Madagascar - First and Second Structural Adjustment, Public Management Capacity Building, and Private Sector Development and Capacity Building Projects

Documentof TheWorld Bank ReportNo. 36287 PROJECTPERFORMANCEASSESSMENT REPORT MADAGASCAR PUBLICMANAGEMENTCAPACITYBUILDINGPROJECT (CREDIT 2911) FIRST STRUCTURALADJUSTMENT CREDIT (CREDIT2937) PRIVATE SECTORDEVELOPMENTAND CAPACITYBUILDINGPROJECT (CREDIT 2956) SECOND STRUCTURALADJUSTMENT CREDIT (CREDIT 3218) June 6,2006 Country Evaluation and Regional Relations Independent Evaluation Croup  Currency Equivalents (annual averages) Currency Unit =Ariary US$l.OO =Ariary 2,000 FiscalYear Government: January 1-December 31 Abbreviations and Acronyms BFV National Bankof Commerce PAIGEP Projet d'Appui Institutionnel au BTM Bank for RuralDevelopment SecteurPublic CAE Country Assistance Evaluation PSDP-I1 SecondPrivate Sector Development CAS Country Assistance Strategy Project CIP CommissionIndCpendante PASERP Programme d'Action Sociale et de Privatisation Economiquepour la RCinsertion CRC ComitC de RCflexionsur la Professionnelle CompCtitivitC PATESP Projet d'AppuiTechnique au Secteur DCA Development Credit Agreement PrivC EMSAP Economic Management and PC Privatization Committee Social Action Project PE Public Enterprise FDI ForeignDirect Investment PIP Public Investment Program GDP Gross Domestic Product PPAR Project Performance Assessment GOM Government of Madagascar Report HIPC Heavily IndebtedPoor Countries PRSP Poverty Reduction Strategy Paper ICR ImplementationCompletion Report PSD Private Sector Development IDA International Development QAG Quality Assurance Group Association SAC Structural Adjustment Credit IEG Independent Evaluation Group SME Small andMedium Scale Enterprises JTF InterimTrust Fund SOLIMA PetroleumCompany NAMA VanillaParastatal TA Technical Assistance LDP Letter of Development Policy TELMA Telephone Company MFB MinistryofFinanceandBudget TSA Secritariat Technique ii1,Ajustement OAG Office of the Auditor General VAT Value Added Tax OED Operations Evaluation Department Director-General,Evaluation : Mr.VinodThomas -Director, IndependentEvaluationGroup(IEGWB) : Mr. AjayChhibber Sr. Manager, IEGCR : Mr.R.KylePeters Task Manager,IEGCR : Ms.ZeynapT a p s  1 IEG Mission: Enhancingdevelopment effectiveness through excellenceand independence inevaluation. About this Report The Independent EvaluationGroupassessesthe programsand activitiesof theWorld Bankfor two purposes: first, to ensurethe integrityof the Bank's self-evaluation processand to verifythat the Bank'swork is producingthe expected results, and second,to helpdevelop improveddirections,policies,and proceduresthrough the dissemination of lessonsdrawnfrom experience.As part of this work, IEGannuallyassesses about 25 percentof the Bank's lendingoperations. Inselecting operationsfor assessment, preferenceis givento those that are innovative, large, or complex;thosethat are relevantto upcomingstudies or countryevaluations; those forwhich Executive Directors or Bankmanagementhave requestedassessments; and those that are likelyto generate importantlessons. The projects, topics, and analyticalapproachesselectedfor assessmentsupport larger evaluationstudies. A ProjectPerformanceAssessment Report(PPAR)is based on a review of the ImplementationCompletion Report (a self-evaluationby the responsibleBank department)and fieldwork conducted by IEG. To prepare PPARs, IEGstaff examines project files and other documents, interviewoperational staff, and in most cases visit the borrowingcountry for onsitediscussionswith projectstaff and beneficiaries.The PPARthereby seeks to validate and augmentthe informationprovidedin the ICR,as well as examine issues of special interestto broader IEGstudies. Each PPAR is subject to a peer review processand IEGmanagementapproval. Once cleared internally, the PPAR is reviewed by the responsibleBank department and amendedas necessary. The completed PPAR is then sent to the borrowerfor review; the borrowers' comments are attachedto the document that is sent to the Bank's Boardof ExecutiveDirectors. After an assessmentreport has beensent to the Board, it is disclosedto the public. About the OED Rating System The time-testedevaluation methods used by IEGare suitedto the broad range of the World Bank's work. The methodsoffer both rigor and a necessarylevelof flexibilityto adapt to lendinginstrument,project design, or sectoralapproach, IEGevaluators all apply the same basic methodto arriveat their project ratings. Following is the definition and rating scale usedfor each evaluationcriterion(more informationis availableon the IEGwebsite: http://worldbank.org/lEG/eta-rnainpage. html). Relevance of Objectives: The extent to which the project's objectives are consistent with the country's current development priorities and with current Bank countryand sectoralassistancestrategies and corporate goals (expressedin Poverty ReductionStrategyPapers, CountryAssistance Strategies, SectorStrategy Papers, OperationalPolicies).Possibleratings: High, Substantial,Modest, Negligible. Efficacy: The extentto whichthe project's objectiveswere achieved, or expected to be achieved, taking into accounttheir relative importance. Possibleratings: High, Substantial, Modest, Negligible. Efficiency: The extent to which the projectachieved, or is expectedto achieve, a return higherthanthe opportunitycost of capital and benefitsat leastcost compared to alternatives. Possibleratings: High, Substantial, Modest, Negligible.This ratingis not generallyappliedto adjustment operations. Susfainability: The resilienceto risk of net benefitsflows over time. Possibleratings: HighlyLikely, Likely, Unlikely, Highly Unlikely, Not Evaluable. lnstitutionalDevelopment Impact: The extentto which a project improves the abilityof a countryor region to make more efficient, equitableand sustainableuse of its human,financial, and natural resourcesthrough: (a) betterdefinition,stability, transparency, enforceability,and predictabilityof institutionalarrangementsand/or(b) better alignmentof the mission and capacityof an organizationwith its mandate,which derivesfrom these institutionalarrangements. InstitutionalDevelopmentImpactincludes both intended and unintendedeffects of a project. Possibleratings: High, Substantial,Modest, Negligible. Outcome: The extent to which the project's major relevant objectives were achieved, or are expected to be achieved, efficiently.Possibleratings: HighlySatisfactory,Satisfactory, ModeratelySatisfactory,Moderately Unsatisfactory,Unsatisfactory, HighlyUnsatisfactory. BankPerformance: The extentto whichservices provided by the Bank ensured qualityat entry and supported implementationthrough appropriatesupervision (including ensuring adequate transitionarrangements for regularoperation of the project).Possibleratings: HighlySatisfactory, Satisfactory,Unsatisfactory,Highly Unsatisfactory. Borrower Performance: The extentto which the borrowerassumed ownership and responsibilityto ensure quality of preparationand implementation, and compliedwith covenants and agreements, towardsthe achievementof developmentobjectivesand sustainability. Possible ratings: Highly Satisfactory,Satisfactory, Unsatisfactory,HighlyUnsatisfactory.   ... 111 Contents PrincipalRatings . . ............................................................................................................. .. vi1 Key StaffResponsible ...................................................................................................... ix Preface............................................................................................................................... xi Summary ......................................................................................................................... ... Xlll 1 Introduction . .................................................................................................................. 1 2. Backgroundand Context ............................................................................................ 1 TheStrategy Context................................................................................................ 2 3 The PublicManagementCapacity BuildingProject (PAIGEP) . ............................. 3 Background .............................................................................................................. 3 Objectives andDesign ............................................................................................. 3 Under Economic Management: ................................................................... 4 Under Governance: ...................................................................................... 4 Relevance of Objectives and Design........................................................................ 4 Implementation and Achievements .......................................................................... 5 Achievements under Governance ................................................................ 7 Monitoring and Evaluation and Other Issues.......................................................... 8 Outcome................................................................................................................... 8 InstitutionalDevelopment........................................................................................ 9 Sustainability............................................................................................................ . . 9 Bank Performance ................................................................................................... 9 Borrower Performance ............................................................................................ 9 4. The FirstStructuralAdjustment Credit(SAC-I) ................................................... 10 Background............................................................................................................ I O Objectives and Design ........................................................................................... I O Relevance of Objectives andDesign...................................................................... I O Implementation andAchievements ........................................................................ 11 Achievements under Economic Management ........................................... 11 Achievements under Incentives for Private Investment inExports and Labor-Intensive Activities ................................................................... 12 Achievements under Public Expenditures Restructuring .......................... 13  iv Monitoring and Evaluation and Other Issues........................................................ i4 Outcome................................................................................................................. i4 Institutional Development...................................................................................... i4 Sustainability.......................................................................................................... . . 15 Bank Performance ................................................................................................. 15 Borrower Performance .......................................................................................... 15 5 The PrivateSector DevelopmentandCapacity BuildingProject(PATESP) . ......15 Background............................................................................................................ 15 Objectives and Design ........................................................................................... 16 Relevance of Objectives and Design...................................................................... 16 Implementation andAchievements ........................................................................ 16 Achievements under the Economic PolicyReformProgram.................... 17 Achievements under the Private Sector Capacity BuildingProgram........18 Monitoring and Evaluation and Other Issues........................................................ 19 Outcome................................................................................................................. 19 Institutional Development...................................................................................... 19 Sustainability.......................................................................................................... 20 Bank Performance ................................................................................................. 20 Borrower Performance .......................................................................................... 20 6 The SecondStructuralAdjustment Credit(SAC-11) . ........................................... 21 Background............................................................................................................ 21 Objectives and Design ........................................................................................... 21 Relevance of Objectives and Design...................................................................... 23 Implementation andAchievements ........................................................................ 23 Achievements under Economic Management ........................................... 25 Achievements under Privatizationand CompetitiveRegulatory Frameworks.......................................................................................... 25 Achievements under Improvementin the Business Environment.............26 Achievements under Public Resource Management.................................. 27 Achievements under Governance andPublic FinancialManagement ......28 Monitoring and Evaluation and Other Issues........................................................ 28 Outcome.................................................................................................................. 29 Institutional Development...................................................................................... 29  V Sustainability.......................................................................................................... 29 . . Bank Performance ................................................................................................. 30 Borrower Performance .......................................................................................... 30 Tables Table 1: Selected Economic Indicators. 1995-2002 ........................................................ 12 Table 2: Budget Allocations to Social Sectors, 1995-2002 ............................................ 13 Annexes Annex A: Basic Data Sheet.............................................................................................. 33 Annex B: Actions Prior to SAC I(Credit No.2937) ..................... :................................. 41 43 Annex D: List o fPersons Met ......................................................................................... Annex C: Measures Supportedby SAC I1(Credit N o.3218) ......................................... 49 Annex E: Comments fromthe Borrower......................................................................... 50   vii Principal Ratings ICR" ICRReview PPAR Public Management Capacity Building(Cr. 2911) Outcome Satisfactory Unsatisfactory Unsatisfactory Sustainability Likely Likely Likely InstitutionalDevelopmentImpact Substantial Substantial Modest Bank Performance Satisfactory Unsatisfactory Moderately Unsatisfactory Borrower Performance Satisfactory Unsatisfactory Unsatisfactory First Structural Adjustment Credit (Cr. 2937) Outcome Satisfactory Satisfactory Moderately Satisfactory Sustainability Likely Uncertain Likely InstitutionalDevelopmentImpact Negligible Modest Modest Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Satisfactory Moderately Satisfactory Private Sector Development and Capacity BuildingProject(Cr. 2956) Outcome Satisfactory Moderately Satisfactory Moderately Satisfactory Sustainability Likely Likely Likely InstitutionalDevelopmentImpact Substantial Substantial Substantial Bank Performance Satisfactory Satisfactory Satisfactory Borrower Performance Satisfactory Unsatisfactory Unsatisfactory Second Structural Adjustment Credit (Cr. 3218) Outcome Satisfactory Moderately Satisfactory Moderately Satisfactory Sustainability Likely Likely Likely InstitutionalDevelopmentImpact Substantial Substantial Modest BankPerformance Satisfactory Satisfactory Moderately Satisfactory Borrower Performance Satisfactory Satisfactory Moderately Unsatisfactory * The ImplementationCompletionReport(ICR) is a self-evaluationbythe responsibleoperationaldivision ofthe Bank. The ICRReview i s an intermediateIndependentEvaluation Group(IEG) product that seeks to independentlyverify the findings ofthe ICR.   ix Key StaffResponsible Project Task ManagerLeader Sector Manager CountryDirector Sector Director Public Management Capacity Building (Credit 291I) Appraisal PierreJ. Demangel Luca Barbone Michael N. Sarris Completion D. Randriamanampisoa Philippe H. Le Houerou Hafez M.H. Ghanem First Structural Adjustment Credit (Credit 2937) Appraisal Ali Mansoor EmmanuelAkpa MichaelSarris Completion Juan Zalduendo Luca Barbone MichaelSarris PrivateSector Development and Capacity(Credit2956) Appraisal Paul Ballard Thomas Allen Michael N. Sarris Completion Marie Ange Saraka-Yao Demba Ba Hafez M. H. Ghanem Second Structural Adjustment Credit (Credit 3218) Appraisal Juan Zalduendo Luca Barbone MichaelN. Sarris Comdetion Jesko S. Hentschel Philippe H. Le Houerou Hafez M.H. Ghanem   xi Preface This is the Project PerformanceAssessment Report (PPAR) on four lending operations to the Republic o fMadagascarfrom 1996to 1999, to assist inimprovingpublic management and creating a favorable environmentfor the private sector, with the overarching objectives of opening the economyto marketforces andreducing poverty. The PublicManagementCapacityBuildingProject(Projet d'Appui Institutionnelau SecteurPublic -PAIGEP') (Credit 2911-MG), inthe amount of SDR 9.6 million, was approved on September 3, 1996, becameeffective on December 18, 1996, and was closed on December 31,2002, 18 monthsbehindthe original date. The Credit was fully disbursed. The FirstStructuralAdjustmentCredit(SAC-I) (Credit 2937-MGandInterimTrust FundCreditN0120-MG), inacombinedamount of SDR49 million, was approvedon March 14, 1997. The ITFCredit became effective onApril 1, 1997, andthe IDA Credit on June 20, 1997. BothCredits closedonDecember 31, 1997, the originaldate, andwere hlly disbursed. Technique au Secteur Privi5- PATESP2)(Credit 2956-MG), inthe amount of SDR 17.2 ThePrivateSector DevelopmentandCapacityBuildingProject(Projet d'Appui million, was approved on May29, 1997, became effective on February 18, 1998, andwas closed on December 31,2002, the original date. Ninety-sevenpercent ofthe Credit was disbursed. The Second StructuralAdjustment Credit(SAC-11) (Credit 3218-MG), inthe amount of SDR 73.5 million, was approvedonMay 29, 1999, became effective on June 30,2000, andwas closedonDecember31,2002, oneyear behindthe original date. Ninety-ninepercent ofthe Credit was disbursed, withthe balancecancelled. The Credit was supplementedbytwo SupplementalCredits.The first (Credit 32181-MG),inthe amount of SDR 15.2million, was approvedonJuly 20,2000, becameeffective on September20,2000, andwas closed on December 31,2002. The second(Credit 32182-MG), inthe amount of SDR 23.5 million, was approvedonDecember22,2000, becameeffective on June 25,200 1,and was closedon December31,2002. Both supplemental Credits were fblly disbursed. The PPAR i s basedon all reIevantBank and IMFdocuments and on interviews with Bank and IMFstaff An IndependentEvaluation Group (IEG) missionvisitedMadagascarin October 2005 to discussperformance with officials who implementedthe projects, representativeso fdonors, and staffo fthe Bank resident mission. Basic Data sheets are in Annex A. Comments fiom the Bank's Regional Management were incorporatedinthe report. A draft report was sent to the GovernmentofMadagascar for comments. The Government replied that it hadno comments (see Annex E). This report was preparedby Pierre de Raet (Consultant), who assessed these projects in October 2005, underthe supervision ofMs. Zeynep Taymas (Task Manager). Ms. H. Joan Mongalprovidedadministrative support. Throughout this report, the Frenchacronymwill beusedbecauseit is the one used inall Bankdocuments. Idem.   ... X l l l Summary 1. This i s the Project Performance Assessment Report (PPAR) on four operations, approved inthe second halfo f the 199Os, aimed at supporting the transition of Madagascar from a largely dirigiste economy since independencein 1960 to a market economy. In 1996, anew government initiateda shift to policies basedonprivate sector ledgrowth andintegrationinto the world economy, with the overarching objective o f reversinga dramatic decline inincomeper capita over the previous decades. The Bank supported this shift by engaging into a dialogue on structural reforms articulated along two axes, a changing role o f the public sector and promotionofthe private sector as engine o f growth, andcovering four areas: broad-based growth ledby foreign investment; humancapital development; strengtheningthe public sector's ability to deliverquality services; andnaturalresource management. Implementationwas supported by two StructuralAdjustment Credits (FY97 andFY99), accompaniedby two technical assistance (TA) operations meant to mitigate the implementation capacity risks associated with the reforms: the Public Management Capacity BuildingProject (PAIGEP) andthe Private Sector Development andCapacity BuildingProject (PATESP), both o fFY97. 2. Implementationandresults were affected by three categories o f factors. First, internally, a persistently fluidpolitical situation, markedbyinstability, rivalries, and resistance to change, ledto varying degrees o f commitment to and ownership o freforms. This culminatedina deep politicalcrisis consequent to contestedpresidential elections in December 2001,duringwhich two parallelgovernments were established. The crisiswas resolved inJuly 2002, when the international community recognizedthe Ravalomanana govemment of the current President. The unstable political situation was exacerbatedby weak institutional andadministrativecapacity. Second, external shocks (three cyclones and a major increase inoil prices in 2000 - the Bank extended two Supplemental Credits to mitigate their negative impact) considerably disrupted the carrying out o freforms. Third, implementationwas negatively affected bythe-overambitious goals andcomplex design o fthe Bankprojects, notably the two TA operations. These were restructured to sharpen their focus, while SAC-I1underwent a major restructuring to respondto the new priorities and revised policy choices o fthe government emerging from the 2002political crisis. 3. Overall, the results were mixed, but, despite all the difficulties encountered, the main outcome i s that Madagascar succeededinmoving - however imperfectly - towards a market economy andto opening its economy to the outside world. This positive outcome, however, is tempered bythe little progress achieved inreducingpoverty during the period. The analysis has led to the following ratings. 4. PAIGEP. Outcome i s ratedunsatisfactory because achievements were mixed and fragmentary due to insufficient commitment, frequent conflicts and changes inthe administration, andpoor coordination. Institutionaldevelopment impact i s ratedmodest because the impact onthe keyministries and entities responsible for improving resource allocations and service delivery was minimal. Sustainabilityi s rated likely basedon increased capacity inmacro-economic management, budget cycle, treasury operations,  xiv and thejudiciary. Bank performance is rated moderately unsatisfactory because of numerous shortcomings at entry as the Bank overestimated GOM's commitment and paid insufficient attention to institutionalissues. Nevertheless, duringimplementation, the Bank responded flexibly to the rapidly changing situationand was able to keep the dialogue open. Borrower performance i s rated unsatisfactory becausecommitment was weak and a lack o fleadership ingovernance, reallocation o fresources, andpoverty alleviation. 5. SAC-I. Outcome i s ratedmoderately satisfactory becauseprogress was considerably delayed inprivatization, a key reform area, andno progress was recorded in redirecting resources to the social sectors. Institutional development impact i s rated modest becauseo fincreased capacity inthe areas o ftrade, private sector development, and dialogue between the private andpublic sectors, but there was very little progress in the management ofthepublic sector. Sustainability is ratedlikely onthebasis ofno reversal inpolicies andprogress inreachinga consensus onthe content o f SAC-11. Bank performance i s rated satisfactory becausekey conditions for opening the economy were well identifiedandprioritized, and, after disbursement o fthe single tranche, the Bank showed consistency inbringingthe reform agendamoving towards SAC-11. Borrower performance i s ratedmoderatelysatisfactory because o fweak commitment to reforms andaninability to initiate a serious poverty reductionprogram. 6. PATESP.Outcome i s ratedmoderately satisfactory becauseit helpedin formulating divestiture policies and launchingthe first phase o fthe privatization program. However, the overall divestitureprogramremained well behind schedule. Although the project succeededinbroadening and strengthening business services to some SMEs, several broader objectives o f developing the private sector were not achieved. Institutionaldevelopment is ratedsubstantial on the basis o f an emerging capacity to formulate privatization strategies andmanage the privatization program and the establishment o fregulatorybodies inkeypublic service sectors. Sustainabilityis rated likely on the grounds that some institutionalstructures are now inplace to promote private sector development andcompetition. Bankperformance is rated satisfactory because Bankassistance and advice were not only consistently strong but also well targeted to the priorities as they emerged from implementation o f SAC-II. Borrower performance i s rated unsatisfactory becausecommitment to reforms remainedlukewarm andbecausesome successful private sector development structures were unnecessarily dissolved. 7. SAC-TI. Outcome is ratedmoderatelysatisfactory becauseresults were mixed anduneven. While progress was madeinmacro-economic management, privatization, andbusiness climate, littlewas achievedinpublic financial management andgovernance. Public resource management continuedto beneglected, with a negativeimpact on poverty alleviation. Institutionaldevelopment impact i s ratedmodest because, overall, little was achieved inraisingthe capacity to formulate and implementpolicies. Sustainability is rated likely because o fno reversal inpolicies, despite the crisis. Moreover, the risks o freversalhave diminishedthanks to a greater acceptance o freforms bythepublic opinion andtheprivate sector. Bankperformance isratedmoderately satisfactory. The credit was generally well-designed, reflecting the Bank's knowledge o f  xv country conditions that hadbeen accumulated over several years, and it was supervised flexibly, especially inthe face of shocks. However, there were shortcomings inthe Bank's performance, it continued to overestimate government's commitment and underestimate institutional weaknesses. Inaddition, itbecame too absorbed by the privatizationprogram at the expense o f issues o fresource allocationandpoverty reduction, where virtually no progress was made as noted above. Borrower performance i s ratedmoderatelyunsatisfactory because o f lukewarmcommitment, a reactive attitude to Bank'spresence, and a lack o fvision to addresspoverty reductionby systematic and coherent policies. 8. The following lessons emerge from the assessment. 0 The recordo f fragile political stability inMadagascar pleads for designingpolicy development operations ina flexible manner based either on a menu-based approach to tranche release, or preferably, on aprogrammatic series o f one-tranche operations withprior actions. 0 GivenMadagascar'srelatively low absorptive capacity, TA operations for supporting reforms should be well focused andhave limited objectives initially aimed at implementationbottlenecks. 0 NewinstitutionsinMadagascar need continued assistance from the donor community. Establishngnew institutions does not ensure their effective operations. Continuedsupport i s required, for example, to strengthenthe different regulatory authorities created inthepublic service sectors and competition ingeneral, as well as the business framework. Similarly, continuedassistance i s neededto strengthen the judiciary, which i s a long-termundertaking. 0 Consideration shouldbe givento revive the Private Sector Support Fund, which proved successhlprior to the 2002 crisis, or to set up a similar scheme to promote PSD. 0 The domestic revenue collectioninMadagascar i s particularly low. Much greater attention than inthe past should begivenbythe authorities andbythe Bankto revenue mobilization andreallocationof public resources for povertyreduction, without whch recent improvements insocial indicators will not be sustained. Vinod Thomas Director-General, Evaluation hdependent Evaluation Group   1 1. Introduction 1.1 After over twenty years o f dirigisme, Madagascar started inthe mid-1980s to reduce the role o fthe state andto liberalize its economy. But the reforms were piecemeal andhesitant untilthe mid-1990s. In1996, anew government presentedan economic programto the National Assembly consistent with policy advice from the International MonetaryFund(IMF) and the Bank and based onprivate sector ledgrowth and integration into the world economy. The Bank supported this shift inpolicy by deepening the dialogue withthe Government of Madagascar (GOM) on structural reforms. 1.2 The four operations reviewedhere find their origin inthis shift. The objective o f this ProjectPerformance Assessment Report (PPAR) is to assess the extentto whichthey succeededinassisting the country inits transition to amarket economy open to the outside world and inreducingpoverty. They were articulated along two axes: a changing role ofthe public sector from economic agent to public service provider, andpromotion ofthe private sector as engine o f growth. Implementationo fthe reforms, supported by the two SACS,was to be facilitatedby two corresponding capacity building operations, one for the public sector, andthe other for the private sector. 1.3 The report i s structured as follows: Section 2 provides the background and the strategic context inwhich the four operations were prepared; Section 3 discusses the PAIGEPas setting the stage for undertakinginitialreforms; Section 4 discusses the implementationandresults of SAC-I; Section 5 discusses the PATESP as support for the development o fthe private sector; and Section 6 discusses SAC-I1and its outcome. Section 7 draws conclusions and lessons. 2. Backgroundand Context 2.1 Madagascar has a population o f about 18 million, growing at 2.7 percent p.a., with three-fourths livinginrural areas. Itis among thepoorest countries, with anincome percapita ofUS$290. After over two decadesof state dirigisme following independence in1960, therewere some attempts atliberalizationinthe late 1980sleadingto some improvement inthe economic situationo fthe country. However, this was interruptedin 1991by demonstrations andstrikes insupport o fpolitical liberalization. After a lengthy transition to democracy, recovery was blockedbypolitical factionalism andpolicy differences on economic reform. Political instability andinfightingpersisted to mid- 1996, when Parliament adopted a motion of no-confidence inthe government (GOM), openingthe way to the appointment o f a non-political Prime Minister andthe return o f PresidentRatsirakainnationalelections. InJune 1996, the new government presented an economic programto Parliament consistent with advice fi-om boththe IMFandthe Bank and, inAugust 1996, Parliamentadopted the necessary legislationfor the implementation o freforms agreedunder a structural adjustment program. This is the immediatepolitical backgroundto the four operations reviewedhere. 2.2 The more liberalpolicies adopted by the mid-l990s, the subject o fthe present PPAR, ledto an average growth rate of 4.6 percent over 1997-2001, outpacingpopulation  2 growth for the first time indecades. However, Madagascar's political scene continued to be markedby tensions between different factions andparty rivalries, a feature o f the country's political life. This erupted inthe openwhenthe December 2001presidential elections were contested bythe two main candidates, President Ratsiraka andhis contender, Marc Ravalomanana, mayor o fthe capital. It ledto a deep political and economic crisis, duringwhich two parallel governments were established, critical infrastructure was destroyed, key social services were discontinued, and export activities virtually stopped. The crisis was resolved inJuly 2002, when the international community recognized the Ravalomanana government. Growth and poverty were adversely affected bythe crisis with GDP falling by 13 percent in2002. Stabilizationand reform resumed after a new government was inplace and the economy rebounded in 2003. Madagascar reached the decisionpoint underthe enhanced Heavily IndebtedPoor Countries (HIPC) initiative inDecember 2000, and the completionpoint in2004. 2.3 Decades o fpoor performance had a dramatic impact onpoverty, which reached73 percent in 1997 (76 percent inrural areas). Extremepoverty (those who cannot affordto buyabasic foodbasket evenifthey spendtheirtotal incomeonfood items) hadreached63 percent in 1997 (66 percent inrural areas). The relatively strong growth during 1997-2001 failed to reducepoverty significantly, while the 2002 crisis wipedout whatever benefits hadbeengained. In2002, povertyhadreached81percent nationwide(62 and 86 percent inurbanandruralareas, respectively). MadagascarissueditsInterimPovertyReduction Strategy Paper (I-PRSP) inNovember 2000 andits full PRSP inJuly 2003. THESTRATEGYCONTEXT 2.4 The early attempts at reform duringthe late 1980s andearly 1990s led GOMto take several liberalizationmeasures in 1994, including floating the exchange rate and abolishing import prohbitions. The same year, the Bank issued a Country Assistance Strategy (CAS) focusing onpromoting a private sector- and export-led growth, tackling poverty, improving naturalresource management, buildingcapacity, and improving project implementation. Underlyingthemes were the redefinitiono fthe role o fthe state, improvingthe quality o fpublic services, and expandingthe role o fthe private sector in investment andthe provision o f services. 2.5 The four operations reviewedhere were ingestation duringthis periodandwere identifiedinthe 1994CAS. At the time, there was anincreasingrecognitionin Madagascar that increased investmentwas the pre-requisite to growthwhich would help alleviate poverty. This was seen as urgent andrequireda redefinition o fthe role o fthe state. Preparation o f an adjustment program started inthis context butprogressedvery slowly, over three years, 1994-96, andmoving inparallelwith the ups and downs inthe political situation. Itwas not untilthe new leadership inplace inmid-1996 was willing to undertake reforms, that a coherent program could take shape. The Bank seized this opportunity to deepen its dialogue andstructure its interventionby launchinganew CAS, (January 1997), a structuraladjustment program(SAC-I), andtwo technical assistance (TA)projects to helpimplement the latter. The CAS concludedthat poverty couldonly bereducedthrough growth andthat only the private sector could deliver such a growth. Its major themes were aligned on GOM's priorities: broad-based growth ledby foreign  3 investment; humancapital development; strengtheningo f the public sector's ability to deliver quality services and create an enabling business environment; andnatural resource management to reduce degradation and develop eco-tourism. 2.6 SAC-Iwas the vehicle to initiate reforms centered on opening the economy to international competition andintegrationinto the world economy. The PAIGEP,an extension o fthe capacity buildingefforts undertakenunder the FY89Economic Management and Social Action Project (EMSAP),3was to assist the public administration inimplementingthe reformprogramwhilethe PATESPwas to assistinmoving decisively on reforming the Public Enterprise (PE) sector andpromotingprivate sector development (PSD). SAC-I1was to deepenandbroaden reforms, with aparticular emphasis on PSD. BothTA operations were meant to mitigatethe implementation capacity risks associatedwith the reforms. The implementationperiod o fthe four operations ranfrom 1997 through 2002. 