Madagascar - Andekaleka Hydroelectric Project

FILE C UP y Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2328-MAG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR THE ANDEKALEKA HYDROELECTRIC PROJECT May 18, 1978 This document has a restricted distributlon and may be used by recipients only in the performance of their oflicial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Calendar 1977 February 1978 Unit - Malagasy Franc (FMG) Malagasy Franc (FMG) US$1 FMG 245.67 FMG 241.95 FMC I - US$0.004 US$O.004 FMG 1,000 US$4.07 US$4.13 (The Staff Appraisal Report is based on US$1 = FMG 240) WEIGHTS AND MEASURES 1 kilovolt (kV) = 1,000 volts (V) 1 megawatt (MW) = 1,000 kilowatts (kW) 1 gigawatt hour (GWh) 1 million kilowatt hours 1 megawatt hour (MWh) = 1,000 kilowatt hours (kWh) 1 kilometer (km) = 1,000 meters (m) = 0.62 miles ABBREVIATIONS AND ACRONYMS BADEA Arab Bank for Economic Development in Africa CCCE : Caisse Centrale de Cooperation Economique CIDA : Canadian International Development Agency EdF . Electricite de France EEM Electricite et Eaux de Madagascar JIRAMA : Malagasy Electricity and Water Corporation SEM : Societe d'Energie de Madagascar SMEE : Societe Malgache de l'Eau et de l'Electricite SNC : Surveyer, Nenniger and Chenevert Inc. Fiscal Year January 1 - December 31  FOR OFFICIAL USE ONLY MADAGASCAR - ANDEKALEKA HYDROELECTRIC PROJECT Credit and Project Summary Borrower: Democratic Republic of Madagascar Beneficiary: JIRAMA (Malagasy Electricity and Water Corporation) Amount: US$33.0 million equivalent Terms: Standard Relendin& The proceeds of the credit would be onlent to JIRAMIA Terms: for a period of 25 years including 5 years of grace, at an interest rate of 7.5 percent per annum. Project (i) ObJectives: The project would meet the growth in Description: electricity demand until 1992 in the Antananarivo area, and provide for the strengthening of JIRAMA. (ii) MaJor Components: (a) a concrete diversion dam 10 m high and 125 m long, and an intake structure; (b) a tunnel 5.2 m in diameter and 4 km long; an underground power house for four 28-MW units, and tailrace and access tunnels; (c) two turbines and two 28-MW generators; (d) electrical and mechanical equipment; (e) a 138-kV, 150-km, transmission line to Antananarivo; (f) engineering services; (g) preliminary investigation and design for a storage reservoir at Ankorahotra; and (h) technical assis- tance and training of JIRAMA staff; (iii) Benefits and beneficiaries: The project will permit substantial savings in fuel imports and will make energy available to the main industries of Madagascar and to households at lower cost than if provided by a thermal plant. (iv) Risks: The risks of the project are those normally associated with hydroelectric plants, namely (i) unforeseen bad geological conditions; (ii) over- investment; and (iii) institutional and financial difficulties. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Project Costs: US$ Million Local Cost Foreign Cost Total Cost Civil Works 8.0 31.6 39.6 Electrical & Mechanical Equipment 1.2 26.1 27.3 Transmission Line 1.2 5.6 6.8 Consultant Services & Training 1.1 7.5 8.6 Sub-Total 11.5 70.8 82.3 Cont ingenc ies Physical 1.4 9.7 11.1 Price 3.1 19.5 22.6 Total Project Cost, net of taxes 16.0 100.0 116.0 Financing Plan: Percent External Sources US$ Million of Total Abu Dhabi Fund 5.0 4 BADEA 10.0 9 Caisse Centrale 16.5 14 CIDA 15.4 13 IDA 33.0 28 Kuwait Fund 10.0 9 Saudi Fund 12.0 10 Sub-Total 101.9 87 Internal Sources JIRAMA 14.1 13 Total 116.0 100 Estimated Credit US$ Million Disbursements: IDA FY 1979 1980 1981 1982 Annual 1.5 9.5 13.5 8.5 Cumulative 1.5 11.0 24.5 33.0 Rate of Return: 11 percent Staff Appraisal Report: No. 1795a- MAG, dated May 15, 1978  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR THE ANDEKALEKA HYDROELECTRIC PROJECT 1. I submit the following report and recommendation on a proposed credit to the Democratic Republic of Madagascar for the equivalent of US$33.0 million on standard IDA terms to help finance the Andekaleka Hydroelectric Project. The proceeds of the credit would be onlent to the Malagasy Elec- tricity and Water Corporation (JIRAMA) for a period of 25 years including 5 years of grace, at an interest rate of 7.5 percent per annum. The project would be co-financed on a joint basis with loans from the Abu Dhabi Fund (US$5.0 million), the Arab Bank for Economic Development in Africa (US$10.0 million), the Kuwait Fund for Arab Economic Development (US$10.0 million), and the Saudi Fund for Development (US$12.0 million); and on a parallel basis with loans from the Caisse Centrale de Cooperation Economique (US$16.5 million), and the Canadian International Development Agency (US$15.4 million), on various terms and conditions. PART I - THE ECONOMY 2. A report entitled "Madagascar: Economic Memorandum on Current Economic Position and Prospects and Selected Development Issues" (Report No. 1099a-MAG) was distributed to the Executive Directors on December 20, 1976. An updated summary of the conclusions is set out below. Country data sheets are provided in Annex I. A Bank mission, scheduled for June 1978, will review recent economic developments and prospects. 