 0 c1 c h 4 c 0 d & I    II 0 0 t-4 B I W 0 0 t-4 0 - -0 -8 8 a W W 0 0 t-4 zB I In - 0 0 t-4 h 93  c   t- 0 0 N g2I \o - 0 0 N h LJ 3 \o 0 0 N gE 4 -g 0 mI 0 N h  3 wE 8 Y 0  - t- 0 0 N gEI Q W -g 0 0 N h - 3 % W 0 0 N Q a 1 I In 0 - 0 Nx -  - 0 t- 0 CJ 4 G 9 a I 0 0 CJ h 4 - \o 0 0 CJ 4 c ha mI 0 0 CJ z ch -  - O I- 0 f-4 u s 1 3 I 0 c.l mh  t- 0 0 m Ba 9 I W 0 0 e4 3 91 ! 3 W 0 0 c-4 a2 El 91 mI - 0 0 e4 h 91  - I- O 0 c1 2a 3 I \o - 0 0 c1 h 3 a - ~ .3 8 \o 0 0 c1 0 fi 31 I In 0 0 c1 mh 3 L, -  Annex 2 Letter of GovernmentPolicy REPOBLIKAN'IMADAGASIKARA Tanindrazuna Fahafahana Fandrosoana - - MINISTEREDEL'ECONOMIE Antananarivo, le 12avril2006 DESFINANCESETDUBUDGET LeMinistredel'Economie, desFinanceset duBudget a MrPaulWolfowitz President BanqueMondiale 1818HStreet NW WashingtonDC CherMonsieurWolfowitz, La R6publique de Madagascar mene sa politique de dkveloppement sur la base du Documentde Strat6giepour laRbductionde laPawret6 quitraduit me feme volont6 dupaysd'auvrer pourunecroissanceCconomiqueCquitable, durableet forte. Lebut principal que se sont assignbes les autorit6s est l'atteinte des Objectifs du Millbaire pour le Dkveloppement,notammentla rifductionde moiti6 de la pauvret6d'ici 2015. Conqu et &is6 dans un esprit et un processus participatif, la version complkte du DSRP a 6t6 adoptke en Juillet 2003. Afm d'intbgrer la vision ((Madagascar naturellement)) et les nouvelles r6formes administratives entreprises, ce document a 6t6 mis Q jour en Juin 2005. Ilsera relay6 en 2006 par unplan innovant sur cinq ans ddnomme << MadagascarAction PlanD. 2. Dans la version mise Qjour du DSRP, le choix de politique 6conomique est orient6 vers Une croissance forte ax6e sur la relance de l'offre globale et l'accroissement de l'investissement.La stratbgie repose sur :(i)dbveloppementdes sectem portem, le (5)la mise en place d'un cadre incitatif et shurisant pour les investissements M~~OMUX et 6tmigers, (iii) dheloppement du capital humainpar l'am6lioration de le I'accks de la population a m services de SantC, d'Education, d'Eau et Assainissement. Sont recensbs en tant que secteurs porteurs : l'industrie manufactmitre tournhe vers 'industrie minibe, le tourisme et surtout l'alpiculture. Pour ce dernier, culier eataccord6 Q l'amkliorationde l'infi-astructureet lerelkvementde quiseront r6alisCsavec l'appui despartenairesfinanciers B traversdes projets et programmes tels que le Millenium Challenge Account (MCA) et le P6le Intkgrk de Croissance (PIC). 70  71  72  73  5 74  75  UnofficialTranslation REPUBLICOF MADAGASCAR Tanindrazana Fahafahana Fandrosoana - - MINISTRY OF ECONOMY, FINANCE, AND BUDGET The Ministerof Economy, Finance,and Budget Mr.PaulWOLFOWITZ Antananarivo, Chairman WorldBank 1818HStreet NW WashingtonDC Mr.Chairman, 1. The Republic of Madagascar is conducting its development policy based on the Poverty Reduction Strategy Paper which expresses the country's strong will to work for an equitable, sustainable and strong economic development. The main purpose which the authorities set to themselves is achievingthe MillenniumDevelopment Goals, namely reducing poverty by halfby 2015. The document was designedina participatory spirit, andthe final version of the PRSPwas completed through a participatory process, which culminated in its adoption in July 2003. In order to integratethe MadagascarNaturally vision andthe new administrative reforms which )) were undertaken, the document was updated in June 2005. It will be taken over by a five year innovativeplancalled (( MadagascarAction PlanD. 2. In the updated PRSP version, the choice for economic policy is directed to a strong growth focused on boosting global supply and increase in investment. The strategy rests on: (i) developing buoyant sectors, (ii) up an incentive and securing framework for national and setting foreign private investment, (iii)developing the human capital through enhanced access of the populationto services inHealth, Education, Water and Sanitation. The following are considered buoyant sectors: export oriented manufacturing, mining industry, tourism and, especially agriculture. Regardingthe latter one, a particular emphasis is laid on improved infrastructureand enhanced productivity which will be achieved with the support from financial partners through such projects and programs as the Millennium Challenge Account (MCA) and the Integrated Growth Pole(IG2P) [P61e IntCgrCde Croissance(PIC)]. 3. In2003, the first year for implementing PRSP, the economic growth rate was 9.8%, and inflation was curbed. Suchgrowth increasedin2004, despite exogenous shocks -cyclones andrice and oil prices on the international market - that the country had to undergo, and which entailed overall increase in prices and depreciation of the national currency. The efforts led by the Government for keeping economic stability and implementing numerous institutional reforms came up with the attainment of the completion point in October 2004. Therefore, Madagascar was granted a significant cancellation of foreign debts within Paris Club. The year 2005 witnessed the 76  continuation of inflationary tensions which were containedat the end of the first quarter. Growth was somehow slowed down by problems inelectric energy provision andthe consequences of the dismantledMultiFiberAgreement, but it nevertheless amountedto a4.6% rate. 4. The actions and reforms started during these last years indicatethat the country is determinedto move forward. In the area of good governance 22 regions, which are provided for in the Constitution, are effectively established. Fight against corruption is materialized in tangible actions: the anti-corruption law and the law relative to money laundering were adopted in Parliament; the texts relative to their implementation were decreed by the Government; the Independent Anti-Corruption Office (Bureau Independant Anti-Corruption (BIANCO)) is operational; anti-corruption strategies were developed and implemented within the Ministry of Justice through reinforcement of internal control. In the mining and the forestry sectors, transparency is ensured through a biannual publication of lists of operation permit holders, as well as of fees collectedfrom each operator. 