3. The PublicManagementCapacityBuildingProject (PAIGEP) BACKGROUND 3.1 The project was a follow-up to the Economic Management and SocialAction Project (EMSAP)mentionedearlier whch hadidentifiedweaknesses ineconomic management andpublic finance (budget formulation, expenditure programming, PE reform) and ingovernance (census andmanagement o fpublic sector employees). Implementationhad also revealed inadequate data andtools for policy formulation and a lack o fcapacity to provide adequate public services. Thus, the project was to support GOMinimplementingthe reformprogrambybuildingits capacity inpolicy-making, in public resource management, andingovernance. OBJECTIVESAND DESIGN 3.2 The objectives were to assist in(i) improving economic management and (ii) addressing governance issues, specifically: (a) a more effective effort to identify, define, implement andmonitor economic policies; (b) raisingthe capacity and efficiency o f the civil service ina context o f a redefined role o fthe state and an on-going decentralization process; and (c) making effective the "rule o flaw" andimproving the security o fbusiness transactions throughthe independence and increased effectiveness o f thejudiciary. Support consisted o f TA, training andequipment. There were seven components, four corresponding to the first objective, andthree to the second one: EconomicManagementand Social Action Project, ReportNo. 7410-MAG, October 27,1988. ImplementationCompletion Report, ReportNo. 16272,February 6,1997. The largestcomponent of the EMSAPwas the SocialAction Program, aprogramofemergency actionsfor the disadvantagedandvulnerablegroups.  4 UnderEconomic Management: 0 Technical Secretariat for Adjustment (TSA) (created inMarch 1995): (i) monitoring andcoordinationofthe reformprogram; and (ii) and implementationof a design public informationcampaign on the program; Statistical Office: strengtheningcapacity with respect to (i) accounts; national (ii)household-welfare surveys; and (iii) business-cycle surveys; State Secretariat for Economy andPlanning: (i) on economic development studies strategy andprojects' economic viability; (ii) preparation o f sectoral strategies, Public InvestmentPrograms (PIP), andPublic Expenditure Programs (PEP) consistent with themandwiththebudget; (iii) monitoring o fprojects' execution and identification o f obstaclesto implementation; (iv) design andpreparation o f a publication on economic information; and (v) organizational audit o fthe Secretariat; and 0 MinistryofFinance andBudget(MFB):(i) strengthening the effectiveness o fthe budget as instrument o feconomic policy; (ii) of autonomous agencies; audit (iii)organizational audit o fthe Treasury; (iv) establishment o f an efficient debt management system; (v) rehabilitation o fthe payroll management system; and (vi) establishment of aDepartmento fEconomic Forecasting andAnalysis. Under Governance: 0 Civil Service reform: (i) workshops to develop an actionplanfor reform, including a new statute; (ii) diagnostic study o f four pilot ministries leadingto reorganizationand redeployment o f staff consonant with decentralization; and (iii) financing o f activities/studies resultingfi-om the above-mentioned workshops; 0 Decentralizationprocess: (i) on the design andimplementation o fthe studies decentralization and deconcentration process; (ii) training o f officials o fthe central anddecentralized governments; and (iii) provisionof training, TA, and equipment in support o fpilot implementation o f decentralization inselectedurbancenters; and 0 Legal andjudicial refom: (i) compilation andpublication o fbusiness laws, and publication o f a legalperiodical; (ii) o f commercial andbusiness laws; reform (iii) andretrainingofjudgesandothercourtpersonnel;(iv)stremliningof training the litigationprocess; (v) strengtheningthe effectiveness ofthe Ministryo fJustice andofthe courts; and(vi) studyo f an arbitrationmechanismfor disposingo f commercial disputes. RELEVANCE OF OBJECTIVES AND DESIGN 3.3 The objectives were relevant andconsistent with the Bank strategy, inthat they addressedthe mainweaknesses inpublic sector management and aimed at assisting GOM's inimplementingthe adjustment program. However, ownership at the administrative andtechnical levels was marredfiom the beginningas a result o f the  5 fragmented structure o f the central ministries. Although this had beenidentifiedby the Bankduringpreparation as a sourceofpotential conflicts and as an obstacle to effective implementation, politicalpressure preventedany streamlining of those ministriesprior to project approval. The negative impact ofthis situation was underestimated at entry and assistanceto policy-making was often undermined by this state o f affairs duringthe whole period covered bythe adjustment program. The matter was only solvedby a ministerialreorganization after the 2002 crisis. Inaddition, the design o fthe operation was too complex with too many different types o f activities dispersedover several central andtechnical ministries, despite the fact that the administration was knownto beweak andlackingincoordinationcapacity. IMPLEMENTATIONANDACHIEVEMENTS 3.4 Implementationsuffered from overambitious goals, complexity indesign, and lukewarmcommitment to reforms. Equally important, it took place ina fluidpolitical situation, frequent changes inappointments, restructurings o fthe centralministries, and uncertainties raised by a revisiono fthe ConstitutioninJuly 1998. The project didnot succeedinadapting to such important andrapid changes. Without strong leadership from GOM, repeated adjustments hadto bemade inproject activities to match strategic realignments bythe authorities. At the same time, the projectmanagement found it difficult to coordinate various sub-components. 3.5 InJuly 1998,QAGratedarapidquality ofsupervisionassessmentas "marginal". Itnotedthat: (i) Bank team was fblfilling amanagement rather than a supervision the role; (ii)structural reforms were severely lagging; (iii) political change and staff constant turnover were requiringcontinued remedial education o f officials on the project andits objectives; and (iv) the project hadnot taken root. Itrecommended that, at the mid-term review, the project bemorenarrowly focused onkeypriorities o finterest to GOMand consistentwith structural reforms, with new indicators agreed. Itconcludedthat the focus on development impact was marginal, that design, readiness for implementation, andborrower commitment were questionable, and that the project was too complex. 3.6 InOctober 1998,the mid-termreviewrecommendedasubstantial restructuringto facilitate implementation, without modifying objectives. The restructuringwas decided onthe basis o f the following: (i) QAG assessment; (ii) revisiono fthe the the Constitution; and(iii) changes inthe organization o fkeyministries in 1998. Inaddition, it was largely inspiredby the need to refocus support to the implementation o f SAC-II, which was under preparation. 3.7 Therestructuring, effectiveonMay 1,1999,consisted o fclosing some components and streamliningothers as follows: (i) Statistical Office component was the closedbecause2 sub-components (national accounts andbusiness cycles) hadbeen completed satisfactorily; the third one (household-welfare surveys) was transferred to the MFBcomponent; (ii) State Secretariat for EconomyandPlanningcomponent was the closed (except for the study fundtransferred to the TSA), because o fits weaker role after the 1998ministerialrestructuring; (iii) Civil Service reform component was to be the closedby end 1999 (after a national seminar) for lack o fpolitical support; (iv) the  6 Decentralizationreform component was closed (except for ongoing activities inthe pilot urbancenters), because o f a change inGOM's strategy on decentralization; and (v) under the MFB component, support to the Treasury was reoriented to its computerization instead o f its reorganization. 3.8 InJuly 1999,the Quality Assurance Group (QAG) didanewrapidquality of supervision assessment. Although it commended the Bankteam for bringingthe project back on track andrefocusing it, it noted that intensive supervision was required, efforts neededto bemaintained, andkey outcome objectives were to beidentifiedandtracked. Itmaintained its negativerating for designandreadinessfor implementationat approval, butrevisedits ratingofGOM's commitment onthe basis ofits adoptionofthe program supported by SAC-I1 (approved inMay 1999). Achievements underEconomicManagement 3.9 Technical Secretariat for Adjustment (TSA). Assistance contributedto the formulation o fthe 1996-99 PolicyFramework Paper (PFP) andthe IMFprogramandwas the main support for the finalizationo f SAC-I. The TSA carried out surveys and studies inseveral areas(visas, tourism, fishinglicenses, andlandtenure, judicial reform, and social security), some of which were eventually included into SAC-11. It also produced a monthlymacro-economic indicator note andplayed an important role inorganizingand conducting the public information campaignon the adjustment program. Starting in 2000, its capacity became over-stretched due to increased involvement inthe preparation o fthe I-PRSP andthe HIPC initiative, which prevented it fiom monitoring sectoral reforrns and supporting the development o f sectoral strategies. Similarly, it limitedits ability to coordinate its activities with those o fthe Statistical Office andthe Forecasting UnitatMFB. 3.10 Statistical Ofice. Activities were carried out as planned: (i) nationalaccounts the for 1993-95 were revised inaccordance with the 1993 UNmethodology and stored on CD-ROM.4Sevennational account experts were trained, but five have left the Office since then; (ii) household surveys were carried out in 1997 and 1999 on the basis o f an analysis o fthe 1993 survey to assess the evolution o fpovertybetween these dates. This provedusehl inthe preparation o fthe I-PRSP, especially in the regionalworkshops. At restructuring, the responsibilityfor poverty monitoringwas transferred to (Ministry o f Finance andBudget (MFB); and (iii) six business cycle surveys were produced. Despite the satisfactory completion o fthe tasks planned, the capacity o fthe Office i s still limited. 3.11 StateSecretariatfor Economy and Planning.' The formulation o f sectoral policies and correspondingPublic InvestmentPrograms (PIPS) andPublic Enterprise Programs (PEPS)was not undertaken following the 1998ministerialrestructuringwhich The StatisticalOfficedecidedto adopt anewbaseyear, 1995, for its NationalAccounts, but, as of 2002, the conversionhadnot beendone. In1996,two ministries wereresponsiblefor budgetpreparation,executionandmonitoring:MFBwas responsiblefor preparingthe currentbudgetandfor all budget execution, andthe Secretariat for preparingthe investmentbudget and for overallmonitoringo f GOM'sprograms. In 1998, MFB itselfwas divided, and in2002, the ministries o fFinance, - Budget, and Economywere mergedinto a singleministry.  7 reduced considerably the role of the Secretariat. As a result, there was no solidbasis for a reallocationo f resources, and the 2000 performance targetswith respect to reducing public expenditures, andmaintainingthe levels of the PIP and o f social spendingwere not met. The component was dropped at restructuring. 3.12 Ministry of Finance and Budget. The budgetandtreasury nomenclatures were unifiedwhile budget execution was improved bymakingappropriations available early to line ministries, by giving spending authority for healthand education to deconcentrated offices-Health and SchoolDistricts-of the ministries,6 andby simplifyingseveral controls. An integrated computerized public finance management system was established as apilot operation inToamasina, the country's mainport, andwas to be installedat the nationallevel. Payrollmanagement was improvedbythe computerization o f aunified databasebetweenthe Ministry of Civil Service andMFB. The Permanent Secretariat for Macro-economic Forecasting was strengthened andperformed satisfactorily; producing goodquality macro-economic frameworks used for thebudget, the IMFprograms, the PRSP, andthe formulation o fthe HIPC triggers. It also issuedan annual reviewofthe macro-economic situation. After the 2002 crisis, it was integrated into the Economic Directorate o fMFB. 3.13 An organizational audit o fthe Treasury was completed byconsultants in 1998, butGOMconsidered that it was ofpoor quality andnotrespondingto its needs. Its recommendations were not implemented. The remainingfunds were redirected to the computerization o f operations. Completedin2000, it allows for timely informationon the execution o fthe budget. Withregard to external oversight o fpublic accounts bythe Office ofthe Auditor General (OAG), considerable progresswas achieved. As of October 2005, final audited accounts for 1993-98 hadbeen approvedbythe National Assembly andthose for 1999-2001 were withthe Assembly for adoption. At the same date, OAGhad sent its comments onthe 2002 accountsto MFB andwas auditingthe 2003 accounts. Achievementsunder Governance 3.14 Civil SewiceReform. A substantial amount o fwork, workshops, audits, and studies, ledto the preparation ofanew draft statutethat was approved bythe National Assembly butrejectedbythe Senate for lack o fpolitical commitment and coordination w i t hthe administration. Institutionalauditswere carriedout for six ministriesleadingto reforminsome o fthem: the disengagement from productionactivities inPublicWorks and Transport; the reduction ofnon-permanent staffinAgriculture; delegation o f decisions to field managers at the district levelinEducation; andsome lesserrestructuring inJustice andHealth. Overall, results weremixedbecauseo funclear strategiesindecentralization anddeconcentration. The component was closedinlate 1999. The transfer ofspendingauthority to deconcentratedoffices was successfulin increasingthe amount oflocal control over spendingandmost districts function more or less. However, the districts focusedprimarily on infktructure, mostlyrehabilitation offacilities or new buildings. Sincefacilities were inadequate inany case, this was not wasted investment, butother constraintssuch as inadequatestaffhg, lack of staff training, poor teacher attendance, and inadequateteachinghealth supplies, were not addressed. Another problemis that the districts remain dependent on the centralgovernmentbudgetallocations.  8 3.15 Decentralization. Assistance was intemptedfollowing a change inGOM's decentralization strategy, following the 1998 revision o f the Constitution creating new administrative level^.^ Many o f the revisions, particularlythe transfer o f competence, budgetary assignments, and the structure o f inter-governmental fiscal relations, remained undefined and the nature o f inter-relations between levels uncertain. As a result, the project was no longer inapositionto influence core policy decisions or provide assistance and guidance inthe absence o f clear direction. However, the pilot programs to improve localmanagement, establish guidelines on accounting standards, and raise revenue mobilizationwere successfully implemented in 12communes and some positive experiments have since been extended to a large number communes. The component was closed at restructuring. 3.16 Judicial Reform. There was progress on several fronts: (i) aNational School for Magistrates andClerks was established, which still runs today with funding from the nationalbudget anddonors. Itnow has a section for Magistrates specializing infinance andadministration; (ii) business legislation(commercial code, companies' law, the guarantees and securities, etc.) was revised; (iii) several basic laws and other legal publications were reprintedand distributed to all magistrates and other legal personnel, CD-ROMswere widely disseminated, andseveral securedlibraries established; (iv) in 2001,anArbitration Center was opened; and(v) the provisiono fmaterials, supplies and IT equipment permittedto reduce the backlogof cases inthe capital andinthree provinces. MONITORINGEVALUATION OTHERISSUES AND AND 3.17 Theproject includeda list o findicators to measureprogress under each component, statedinterms o f activities, outputs, milestones, and dates. The indicators were adequate andcorresponded to the right data to be collected, given the objectives o f the project. However, M&Eimplementationwas mixed: for components not dropped after the restructuring, some outputs were produced on time, others with delay, and still others were not produced. For the components terminated at restructuring, many activities were not completed. There i s insufficient information to asses -andthe ICR does not discuss - the extent to which data collectedor outputs produced informed directly decision-makmg processes andresource allocation. There were no issues with respect to compliance with safeguards and fiduciary requirements. OUTCOME 3.18 Unsatisfactory. As mentioned above, there are few indicators providing quantitative results, partlybecauseo fthe disruption causedby the restructuringandthe numerous administrative and institutional changes. Overall, achievements were mixed andfragmentary dueto insufficient commitment, frequent conflicts andchangesinthe administration, andpoor coordination. Economic management was not strengthened as The 1998 ConstitutioncreatedRegions, as distinct fromprovinces and communes, but, as late as the end o f2003, they hadnot been established. The new Constitution also createdDistrictsas deconcentrated unitso fthe central government andthe most important interfacefor public service delivery.  