3. With a GNP per capita estimated at US$200 in 1977, Madagascar is one of the poorest countries in the world. It is predominantly an agricul- tural country and 85 percent of its 9.2 million people live in rural areas with a per capita income of about US$120 per annum. In many areas the standard of living is close to subsistence level. Although the country is sparsely populated (an average of 16 inhabitants per square kilometer), there is great pressure on cultivable land in some regions. Owing mainly to different ecological conditions, the highlands are more advanced than the coastal areas, and the south is particularly poor with a harsh, arid climate and infertile soils. The east coast is rich agriculturally, but crops are frequently devastated by cyclones. Internal migration is common and has accelerated as improved roads have provided access to new areas. However, poor roads remain a major constraint to development; only one third of the main highways are passable in all weather in a country where production centers may be as far as 800 kilometers from main points of consumption. Many areas are cut off from the rest of the country for several months each year.  -2- 4. The basic political program of the Government has been outlined in the Charter of the Socialist Revolution published in September 1975. Major institution and policy changes aim at: (i) Decentralization: greater local responsibility for development is to be encouraged by giving the provincial administrations and fokonolona considerably increased authority. (ii) Land reform: the few large estates left unexploited are to be broken up and sharecroppers would receive the land they actually work. (iii) Rural development: high priority is to be given to increasing incomes and services in the poorest areas. (iv) Basic education: all children of school age are to be gradually enrolled in a new five-year primary education program with a curriculum which is to be made more relevant to local circum- stances. (v) Greater national participation in commerce and industry: the commercial banks, insurance companies and a number of other key businesses in foreign hands have been nationalized and Government may become a majority shareholder in all major enterprises. 5. Over the five years ending 1975 annual growth of GDP, averaging less than one percent, lagged far behind the 3 percent annual increase in population; and GDP per capita (in constant prices) fell by 11 percent. The drop in real income per capita was even steeper, about 17 percent, owing to the sharp fall in the purchasing power of exports resulting from worsening terms of trade. With falling real income, gross domestic savings declined from 14.5 percent of GDP in 1970 to only about 11 percent in 1975. But for the restraint on the growth of government consumption, achieved mainly through curtailment of expenditure on materials and maintenance, the rate of savings would have recorded an even sharper decline. Actual budgetary outlays on investment remained practically unchanged during 1970-75 and, as private investment spending, particularly foreign investment, was inhibited by policy uncertainties, the rate of investment declined more or less in step with the rate of savings. Consequently, the overall resource gap remained small. Estimates prepared by IMF indicate some resurgence of growth during the last two years largely as a result of increasing agricultural production. Real GDP consequently has been rising at about the same pace as population. 6. Agricultural production increased during 1970-75 at an average annual rate of just under 2 percent, or somewhat faster than the rest of the economy. The overall growth of the agricultural sector, however, con- ceals divergent commodity output trends. Cash crop output went up com- paratively fast, owing mainly to the rapid growth of cotton and coffee production. Production of coffee, which has become by far the largest  single export earner, increased by 31 percent over the period to nearly 90,000 tons, while seed cotton output nearly doubled. But production of paddy, the principal staple, rose only marginally to 1.8 million tons neces- sitating increasing reliance on imports of rice, while output of groundnuts, the main source of edible oils, and sugarcane was virtually stagnant and meat production actually declined. Since 1975 crop production levels - barring coffee, affected by adverse weather conditions, and groundnuts - are reported to have registered a further rise. Several factors such as poor marketing arrangements, transportation problems, farmers' lack of access to extension, credit and improved inputs, and insufficient price incentives explain the inadequate growth of farm output and the consequent erosion of availability of food products for exports as well as the increasing dependence on rice and edible oil imports. 