5. As regards public finance, the Government implemented the 2005 Priority Action Plan (PAP 2005), which continued public finance reform. Such reforms relate to both revenues and expenditures. Regarding revenues, important improvement was brought to taxation for better revenue performance. Concerning internal taxation, tax and duty rates were revised downward, and the base was broadened through better inspections and controls by strengthening the economic role ofthe taxation system (modification ofthe base for ProfessionalTax, modification of Corporate Tax (BS) ....); the SIGTAS software was operational in August 2005. As regards , customs, the first year in the implementationof the Customs Action Plan enabled restructuring and rationalizing the rates in import duties and taxes (DTI), accelerating customs clearance, effective commissioningofthe SYDONIA++ software amongcustoms offices inToamasina, and instituting the payment for DTIthrough the bankingsystem. 6. Efforts were also deployed for the sake of transparency and good public expenditure management. The new programmatic budget was introduced by the texts governing the public finance reform as a whole, which were passedduring the year 2004 and applied starting from the year 2005. The organic law on Finance Laws namely institutedthe Medium Term Expenditure framework (MTEF) andthe programmaticbudget so as to ensure consistencybetweenthe budget and the development strategy. An Integrated Public Finance Management System was also establishedto strengthen transparency. Such a system is operational inthe Treasury (Paierie et la Recette GBnBrale) of Antananarivo, as well as in the five main treasuries of the main towns of Faritany. It enables producing the budget execution reports within 15 days following the closing of monthly entries inthe locations where it is implanted.The Procurement Code was adoptedand the texts for its implementationare beingfinalized. 7. In order to reach the objectives which the Government set forth, the intention is to take appropriate actions and to implement adequate reform programs. Priority will be granted to actions in good governance and rational management of the State finance, which will be accompaniedby appropriatemacroeconomic,structural, and sector-basedpolicies. 8. The reforms undertaken in the area of public finance management will be strengthenedboth in formulation and executionof the State budget, and incontrol. Budget allocations are inline with PRSP priorities. As regards public investment program for 2006, the social sector which is composed of education and health, benefitedfrom 27.2% of the total amount, and infrastructure from 39.7%. Concerning 2006 budget execution, training for ((ordonnateurs secondaires and )) activity managers were provided at the beginning of the 2006 in all provinces and former prefectures which are equipped with financial districts. A budget execution guide was edited and distributedto ordonnateurs secondaires and activity managers in the course of such training (( )) sessions. The efficiency and the quality of the control mechanisms inpublic finance management will be improved as regards the management of committed expenditures through the 77  establishmentof an organizational and analytical audit of the Financial Control. Budget execution reporting based on an economic and functional nomenclature will be performed with the International Consultant recruited for such a purpose regarding training MEFB technicians. The budget execution report inthe framework of the four month review with donors will be extended to all ministries in2006. 9. The 2000 and 2001 Reports on Budget Execution (Lois de reglement) were passed inParliament in 2005. The 2002 and 2003 Draft Reports on Budget Executionwere reviewed by the Auditor General(Cour des Comptes) and forwardedto Parliamentfor including them on the agenda of its sessions for this year 2006. The 2004 Draft Report on Budget Executionwill be forwardedto the Auditor Generalat the endof June 2006. 10. Budget preparation for 2007 will start earlier than in previous years: the first phase of budget conferenceswill take placebefore July 2006. 11. Procurement reforms will be continued. In application of part of the code, the procurement managementunits inministries are operational. The applicationtexts of the new code adopted in 2004 were developedby international Firms and reviewed by the SteeringCommittee. They will be presented to a Cabinet meeting for approval in May 2006. The Procurement Oversight Organization (Autoritd de Rkgulation des Marchks Publics (AMP)) members will be appointed at the end of May 2006. Training sessions for users of the new Procurement Code at both the central government level and local government level will be provided following the approval of application texts by the Government. Such application texts will be gradually established in the course of2006 second quarter. 