9 expected: results were poor inthe management o fpublic resources and their reallocation to the social sectors; sectoral strategieswere not redefined and public expenditures and the budgetnot readjusted accordingly, a major shortcoming inthe years leading to the preparation of a PRSP.Leadership andcommitment were missing to make strides in governance, and the efficiencyof state institutions indeliveringpublic serviceswas not improved, except for someprogress under thejudicial component. Most opportunities for reformwere missed. INSTITUTIONAL DEVELOPMENT 3.19 Modest. Impact on the different ministriesand entities involved was limited. Some progress was made inthe formulation of the macro-economic framework, the management o fthe budget cycle, the oversight o fpublic accounts, and thejudicial system, butthere was no improvement inrevenuemobilization(see Table 1in Section 4). Also, there was no progress inraising GOM's capacity to manage andredirect resources inlinewithaprogramof povertyreduction. Infact, there was no attempt to formulate such a program and redesigninstitutional frameworks accordingly. A broad vision was missing inthat respect. Finally, keyreforms were abandoned inthe areas most likelyto raise the efficiency o fpublic expenditure and quality inthe delivery o fpublic services, i.e., civil service and decentralization. SUSTAIN ABILITY 3.20 Likely. The ratingi sjustified onthe basis o f increased capacity inmacro- economic management, budget cycle, treasury operations, andthejudiciary. Also, there was no reversal inpolicies, evenin2002. The consolidationo fpolicy-making andits monitoringunder a single ministryafter the crisis should facilitate the sustainability o f whatever was achieved underthe project. BANKPERFORMANCE 3.21 Moderately Unsatisfactory. Quality at entry was unsatisfactory, despite the amount o fwork that went into project preparation. The Bankoverestimated GOM's commitment andpaid insufficient attention to the possible consequences o f a fragile institutionalset-up. The projectwas also overburdened bytoo manyandtoo different components. Risks were well identifiedbut insufficient care was takento define and prepare mitigating measures. Infact, this task turned out to be done by QAG in advocating safeguards against the risk o f even greater difficulties inimplementation. Although the Bankteam heededQAG's recommendations and acted swiftly by streamliningthe project, supervision continued to suffer fkom poor design at entry. However, task management inthe field, permitteda constant dialogue with officials, thus minimizingthe risk for negative developments. BORROWER PERFORMANCE 3.22 Unsatisfactoq. GOM's commitment was weak, showing no resolve intackling the institutional problems besettingimplementation. GOMwas essentially passive, letting the Bankteam assumedecisions and tasks falling normally under its responsibility. Q A G  10 had characterized the Bank team as "fulfilling a management rather than a supervision role". With the arrival o f SAC-11, GOMbecame more pro-active, notably inmacro- economic management to meet the requirement ofmaintaining a sound framework. This helped reinforce to a certain extent the structures directly involved inthis area, such as the TSA andMFB. However, GOM showed no leadership inpromotingthe program areas concernedwith governance, reallocation o fresources, andpoverty alleviation. 4. The FirstStructuralAdjustment Credit (SAC-I) BACKGROUND 4.1 Given GOM's poor recordintacklingreforms, the Bankwas very cautious in preparing the project. Active preparation didnot start untilthe following actions hadbeen taken: flotation o fthe currency in 1994; elimination o f subsidies on flour andrice; appointment o findependent administrators to the two state-owned commercialbanks; loweringo fthe maximumtariff from 50 to 30 percent; reorientation ofbudget allocations to primaryeducation, basic health services and social fund communityprojects; creation (September 1995)o f ajoint public/private sector group, the Committee for Reflection on Competitiveness (CRC), to develop recommendations to mobilizeprivate investment; andappointment o fthe Independent PrivatizationCommission (CIP) (established in January 1995)to draft a new privatization law (enacted inAugust 1996). Preparation also moved as agreed actions were taken, with all conditions to be met prior to Board presentation. Appraisal took place after Parliamentinmid-1996 hadvoted a motion o fno confidence followed bythe appointment o f a non-politicalprimeminister. OBJECTlVESAND DESIGN 4.2 The objective was to break Madagascar out o f a povertytrap byhelpingrestore investor confidence, specifically by: (i) underpinning a fimdamental relaxation o f controls andrestrictions facinginvestors andtourists; and(ii) the stage for aresolutiono fthe setting external payment problems o fMadagascar (debt rescheduling at the ParisClub and mobilizingexceptional donor support). Actions prior to Boardpresentation fell under the following headings: (i) Macro-economic management: fiscal management; monetary and financial policies; exchangerate policy; and external trade; (ii)Incentivesfor private investment in exports and labor-intensive activities: divestiture o fPES; fiamework for private sector incentives; tax incentives; banking;petroleum; telecommunications; vanilla; andairtransport; and(iii) Refocusing public expenditures: restructuring o f expenditures towards the social sectors. The Credit consistedo fa single tranche, disbursedupon effectiveness. GOMs progamwas detailed in a Letter o fDevelopment Policy (LDP). h e x B lists actions prior to preparation andprior to Boardpresentation. RELEVANCEOFOBJECTIVESAND DESIGN 4.3 The objective was relevant and fully consistent with the 1997Bankstrategy in tacklingthe mainobstacles to growth andto PSD. An implied objective was to provide credibility to the reform programvis-&vis domestic and foreign investors, creditors, and  11 donors and to persuade themto extend financial assistance.' By stating that the objective was to break Madagascar out o f a povertytrap shouldbe interpreted as only initiating a movement inthat direction as it would be unrealistic to expect a three-year reform programto impact poverty significantly. SAC-I, prepared inparallelwith the PAIGEP and the PATESP, suffered from the same shortcomings as those mentioned above for the PAIGEP,i.e., unevencommitment and fragmented structure ofthe central ministries. The design of the operation -a singletranche - was well advised inthe circumstances. However, for the same reason, given the fragile political situation and the stop-and-go reforms of the past, there was a highrisk o f much reduced commitment once the tranche would be disbursed. This is infact what happened, delaying completiono fthe reforms listedinthe LDP by over one year. IMPLEMENTATIONAND ACHIEVEMENTS 4.4 Implementationwas negativelyaffected bycontinuedpoliticalinstability and, after disbursement, by reduced commitment to reforms. Inaddition, the complexity o f some components ledto unexpected difficulties inexecution, particularly inthe privatizationo fPES, which posed enormous challenges. Also, institutional weaknesses 'persistedwith efforts under the PAIGEP insufficient to overcome them. By the end o f 1997,at closing, Bank expectations h.adnot been fulfilled and there was a fairly large unfinishedagenda,' most importantlythe privatization o fthe two state-owned barks (BTMandBFV) and o fthe oil company, SOLIMA. This PPARassessesimplementation andachievements onthe basis ofactions taken prior to Boardpresentation andprogress made over 1997-98, i.e., untilpreparation o f SAC-II started inearnest inNovember 1998. AchievementsunderEconomicManagement. 4.5 Macro-economic stability was maintainedand GDP growthreached 3.7 and 3.9 percent in 1997 and 1998,against targets o f 3.0 and 3.5 percent. Growthperformance was mainlydue to an increase in investment, from 10.9 percent o f GDP in 1995 to 14.8 percent in 1998. Butthere was no progress inrevenue mobilizationwith tax revenues stagnating at 9-10percent of GDP, a very low level by Sub-SaharaAfkica standards. The overall fiscal deficit deteriorated further due to a lower than expected reduction in expenditures. Overall, performance was good instabilizing the economy, mainlydue to the monetary and financial policies pursued(Table 4.1). * Atappraisal in 1996,debt servicing absorbed45 percent o f exports o fgoods and services starving the country of foreign exchange. Inthe best scenario calculated at the time, debt rescheduling and exceptionaldonor fmancing were expectedto cover only halfo fthe gross financing requirementsto reach and sustainareasonablerate o fgrowth, the other halfhavingto bemobilizedfrom foreign direct investment. An internalBankdocumentofJanuary 1998 expresses concernat progress and lists: (i) actionsremainingto betaken the prior to engagingthe dialogue on SAC-I1(sale ofthe two state-ownedbanks;completion ofthe regulatoryframework in the petroleumsector and sale o fSOLIMA; increased flexibility inissuing visas; reduction inthe discrepancybetween budgetary allocations andactual expenditures, etc.); and (ii) the proposedmeasuresthat would berequiredfor the release oftranches under a second operation ('privatization ofAir Madagascar andairport inkastructure; further liberalization of the telecom sector; audit ofinsurancecompanies andtheir privatization; audit ofpension funds; liberalization ofland tenure; effectiveimplementationofliberalization inmining; greater progress inrevenuemobilization and expenditures restructuring, etc.).  12 4.6 Inflation and credit to GOMwere kept under control thanks to the Central Bank's tight monetary stance following measures adoptedin 1994 (increases ininterest rates; increased reserve requirements; and limitsto credit to the Treasury). Inflation fell from 49 percent in 1995 to 6.2 percent in 1998, almost on target. The tight monetarypolicy was also dictated by the needto absorb excess liquidity causedby the indiscriminate lending o fthe two state-owned banks, which hadresultedinlarge monetary expansion in 1994 and 1995. The exchangerate remained determinedbymarket forces since its flotation inMay 1994. A harmonizedtariff with three rates (a top rate o f 20-25 percent and an average rate of 15 percent) was to be introduced by 1998, but, by the endo fthe year, only equipment, primaryimports andbasic consumption itemsbenefited from a 5- 15-25 percent rate structure, with a weighted average rate still above 15 percent. Table 4.1: Selected Economic Indicators, 1995-2002 1995 1996 1997 1998 1999 2000 2001 2002 Real GDP growth 1.7 2.1 3.7 3.9 4.7 4.8 6.0 -12.7 Inflation, consumer prices 49.1 19.8 4.5 6.2 9.9 11.9 7.4 15.8 Totalinvestment (% GDP) 10.9 12.2 12.8 14.8 14.9 15.0 18.5 14.3 Ofwhichprivate 4.9 5.0 6.3 6.9 8.0 8.3 11.2 9.5 OfwhichFDI 0.3 0.3 0.4 0.4 1.6 1.8 2.0 0.2 Tax revenue (% GDP) 8.8 8.8 9.7 10.2 11.0 11.3 9.7 7.7 Fiscal deficit (% GDP) -4.3 -4.8 -5.6 -6.4 -5.5 -5.3 -8.1 -7.7 Source:IMF, World Bank. AchievementsunderIncentivesfor PrivateInvestmentinExportsandLabor- IntensiveActivities 4.7 Frameworkfor Private Sector Incentives and TaxIncentives. Conditions prior to Board presentationrelating to entry and exit visas, work permits, and other restrictions on foreigninvestment were sustained, while legalmonopoliesinpower, petroleum, telecom, andair transport were lifted.The fiscal incentives formerly providedbythe investment code and incorporated into the tax code prior to Board approval were maintained. In addition, taxation o f imports designated for theproductiono f exports was reduced; a special service was created to monitor the largetaxpayers; the Value Added Tax (VAT) was extended to all activities above a threshold with a zero rate limited to exports; and most exemptions to the VAT were eliminated. 4.8 Divestiture of Public Enterprises. The 1996Privatization Law definedthe privatizationprogram andestablished a legal andinstitutionalframework consisting o f (i) a PrivatizationCommittee (PC) composed o frepresentativesfrom the private andpublic sectors and assistedby a Technical Secretariatresponsible for coordinating the preparation andexecution o fprivatizationtransactions; (ii) aPrivatizationTrust Fundresponsible for establishing a share warehousing scheme to holdminority shares inprivatizedPESpending their sale to employees of the privatizedPESandthe public at large; and (iii)Social and a RegionalDevelopment SupportFundresponsible for ensuringthat benefits o fthe privatizationprogramwould accrueto the less privilegedinsociety. Inapplicationo fthe newlaw, a decree, issuedinMay 1997, listed45 PES(to which was addedthepublic telephone company, TELMA, inearly 1999) slated for privatization. A concomitant law  13 relatingto the settlement of disputes arising out o fprivatizationestablishedanArbitration Commission. None o fthese entities, however, was operational at project inception. 4.9 Progress was very slow because o fpolitical infighting and strong resistance. By the end o f 1998, only ahandful o f small PEShadbeensold or liquidated and the bulk o f the privatization agenda was infact pushedto SAC-11. Specific Board conditions applied to some o f the largePES,but, here also, progress was slow. The sale o fBank for rural Development (BTM) andNational Bankof Commerce (BFV), expected by the end 1997, was delayed due to political interference. BFV was sold only inDecember 1998, and a sale protocol for B T M signed only inApril 1999. Inpetroleum, although the sector had been liberalized in 1995, the legal instruments requiredto render the decisions effective were issuedonly before Boardpresentation. Another Boardconditionwas to allow at least one other oil company to enter the market and compete with SOLIMA, but the very existence ofPetroleum Company (SOLIMA) provedto be a deterrent and the condition was modified to the sale o f a controlling interest under SAC-11. Intelecom, the sector hadbeen liberalizeddejure prior to Board, but competitionbecame effective only after four mobile phone operators, selectedon the basis o f competitive bidding, entered the market in 1998. Inair transport, the market had also been liberalized, but there was no progress inthe sale ofAir Madagascar. Insum, by end 1998, little progress hadbeen achieved inprivatizing SOLIMA, Telephone Company (TELMA), andAir Madagascar. Different transactions were under discussion butwith new conditionality plannedfor SAC-II." Achievements under PublicExpendituresRestructuring 4.10 The objectives o frestructuring expenditures infavor o f the social sectors were not achieved. Between 1989 and 1994, expenditures onprimary and secondary education were generallybetween 1.6 to 1.8 percent o f Gross Domestic Product (GDP) andon health about 1percent." Table 2 shows that minimalprogress was achieved inraising allocations for education (total sector) over 1997-98, while allocations for health decreased. Actual expenditures were even lower.12 Also, monitoringo f andreporting on expenditures for the sectorswere expected to be strengthened, but little was achieved, andinstitutional strengthening inthat areawas incorporated into SAC-11. lo Although there was no SAC conditionality for the vanilla sector, GOM withdrew its support to IVAMA, the trading parastatal, and, in 1997, the export tax on vanilla was abolished. At end 1998, IVAMA was under liquidation. l1 As a condition o fBoardpresentation, the 1996budget allocations for educationand healthwere increasedby 0.1 percent o f GDP. Neither the Government's Medium-TernAdjustment Programfor FY1996-99 nor SAC-I contained specific targets for further years for expenditures inthe social sectors. GOM's program referred only to "Increase social spending, inparticular onbasic health care andprimary education". l2 The breakdowno f allocations to the education sector by level and actual expenditures is not available.  14 Table 4.2: Budget Allocations to Social Sectors, 1995-2002 I997 1998 1999 2000 2001 2002 Education In%oftotalexpenditures 10.5 12.7 11.8 12.8 12.2 14.0 In%ofGDP 1.9 2.3 2.5 2.9 2.8 3.4 Health In%oftotal expenditures 7.8 6.6 6.7 8.1 7.3 8.o In%ofGDP 1.4 1.2 1.4 1.8 1.7 1.9 Source:hide Finances MONITORINGEVALUATION OTHERISSUES AND AND 4.11 SAC-I didnot contain any specific monitoring indicators or milestones to assess progress after disbursement o fthe tranche at effectiveness. Progress was monitoredby reference to GOM's commitments under its FY96-99 reformprogram. There were no issues with respect to fiduciary safeguards. OUTCOME 4.12 Moderately Satisfactoly. Some objectives weremet, others only partially, andstill others were not. Macro-economic stability was maintained, inflationdeclined substantially, andprior achievements inexchange rate andtrade policies were sustained. The businessclimate was somewhat improvedwith better incentives for PSD, but effective implementationleft muchto be desired. Inthree important areas, progress was very limited: (i) privatizationo fBTMwas considerably delayed; (ii) the legal the although monopolies intelecom, petroleum, and air transport were abolished, noprogress was achievedinprivatizingthe incumbent companies or in attracting competition, except for mobilephone operators; and(iii) expenditures were not redirectedto the social sectors. Despite the numerous shortcomings, the ratingisjustified onthe basis that SAC-Iwas the first - and important - step to opening the economy to market forces andto the outside world. Changingthe climate was a valuable outcome, giventhe isolationofthe country sinceindependence. INSTITUTIONAL DEVELOPMENT 4.13 Modest. Institutionalcapacity was somewhat strengthened inthe areas o ftrade andPSD andthe public andprivate sectors entered into a dialogue on incentives for investment. However, there was little progress inthe management o fthe public sector, either inthe PEdivestiture program, where vested interests and oppositionremained strong, or inthe ability to redirect resources to povertyreduction. There was definitely less GOM's ownership in those areas with a corresponding lesser interest in strengthening the responsible ministries and entities.  15 SUSTAIN ABILITY 4.14 LikeZy. There was no reversal inpolicies. Moreover, the initial steps taken under SAC-Ipermittedto arrive at a consensus on the content o f SAC-11. From then on, it became clear that it would havebeen very difficult for any government to backtrack on reforms. BANKPERFORMANCE 4.15 Satisfactory. The key conditions for openingthe economywere well identified andprioritized. Inthat sense, quality at entry was satisfactory, but, at preparation, the Bank overestimated GOM's commitment, a shortcomingwhich affected also the PAIGEPandthe PATESP. The Bankcorrectlymadethe processing ofthe project conditional on actual progress, given the country's prior record. It was also right, after disbursement, to insist onpursuingthe agendabefore launchingthe appraisal o f SAC-11. Thisperiodprovidedthe Bankwith the necessaryinsightinto GOM's priorities and constraints andthus helped clarify the content o f SAC-11. However, the Bank didnot seize the opportunity to deepenthe dialogue onthe conditions amenable to wideningthe tax base, raisingrevenue, andredirectingresources to the social sectors. It became too absorbed bythe privatizationo fthe large PES. BORROWER PERFORMANCE 4.16 Moderately Satisfactory. Performance varied according to components and degrees o fcommitment and ownership. Disciplinewas demonstrated inmacro-economic management and incurbing inflation and there was some commitment to liberalizethe PSD framework. But GOMwas unable to overcome the obstacles to privatizationand to initiate a program to improvepublic services and start tacklingpoverty reduction. 