7. Encouraged by generous fiscal incentives and protection against competition from imports extended to investors, industrial capacity and output had been expanding, although from a rather narrow base, fairly rapidly until about 1970. Thereafter, however, the growth of manufacturing output, consisting mainly of textiles, processed foods and agriculture-based products destined for the home market, slowed down considerably. Although production of cotton textiles has, except in 1973, continued to expand comparatively fast, the annual growth of industrial output has averaged only about 2 percent. A number of unfavorable developments appear to have affected the pace of industrial growth and development in recent years. Domestic market has not been expanding much. Price controls, statutory wage increases and the rising cost of imported inputs have generally lowered manufacturing profits. Investment has been discouraged by the uncertain policy environment. 8. Fiscal pressures strengthened from 1970 onwards as a result of weak growth of budget revenues, rising expenditure on personnel and the subsidiza- tion of rice imports undertaken as a counter-inflationary measure. The Govern- ment, however, was able, through overall restraint on spending, to avoid until 1975 a serious deterioration of the budgetary situation. With economies effected in current expenditure, particularly in the purchase of materials and supplies, budgetary savings during 1970-75 averaged about FMG 8 billion per year and financed close to 60 percent of capital outlays. Actual spending for capital development, however, increased but marginally, partly because of small rise in allocations and partly as a result of constraints encountered in implementing the investment budget. With larger capital expenditures and rising current outlays for social services as well as the extension of subsidy to locally procured rice, the budgetary situation worsened after 1975. Despite an exceptional 25 percent increase in revenues during the year, budgetary savings dropped sharply in 1976, and no budgetary savings are likely to have been generated in 1977. The Treasury deficit continued to widen to reach an estimated FMG 17.8 billion in 1977. Reflecting the Government's emphasis on a bolder development strategy, the budget for 1978 envisages a near doubling of allocations for capital expenditure and projects a further substantial increase in the Treasury deficit. In view of the implementation constraints, however, investment spending as well as the deficit may eventu- ally turn out to be smaller than the budget forecasts.  - 4 - 9. Outstanding bank credit and money supply were increasing at a comparatively moderate pace until 1973. Monetary and credit expansion in subsequent years, however, has been fairly rapid and reflects Government's budgetary needs and its increasing recourse to Central Bank financing. The Government, which until 1973 had remained a net lender to the banking system turned thereafter into a net borrower. Inspite of slow growth of real output of goods and services, prices, judging by the consumer price index, seem to have remained reasonably stable except for the 22 percent increase occurring in 1974. However, because of extensive price controls and the emergence of secondary markets in periods of scarcity, the index tends to be a poor indicator of price movements; and the actual rate of inflation has very probably been higher. 10. The balance of payments position deteriorated considerably after 1974 despite increasing restrictions on foreign trade and payments. Madagascar was a member of the French franc zone until 1973 with virtually no trade and exchange controls. Restrictions were introduced when it left the franc zone with the intention of limiting non-essential imports, and have since become stricter and more comprehensive. The merchandise and current account deficits widened sharply in 1974; and, as net public capital inflow and foreign investment declined, foreign assets of the banking system fell by US$7.4 million. A larger payments deficit, leading to a further decline in net foreign assets of US$14.0 million, occurred in 1975. The payments deficits reflected largely the serious worsening of the terms of trade after 1973; but increasing imports of rice and edible oils, which peaked in 1974, as also the static, or declining, volume of most agricultural exports other than coffee, contributed to the underlying weakness of the balance of payments. The balance of payments is estimated to have registered a surplus of US$7.3 million in 1976. This surplus is attributable essentially to a 20 percent decline in the import bill owing to delays in authorizations under the restrictive 1976 import program. Export earnings during the year fell due to the drop, from the unusually high level of 1975, in