12. Inthe framework of good governance, actions will be taken as regards fight against corruption, decentralization and justice. A sector-based anti-corruption strategy will be adopted and implemented. The reinforcement of the regulatory framework is continued, amongst others, through the adoption of anapplication decree governingissues inconflict of interest, and a decree involving recruitment and selection procedures for the public service. Anti-corruption officials will also conduct the following actions: independentreviews of procurement in large investment projects, independent audits of customs directorates, enquiries on probable conflicts of interest in specific areas. Inorder to fight against corruption within customs departments, service standards inlinewith internationalstandardswill begraduallyestablished. 13. With a view to having effective decentralization, budget allocations to communes will be revised upward. Such allocations already increased by 20% between 2003 and 2005, and by 42.5% between 2004 and 2006. The commune budget allocation system will be reviewed. The Local Development Funds will be made operationalfor building commune capacities in public service provision. 14. With a view to enhancing transparency and efficiency inthe judiciary system, service standards will be developed, and which set the number of cases to be processedby magistrates and court clerks. The programfor reducingbacklogs infile processingwill be extendedto lower courts. 15. The social sectors are also covered by the Government program. The educational policy has an important role to play for strengthening Madagascar competitiveness and for training skilled labor. The actions taken under the implementation of the policy of Education For All (EFA) are strengthened. In the second year of its implementation, it enabled to further strengthen the educationalsystem, especially the primary education. Thus, the net enrolment rate increasedfrom 82% in2002103 to 98% in2004105 -thanks to the constructionof 920 additional classrooms and the recruitment of about 2,000 additional teachers. The efforts will be continued in both areas with a view to broadening education supply, as well as to promoting non formal education in order to valorize the human capital. Primary education receives particular attention from the authorities. The actions aiming at enhancing its quality are strengthened: introduction of the Skill 78  based Approach, developing adequate training strategies for primary school teachers, modification in the number of learning years for primary school, defining criteria in FRAM teacher recruitment, institutinga new status to encourage teachers to settle in remote areas of the island. 16. Improvement in the health sector is also of prime importance for development and poverty reduction. The actions aiming to promote mother and child health, to combat malnutrition and diseases, as well as to improve health infrastructure will be continued for the upcoming three years. Furthermore, a plan for redeploying human resources is being developed to improve service provision. Finally, capacity building in programming and budgeting at the central, intermediary, andperipheral levels was startedfor a rational use o fresources. 17. Three programs related to water, nutrition, and social protection will be implemented. Regarding the water sector, the National Program for DrinkingWater Supply and Sanitation, which aims to achieve the MillenniumGoals, was approved by the Government inJuly 2005. Between 2003 and 2005, the access rate, in rural areas, increased form 14 to 16%. The Government intends to continue the efforts in such an area by setting up a programmatic approach, a medium term planning with the programmatic budget, standardization in line with the manual of procedures, coordination and harmonization o f actions by donors, namely through the annual sector review. Regarding nutrition, the plan is to integrate the current SEECALINE project into the National Office which will provide the coordination and the execution o f the strategies in the National Policy and the shift to the pilot phase o f the National Community-based Program for Nutrition in the 22 regions. In terms of social protection, the focus is on making operational the related strategy through the development o f an action plan, as well as the establishment of an institutional framework and a monitoring evaluation system. The provision o f safety nets will also be effectively implemented. 18. The Government will grant particular interest to the monitoring and evaluation of poverty reduction for which a plan will be developed. Besides, as the appraisal o f actions requires adequate, reliable, and relevant information, the policy on access to data will be prepared and adopted. 19. As Madagascar opted for an investment pulled growth, actions are provided for with the aim o f attracting both national and foreign investment and, therefore, o f developing the private sector. Apart from good governance, fight against corruption, and public finance reform, a larger consultation of the private sector is instituted to bring to perfection the credibility o f the State, and restore mutual trust. The authorities are seeking to bring in economic operators so that they are involved in policy processes and decisions related to generating wealth and growth. Support to acceleratedgrowth in regions and sectors with a higheconomic potential is provided thanks to the establishment o f infrastructure and services required in a business enabling environment. Investment promotion continues through the security it is provided, the development of a promotion strategy for foreign direct investment, and the extension of legal and regulatory provisions in the business laws, which are in compliance with the international and regional agreementsto which the country has adhered. 