5. The PrivateSector Developmentand CapacityBuilding Project(PATESP) BACKGROUND 5.1 The project hadits origin inthe economic and sector work bythe Bank and IFC in the early 1 9 9 0 ~which hadidentified the obstacles to private sector-led growth and ~ ' ~ highlightedthe needto improvethe general business environment and strengthen the managerial, technical, and financial capacity o f existing enterprises. Also, in 1994-95, the private sector hadbecome increasinglyvocal indemandingreforms andprogress in privatization. With the new leadership inplace inmid-1996, the stage was set to designa project aimed at supporting the PSD components o fthe reform program. The new climate had allowed setting clearer objectives for PSD under SAC-I.l4 l3 Madagascar: Newhorizons-Building a Strategyfor Private Sector, Export-ledGrowth.A PrivateSector Assessment, ReportNo. 14385-MAG, May 31, 1995. l 4SAC4 andthe PATESPwere approvedbythe BankBoardtwo monthsapart in MarchandMay 1997.  16 OBJECTIVES AND DESIGN 5.2 The objective was to support accelerated export-led growth, specifically by: (i) designingand implementingreforms inmarket deregulation, de-monopolizationand competition, PE divestiture, andthe tax systemto addressmajor constraints to increased private investment, efficiency, exports, andjob creation; (ii) fostering an improved government-private sector dialogue; and (iii) strengtheningcapacities and skills o fprivate firms and associations. The Credit supported two reformprograms: 5.3 TheEconomic Policy Reform Program, consisting of: (i) and design implementation o freforms inthe business environment andprivate sector incentives; (ii) toprivatization,includingtheestablishmentofthePCanditsTechnical support Secretariat, the PrivatizationTrust Fund, the Social andRegionalDevelopment Support Fund, aRetrainingFundto finance the training andredeployment ofemployees affected privatization(later institutionalized under the name Programme d'Action Sociale et Economiquepour laRCinsertion Professionnelle - PASERP),I5and the Arbitration Commission; and (iii) tax reform (modernization o fthe VAT and strengthening ofthe fiscal and customs administrations - component to bemonitoredbythe Fiscal Affairs Departmento fthe MF). 5.4 ThePrivate Sector CapacityBuilding Program, consisting of: (i) establishment o f a Private Sector Support Fund(PSSF) to provideprivate firms andbusiness associations access to support services, international data, and market sources; (ii) TA andother support to the CRC; (iii) establishment o f a Seminars Fundto finance seminars between GOMandtheprivate sector on competitiveness; and(iv) establishment andoperation o f a FDImatch-making scheme through the creation o fa Match-makingFund. RELEVANCEOF OBJECTIVES AND DESIGN 5.5 The objective was highly relevant and consistent withBank strategy. Inaddition to strengthening GOM's capacity to carry out the reforms, the project aimed at raisingthe capacity o f domestic firms by exposing themto foreign operators andworld markets. However, it attempted to tackle too many different aspects o fprivatization andPSD, and, as a result, its designwas overly complex: activities were spreadover several entities, some functioning, others existing onpaper only, and still others to be created; conventions were requiredto makesomeproposed funds operational; procedure manuals andimplementationplanswere to bedrafted, etc. All these provedto be a constraint to a rapid start o f the project. IMPLEMENTATION AND ACHIEVEMENTS 5.6 Effectiveness ofthe Credit was delayed by 9 months, fiom May 1997 to February 1998 (against one month expected at appraisal), to satisfy the several conditions relating ~~~~ l5The inclusion of a Retraining Fund, with SDR2.3 million, was decided at negotiations, without a precise institutional set-up. Itwas institutionalized inOctober 1997 as Programme d'Action Sociale et Economique pour laReinsertion Professionnelle(PASERF'), effectively establishedinOctober 1998,andbecameoperational only inApril 1999. It was a follow-up to the Programme de RkinsertionProfessionnelle (PRP) establishedunder EMSAP.  17 to the complex institutional set-up mentioned above. Inthis context, pressure from vested interests andpolitical interference became additional causes o f delay. Before effectiveness, QAG had conducted a quality at entry assessment, rated as marginal. It hadnotedthe over-complexity of the project, the questionable commitment of the authorities, the lack ofreadiness for implementation, the inadequaterisk assessment, and the mismatchbetween the capacity o f the entities responsible for implementationandthe tasks expected fiom them. The assessmenthad concluded byrecommending to reduce the numbero f components and to sharpenthe focus o f intervention. 5.7 Theprojectwas restructured inJuly 1998, without changesinobjectives. Three components were dropped, none o fthemhaving started bythen: (i) the tax reform on the basis o f an improved dialogue inpreparation of SAC-I1(which bythen had an increased focus on liberalization andprivatization);16 (ii) the Match-making Fundonthe basis o f negligible success and impact;17and (iii) Seminars Fundon the basis o fthe need for a the sharper focus. The ICRnotes that, inretrospect, quality at entrywas indeedmarginally satisfactory. IEGconcurs witht h s assessment. The restructuring ledto a much leaner project, and, as preparation of SAC-I1progressed, its focus improved and narrowed. It became the mainvehicle to provide support to PSD andto the privatizationo fthe incumbent companies intelecom, air transport, andpetroleum. The PATESP agendawas increasinglydrivenbythe requirements to meet the conditions for tranche release under SAC-II. Achievementsunderthe EconomicPolicyReformProgram 5.8 Market Liberalization andPrivate SectorIncentives. A FacilitationCenter was created to facilitate access to informationand simplify businesscreation andregistration procedures, but remained largelynon-operational. Procedures for obtainingwork permits andvisas were simplified. Inthe mining, telecom, air transport, andpetroleum sectors, the primaryand secondary legislationwas completed (competitive licensing award, technical standards, price adjustment mechanisms) and the capacity ofthe regulatorybodies was strengthened inlicensingprocedures, compliance with internationalstandards, andmonitoring. 5.9 Public Enterprise Divestiture. The privatizationprogramwas to beimplemented inthreephasesover five years (1997-2002), covering 120PES.InphaseI(1997-98), 46 PESwouldbeprivatizedor liquidated.l9 Assistance consisted mainly o f financing internationalexperts to the PC and its Technical Secretariat to designprivatization strategies andprepare transactions. From the onset, Bankmissions also played a significant role inadvising on the structure andsharingo fresponsibilities between the PC andits Secretariat, sincethesewerethe key actors inthe divestitureprocess. During l6There had also beena disagreementon the modalities o f a bonus incentive schemelinked to tax collection, which were a condition o fdisbursementunderthat component. l7Despite a pilot phaseprior to appraisal which hadbeen characterizedby the Bankteam as a complete success. A fully functioning "one stop shop" was established only in2003 underthe successor project, the Private Sector Development Project-I1(PSDP-11), approved bythe Board inAugust 2001, (Cr. 3567-MAG). l9Out o fthese, there were 11large companies dominating major sectors, 30 smaller ones slated for divestiture, and 5 slated for liquidation.  18 supervision, the Bank advised on procurement procedures, proper sequencing inthe privatizationprocess, active communication campaigns, and timely preparation and implementationof social safety net measures. By Credit closing, the divestitureprogram was not completeddue to resistance from vested interests, the complexity o f some transactions, and the inordinate amount o ftime and energy spent onthe large PESin support o f SAC-IL2' GOMwas supposedto set-up a tracking systemto monitor fiscal transfers to PESbut it failed to do so. A CountryFinancialAccountability Assessment conducted in2003 concludedthat few transfers hadbeen abolished and that the Treasury didnot have the capacityto monitor the financial situationofPES. Underthe scheme to promote local ownership, a strategy for the distribution o f shares inprivatizedcompanies (criteria, mechanisms, etc.) was developed, but the fundwas not operational by Credit closing. 5.10 ThePASERP was meant to mitigate the social costs o fthe program. However, after becoming operational inApril 1999, its mandate was substantially broadened from financing severancepayments to becomingthe mainbody responsible for all social aspects o fprivatization. Itthus becameoverwhelmed by activities incommensurate with its capacity and staff, all the more so that it hadbeen assigned responsibility also for the Social and RegionalDevelopment Support Fund. This created considerable confusion in the execution o fthe program. For the three years 1999-2001,only 821employees benefited from the program out o f2,256 eligible beneficiaries. Achievementsunder the PrivateSector CapacityBuildingProgram 5.11 Private Sector Support Fund. The Fundwas established successfblly and acted as intermediary betweenrecipient firms, mostly SMEs andbusiness associations, and local andinternational suppliers o fbusiness services. Itreceived 1,532 requests, o f whch 809 were approved for a total amount o fUS$5.9 million, o fwhich 66 percent were financed by the Fund. According to aNovember 2002 survey, 83 percent o fbeneficiaries were satisfied ofthe support provided. The Fundalso played an important role in facilitating accreditationo f I S 0 norms inquality, environment, and accounting, andin supporting the launching o fthe Afiican Growth OpportunityAct andthe US-Madagascar Business Council. These latter initiatives led to a substantial increase intrade and investmentbetweenthe U S andMadagascar. Despite its success, the Fundwas closed after the 2002 crisis because it was deemedby GOMto have too much autonomy in managing its budget. 5.12 Government/Private Sector Dialogue. The CRC was very active indebating issues and inairing them inthe media and it contributedto launchinga consultative process involving the private sector, civil society andpublidprivatepartnerships. However, its impact remainedlimitedinterms o finfluencingGOMdecisions inpolicy making. Itwas dissolved after the crisis andreplacedbyamuchless independententity composed inpart o fministers. 2o By December2002, strategieswere completedfor 35 companiesandtransactionsfor 17, including 10that were liquidated.  19 MONITORINGANDEVALUATION OTHERISSUES AND 5.13 The project document contained a matrix ofperformance indicatorsper component, stated interms o f units (e.g., number of firms, values, percentages, etc.) and sources o fmeasurement by the end of the project (i.e., byPY5). While the nature o fthe indicators was adequate, the measurement units andthe targets by PY5 impliedinmany cases the existence of data (from the statistical office, reports, surveys, etc.) unlikely to be readily available. There i s insufficient information about whether data were actually collected duringimplementationand, ifso, how they were utilized. The ICR limitsitself to record achievements under each component. Therewere no issueswith respect to compliancewith fiduciary safeguards. OUTCOME 5.14 Moderately Satisfactory. The project contributed indirectly to the growth performanceo fthe secondhalf o f the 1990sbyhelpingGOMimplement - with reasonable success - its PSD and divestiture policies, despite the difficulties encountered. This positive outcome i s due to the refocused objectives after restructuring, reducing the risks of dispersion. The fact that the privatizationprogramwas not completed does not alter fundamentally this assessment, as the priority givento the large PESwas deliberate to have a demonstmtioneffect o fthe role o fthe private sector, as illustratedbythe surge inFDIover 1999-01(Table 1inSection4). Itremainshowever that averylargeportion o f the privatizationprogramwas postponed (as o f end 2005, it was still not completed). The activities directed at SMEs also contributed to reaching the objective. Unfortunately, this component was not carried over under the successorproject (Private Sector Development Project-I1(PSDP-It), approved by the Board inAugust 2001), following the decision o f the post-crisis government to discontinue the scheme. Insum, the PATESP ledto muchprogress considering the situation from which the reformprocess started, and, without it andthe advisory role o fthe Bank,results under the program would havebeenvery different. However, as early as 2000-01, it was clear that a successorproject would beneededto complete the agenda. This provedto be a sound decision, as the PSDP-11, effective since November 2002, became the mainvehicle to consolidate the still fi-agile achievements o fthe PATESP. INSTITUTIONAL DEVELOPMENT 5.15 Substantial. Theproject succeededinstrengtheningsome institutions, not least bymakingthem operational to cany out theirmandate. Themainbeneficiaries were the Technical Secretariat o fthe PC andthe regulatory authorities. However, after closing, these were still weak andinneedo ffurther support to buildtheir staff and expertise -a serious challenge giventhe complexity o fthe tasks involved. Thus, continued support was providedunder PSDP-II. Onthe other hand, the project hadno impact on the two funds aimed at disseminating ownership inprivatizedPESanditis questionable whether theywere apriority inthe circumstances. Similarly, there was littleimpact onthe PASERPdue to its changein mandatethat blurredits original objective. Incontrast, a serious loss was causedby the decisionto dismantle the Private Sector Support Fund.  20 SUSTAINABILITY 5.16 Likely. There was no major reversal inpolicies that mighthave affected negativelythe support providedby the project, even duringthe 2002 crisis. Most ofthe benefits were sustained eventhough further strengtheningunder PSDP-I1was needed. The extent to w h c h thebenefits gained under the PASERP are sustainable is not known (it was also extended underPSDP-11). Butthe benefits associated to the activities under the CRC andPrivate Sector Support Fundcomponents are unlikely to be sustained since their activities were discontinued. Overall, the benefits generated were resilient to the effects o f the crisis andmitigatedits adverse impact on economic performance. BANKPERFORMANCE 5.17 Satisfactory. Although quality at entrywith respect to design was unsatisfactory, the analytical work carried out bythe Bank duringpreparationwas a solidbasis for defining the content ofreforms. Bankperformance during supervisionwas satisfactory, with consistency insupport and staffing. O fparticular importance, the Bankreacted positively to Q A G assessmentby narrowing the scope ofthe project while preserving its keyobjective. The alignment ofassistancewith the SAC-11agendawas also well advised, since this was the cornerstone of the adjustment program. Finally, the decisionto launch a successorproject was timely. BORROWERPERFORMANCE 5.18 Unsatisfactory. GOM's commitment to reforms was lukewarm well into project implementation. Resistance from vested interests and fi-ompolitical quarters responsible for key sectors, as well as poor coordination andpoor governance within the administration, interferedwith anddelayed the implementationo f the privatization program.'l Inaddition, GOM showed no coherent vision for the role o f PASEW and underestimated the potentialrole o fthe Private Sector Capacity Buildingcomponent as an indispensable complement to public policies. It erred indissolving the successful Private Sector Support Fundandinunderminingthe independence o f the CRC, two structures that could have strengthenedPSD further. These shortcomings showed the continued skepticism o f GOMvis-a-vis the role o fthe private sector. ' lThe divestiture of SOLIMA was taintedby a transparencyissue inthe award o f bids, with the authorization of the PC.  21 6. The Second StructuralAdjustment Credit (SAC-11) BACKGROUND 6.1 The President's Report o f SAC-I1stressed the continuedvalidity ofthe 1997 CAS andnotedthat progress under SAC-I hadbeenslower thanexpected, particularlybecause o f inadequate ownership o f specific reforms, such as inprivatization. In addition, it argued that, with a single tranche under SAC-I, the Bank hadnot hadthe leverage to push the reform agenda forward. Eighteenmonths hadbeen spent incompleting the SAC-I agenda after its disbursement. Onlythen didthe Bank feel that preparation o f a second operation could be launched. This had created a dilemma, however, because, inthe absenceo f Bank involvement and sustainedreforms, donors hadbeenreluctant to provide budget support. Indeed, a major concern o f the Bank since early 1998 hadbeen to press for the adoption o fhighlyvisible measuresas ajustification to start actively preparinga second operation, andthus senda strong signalto the donor community to extendbudget support in 1998. OBJECTIVESAND DESIGN 6.2 The objective was to achieve higher growthandreducepoverty by: (i) consolidation o fmacro-economic stability; (ii) privatization and introductionof competitiveregulatoryframeworks; (iii) improvement inthe business environment by targeting promising sectors andpromoting transparency inlicensing for the exploitation o fnaturalresources; and(iv) strengthening o fpublic finance by expanding the tax base, increasingnon-tax revenues, and ensuring that resources allocatedto the social sectors were effectivelyusedfor the poor. The designreflectedthe lessons from SAC-I. The issue of leverage was addressedby adopting a multi-tranche "menu-based" approach recognizingthat implementationevolvedover time andthat flexibility was needed. The Credit hadthree tranches, with amounts increasing insteps. Excluding the general conditiono fmaintenance of macro-economic stability and including those prior to Board presentation, there were four sets o f conditions (see Annex C). 