clove exports and smaller sales abroad of manufactures. In spite of some improvement in export receipts estimated to have occurred in 1977, the balance of payments is again expected to be in deficit because of larger imports of rice, equipment, spare parts and other essential commodities. At the end of November 1977 net foreign assets stood at only US$53.4 million, or just about 17 percent of the annual import bill. The IMF has approved a standby arrangement for SDR 9.4 million against the first credit tranche for a period of one year, as well as a Trust Fund Loan of about the same amount. The Government intends to check the drain on reserves in the future through policy measures designed to restrain the growth of consumption expenditure instead of through reliance on stricter import curbs. 11. Medium- and long-run development prospects for the economy are favorable. There is considerable scope for the expansion of agriculture and livestock production. Only about a fifth of arable land is at present being cultivated, while fertilizer consumption, estimated to be some 14,000 tons in 1976, is still rather small. The irrigation potential has as yet been only partially exploited. The outlook for further development of manufacturing based on locally available materials is promising. On the whole, sustained growth at an average annual rate of 4-5 percent appears to be within the realm of feasibility.  12. A Three-Year Plan, which is to be the first of a series of medium- term investment programs intended to attain specific long-run development objectives by the end of the century, was launched this year. The Plan envisages overall expansion of the economy at an average annual rate of 5.5 percent during 1978-80. The rate of investment is projected to rise to 17.1 percent by 1980 from an estimated 11.5 percent in 1977. The savings rate is to be stepped up, partly through the mobilization of additional budgetary resources for capital development. But about a quarter of the investment outlays during the Plan period will need to be financed through external loans and grants. Greater emphasis will be placed on the development of food crops; and household consumption is targeted to rise, in real terms, by 3.6 percent per year. The Plan also accords high priority to manufacturing, particularly basic industry and processing of agricultural raw materials. 13. Official development assistance to Madagascar averaged about US$58 million per annum during 1970-75, somewhat over half of it being in the form of grants. Over this period annual gross official flows from DAC countries increased from US$32 million to US$42 million, France's share declining slightly from 76 to 64 percent. Disbursements on long- and medium-term loans more than doubled to US$20 million between 1970 and 1976. During the latter year external loan aid commitments amounted to nearly US$42 million of which US$36 million represented IDA credits. New major sources of external loans are the European Development Fund and Peoples' Republic of China; in 1975 the latter committed US$54 million to be disbursed over the next ten years. As a result of concessionary terms under which most external assistance was granted and of the 1972 agreement canceling about 43 percent (US$27 mil- lion) of the debt owed to France, Madagascar's current level of indebtedness is low. External public debt disbursed and outstanding at the end of 1976 was US$181 million, of which the Bank's share was 14 percent and IDA's was 37 percent. Service payments on this debt amounted to US$13 million in 1976 (or about 5 percent of merchandise exports), of which payments to the Bank Group represented 17 percent. 14. In view of Madagascar's low per capita income, external assistance should continue to be provided on concessionary terms, although the presently low debt service ratio seems to indicate that modest amounts could be borrowed on harder terms. In addition, in view of the scarcity of local capital resources, external assistance should continue to cover a high proportion of project costs, including in appropriate cases some portion of local currency outlays. PART II - BANK GROUP OPERATIONS IN MADAGASCAR 15. Madagascar has received thirteen IDA credits amounting to US$125.2 million and five Bank loans totaling US$32.6 million. About 60 percent of Bank Group lending has been for transport, 28 percent for agriculture and the balance for education. IFC's first investment was made in March 1977 with an equity investment of US$290,000 and a loan of US$11.0 million for the  - 6 - expansion of a textile mill; other projects in leather and ferrochrome are under active consideration. Annex II contains a summary statement of Bank loans and IDA credits, and of IFC investments as of April 30, 1978, as well as notes on the execution of ongoing projects. The priority given to transport investment recognizes that improvement in communications is a precondition for Madagascar's development. Four