20. The implementation o f such actions will result in a consolidated growth. In the long term, the subsistence economy will change into a market economy, the rural economy will extend into an industrial economy, and the opening to foreign countries will be strengthened becauseo f increase inexport. Inthe short term, the 2006 economic growth rate will be 5.2% andthe poverty rate will decrease to 68%. The crosscutting actions undertaken will certainly have an impact on the economic sectors, which will develop in total synergy for the achievement o f the growth announced. Moreover, the projects achieved by the Government inagriculture andrural areas will bear their fruit. The secondary sector will experience a new lease of life inits activities following the resolution of power cut problems. The dynamism in industries relatedto agriculture, tourism . 79  and mining will be boosted. The tertiary sector will go on being flourishing thanks to the programs for developing and intensifying infrastructure: buildings and public works, roads, telecommunications. Transport as a branch will also benefit from the overall improvement. Exports will definitely increaseby 10.6% interms of SDR. 21. The Malagasy Government is determined to achieve the objective of substantial poverty reduction. We rely on the support from the international community, namely the International DevelopmentAssociation to supplement the resources requiredby the State for the achievement of such an objective, preferablyinthe form of budgetary aid. 80  c1 a %I I,1 .r8 z a %3 0 a 3 Y E 33 aEa 5 8 8 w ci   Y  2 .e E rr k 0 cEr: a 0 +I 3 v1 0 u m  k 0 .e m e 3 E e, g B Y 3 m a 8  m 3 ` E 2 ? dL 3 - m e, .* 0 > 5 5 -2 F t: -5 2 5 F +- 0 m a Z Y a, 0 i - 3  c  Annex 4. ProgressinSupportingBroad-BasedGrowth 1. The Bank's support for the second strategic axis of the PRSP on broad-based growth includes a significant portfolio of investmentlending, and policy dialogue. The first three PRSCs do not include any specific policy actions on growth as triggers but it is intendedthat the engagement inthis area will be deepened under future PRSCs. As noted in the PRSC 1 Program Document, the Bank's support for the growth pillar is provided through its significant investment lending operations in private sector development; transport, rural development and environment (see Table 7). This Annex summarizes progress in three key areas: private sector development, transport and rural development and environment. PRIVATE SECTOR DEVELOPMENT 2. The PRSP emphasizes the importanceof creatingan investment climate that is conducive for private-sector led growth. Since PRSC 2, additional steps have been taken in 2005 to improve the investment climate, to implement public-private partnerships (PPP), and to improve co-ordination of policies andto give voice to the private sector andcivil society, morebroadly. GUIDE, the one-stop shop for enterprisecreation, has continuedto perform well and facilitates settingup enterprises. Although there were no new privatization transactions since the sale of HASYMA in July 2004, the management contracts for JIRAMA (energy) and SRAMA (sugar) are in place and the Government is examining optionsto restructure these enterprises. 3. Reforms in the energy sector have advanced slightly in2005, but much remains to be done, and the energy situationremains critical. InApril 2005, atwo-year, IDA-fundedmanagement contract took over responsibility for JIRAMA. The Government implemented tariff increases in July and November 2005 after tariffs remainedfrozen from 2001 even though this was a period of high inflation, sharp devaluationofthe local currency andrising world oil prices. Very limitednew investmenthas taken place to increase power supply, while demand has increased substantially. JIRAMA's operational performance is unsatisfactory, with high losses and poor maintenance.A donor's conference was held in Paris in January 2006 to secure financing for JIRAMA and the Government is now implementing the agreed restructuringplan. 4. There has also been some progress in improving prospects for the key export-oriented sectors that are driving growth. The tourism sector has shown continued strong growth in 2005 and new investors have expressed interest inNosy Be (one o f the growth poles). Despite the overall decline in the textiles and garments sector, there are signs of some new investments and consolidation taking place in the industry as firms adjust to the increasing competition from Asian exporters. The mining company Rio Tinto confirmed their decision to launch the long awaited ilmenite mining project in 2005 and the new port being financed by the Government through a private-public partnership with Rio Tinto/QMM is expectedto boost agricultural exports from the region. Other new mining investors have shown interest, including inthe petroleumsector. 