0 First, conditions prior to Boardpresentationcoveredthe completionofSAC-I measuresand some additional ones: (i) reforms inthe telecom, mining, fisheries, and exemptionregime; (ii) adoption o f an Arbitration Law; (iii) reconciliation o fthe budget andtreasury classifications; and (iv) signingof a sale protocol for BTM. 0 Second, effectiveness o fthe Credit and disbursement of the first tranche were subject to conditions ensuringprogress before disbursement and a greater chance o f success inimplementation, especiallyoftheprivatizationprogram. Theyincluded: (i) submission o f a detailed actionplan for the implementationo fthe PASERP;" (ii) establishment andregistrationofjoint ventures relatingto the sale o f SOLIMA's oil operations andconclusiono fcontractual arrangementsrelatingto the transfer of ~~~~ 22Eventhough this provision was specified inthe Development Credit Agreement (DCA) as condition of effectiveness, it applied to the release of each tranche, as a Supplemental Letter stated that it was to be read as part of the general condition o f "satisfactory progress inthe canylng out o fthe program".  22 ownership o f its non-oil operations; and (iii) establishment o f a legal andregulatory framework, including the regulatory body, for the petroleum sector. e Third and fourth, each o fthe secondandthird "menu-based" tranches would comprise a core measure and additional measures inPSD andor inpublic finance reform. Each core measure would involve the sale o f either TELMA or Air Madagascar (including the establishment of a fully operational regulatory framework andbody). The additional measureswere to be selected from atotal o ffour PSD areas and four public finance areas:23 PSR areas: Measure I:Mining: enactment o f arevised MiningCode, includingimplementation decrees; and actionplanto expedite the processing o fminingpermit applications; Measure 2: Land tenure: facilitation o f access to land; andinvitationto investors to submit bids for five tourism andfive industrialzones; Measure 3: Business environmentandjudicialprocesses: (a) actionplanto improve caseload management and substantive progress inthe same; and (b) actionplanfor the purpose o f streamlining formalities/procedures requiredto carry out economic activities, and substantive progress inthe same; and Measure 4: Sector liberalization and additional sector reforms: (a) grantingat least two airport concessions to qualified and experienced private operators; (b) invitation to telecom operators to bidfor anationallicense; and (c) enactment of a law and issuance o f decrees governing the fiscal regime o f largeminingprojects. PublicJinance areas: e Measure 5: Revenuepolicies and monitoring: establishment of aunitwithinthe MinistryofBudgetto monitor public revenues andto review medium andlong-term tax policy andtax administrationreforms; e Measure 6: Expenditure monitoring in social sectors: (a) establishment o f a monitoring system to capture the implementationo f social policies and expenditures actually incurred for primary education andbasic health; and (b) canying out o f a survey to assess performance inthe deliveryo fprimaryeducation and basic health services; e Measure 7: Fishing licenses:(a) establishment o f a system to allocate shrimp fishing licenses ina non-discretionary, competitive andtransparent manner; (b) annual adjustment o fshrimp fishing fees inaccordance with the new allocation system; and (c) carrying out the recommendations o fthe audits o fthe Fonds de DCveloppement Halieutique et Aquicole (FDHA); and e Measure 8: Financial sector reforms: (a) carryingout the financial, organizational andactuarial audits for two insurance companies andthree social security funds; and (b) adoptionofactionplansto improvetheir performance. The exact language o fthe additional measuresi s inAnnex C.  23 6.3 Thus, the second tranche would bereleasedafter one core measure and at least four out o f eight additionalmeasureswere completed, the choice beingleft to GOM. In addition, it was subject to either completing the sale o fBTMas per the April 1999 protocol or, incase o f unsuccessful negotiations, proceeding with divestiture.The third tranche would be released after the remainingcore and additionalmeasureswere completed. 6.4 The Bank'sRegionalOperation Committee agreedto raise the amount o fthe Credit from US$75 to US$lOO million to cover the social cost o fthe privatization program. However, there was no provision, either inthe DCA or inGOM's legislation, specifying such an allocationto the PASERP andno such allocationwere made. The two-year reforrnprogram, detailed ina LDP, was to be completed by December 31,2001. RELEVANCEOF OBJECTIVESAND DESIGN 6.5 The objective was highlyrelevant and consistent with Bank strategy, with emphasis rightlyplacedon: (i) completingthe privatizationo fthe largePES(indeed, in hindsight, this provedto bethe centerpiece o f SAC-II); (ii) promoting the liberalization of sectors with a good potentialfor growth; and (iii) strengthening the management o f public resources to widenthe tax base andredirect expenditure to the social sectors. Since there hadbeenno bQdgetsupport from the Bank in 1998, the project highlighted the need for Madagascar to obtain external support to sustain macro-economic stability andexpenditures onbasic services. The designwas also relevant inthat itrespondedto the situationfaced after the disbursement o fSAC-I, when it hadbecome clear that reforms had lost their momentumand commitment had subsided. The "menu-based" approach was realistic andthe inclusiono f a programto mitigatethe social impact o f privatizationwas well advised. IMPLEMENTATION AND ACHIEVEMENTS 6.6 Implementationwas much slower than expected andwas directly andnegatively affected by two external shocks (three cyclones and the sharp increase inoil prices in 2000) andbythe political crisis o fthe first halfo f2002. These ledto sudden shifts in priorities. To start, there was a delay o f 13 months between approval (May 1999) and effectiveness (June 2000) due to the complex negotiations andunforeseen complications intheprivatizationo fseveral lots ofSOLIMA (see para.6.2), that were exacerbatedby the increase inoilprices. Thefirst tranche was disbursedin July 2000. 6.7 BetweenFebruary and April 2000, Madagascar was hitbythree cyclones with considerable damages inparts of the country. The Bank approved a Supplemental Credit of US$20million inJuly 2000 to provide: (i) fast-disbursing foreign exchange to compensatepartially for lower export earnings andhigherimport needs in2000 and 2001; and (ii) counterpart funding for the reconstructiono fhealth and education facilities, roads, bridges, etc. GOM took upon itselfto monitor and evaluate reconstruction and decided, despitethe absenceo fconditions prior to disbursement, to withdraw funds from the Credit intwo installments, the first upon effectiveness, and the  24 second after completionof 50 percent o freconstruction inthe most affected areas.24The first installment was disbursed inSeptember 2000. Reconstruction took much longer thanplannedandthe secondinstallment was disbursedonlyinJuly 2002. 6.8 The doubling of oil prices between 1998 and 2000 to more thanUS$30 per barrel put heavypressure on foreign exchange andthe stabilization program, with additional financingrequirements for 2001 estimated at US$SOmillion. The Bank approved a second Supplemental Credit o fUS$30million inDecember 2000 to cushion the impact o fthe oil shock and avoiddisruption inprogram implementation. The counterpart funds were to reduce the specific taxes on petroleumproducts and/or maintainexisting rebates to mitigatethe impact on the poor. Thebalance o fthe financing gap was expected to be filled by extraordinary donor contributions andhigher export growth. The Credit was disbursed inJune 2001, without conditions. 6.9 Although implementationcontinued to be slow and unevenduring2001, the Bank was o fthe opinion that, overall, the programwas achieving its objectives, given the maintenance o f a relatively strong macro-economic performance ina stable price and deficit environment. For second tranche release, GOMhadchosen, by mid-2001,the privatizationo f TELMA over Air Madaga~car.~~ Ithadplannedto sendaninvitationto negotiate to the winning bidder, uponreceivingthe bidsinDecember 2001. However, withthe conditions relatingto the regulatoryframework already fblfilled and faur o fthe eight additionalconditions also met (1: mining; 3: business environment andjudicial processes; 5: revenue policies andmonitoring; and 6: expenditure monitoring insocial sectors - see para. 6.2), the Board approved inDecember 2001 a waiver to the requirement o f a sale of 34 percent o f TELMA's voting stock to avoid unduepressure on GOMduringnegotiations. Instead, issuanceo fthe invitationto negotiate was considered as meetingthe core condition. At the same time, the closing date was extended fi-om December 2001 to December 2002, andthe second tranche was released inJanuary2002. 6.10 Followingthe crisis o f 2002, consultations between GOM andthe Bankwere held inJuly/August2002 to take stock ofprogress achievedandtoreviewtheprioritiesofthe new government to readjust the program accordingly. The review concludedas follows: (i) December2001,noprogresshadbeenmadeinfinancialsectorreforms(auditof since pensionandsavings funds), infacilitating accessto land, andno invitation hadbeen sent to investors for the development o ftourism and industrial zones; (ii) hadbeen there progress intheminingsector (adoption o f a law on largeminingprojects) andinair transport (inMay 2002, GOMhad signed a two-year management contract with Lufihansa Consultingto operate Air Madagascar); (iii) the crisis, illegal licenses during hadbeen issued inthe fishery, mining, and forestry sectorsbyvarious officials; and 24GOMplannedto withdraw the secondinstallment after 350 primaryschools inthe 10most heavilydamaged school districts and 33 out of 82 primaryhealth centers destroyed hadbeenrehabilitated, reequipped, and staffed. *'A tender to sell amajority stake inAir Madagascarhadbeen launchedin 1999buthadnot beenbrought to closure  25 (iv) after the crisis, the new government hadlaunched a series o femergency measuresto tackle corruption and strengthen public financial management (see para. 6.22 below).26 6.11 Upon completingthe review, the Credit was restructured andthe conditions for thirdtranche releaserevised, with anotable shift infavor of governance andfinancial management. Some conditions were amended, others deleted, and still others added. The core measure relating to air transport was amendedfrom the sale o f amajority of shares inAir Madagascar to the signingo famanagement contract. Theadditionalmeasures2, 4, 7 and 8 were modified as discussedbelow. Annex D lists the changes indetail. Onthe whole, the conditions were substantially diluted: not only were they less constraining, but they essentially confirmedmeasurestaken sincethe endofthe crisis inJune/July 2002, thus ratifyinga de facto situation. GOMandthe Bank agreedon a supplementto the original LDP and on amendments to the DCA. The Board approved the restructuring in September 2002 andthetranche was releasedinOctober 2002. Achievements underEconomicManagement 6.12 Upto the endof2001, macro-economic stability was maintained. Growth reached an average o f 5.2 percent over 1999-2001 due to the goodperformance ofprivate investment, inparticular o f foreign direct investment(FDI) intextiles, petroleum, and mobile telephony, with i!!age spillover effect on small businesses and employment. Therewas also a substantial increase intourism. Inflationremainedcontained, hovering just below 10percent per year. Buttax revenues continuedto performpoorly, stagnating at an average of 10.6 percent o f GDP over 1999-01 as a result o ftax exemptions, weak tax administration, andwidespread fraud inthe run-upto the presidential elections o f 2001. The fiscal deficit rose from an average o f 5.6 percent o f GDP over 1996-98 to an average o f 6.3 percent over 1999-01 (Table 1inSection 4). The crisis ledto a dramatic reversal inperformance, with GDP falling by 12.fpercent in2002, and investment fiom 18.5 percent o fGDP in2001 to 14.3 percent.27After the crisis, the economy rebounded with acumulative growthrate o f about 15percent over 2003-04. Achievements under Privatizationand CompetitiveRegulatoryFrameworks 6.13 The LDP specified that the state hadtotal or partial ownership o f about 136 enterprises andthat, by June 30,2000, it would sell its controlling interests i n - o r proceed with liquidations o f 4 6 o fthese, ie., the list ofM a y 1997plus TELMA. However, SAC-I1included specific conditions only for BTM, SOLIMA, TELMA, and Air Madagascar. As aresult, andas notedearlier, SAC-II focused onthese latter three andonconcluding BTM's transaction, which was a conditiono f second tranche release. Divestiture o fthe other PEScontinuedto be carried out under the PATESP. 6.14 The sale ofBTMwas completed inNovember 1999. Inthe petroleumsector, the regulatory framework and regulatorybodybecame operationalinSeptember 1999, but 26Duringthe crisis, corruption hadflourished, public resources squandered, andthe President' Special Fundsoverspent to the tune o fUS$25 million vs. a budgeted amount o fUS$400,000. 27The largest drop was inFDI, falling from US93 million in2001 to US$8.5 millionin2002 and, inthe textile sector where foreign investment dominated, output fell by 81.1 percent.  26 the sale o f SOLIMA and o f its subsidiaries provedto be a long and arduous process. The division of the assets into lots raised difficult issues o fproperty rights and landtenure, andrequiredthe creation o f severaljoint ventures.The complexityofthe operation was exacerbated bythe increase inoil prices as GOM and the new owners had to agree on a timetable and a formula to align domestic and world prices. The transaction was deemed completed inJune 2000, with the sale o fthe refinery andthe oil terminal at Taomasina, thus clearingthe way for Credit effectiveness. However, the transactions ofthe other lots (logistics, distribution, etc.) were concludedmuch later, the last one inMarch2005. 6.15 The privatizationo f TELMA was considerably delayed due to contested property rights, litigation over biddingprocedures, andthe political crisis. The transaction was finally closed inJune 2004, with DISTACOM, a HongKong group, holding 68 percent o fthe shares (34 percent from the state and 34 percent from FranceTelecom for a total o f US$25.2million).'* The objective o finvitinga secondfixed line operator was abandoned at restructuring, although GOMreserved the right to launch a bidto that effect. Inair transport, the regulatory authority was established in 1999, but the privatization o fAir Madagascar was abandoned. After a bidwas launched inFebruary 1999, the process stalled due to an unsettledclaim o fthe U S EximBank on the airline's largest asset, its Boeing 747. Inaddition, the events o f September 2001 andthe crisis ledto a sharp deterioration inthe financial situationo f the company makingits sale unattractive. This led GOMto revise its strategy infavor of a management contract with Lufthansa Consulting, signed inMay 2002 and renewedinMay 2004. Inthis climate, the twin objective o fprivatizing airport infrastructurewas temporarily abandoned. 6.16 To sum up, achievements were mixed andconsiderably delayed. The number o f issues encountered inthe privatizationo fthe largePES,together with resistance from somepolitical quarters and labor unions, absorbed an enormous amount o ftime and energyfor both GOMandthe Bank. Byproject closing, none o fthe three major privatizationshadbeen completed bythe original deadline. Moreover, there were many shortcomings, such as incomplete adherence to procedures, lack o f clarity inthe h c t i o n s o f the PC vs. the secretariat, andlack o f expertise inthe latter. Finally, IEGnotes that the ICRi s silent onthe divestiture o fthe remaining 43 PES,anindicationo fthe overwhelmingattention accorded to the three major companies. After December 2002, the privatizationprogramwas carried over underPSDP-K2' Achievements underImprovementinthe BusinessEnvironment 6.17 The project aimed at improving the business environment by targetingpromising sectors andpromoting transparency inlicensing for the exploitation o fnaturalresources. Three sectors were targeted as initial engines o f growth: mining, fisheries, andtourism. 28The state currently holds 22percent; TELMA's personnelholds4 percent; and 6 percent are to be transferredby the stateto the Privatization Trust Fund. 29As of end May 2005, ofthe 43 remainingPES,24 hadbeen sold and 5 liquidated; biddingdocumentswere under preparationor sent for 4 companies; consultantswere being recruitedto preparethe bidding documentsfor 6 companies; andbiddingwas suspendedfor 2 companies. The NorthernRailway Companywas operatingunder concessionand aconcessionagreementwas underpreparationfor the SouthemRailway Company(Source: Internal Bankdocument ofAugust 2005).  27 Inmining, anew transparent andnon-discriminatory regulatoryframework (additional measure 1)30 was put inplace with the enactment of a new Code in 1999, a new cadastre inMay2000, andthe enactment ofalaw governingthe fiscaIregime oflargemining projects (at restructuring, additional measure4 was limitedto the enactment ofthat law, while the conditions relatingto airport concessions anda secondtelecom company were dropped). 6.18 Infisheries (measure 7),licensefees for shrimp fishingwereraisedby 100 percent in 1999 and, inJune 2000, GOMadopted an allocation system based on transparent, competitive, andnon-discretionary delivery o f licenses. The system functioned for the 2000 season, but failed already in2001, as operators enteredinto informal cartel agreements insubmittingtheir renewalbids. At restructuring, the requirements o f adjusting annual fees inaccordancewith the new systemando f carrying out the recommendations o fthe audit o fthe Fonds de DCveloppement Halieutique et Aquicole were removed (the audit hadnot beendone). A new requirementwas added, i.e., that the forestry sector be subject to a similar licensing system as for fisheries, and this was adopted inAugust 2002. In addition, the revised measure 7 requireda review o f all licenses granted inthe two sectors andthe withdrawal o fthose issued illegally. During the crisis, illegal licenses hadbeenwidely issuedby local authorities. As noted above, no progress was achieved indevelopingtourism andindustrial zones (this was dropped under measure 2 and replaced by actions pertainingto governance - see below). 6,19 Inthe areaofjudicial processes, anactionplanto improvecaseloadmanagement was prepared andapproved bythe Bankin2001, butwas not implemented pendingthe findings andrecommendations ofa forum tasked to expeditejudicial proceeding^.^' However, before approval o fthe plan, the Ministry of Justice had already adopted a number of measures with some success. Inthe area o fbusiness environment, an Arbitration Law was adopted and a Center for Arbitration andMediation set up before Boardpresentation, but recourse to arbitration i s limitedbecauseo fthe highcosts. On the basis of consultations with the private sector, measuresaimed at streamlining the formalities for enterprise creationand for environmental appraisals were adoptedbut they were hardlyimplemented(see additionalmeasure 3 para. 6.2).32 Achievements underPublicResourceManagement 6.20 A TechnicalUnitonRevenueMonitoringwas createdinthe BudgetMinistryin March2000 to collect, analyze, anddisseminate data relatingto public revenues and a group was made responsible for formulating mediumand long-term fiscal policy (see measure 5 para.6.2). InDecember 2001, the Unitissued a report on revenues at the central and decentralized levels andontrends intax collection over five years. However, it didnot succeedinanalyzingthe determinants o frevenue, closingtax loopholes, and 30InSeptember 1999,asconditiontoBoardpresentation,thepermitallowingamilitaryentity,theOfficeMilitaire Nationaldes IndustriesStratkgiques (OMNIS), to engageinmining activities had beenwithdrawn. 31A revised action planwas to bepreparedon thebasis ofthe conclusions ofthe forum, buthadnotbeendone bythe time the ICRwas written (June 2003). 32As noted above, an effective "one stop shop", under the acronym of GUIDE, was createdonly inOctober 2003 under PSDP-11.  28 identifyingweaknesses intax administration or ways to broadenthe tax base. Nonetheless, the creation o fthe Unit,the submission o f its report, and the prospect of a conference on tax policy in2002 were considered as meetingthe condition for second tranche release. Duringthe crisis, the Unit was dissolved. 6.21 In2000, GOMestablished a systembywhich spending decisions for education andhealthwere delegatedto deconcentrated offices to speedup the use o fbudget allocations inoutlying areas (see measure 6 para. 6.2). A Technical Monitoring Unito f Social Expenditures was created to monitor social policies and expenditures actually incurred, includingperformance under the new deconcentrated system. It carried out a tracking surveyto analyze the proportiono fbudget flows actually reachingprimary education andhealthcenters andproduced quarterlyreports on expenditures based on budget items and hctions. However, it failed to produce recommendations onpolicies andaction plansonhow to increase social expenditures or to improve executionrates. AchievementsunderGovernanceandPublicFinancialManagement 6.22 The original conditionality didnot address specifically governance and financial management, although these were underlyingconcerns. Duringthe July/August2002 consultations, GOM and the Bank agreedthat actions taken by GOM inthe aftermath o f the crisis ir,the areas of mti-comptionandfiiancial management would be substituted to actions not takeninlandtenure (measure 2) and financial sector reforms (measure 8) as conditions for thirdtranche release. Accordingly, the following replaced measure 2: creation o f a task force responsible for proposinga national anti-comption strategy and adoption o f a decree requiringministers, senior officials, andjudges to declare their assets andthose o ftheir close relatives. Measure 8 was modifiedto cover actions taken to strengthen financial management: tighter control over the use o fthe Special Funds, including sanctions against officials involvedintheir misuse, and adoption o f a decree mandating OAGto carry out semi-annulaudits o fthe Special Funds; completion o f an audit o fthe HIPC funds for 2001; andmergero fthe Ministries o fFinance and o fBudget, thereby bringingto closure a long-standing obstacle to improving fiscal policy andpublic financial management. The new conditionalitywas infact nothingmore than a rubber stamp ofthe urgent measurestaken to addressthe unique situationthat haddeveloped duringthe crisis, andwith noprovisionor requirement for furtherreforms. Actual implementationand/or institutionalization o fmost o f these measureswere infact undertaken under subsequentprograms or operations. MONITORINGEVALUATION OTHERISSUES AND AND 6.23 Inadditiontotheseriesofconditions referredto above, SAC-11containedthree simpleoutcome/impact indicators at project end (originally December 31,2001), compared to end 1998: increase inFDIas a share o f GDP (fi-om 0.4 to 1.7 percent); increase inthe share of private investment (the public investment/private investment ratio declining fi-om 1.2 to 0.9); and anincrease inthe growth rate (above 5 percent). The three targets were met by end 2001 (see Table 1in Section 4). SAC-I1also listed intermediate/output indicators with targets set for the closing date. There i s no informationwhether data were collected to verify these targets or whether they were  29 utilized. The ICR discussescompliance with the tranches conditions only. There were no issues regarding compliance with fiduciary safeguards. OUTCOME 6.24 Moderately Satisfactory. Achievements were mixed: satisfactory inmacro- economic management untilthe political crisis, moderately satisfactory inprivatization, business climate, andpublic financial management, andunsatisfactory inpublic resource management. Ingovernance, the measures taken after the crisis could not have any measurable impact by Credit closingand corruptionremains pervasive, especially inthe j ~ d i c i a r y .The progress recorded ingrowth was wiped out in2002, revealing the fact ~ ~ that reforms remained hostageto the fragile political and social environment. Poverty was slightly reduced inurbanareas thanks to the increase inFDIbut the situation stagnated or worsened inrural areas. Here again, the crisis of 2002 wiped out whatever benefits hadbeen gained. However, the budgetary support providedby the Credit prevented the crisis from havingworse consequencesonpoverty. 6.25 Despitethe disappointing results, achievements under SAC-I1consolidated the transition to a market economy initiatedunder SAC-I, by laying the foundations for a PSD-driven growth. The main achievement o fthe SAC-VSAC-II programmaybe chstracterized as having arrestedthe "dirigisme" o f the previousdecades, with little risk of reversal, Insum, the two SACSset the stage-but not muchmore - for the government, after the 2002 crisis, to embark on a more resolute policy o f growth cum poverty reduction.34 The rating i sjustified on the basis ofthis conclusion. . INSTITUTIONAL DEVELOPMENT 6.26 Modest. Little was achieved inraisingthe capacity to formulate andimplement policies. Some o fthe units created were dissolved or were largelyineffective, such as in public resources management. InPSD andprivatization, GOMremains dependent on external assistance, andthe regulatoryauthorities remainweak andreportedly receive technical support from the enterprisesunder their oversight. Inthe fisheries sector, there i s no effective competitionand, inthe area of facilitating the creation ofbusiness enterprises andjudicial processes, institutionalcapacity was only slightly improved. In governance and financial management, a new institutional set-up was inplace only after Credit closing. Onlyintwo areas was capacity strengthened: inmining, with the establishment o f a hllyfunctioning cadastre and inpublic finance, with the long-awaited merger o fthe ministries o ffinance andbudget. Overall, institutionalcapacityremains very weak. SUSTAIN ABILITY 6.27 Likely. There was no reversal inpolicies, despite the crisis. Several positive factors concurred to reduce the risk o freversal: the government emerging from the crisis 33Underthe decreerequiringhighofficials to declaretheir assets, there are important remaining exceptions. 34Inparallelto this PPAR, IEG-CR undertookaCountryAssistance Evaluation (CAE)coveringBank assistanceto Madagascar over 1994-2004.  30 showed commitment to pursuingreforms and did so starting in2003, althoughat a slower pace than anticipated; public opinionhas come to accept the reforms, particularly a greater role for the private sector, althoughthere i s a growing impatience to see concrete results interms o f employment opportunities and reductionininequality; and the private operators who have invested inthe privatizationprogramhave now vested interests in maintainingand strengthening the reforms. However, the remaining challenge for any government i s to deliver benefits rapidly andmore widely, especially to the rural populations. BANKPERFORMANCE 6.28 Moderately Satisfactory. The agenda o f SAC-11was well identifiedandits design appropriate. Indeed, by appraisal, the Bankhad a goodknowledge o fthe political uncertainties and o fthe economic challenges. It was particularly concerned about the long implementingdelays. However, despite the precautions taken (menu-based tranches), there were weaknesses at entry, notably the overestimation of the commitment to some reforms ando fthe institutional capacity to carry out several reforms simultaneously. Inparticular, the Bankunderestimated the complexity inherent to the privatization o f large andpowerful PES,notably the multitude o flegal issues involved. Inthat sense, the component was notreadyfor implementation. Duringsupervision, the Bark demonstrated redismarid flexibility, viz., itreacted quickly andpositivelyto the cyclones andthe oil shock. Unfortunately, the dominance o fthe privatization agenda considerably reduced the attention given to other components. This was eventually reflected intwo ways, the absence o f anyprogress under some "additional measures" and the "formal" fulfillment o ftranche release conditions under others, notably inpublic resource management (measures 5 and 6). 6.29 After the crisis, the Bankplayed an importantrole inhelping GOMselect key areas demandingurgent attention, but endorsed revisions inthe thirdtranche conditions that were nothngmore than a rubber stamp o f actions taken. This was understandable in the circumstances but meant little interms o fbuildinga solidbasis for future reform. At the time, the Bankwas drivenby the willingness to transfer fimds rapidly to the new government to mitigatethe effects o fthe crisis. Finally, it failed to monitor adequately performance under the Cyclone Supplemental Credit. Despitethe many shortcomings on the part o fthe Bank, its very presence andinvolvement were critical to the turnaround in economic policy after decades o fmismanagement. BORROWER PERFORMANCE 6.30 Moderately Unsatisfactory. The commitment to reforms was lukewann throughout and opposition to some ofthem was strong, inparticular to the privatization o fthe largePES,symbols o fautonomy. For historicalreasons, the mentality i s strongly nationalistic andisolationist-still an obstacle to attracting FDI. Inareas less contentious thanprivatization, GOMdidnothavethe will or the capacity to translate decisions into permanent andworkable mechanisms or to create institutions capable o f applying and enforcingpolicies ina consistent and systematic manner. This was particularly the case inresourcemanagement. To alarge extent, itwas apassive actor, reactingto external  31 events andto the recommendations o fBank missions. Also, it was not capable to neutralize abuses that underminedthe implementationor the success o f some components. Finally - andmost importantly-it failed to take advantage o f the program to formulate and develop pro-poor policies andbuildeffective mechanisms to reduce poverty and inequality as well as the urban-rural disparity. 7. Lessons 7.1 The following lessons emerge from the assessment. 0 The recordo ffragile political stability inMadagascarpleads for designing policy development operations ina flexible mannerbasedeither on amenu-based approach to tranche release, or preferably, or on a programmatic series o f one-tranche operations withprior actions. 0 GivenMadagascar's relatively low absorptive capacity, TA operations for supporting reforms should be well focused andhave limitedobjectives initially aimed at implementationbottlenecks. 0 New institutions inMadagascar need continued assistancefrom the donor community. Establishingnew institutions does not ensure their effective operations. Continued support i s required, for example, to strengthenthe different regulatory authorities created inthe public service sectors and competition ingeneral, as well as the business fi-amework. Similarly, continuedassistancei s needed to strengthen the judiciary, which i s a long term undertaking. 0 Consideration should be given to revive the Private Sector Support Fund, which provedsuccessful, or to set up a similar schemeto promotePSD. 0 The tax effort inMadagascar i s particularly low. Muchgreater attention than in the past should be givenby the authorities andbythe Bankto revenue mobilization andreallocationo fpublic resources for povertyreduction, without which recent improvements insocial indicatorswill not be sustained.   33 Annex A Annex A. BasicData Sheet PUBLIC MANAGEMENT CAPACITY BUILDINGPROJECT (CREDIT 2911-MG) KeyProjectData (amounts in US$million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Original commitment 13.83 12.99 93.9 Total cancellation n/a 0.84 n/a Total projectcost 15.09 15.52 102.8 Cofinancing 1.26 2.53 2.00 Project Dates Original Actual Departureof Appraisal Mission 06/06/1995 06/06/1995 Boardapproval 09/03/1996 09/03/1996 Signing 09/26/1996 09/26/1996 Effectiveness 12/24/1996 1211811996 Closingdate 06/30/2001 12/31/2002 StaffInputs (staff weeks) Astua//LetestEstimate N" Staff weeks us$us$(looo) Preappraisal n/a nla AppraisaVNegotiation 73.0 249.4 Supervision 168.67 221.7 Completion 10.00 7.0 Total 241.67 478.1 Mission Data Date No. of Staff Specializations Performance Rating trend (montWyear) persons days in represented rating field Identification/ 03/95 1 Team Leader, S S Preparation 06/95 3 Members S S Appraisal 1Of95 1 Team Leader S S 07/96 6 Members S S Supervision 11/97 1 Team Leader S S 10198 4 Team members S S 07/99 3 Country Economist(2) S S Team Member (1) 03/00 4 Team Leader (1) Country Economist(2) S S Team member (1) 02/01 4 Team Leader (I) CountryEconomist(2) S S Team member (1) 12/02 4 Team Leader (1) CountryEconomist(2) S S Completion n/a n/a n/a n/a n/a n/a  34 Annex A FIRSTSTRUCTURALADJUSTMENT CREDIT(CREDIT 2937-MG) Key ProjectData (amounts in US$million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Original commitment 70.6 70.6 100 Total projectcost 70.6 70.6 100 ProjectDates Oriainal Actual Departureof Appraisal Mission 10/03/1996 10/03/1996 Boardapproval 03/14/1997 03/14/1997 Signing 03/14/1997 0311411997 Effectiveness 0611311997 04/01/1997 Closing date 12/31/1997 12/31/1997 StaffInputs(staffweeks) ActuaVLatest Estimate N" Staff weeks lJs$us$~ooo) Preappraisa! 173 623 Appraisal 3 60 Negotiations 12 38 Supervision 10 28 Completion 11 20 Total 209 769 Mission Data Date No. of Staff days Specializations Performance Rating trend (month/year) persons in field represented rating Identification/ 05194-07/96 35 n/a Economist n/a n/a Preparation PrincipalEconomist Private Sector Dev. Spslt. DivisionChief Managerand Resp. Rep. Country Ofticer ProcurementSpecialist PublicSector Mgt. Spslt. Rural Development SocialScientist AppraisaVBoard 07196-03/97 0 n/a n/a n/a n/a Approval BoardIEffectiveness 03197-04\97 n/a n/a n/a n/a n/a Completion 11198-04\99 2 nla Economist nla n/a PrincipalEconomist PublicSector Mgt.Spslt.  35 Annex A PRIVATESECTOR DEVELOPMENT AND CAPACITY BUILDINGPROJECT (CREDIT 2 9 5 6 - ~ ~ ) Key Project Data (amounts in US$million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Original commitment 23.8 23.1 97.0 Total cancellation 0.7 nla Total project cost 35.5 n.a. Cofinancing 11.7 nla n/a Project Dates Original Actual Departure of Appraisal Mission 09/14/1996 09/14/1996 Board approval 05/29/1997 05/29/1997 Signing 07/14/1997 0711411997 Effectiveness 1011311997 0211811998 Closing date 12/3112002 12/31I2002 Staff InDuts(staff weeks) ~ Actual/LatestEstimate N" Staff weeks ussus%('ooo) Preappraisal 112 226.4 AppraisalINegotiations 20 66.0 Supervision 93 220.6 Completion 4.5 5.3 Total 229.5 518.3  36 Annex A MissionData Date No. of Staff days Specializations Performance Rating trend (month/year) persons in field represented rating Identification1Preparation 5/95 8 nla A nla nla 7195 10 nla s-1 nla nla 9195 5 nla s-I nla nla 12/95 6 nla s-I nla nla 2196 4 n/a s-I nla nla (Pre-appraisal) 7196 4 nla s-1 nla nla (Pre-appraisal) AppraisalINegotiation 10196 5 nla s-2 nla nla (appraisal) ' 4/97 8 nla s-2 nla nla (negotiations) Supervision 7198 3 nla s-3 U U 9/98 4 nla s-3 S U 12/98 3 nla s-3 nla nla 4/99 3 nla s-3 S S 7/99 2 nla s-3 S S 12/99 3 nla s-3 S S 3100 1 nla s-3 S S 7/00 2 n/a s-3 HS HS 3/01 7 nla s-3 S HS 6101 4 nla s-3 S HS 9101 1 nla s-3 S HS No missiondueto U S Political crisis 7102 5 n/a S-3 S S Completion 4103 1 nla s-4 S S SDecialized staff skills reoresented A =Specialist, business law, PSD, taxpolicy, trade and Export, regulatory policy S-1 = Team leader, Economist, Financial Analyst, IndustrialEconomist, PSD Spec. Regulatory Policy Spec., Operations Analyst, FDIPromotionSpecialist, FiscalEconomist, ExportPromotion Specialist. S-2 =Team leader, PSD Spec., Export Promotion Spec., CountryDirector, Lawyer, Economist, Country Manager, Portfolio Manager S-3 =Team Leader, PSD Spec. Information Analyst, Privatization, Civil Aviation, Air Transport, Infrastructure,Telecom., Environment, Energy, Lawyer, Operations, Economist, Sector Manager, ProjectFinance S-4 = Consultant  37 Annex A SECONDSTRUCTURAL ADJUSTMENT CREDIT(CREDIT 3218-MG) Key ProjectData (amounts in US$million) Appraisal Actual or Actual as % of estimate current estimate appraisal estimate Original commitment 100 100 100 Total projectcost 100 100 ProjectDates Original Actual Departureof Appraisal Mission 03/15/1999 0311511999 Boardapproval 05/20/1999 05/29/1999 Signing 06/10/1999 0611011999 Effectiveness 09/08/1999 06/30/2000 Closina date 12/3112001 12/31/2002 StaffInputs (staffweeks) ActualLatest Estimate N" Staff weeks us%us$('ooo~ Preappraisal ~ n/a 181.08 Supervision 101 350.51 Completion 32 45 Total 133 576.59 Mission Data Date No. of Staff days Specializations Performance Rating trend (month/year) persons in field represented rating Identification/Preparation 12/98 7 nla A S S Supervision 7/99 2 n/a s-I s-I S S 11/99 3 nla S S 03/00 6 n/a s-I s-I S S 03101 10 nla S S 06/01 9 n/a s-1 S S 09/01 4 n/a s-I S S 11/01 6 n/a s-1 S S Completion 12/02 3 n/a $2 S S A = Country Director, ResidentRep. SectorManager, Task Manager, Mining, Fisheries, Public SectorReform S-l= Task Manager, Team Leader, Economist, Fisheries Procurement, Operabons, Privatization, Cyclone Reconstruction Sr Counsel Lawyer, Public SectorRefom, Mining, Judicial SectorReform, Social Expenditures S-2 =Team Leader, Economist, Consultant   39 Annex B Annex B: Actions Prior to SAC4 (Credit No. 2937) Actions takenfor ProjectPreparation. 