5. The Government is in the processof establishing a new investment promotionand business facilitation agency that will function as an apex body for private sector development. The IDA- supported Integrated Growth Poles Project (IG2P) was launched in 2005 and is expected to increase private investments in the three geographical growth poles (Nosy Be, Antananarivo-Antsirabe, and Fort Dauphin) in the key sectors of the economy. The IG2P supports infrastructure investments, support to MSMEs, improving the policy andregulatory regime and strengtheninginstitutional capacity to leverage 88  private investments, including support for reviewing the legislation governing both Zone Franche and domestic enterprises. 6. The Bank completed an Investment Climate Assessment (ICA) and a Financial Sector Assessment (FSAP) in FY05. A high level workshop was held to disseminate the findings and recommendations of these studies which highlighted the poor business environment for firms which hampers their productivity. The Government has initiated follow up action from the workshop to make policy and regulatory changes that will improve the investment climate in Madagascar in areas such as ease o f entry for new enterprises, import-export processes, tax administrationandconstruction licensing. TRANSPORT 7. The transport sector, particularly the roads program, plays a key role in Madagascar's growth and poverty alleviation strategy. As noted before, remoteness is associatedwith poverty, and improving access is critical for enhancing productivity inrural areas, improving access to social services and expanding access to markets. Three decades of inappropriate sector policies have led to serious deterioration o f the country's transport infrastructure. It is estimated that from 1970 onwards the country lost on average 1,000 kilometers o f roads per year due to lack of maintenance, or the loss and deterioration o f over 80 percent of the network over the last 30 years. InApril 2000, after almost ten years o f sector dialogue and very little investment, the country adopted a comprehensive transport sector policy which aims at (i) focusing the Government's role on strategic planning, sector oversight and coordination; (ii)creatingagenciesfor sub-sectormanagementandregulatoryfunctions thatarejointly controlledby the public and private sectors and gradually user-financed; (iii)divesting operational activities to the private sector, through privatization and concessioning arrangements; (iv) developing the local private sector for works design and execution; and (v) rehabilitating transport infrastructure to appropriate levels and ensuringtheir maintenance thereafter. ReformProgram 8. After the 2002 crisis, the Government launched-an ambitious road rehabilitation and maintenance program (2003 - 2008) with the objective to rehabilitate or provide periodic maintenance for approximately2,000 km per year. The road network consists o f about 25,100 km of national and provincial roads of which 5,600 km are paved and 19,500 km unpaved. Overall 32% o f the network is in good or fair condition and 66% o f the paved roads is in good condition. Since 2003, nearly 3,300 km of national and provincial roads have been improved. For rural roads, between 2003 and 2005 about 2,000 km were improved. Regarding the program financed by the Bank's Transport APL2, 1,300km have beenrehabilitatedso far. To rationalize the management o f the rural roads, the Ministry of Public Works and Transport (MTPT) has created a rural roads unit which i s part o f the well-functioning Large Works Unit.In2004 and 2005, the RMF contracted for the maintenance of 6,800 kmand 7,000 km of roads respectively. The organizational effectiveness o f the RMF needs to be strengthened and its resource base needs to be enhanced. Currently the RMF collects between 30 to 40 billion MGA annually whereas its needs are 90 billion MGA and increasing with the continuing improvement o f the network. 9. There has been some progress in setting up the autonomous sub-sector agencies. The Maritime, Ports and River Agency (APMF) has been operational since October 2004 and its board has been able to install a measure of independence. The appointment o f staff is virtually complete and the private sector is satisfied with the functioning o f the agency. The Civil Aviation Agency (ACM), which has been operational since 2000, has been restructured based on an organizational audit, to be more efficient and to enhance the capacity of the technical personnel. Laws creating the Roads Authority (AR) and the Land Transport Agency (ATT) were voted by the Parliament during 2005 but have not yet been ratified. 89  10. In March 2005, the Vice Primature Office in charge of Economic Programs, Ministry of Transport, Public Works, and RegionalPlanningwas dissolved, and two separate ministries were created:the Ministry o f Public Works and Transport and the Ministry o f Decentralizationand Regional Planning. This reorganization has provided a better focus for policy and planning but the restructuring brought with it further delays in implementing institutional reforms. The Minister has made a considerable effort to appoint qualified staff for his cabinet and improvements are beginningto show. 11. The Government is using public-private partnerships for managing the transport infrastructure. As noted before, Air Madagascar is operating under a management contract and is performing well. The privatization o f the company should now be prepared. The concessioning of the airports is under way. The IDA-financed Transport Infrastructure Investment Project (APL3) has been restructured and now includes a component to finance the investment program o f the Northern Railway which was concessioned in 2002 to Madarail. The Government, in agreement with the donors, has decided to delay the concessioning o f