1. The Government took keyactions prior to discussions onthe adjustment operation: e flotation o fthe FMGin 1994; e eliminationo f subsidies on flow andrice; e appointment o f independent administrators to the two state-owned banks; 0 lowering the maximum tariff from 50 percent to 30 percent; (reorienting expenditures to primary education, basic health services, and social fund community projects; invitinga formally-constitutedprivate sector group to participate inpolicy discussions anddraft an incentives framework for private sector development; and; appointing anIndependent Commissionfor Privatizationto draft the privatization law. ConditionsofPresentationof the Credit for Approval andTrancheRelease 2. The following conditions were met prior to Boardpresentation: e liberalizingentry, work permit andresidence requirements for investors, andvisas for tourists and abolishing exit visas for nationals and foreign residents; e granting foreign managerial andtechnical staff automatic work permits andrights o f residence for their families subject only to a valid employment contract; e allowingforeign investors access to landtenure through 99-year mortgageable leases to be approved w i t h 2 months o f application; e removingthe requirement for prior authorization to invest andintegrating the fiscal incentives o fthe investment code into the tax code; e abolishing prior approval for equity capital contributions by foreign investors (above a threshold o f20 percent o f a company's authorized capital); e appointing experienced negotiators to design andcarry out the divestiture o f the two state owned commercialbanks; e ending the monopoly intelecoms and selecting at least one company based on an international competitive bidfor cellular operation; e liberalizingair access by allowingregional airlines from Eastern and Southern Afkica andthe IndianOcean access to all Malagasy airports, allowingnew airlines to operate on other internationalroutes, canceling the designation o fAn Madagascar as the sole  40 Annex B beneficiary o fMalagasy air traffic rights and opening ground handling facilities for airlines to competition; openingthe petroleum sector to competition and taking the necessary steps to allow at least one oil company to compete with SOLIMA; issuingthe legal instruments to give effect to the decree liberalizingthe import, transformation, storage, transport and distributionof all petroleumproducts and settingup an entity to bejointly managed byall oil companies to control storage, pipelines andunloadingofoil; adopting the legal framework for the divestiture o f the hundredor so remaining public enterprises; reorienting the 1996budget andthe 1996-99 PIP to strengthen the contribution o f Government expenditure to poverty reduction; 0 completion o f an independentaudit on the satisfactory implementationofthe social safety net; and 0 submission o f a signed Letter o fDevelopment Policy.  41 Annex C Annex C: Measures Supported By SAC I1(Credit No. 3218) MEASURESTAmNPRIORTO BOARD PRESENTATION BTM: Signingasalesprotocolefor BTM. Public Finance: Complete changes inbudget nomenclature to matchBudget Law and Treasury accounting. Arbitration: Adoption o f anArbitration Law bythe National Assembly. Telecommunications: Publicationof inter-connection decreebetween fixed and cellular operators. Mining:MiningCode, agreeableto IDA,approvedbythe CouncilofMinisters and submitted to theNationalAssembly. Re-definitionby law o f the role o f OMNIS, in practice precludingthe State from participating incommercializationand/or productiono fminingproducts and limitingits role to promotional activities. Fisheries: Increase license fees by 100percent (on average) in 1999 relative to 1998, andprepare report on actual andpotentialpayments per firm. Commit to the introductiono f a transparent, non-discretionary, and competitivemechanism for the allocationo f fishinglicenses before the fishingcampaign o fthe year 2000 (e.g., biddingmechanism that takes into consideration Madagascar's own features, and following terms o freference already agreed with IDA).Limitthe numbero f licenses inthewest coastto atotal of69 industrialand36 artisanal, andto 6 industriallicenses inthe east cost (freeze to remainuntilcompletionofsustainability study), and respectingthe 1998 distribution o fauthorizations per zone andboat for each firm. MEASURESFORCRE;DITEFFECTIVENESS(lST TRANCHE) TheBorrower has: (a) a macroeconomic framework consistent withthe objectives of the Program, t h s includes securing the international financial support necessaryfor the sustainability o fthis framework; (b) adopted an actionplan(including an implementationschedule) describing the methodologyto be followed to compute severancepayments; (c) furnishedevidence that: (i) withrespect to the privatization o f SOLIMA's oil operations, eacho fthejoint-venture companies referred to under paragraph 17o f the LDP hasbeenestablished (inparticularwithrespect to the relevant share o fthe capital stock to beheldbythe Borrower), andduly registered; and(ii) respect to SOLIMA's non-oil operations, the Borrowerhas concluded with contractual arrangements aimed at transferring the ownershiphse o fthe said operations to private sector entities; and (d) the Borrower has established a legal and regulatory framework anda regulatoryauthority for the petroleum sector with functions, membership, budgetary resources and adequate staffing, all satisfactory to the Association andinaccordancewithparagraph 19o fthe LDP.  42 Annex C GENERALCONDITIONS AND DESIGNOF 2NDAND 3RD "MENU-BASED"TRANCHES 0 The Borrower has achieved satisfactory progress inthe carrying out o fthe Program, including: (i)BTMprivatizationprocess hasbeensettledprior to the release ofthe second tranche throughthe completion o fthe existing sales protocol or, ifthe deal unravels, already agreed steps for full State disengagement from BTMare put in place; (ii) programs have been implemented as agreedwith IDA; and (iii) social a macroeconomic framework consistent with the Programhasbeenmaintained. In addition, each o fthe "menu-based" tranches requires a COREMEASURE (one sales contract, and fully operational regulatory framework andbody), and ADDITIONAL MEASURES (fully complied a total o f4 out o fthe 8 reform areas listedbelow). MEASURESFOR2NDAND 3RD"MENU-BASED" TRANCHES CORE MEASURES Air Transport: TheBorrower shall have: (a) soldat least 65 percent o fAir Madagascar's voting stock; (b) established an adequate legal and regulatoryframework and a regulatory authority with functions, membership, budgetary resources, and adequate staffing (all in accordance to paragraph 19 ofthe LDP); and (c) invitedairport operators to bid for the concessioning o f at least two main lots o f airport infrastructure. OR Telecommunications: The Borrower shall have: (a) sold at least 34% o f TELMA's voting stock; and (b) established an adequate legal andregulatory framework and a regulatory authority with functions, membership, budgetaryresources, and adequate staffing (all in accordance to paragraph 19ofthe LDP). ADDITIONAL MEASURES Private Sector Development 1. MiningSector. The Borrowershallhave enactedarevisedMiningCode, including implementationdecrees; and adopted an actionplanaimed at expeditingthe processing o fminingpermit applications. 2. LandTenure. TheBorrower shall have taken all the measuresreferredto inparagraph 12o fthe LDP to facilitate accessto land; and invitedinvestors to submit bids for five tourism andfive industrialzones. 3. Business Environment and Judicial Processes. The Borrower shall have: (a) on the basis o fthe results andrecommendations o f its ongoing study (Etude sur les lenteurs de laprocedurejudiciaire), adopted an actionplanto improve caseload management withinthejudicial system; andacheved substantive progress inthe executionofthe said action plan; and (b) on the basis o fa consultative process involvingall interested parties, adopted an actionplan for the purposes o f streamlining formalities and procedures requiredto carry out economic activities, andacheved substantive progress inthe execution o fthe said action plan.  43 Annex C 4. Sector Liberalization and Additional Sector Reforms. The Borrower shall have: (a) granted at least two airport concessionsto qualified and experienced private operators; (b) invitedtelecommunications operators to bid for a nationallicense to provide telecom services; and(c) enacted a law governing the fiscal regime o fmining projects whose investmentcosts exceedabout US$200 million, including implementationdecrees. Public Finance Reform 5. Revenue Policies and Monitoring. The Borrower shall have established a unitwithin the Ministryo f Budget with terms o freference satisfactory to IDAto monitor public revenues andto review medium and long-tenn tax policy and tax administration reforms. 6. ExpenditureMonitoring inSocial Sectors. The Borrower shall have: (a) established an appropriate monitoring systemto capture the implementationo fthe Borrower's social policies andexpenditures actually incurred for primary education andbasic healthwith respect to the specific budget items and sectoral policies specified in paragraph24 o fthe LDP; and(b) carried out a surveybased on a methodologyaimed at assessingthe Borrower's performance inthe delivery o fprimary education and basic healthservices. 7. FishingLicenses. The Borrower shall have: (a) established an appropriate system, satisfactory to the Association, to allocate shrimp fishinglicenses ina non- discretionary, competitive and transparent manner, (b) adjusted annual shrimp fishing fees for licenses granted for the 1999fishingcampaign inaccordance with the methodology adopted as a result o fthe revamped licensing systemreferredto above; and(c) carried out the recommendations resultingfrom the technical andfinancial audits o fthe FDHA. 8. Financial Sector Reforms. The Borrower shall have: (a) carried out the financial, organizational and actuarial audits through independent consultants for the insurance companies Ny Havana andAro, andthe social security funds CNAPS, CRCM and CPR; and(b) adopted actionplansto improve theirperformance. RESTRUCTURINGOFSEPTEMBER2002 CORE MEASURE The Core Measure with respect to Air Transport was modified as follows: 0 With respect to air transport operations, the Borrower shall have concluded a performance-based management contract with a reputable operator for the management and restructuring o f Air Madagascar, o n terms and conditions acceptable to the Association and in accordance with paragraph 18 o f the Supplement to the Letter o f Development Policy;  44 Annex C ADDITIONAL MEASURES Additional measures2,4, 7 and 8 were modified as follows: 2. With respect to its anti-corruptionprogram of activities, the Borrower shall have: established a national anti-comption task force, whose mandate, composition and terms of reference shallbe acceptable to the Association, to beresponsible for provision o f advice on the development o f a national anti-corruption strategy, provision o f general policy guidance on the practical application and implementationo f the anti-corruption strategy, and regular monitoring o f the impact and achievements o f the anti-corruption program, inaccordance with para. 33 o f the Supplement to the Letter o fDevelopment Policy; adopted a decree requiring ministers, senior officials andjudges to issue annual declarations o f their assets and those of their close relatives, inaccordance withparagraph 34 o fthe Supplement to the Letter o fDevelopmentPolicy. 4. With respect to the mining sector, the Borrower shall have enacted a law governing the fiscal regime o f miningprojects whose investment costs are estimated to exceed FMG 1trillion, along with all necessary implementation decrees required to give full effect to the law, all inform and substance satisfactoryto the Association. 7. With respect to the fisheries and forestry sectors, the Borrower shall have: established an appropriate regulatory framework, acceptable to the Association, to allocate shrimp fishing licenses in a non-discretionary, competitive and transparent manner; 0 developed an actionplan and schedule for such a regulatory framework to be similarly established and applied inthe forestry sector; 0 inthe case ofboththe fisheries and forestry sectors, completed a status review o f all licenses issued to date and taken appropriate steps to withdraw all licenses which have been issued in contravention of, or without due regardto, the relevant legislation. 8. With respect to financial management, the Borrower shall have taken appropriate measures to strengthen its organs o fbudgetary control, including: 0 completion o f a detailed report o f the operation and use o f Special Funds duringFY 2001 and the first half o f FY 2002, and adoption o f a full and comprehensive list o f corrective measures, acceptable to the Association, designed to strengthenthe management o f such Special Funds, including: (i) measures to prevent any possibility o f misuse o f funds allocated to, or on account of, such SpecialFunds; and (ii)sanctions, as appropriate, against officials involved inincidences o f misuse o f such funds; 0 adoption o f a decree mandating the Chambve des Comptes to conduct semi- annual audits o f Special Funds; 0 completion o fthe audit o fHPC funds for FYO1; merger o f the Ministries o fFinance and Budget.  45 Annex D Annex D: List Of Persons Met PublicSector Mr.RadavidsonAndriamparany, Ministredel'Economie, desFinances et duBudget (MEFB) Mr.Refeno Fanjava, PrtsidentdelaCommissiondes Finances, AssemblCeNationale Mr.NoelRakotondramboa, SecrCtaireGCnCralde laPrCsidence Mr.Favjama, PrCsidentdelaCommissiondesFinances et del'Economie, AssemblCe Nationale Mr.Jeannot CClestinTatagera, Rapporteur GCnCraldelaCommissiondesFinances et de l'Economie, AssemblCeNationale Ms. Anjaratiana Antsaseheno Rasoloalinoro, Responsable du Suivi des MarchCsPublics, Sservice duBudget, de la ComptabilitC Financikre et Approvisionnement, AssemblCe Nationale Mr.LouisMaxenceRandnantoetra, Directeur GinCralduTrCsor, MEFB Mr.Honor6ParfaitRazafinjatovo, Magistrat, Directeurde 1'Appui aux Programmes, Ministbre de la Justice. Mr.PhilibertRatsimbazafy, DirecteurGknkral, DirectionGknkrale de1'Audit Interne, MEFB. Mr.GuyGabrielRazafinony, SecretaireGCnCral, Secrttariat Technique del'Ajustement, MEFB Mr.JamesAndriamatemaima, SecrCtariatTechnique de l'Ajustement, MEFB Mr.ClaudeRakotoanvao, Secr6tariat Technique del'Ajustement, MEFB Me. Martine Masoafora, Secritariat Technique de l'Ajustement, MEFB Mr.BoanaryRaveloarijaona, PrCsidentdelaChambre des Comptes, Cour Supreme Private Sector Mr.Constant Horace, Cabinet Concept Gestion(formerly MinistreduD6veloppement du Secteur Priv6 et de laPrivatisation MDSPP) - Ms.AmClie Voninirina, Consultant (formerly PAIGEP) Mr.ZazaRamandimbiarison, Consultant (formerly VicePrimeMinisterandDirectorof AGETIPA) Mr.PatricePezat, Directeur, ORANGE Mr.EugkneBeckers, DirecteurGCnCral, TELMA Mr.LionRajaobelina, Vice-PrCsident RCgional, ConservationInternational Mr.Aim6 Harivelo, Consultant (formerly Coordonnateur PAIGEP) Mi.Herintsalama A. Rajaonarivelo, Prhident, GroupementduPatronatMalgache Me. HantaRakotovao, SecrCtaireExkcutif, Groupement duPatronat Malgache Mr.RasataRainiketamanga, Professeur, CEDS (formerly DirecteurdeCabinet, Ministry o fFinance) Mr.Pierre-Aim6 Clerc, DirecteurGCnkral, TOTAL Mr.MichelRambelo, DirecteurdeProgramme, Programmed'Action Sociale et Economiquepour laRCinsertion Professionnelle (PASERP) Mr.BerendBruns,DirecteurGCnCral, Air Madagascar. Dr.FloretteAndriamiarisatrana, P.C.A. SagediProma (formerly President, CRC)  46 Annex D Mr.Charles Andrianaivojaona, Coordonnateur, Projet Zones d'htnagement Concert6 (formerly SG, Ministkre des Pgcheset des RessourcesHalieutiques) Mr.AlainRasolofondrainibe, DirecteurGCnCral, SILAC(formerlyPrCsidentduBureau Permanent du FASP, PATESP) Mr.JaonaRandrianarisoa, (formerly Directeur, AppuiauSecteurPrivC,MDSPP) LaborUnions Mr.JosCBertinRandrianasolo, Secrktaire GCnCral, ConftderationGCnCrale des Syndicats des Travailleurs de Madagascar - FISEMA. WorldBank Mr.JamesBond, CountryDirector Mr.DieudonnCRandriamanampisoa Mr.JocelynRafidinarivo Mr.Guenter Heidenhof Ms.JosianeRaveloarkon Ms.BenuBidani Mr.HafezGhanem Mr.PhilippeLeHouerou Mr.Ali Mansoor Mr.JeskoHentschel Mr.SimonGray Ms.Marie-AngeSaraka-Yao Mr.Laurent Besangon IFC Mr.HenriE.Rabarijohn, CountryManager Me. Johane Rajaobelina, ProgramManager, SSC (SME Solutions Center) IMF Mr.Raez-Vaez Zadeh Mr.JuanZalduendo Mr.Marc G.Quintyn Others Mr.MichaelSarris, formerlyCountryDirector, WorldBank Mr.Jan-Hendrik vanLeeuwen, Consultant  47 Annex E  48 Annex E Comments fromthe Government(English Translation) RepublicofMadagascar MinistryofFinance,Economy andBudget Secretary General Director Generalof Treasury Directorof PublicDebt TheMinister ofFinance,Economy andBudget No. 363 05/24/2006 To: Mr.R.KylePeters Senior Manager CountryEvaluationandRegionalRelations Independent EvaluationGroup The World Bank,Washington Re: Project Performance Assessment Report Madagascar Public Capacity BuildingProject (Credit 2911);First Structural Adjustment Credit (Credit 2937); Private Sector Development and Capacity BuildingProject (Credit 2956) and Second Structural Adjustment Credit (Credit 3218) Reference: Your letter o f 04/20/2006 Dear Sir, Inresponseto your letterreferencedabove, Ihavethehonor to informyouthat we have no particular observation on the draft Project Assessment Report for the subject projects. Pleaseaccept, Mr.Division Chief, the expression o fmydistinguished consideration. BenjaminRadavidsonAndriamparany Minister of Finance,EconomyandBudget