the Southern Railway (FCE) becausethe tender did not result inan acceptable offer. The FCE will be under management contract with Madarail for the next two years at which time a new tender will be issued. The main port o f Toamasina, which handles more that 80 percent of the total traffic, has been restructured: its container terminal was concessionedand is now operated by the Philipino company MICTSL. The operations o f the secondary ports Tulkar, Mahajanga, and Antsiranana/Nosy BeJAnkifywill be concessionedby mid-2006. RURALDEVELOPMENT AND ENVIRONMENT 12. Rural development and environmentare critical elements of the PRSP, since over four in five poor peoplelive in ruralareas. Agricultural productivity is low and naturalresource degradation is widespread. The main elements o f the Government's rural development sector strategy reform agenda adopted under the Rural Development Policy letter recognizes the need for approaches to provide integrated solutions to multiple problems simultaneously (e.g. through growth poles, value chains etc). The strategy aims to address five main challenges: i.Maketheinstitutionalframeworkofthesectormoreeffectiveandefficientbycompletingthepublic administrationreform and implementingthe newly approved decentralization policy. ii.Facilitateaccesstocapitalandproductionfactors byimprovingproducers' andinvestors' accessto land, developing sustainable financing mechanisms to facilitate access to working capital, technologies and equipments, and developingrural electrification iii.Improve food security and food production through investment that increases productivity, diversification of agricultural production, and better risk management iv. Promote better natural resources management through sustainable use o f soils, water, biodiversity, ecosystems, forest resources and rural spaces, and v. Develop markets and promoting a commodity approach by encouraging public-private partnerships, supporting non traditional agricultural exports and emergence o f new markets participants, and developingofnorms and standards. 13. Inthe vision, MadagascarNaturellement,there is a renewedfocus on ruraldevelopment. In 2004, despite the losses associated with the cyclones, agricultural growth was 3.5 percent, significantly higher than the 1.3 percent recorded in 2003. Rice policy has been a dominant policy issue in Madagascar since mid-2004. Inearly 2004, the reduction in the rice production due to the cyclones, the sharp depreciation in the local currency and an increase in the international price o f rice contributed to price increases. Early announcements o f state intervention in case of a steep increase inthe price o f rice createduncertainty among private sector importers. Rice imports inthe first halfo fthe year in2004 were only 59,000 tons as compared to 150,000 tons in2003 duringthe same period. The shortage inrice with highprices triggered a Government facilitated rice import operation. In2005, the Government removed 90  the import tariff on rice, while maintainingthe VAT. This contributed to strengthening the rice market as rice traders responded by importing sufficient quantities of rice in 2005/2006. Producers also responded to price signals with a significantly higher yield (2.57 MT/ha) and production increase (13%) in 2005. The Government is focusing on the entire rice value chain and intends to improve access to agricultural inputs, privatize the seed multiplication centers and rehabilitate the irrigation schemes in high potential agricultural areas. The Madagascar Action Plan for 2012 proposes an increase of 150% in rice production, from a current production of 3.42 milliontons o fpaddy. ReformProgram 14. The implementationof the Government's institutionalreform programfor the Ministry of Agriculture,Livestockand Fisheries has started, aimed at supportingthe decentralization process and improvingthe quality of services. Re-assignment o f staff and budget towards the regions has begun, with deconcentration o f responsibilities to the Regional Directors for Regional Development (DRDR). Decentralization efforts are also under way: the Ministry aims to establish district-level Agriculture Service Centers (CSAs) as a consultative and service platform between farmers, private sector, NGOs and the Government. Two CSAs are currently beingpiloted inItasy and Ambohimahasoa, and five more are planned inthe near future. 15. The Governmenthasdeveloped its Land PolicyLetter which was validated by a wide range of stakeholders in February 2005 and adopted on May 3,2005. Under the National Land Program the Government intends to put in place a land rights registration system based on the principles o f (i) decentralization of the land administration to the lowest level o f local government; (ii)improvement of landtenure information; (iii) simplifiedlandtenure legislation; and (iv) capacity building, through a pilot, learning-by-doing approach. Pilot activities have started in one area (guichet foncier communal) and 7 more are underway, with a target of 50 guichets fonciers by end-2006. The Bank is completing a AAA on Land and Property RightsReview which has served as an inputto the National LandTenure Program. 16. The implementationissues for makingthe maintenancefund for irrigation schemes (Fonds d'Entretien des RCseaux Hydro Agricoles, FERHA) which was established in September 2003 are being addressed. A Task Force is finalizing the operations manual for FERHA. Financingmechanisms for FERHA are under discussion, and will be finalized as part o f the Bank's planned Irrigation and Watershed Development Project (FY07). 17. Food security and agriculture productivity are being strengthened through the National Program o f Watershed Management and Irrigated Perimeters (to be supported under the Irrigation and Watershed Development Project), promotion o f agriculture diversification, improved planning of infrastructure in enclaved areas, a new rice observatory and diffusion o f agriculture statistics, and consolidation o f early warning systems for disaster management. 18. Market development is being promoted through public-private partnerships (PPPs), the strengtheningo fprofessional organizations suchas the recently created Rice Platform (PC Riz) and Dairy Board, establishment of Agriculture Chambers of Commerce, promotion o f agriculture growth centers in major potential areas (Alaotra, Itasy, Andapa, and Marovoay), and reinforcement o f quality standards (namely through the Aquatic Surveillance Agency, ASH). 19. The Government has continued to expand its national System of ProtectedAreas (SAPM), now at 2,750,000 ha. The SAPM is expectedto attain 6 millionha by 2010 (about 10% ofthe national territory). The Foundation for Protected Areas was established in January 2006 to help finance the SAPM. The National Environmental Program - supported by the Bank's Third Environment Project - is now inits third phase. 91  20. The Ministry of Environment, Water and Forestry is undertaking a reform program focusing on strengthened forestry and environmentalgovernance. The Governmenthas strengthened its forest exploitation adjudication system, by publishing the status of forest exploitation permits on newspapers. A Forestry Observatory and a mobile control unit are now operational. Mining and forest exploitation has been prohibited in the new system of ProtectedAreas of Madagascar. Fire monitoring committees have been created and are being strengthened at commune level. The decree making the Office National pour 1'Environnement (ONE) the one-stop shop for enforcing the MECIE (National Environmental Impact) law passed in February 2005. The Ministry will be also creating Environmental Units in each of the 22 regions, starting from 2006, to help mainstream environmental concerns into regional plans. 92  Annex 5 Madagascar at a Glance Sub- POVERTY and SOCIAL Saharan Low- Madagascar Africa income 3evelopmentdiamond- 2005 Population,mid-year (millions) 18.6 726 2,343 290 600 510 Life expectancy GNI (Atlas method, US$billions) 5.4 437 1,188 Average annual growth, 1999-05 Population1%) 2.8 2 3 1.9 Labor force (%) 3.1 2 4 2.2 GNI Gross per primary Most recent estimate (latest year available, 1999-05) capita enrollment Poverty (% ofpopulationbelownationalpovertyline) 71 Urbanpopulation(% of totalpopulation) 27 37 31 56 47 58 Infantmortality(p 76 101 79 Child malnutrition(% of childrenunder5) 42 43 Access to improvedwater source Access to an improvedwater source (% of population) 31 58 75 Literacy (% ofpopulationage 15+) 68 60 61 Gross primary enrollment (% of school-age population) 134 93 100 -Madagascar Male 136 98 105 -Low-incomegroup Female 131 87 94 KEY ECONOMIC RATIOS and LONG-TERMTRENDS 1985 1995 2004 2005 Economicratios" GDP (US$billions) 2.9 3.2 4 4 5.0 GrosscapitalformationlGDP 8.5 109 24 3 22.4 Exportsof goods and serviceslGDP 12.2 24.1 32 6 25.6 Trade Grossdomestic savingslGDP 0.3 3.6 7 8 7.7 Gross national savings/GDP -0.2 0.4 13 5 11.1 T Currentaccount balancelGDP -8.2 -8 4 -10 8 -11.3 InterestpaymenWGDP 2.1 0.6 0 7 0.8 Total debffGDP 88.2 136.2 79 5 70.3 Total debt servicelexpotts 36.1 7.1 5 6 9 6 Presentvalue of debffGDP 50.9 Presentvalue of debffexports 195.0 Indebtedness 1985-95 1995-05 2004 2005 2005-09 (average annualgrowth) 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-ncornegroup Exports of goods and Services 4.4 0.8 1.5 8 1 11.9 STRUCTUREof the ECONOMY 1985 1995 2004 2005 Growth of capital and GDP (%) (% of GDP) Agriculture 35.1 26.7 28.8 28.1 80 I 60 Industry 13.3 9.2 16.0 15.9 40 Manufacturing 11.3 7.9 14.2 14.1 20 Services 51.5 64.1 55.2 56.0 0 -20 Householdfinal consumption expenditure 90.0 89.9 82.7 84.2 -40 General gov't final consumption expenditure 9.8 6.7 9.6 8.1 Imports of goods and services 20.5 31.7 49.2 40.3 1985-95 1995-05 2004 2005 (average annualgrowth) Growth of exports and imports (%) Agriculture 2.2 2.0 3.1 2.5 / B O i I 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 4 0 General gov't final consumption expenditure -1.2 3.1 -6.6 5.4 Gross capitalformation 1.7 10.4 57.6 2.3 Importsof goods and services 0.7 8.6 24.8 18.5 Note: 2005 data are preliminary estimates. * The diamondsshowfour key indicatorsin the country (in bold) comparedwith its income-group average. Ifdata are missing,the diamond will be incomplete. 93  Madagascar at a Glance (continued) PRICES and GOVERNMENT FINANCE 1985 1995 2004 2005 Domestic prices [Inflation I (% change) Consumerprices 49.0 14.0 18.4 ImplicitGDP deflator 10.4 45.2 14.3 18.3 Governmentfinance (% of GDP,includes current grants) Current revenue 13.7 9.0 16.0 12.3 Current budget balance 7.0 -1.6 3.4 1.4 I I Overall surplus/deficit 1.o -7.9 -9.1 -8.7 -GDPdeflator *CPI TRADE I 1985 1995 2004 2005 (US$ millions) Exportand importlevels(US$ mill.) Total exports (fob) 291 566 997 788 2,000 Coffee 22 59 47 26 Vanilla 44 41 140 34 Manufactures 42 296 737 671 Total imports(cif) 466 739 1,634 1,733 Food 50 67 83 79 Fueland energy 85 81 204 253 Capitalgoods 98 141 300 293 Export priceindex (2000=100) 104 119 9s aa ai 02 03 04 ' 176 125 Importpriceindex (2000=1001 72 107 103 106 t4 Exports Imports Terms of trade (2000=100) 145 111 170 118 BALANCE of PAYMENTS 1985 1995 2004 2005 1 Current (US$ millions) account balance to GDP ("A) Exports of goods and services 350 803 1,423 1,291 0 Importsof goods and services 569 992 2,143 2,030 Resourcebalance -219 -189 -720 -739 2 -4 Net income -112 -158 -79 -84 Netcurrenttransfers 98 80 330 249 -6 Currentaccount balance -233 -267 -470 -568 8 Financingitems (net) 217 328 488 569 -10 Changes in net reserves 16 -61 -18 -1 -12 Memo: Reservesincludinggold (US$millions) 49 110 489 495 Conversionrate (DEC, local/US$) 132.5 853.6 1,871.8 2,005.7 EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 2004 2005 (US$ mi//ions) :omposition 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 Total debt service 150 58 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 Privatecreditors 5 -4 4 -10 Foreign direct investment(netinflows) 0 10 0 Portfolioequity (net inflows) 0 0 0 World Bank program Commitments 73 65 260 \ IBRD - E - Bilateral Disbursements 56 76 318 227 D -Other multilateral F Privata - Principal repayments 2 11 10 30 G -Short-term Netflows 56 65 307 198 Interest payments 4 9 16 18 Nettransfers 52 56 291 179 ~ Development Economics 6113/06 94  Annex 6 MadagascarKey EconomicIndicators National Accounts As % of GDP Gross DomesticProduct I00 100 I00 100 100 I00 100 100 100 Agriculture 32.7 32.0 31.4 30.6 29 9 29.2 28.5 27.9 27.2 Industry 11.6 11.8 11.6 11.6 11.6 11.6 11 6 11.6 11.6 Services 47.4 47.8 48.4 49.1 49.7 50.4 50.9 51.6 52.1 Investment 17.9 24.3 22.5 21.8 22.3 22.5 22.7 22.9 23.2 Public Investement 7.8 12 5 10.3 11.5 10.7 10.4 10.3 10.2 10.1 PrivateInvestement 10.1 11.8 12.3 10.3 11.5 12.1 12.4 12.7 13.1 GrassNational Saving 13.0 15.0 11.7 11.4 11.5 12.0 12.3 12.7 13.1 Public Saving 3 1 6.8 6.0 50.4 5.0 5. I 5.1 5.2 5.3 PnvateSaving 9.9 8.2 5.8 -39.1 6.5 6.8 7.2 7.6 7 8 Current accountbalance(excludinggrants) -7.5 -13.1 -12.1 -11.6 -11.4 -11.1 -11.0 -10.7 -10.6 Export f.0.b 17.2 22.9 16 7 15 4 15 3 15.2 15.0 14.8 14.7 Import c i.f 24.4 39.0 33.4 30.4 30.6 30.0 29.6 29.0 28.5 Memorandumitem GDP per capita(in U.S.dollars) 323.9 251.0 281.8 294.5 309.7 325.7 342.4 360.1 379.0 Nominal GDP @illionsof Anary) 6,778.6 8,155.6 10,095.1 11,794.6 13,722.1 15,685.5 17,580 4 19,513.5 21,664.5 National incomeand prices Annual percent change Nominal GDPgrowth 12.8 20.3 23.8 16.8 16.3 14.3 12.1 11.0 11.0 Real GDPgrowth 9.8 5.3 4.6 4.7 5.6 5.6 5.6 5.6 5.6 GDP deflator 2.8 14.3 18.3 1 1 5 10.2 8.3 6.2 5.1 5.1 Consumer priceindex (periodaverage) -1.7 13.9 18.4 11.2 9 9 8.0 6.0 5 0 5.0 Consumer price index (end of period) -0.8 27.3 11.4 11.3 9.0 7.0 5.0 5.0 5.0 Balanceof Payments In US%million Export (GNSF) 1,277 7 1,437 5 1,366.2 1,356.1 1,452 2 1,550.0 1,650.0 1,755.6 1,868.6 Import(GNSF) 1,848.5 2,173.0 2,152.7 2,157.4 2,297.8 2,440.4 2,599.4 2,758.4 2,933.5 Net factor income(excludinginterestpayments) -20 0 -15.0 -28.9 -36.6 -35.0 -36.6 -38.2 -39.9 -41.6 Interestpayments 59 7 64.3 50.0 23.2 19.4 22.4 25.6 29.0 33.1 Net current transfers 302.7 329.9 241 2 235.6 217.4 226 5 238 9 252.0 264.6 Currentaccount, including official tranfen -268.1 -405.6 -545 4 -565.7 -628.2 -664.0 -710.5 -750.8 -800.3 CurrentAccount, excludingofficial transfers -410.8 -572.7 -609.5 -628.7 -664.1 -699.3 -748.3 -791.3 -842.5 Capitaltransfen (governmentprojectgrants) 89 3 1,564.1 159.9 2,601.2 193 4 197.8 212.0 226.0 240.9 Financialoperations 40 4 -1,147.1 265.9 -1,861.1 411.9 440 3 485.5 555 2 602.4 Net Foreigndirectinvestment 12.7 52.9 93.8 86.3 116.9 158.0 187.6 239.3 258.3 Net long-termbcnowng 66 6 -1,182.5 176.6 -1,940. I 294.9 282.3 297.9 315 9 344.1 Disbursements 169.2 302.0 265.5 326.0 3167 303.8 320.0 336.9 354.6 Program 52.5 74.3 79.5 65.2 65.2 65 3 69 1 73.0 77.3 Project 116.8 227.7 185.9 260.8 251.4 238.5 250 9 263.8 277.4 Amortization -102 6 -1,484.5 -88.8 -2,266.1 -21.7 -21.5 -22.0 -20.9 -10.6 OverallBalance -36.9 -55.8 -63.8 174.5 -23.0 -25 9 -13.0 30.3 43.0 95  Annex 6 Madagascar Key Economic Indicators (continued) Public finance (in percentof GDP) Total revenue(excludinggrants) 10.3 12.0 10.9 11.7 119 12.4 12 9 13.4 13.8 Ofwhich: tax revenue 10.0 10.9 10.1 11.0 11.5 12.0 12.5 13.0 13.4 Total grants 5.1 8 2 5 7 49.5 4.2 3.9 3.9 3.8 3.7 Currentexpenditure 11 4 12.6 11.0 10.4 10.8 11.0 11.4 11.8 12.1 Capitalexpenditure 7.8 12.5 10.3 11.5 I O 7 10.4 10.3 10.2 10 1 Total expenditure 19.5 25.1 21.2 21.9 21.5 21.4 21.7 22.I 22.2 Domesticbalance -3.5 -2.3 -2 2 -0.9 -1.7 -1.7 -1.7 -1.6 -1.4 Overall balance (cashbasis, incl. grants) -4.8 -5.7 -4.3 38.7 -5.7 -5.3 -5 2 -5.1 -4 8 Overall balance(cash basis, excl. grants) -9 9 -13.9 -10.1 -10.6 -9.8 -9.2 -9.0 -8.9 -8.6 Domestic financing 1.8 -1 0 0.5 -3.1 0.6 0.8 0.8 0.8 0.5 Monetary Indicators (in percent of GDP) Broadmoney (M3) 25.1 25.9 21.6 21.3 21.3 21.3 21.3 21.4 21 4 Net foreign assets 7.3 10.9 9.2 12.2 12.1 11.8 11.4 11.2 11.0 Net domesticassets 17.8 14.9 12.3 9.I 9.2 9.5 10.0 103 10.5 Creditto government 9.1 5 0 2.9 -0.6 -0.1 0.5 1.O 1 5 1.7 Creditto the privatesector 8.8 10.0 9.9 10.5 11.0 11.4 11.8 12.2 12.5 Broadmoneygrowth ("70) 8.2 23 8 3.1 15.6 16.3 14 3 12.1 11.3 11.3 MZIGDP(%) 21 9 21 6 18.3 18.5 187 18.9 19.0 19.3 19.5 Debt Indicator Netpresent value (NPV) of external debt NPVofdebt-to-GDPratio ... 41 3 194 208 21 9 22 9 23 8 24 6 NPVof debt-to-exportsratio 154 8 75.1 81.1 86.2 91 3 96.3 101.2 Source : IMF macroframework and World Bank staff calculation, June 2006 96  h ?i c g438 Y v)  s s 00 d c? 2 hl 3 m 0 s Y m 2 c? 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