projects have been for the construction of all-weather links between the island's different regions, one for improvements to Madagascar's main port of Tamatave and one for the moderni- zation of the railway line between Tamatave and the capital, Antananarivo. Bank Group lending for agriculture consists of two livestock development projects, two irrigation projects and a forestry project. A study on the problem of agricultural marketing and meat pricing is being executed with the assistance of an international consultancy firm. 16. In the past, problems have arisen in the course of execution of several projects. There were delays in execution, cost overruns and defi- ciencies in institution building, especially in agriculture. The Morondava Project continues to encounter problems, but implementation of the Village Livestock Project has improved substantially. Likewise, the highway projects are proceeding satisfactorily. Progress of all projects is being closely monitored. 17. In our future lending to Madagascar, we intend to continue focusing primarily on infrastructure development (power, water, roads, and railway), agriculture and education. A second railway project and an irrigation project in the lower Mangoky area have been appraised. A water supply and sanitation project is under active preparation, as are a third education project and a fifth highway project. We are further assisting the Government in preparing an agriculture credit project, which would include a component based on the fokonolona system. PART III - THE ENERGY AND POWER SECTORS The Energy Sector 18. The main known energy resources of Madagascar are hydroelectric potential, coal, lignite, and oil shale, all virtually untapped. The forests, covering about 16 percent (100,000 km ) of the country, are on the other hand widely exploited as a source of firewood. The evaluations carried out so far have concluded that exploitation of fossil fuel deposits would be un- economical, while the hydroelectric resources can be developed gradually, as demand develops. Fuel accounts for approximately 10 percent of total imports and consists essentially of crude oil which is processed at the Tamatave refinery. 19. Domestic consumption accounts for about 80 percent of energy use in the country. In rural areas, firewood is virtually the only source of energy; in urban areas, despite the availability of other energy, firewood still  -7- accounts for at least one half of domestic usage, because it is the cheapest energy source for cooking and heating purposes. The extensive consumption of firewood has a considerable ecological impact, as the natural forests are being rapidly depleted and erosion is increasing. Reforestation is, therefore, urgently needed because a shift to other energy sources would be uneconomic for the majority of the population. 20. The industrial and transport sectors account for an annual consump- tion of some 35,000 tons of mineral fuel products. In addition, the industrial sector is the largest user of electricity. The Government is putting increased emphasis on the development of the industrial sector in order to reduce unem- ployment and boost exports. Increased provision of electric power is essen- tial and, wherever possible, priority is given to the development of the hydroelectric potential. The Power Sub-Sector 21. Until 1973, the institutional responsibility for the power sector was divided between two companies with foreign interests, the Electricite et Eau de Madagascar (EEM) and the Societe d' Energie de Madagascar (SEM). These companies were nationalized and a single, autonomous electricity and water corporation (JIRAMA) was established, to carry out the national objectives of the Government, described in a Presidential Ordinance of 1974 as follows: (i) to provide gradually the whole country with electricity and water supply facilities; (ii) to provide these services at the lowest price; (iii) to unify gradually policies in the fields of production, transmission and distribution of electricity and water, as well as tariffs; and (iv) to maintain tariffs that would enable recovery of all costs as well as generating a reasonable surplus to finance part of the expansion. The difficulties associated with the merging of the two entities into one organizational framework, the selection of key personnel and the introduction of procedures were resolved quickly and JIRAMA now functions as a single, well-integrated entity. The legal framework of the sector is satisfactory. 22. JIRAMA's electricity facilities consist essentially of a large Interconnected System around the Antananarivo area, which accounts for one half of its installed capacity of 100 MW and two thirds of its annual sales of 230 GWh, and 30 isolated systems essentially located in the larger urban centers. Independent generation facilities account for 58 MW of installed capacity, mostly in bagasse-fueled power plants on sugar estates and in remotely located, small-scale industries.  - 8 - 23. Industrial consumption accounts for about two thirds of both JIRAMA's Lotal sales and the Interconnected System's sales. The bulk of the industrial sales are accounted for by a small number of textile plants. Commercial sales are relatively small - less than 10 percent, while domestic consumption ac- counts for 25 percent of the total. At present, about 58,000 households in the Antananarivo area have electric connections and 31,000 in the rest of the country. Approximately 70 percent use electricity for lighting purposes only, which explains the low level of consumption: 610-650 kWh per household per annum. Access to service is restricted; less than a quarter of the house- holds in the supplied areas use electricity, while in the country as a whole less than 5 percent have access to electricity. The major constraints are: (i) the high costs of electrification of new areas; (ii) full payment of connection costs by the consumer; and (iii) higher costs of electricity when compared with firewood, for heating and cooking, and with candles, for lighting. JIRAMA will reconsider its pricing policy after completion of a market survey, which is now underway, to assess to what extent the full payment of connection costs by consumers affects the demand for new con- nections, particularly for lighting purposes. PART IV - THE PROJECT 24. A report entitled "Staff Appraisal Report, Andekaleka Hydroelectric Project-Madagascar" (No. 1795a-MAG) dated May 15, 1978 is being distributed separately. A supplementary project data sheet is given in Annex III. The project was prepared by the Government with assistance of consultants, and appraised by an IDA mission in August 1977. Negotiations were held in Washington, D.C., from March 16 to 22, 1978. The Malagasy delegation was led by Mr. Leon Rajaobelina, Governor of the Central Bank, and included Mr. Caleb Rakotoarivelo, JIRAMA's General Manager. Description 25. The Andekaleka Hydroelectric Project would meet the growth of demand until 1992 in the Interconnected System, as well as provide substantial fuel savings. It represents about 70 percent of the investment in the power sector for the period 1978-82. The credit would also provide for the strengthening of JIRAMA, particularly in planning and staff development. The feasibility study, preliminary design and pre-engineering of the project were carried out by Surveyer, Nenniger and Chenevert, Inc. (SNC) of Canada. The Canadian consultant Societe d'Ingenierie Cartier Limitee has been contracted to prepare tender documents and to supervise project implementation. 26. The project comprises: (i) the Andekaleka Hydroelectric Plant; (ii) a preliminary study and cost estimate of the Ankorahotra storage reser- voir; (iii) technical assistance and training. These can be described as follows:  - 9 - (i) The Andekaleka Hydroelectric Plant (a) a concrete diversion dam 10 m high and 125 m long, and an intake structure; (b) a tunnel 5.2 m in diameter and 4 km long; an underground powerhouse for four 28-MW units; and tailrace and access tunnels; (c) two turbines and two generators, each of 28 MW; (d) electrical and mechanical equipment; and (e) a 138-kV, 150-km transmission line to Antananarivo. 27. The Andekaleka plant will be situated on the Vohitra river 115 km east of Antananarivo. It will utilize a fall of 242 m in the Vohitra river over a river distance of 10 km. The foundation rock for the diversion dam and the intake is exposed and of good quality. The tunnel alignment has been explored by 20 borings and the rock is also of good quality, except in a few short faulted zones where concrete linings will be needed and where the tunnel passes beneath a tributary stream bed with insufficient rock cover and a steel lining will be required. The tunnel is designed for optimum use of three 28-MW units; the fourth 28-MW unit will be utilized as standby and for peaking. 28. The Government is considering constructing a ferrochrome plant near Moramanga, between Antananarivo and Andekaleka. If commissioned, this plant would be a major electricity user and a third 28-MW unit would be justified. Feasibility studies for the ferrochrome plant are now underway and the Government is presently setting up a financing consortium. A final decision will be taken during 1978. Bidding documents for the proposed project would provide for an optional third turbine and generator, with the option to be exercised before end-1978. The project and its financing plan, however, are based on two units. (ii) Preliminary investigation and design for a storage reservoir 29. The design for the project, with provision for four generating units, could only be finalized when the feasibility of constructing an upstream stor- age reservoir was confirmed. The benefits of the fourth unit, to be added in a later stage, can only be fully reilized if an adequate upstream storage reservoir of about 400-500 million m is constructed, for which a possible site has been identified at Ankorahotra, 45 km from Andekaleka. Additional geological investigations undertaken from October to December 1977 confirmed that the dam, at an estimated cost of US$54 million, is technically feasible and economically justified. Retroactive financing for up to US$200,000 from September 1977 is recommended to meet the cost of these studies.  - 10 - (iii) Technical assistance and training of JIRAMA staff 30. Madagascar lacks sufficient planning capacity in the power sector; there is also need to strengthen the accounts department of JIRAMA, and to establish electricity tariffs based on long-term marginal costs. JIRAMA has prepared a five-year training program to supplement the facilities and practices already in use in order to serve all levels and categories of staff, including water operation staff. The project will strengthen the planning department of JIRAMA through the secondment of expatriates knowledgeable in power planning who would train counterpart staff, and will include financing for the five-year training program. Provision is also being made to form a power planning unit in JIRAMA. Project Cost 31. The estimated total project cost is about US$116 million equiva- lent, including a foreign exchange component of about US$100 million. The project is exempt from customs duties and taxes. Detailed cost estimates were prepared by SNC and Cartier, and are as follows: US$ Million Item Local Foreign Total 1. Civil Works 3.6 27.7 31.3 2. Turbines and Valves .. 5.0 5.0 3. Gates and Linings 0.2 8.7 8.9 4. Electrical Equipment 0.3 2.8 3.1 5. Generators 0.2 3.8 4.0 6. Transformers .. 1.5 1.5 7. Substations 0.5 4.3 4.8 8. Transmission Line 1.2 5.6 6.8 9. Engineering 0.6 6.5 7.1 10. Technical Assistance 0.5 1.0 1.5 11. Jirama's Site Costs 4.4 3.9 8.3 Sub-Total 11.5 70.8 82.3 12. Contingencies: Physical 1.4 9.7 11.1 Expected Price Increases 3.1 19.5 22.6 Total Project Cost 16.0 100.0 116.0 32. The high percentage of foreign costs (86 percent) is due to the fact that the local contribution would consist only of manual labor. Cement and lumber must be imported, together with all other supplies and equipment. In- terest during construction is to be capitalized and financed by a loan from the Government.  - 11 - Financing Plan 33. The financing of the proposed project would be shared among seven international colenders and Madagascar as follows: External Sources US$ Million Abu Dhabi Fund 5.0 BADEA 10.0 Caisse Centrale 16.5 CIDA 15.4 IDA 33.0 Kuwait Fund 10.0 Saudi Development Fund 12.0 Sub-total 101.9 Internal Sources JIRAMA 14.1 Total 116.0 34. All loans and credits would be made to the Government of Madagascar for subsequent on-lending to JIRAMA. The proceeds of the proposed IDA credit would be on-lent to JIRAMA under a Subsidiary Loan Agreement on terms and conditions to be approved by the Association, for a period of 25 years in- cluding 5 years of grace, at an interest rate of 7.5 percent per annum (Section 3.01(b), draft Development Credit Agreement). The other colenders have stipulated that the proceeds of their loans would be on-lent to JIRAMA on the same terms as those granted to the Government. In May 1977, CIDA made a loan of US$13.3 million equivalent towards the project, which became effective on August 1, 1977. In the near future, CIDA will make an additional loan of US$2.1 million equivalent for the same purpose. Both loans are for a period of 50 years including 10 years of grace, interest free. The US$10 million BADEA loan was signed on April 30, 1978, but is not yet effective; the loan is for a period of 25 years including 5 years of grace, at an annual interest rate of 4 percent. 35. The proposed loan of US$16.5 million equivalent from the Caisse Centrale is for a period of 20 years, including 5 years of grace, at an annual interest rate of 6 percent. The US$12.0 million equivalent loan from the Saudi Fund will be for a period of 20 years, including 5 years of grace, at an annual interest rate of 3 percent. The terms of the US$10.0 million equivalent loan from the Kuwait Fund and of the US$5.0 million equivalent loan from the Abu Dhabi Fund are not yet known; the latter has not yet formally confirmed its participation. Fulfillment of the conditions of effectiveness of the above mentioned loans is an additional condition of effectiveness of the proposed IDA credit (Section 5.01 (b), draft Development Credit Agreement). All colenders will cooperate closely during project implementation and a draft memorandum of understanding to that effect has been agreed and will be signed once all the loans have been approved.  - 12 - Project Implementation 36. JIRAMA would implement the proposed project with assistance from Cartier Engineering. Assurances were obtained that JIRAMA will continue to employ engineering and management consultants, and other specialists on terms and conditions satisfactory to the Association (Section 2.02, draft Project Agreement). Cartier has taken full responsibility for the design prepared by SNC. Project implementation should present relatively few problems. A special feature is that all transport to the site will be done by railway (the Antananarivo-Tamatave line follows the river at Andekaleka). The railroad has provided suitable assurances to JIRAMA as to its cooperation for the proposed transport. The power station is expected to be commissioned in mid-1982. 37. JIRAMA has a reasonable degree of autonomy. JIRAMA's General Manager, a civil engineer with an impressive managerial background, has responsibility for the day to day operations. At the technical level, all senior posts and, where required, the posts below, are occupied by well- qualified and experienced engineers. On the other hand, the Administrative and Finance Department suffers from an acute shortage of qualified account- ants. Efforts are now underway to strengthen the department (ref. paragraph 40). JIRAMA will give the Association an opportunity to comment on proposed new appointments to the posts of Interconnected Zone Manager, Development Manager, and Administrative and Financial Manager (Section 3.02, draft Project Agreement), and JIRAMA will continue to conduct its operations under qualified and experienced management and staff at all levels (Section 3.04, draft Project Agreement). 38. Consideration is being given to applying to JIRAMA the new "Charter of Socialist Enterprises". Under this Charter, a Management Committee would be constituted by the General Manager, and representatives of the State and the staff, to which the General Manager would be accountable. The staff would elect a Workers' Committee which would be consulted on all reforms affecting the staff. 39. JIRAMA employs a total staff of approximately 3,900 persons in- cluding 2,600 assigned to the electricity operation. Indications are that, since its inception, JIRAMA's permanent unskilled staff has grown much faster than the extent of its operations would justify. JIRAMA has agreed that the size of the permanent unskilled staff will not be increased beyond the level required by the scope of its operations (Section 3.03(b), draft Project Agreement). 40. JIRAMA's main training center, located near Antananarivo, provides for the training of lower cadres and new recruits in the technical and admin- istrative aspects of district operations. JIRAMA organizes seminars which range from literacy at the lowest echelons to highly specialized technical subjects. JIRAMA also sends technical staff to seminars abroad and sponsors fulltime students in foreign universities. JIRAMA has prepared a comprehen- sive training proposal, covering all categories of staff, including the water operation staff. The project includes a training component, based on JIRAMA's proposal. Cartier has agreed to train the JIRAMA staff who will be in charge of operating and maintaining the Andekaleka power station.  - 13 - Financial Prospects 41. Considerable difficulties have been experienced with regard to the establishment of a uniform system of accounts and accounting policies covering all of JIRAMA's operations. This task was completed by end-1977. Efforts are now underway to recruit qualified accountants to head the Inter- nal Audit and Budgetary Sections. Budgetary control systems are now being introduced. 42. It is difficult to analyze fully JIRAMA's present financial posi- tion and prospects, as in the past the electricity and water operations were not clearly separated. It was therefore decided to establish an opening balance sheet as per January 1, 1977 in which all fixed assets were stated at their replacement values, current assets and liabilities were actuals as of that date, and long-term debt, including debt to the Government related to the compensation of related foreign interests, was stated at its outstanding value. Formats for the electricity and water income statements were established to permit a reasonable analysis of the main accounts, and as a basis for the financial projections. 43. JIRAMA's opening balance sheet indicates a low indebtedness and a high liquidity level. Accounts receivable, equivalent to 5.5 months of sales, are high and are mainly accounted for by arrears due by the Government and its Administration. The Government has presented specific satisfactory proposals to reduce these arrears to a more reasonable level by the end of 1978. 44. The tariff structure is complex, often bearing little relation to costs. The tariffs in effect are still those of JIRAMA's predecessors, complicated further by the fact that since the late 1960s the Government has frozen certain tariffs in order to help low income groups. The Government is aware of the need to establish a national tariff policy, and some attempts have already been made by JIRAMA in this direction. It is now planned as a first step to establish electricity tariffs in the Interconnected System based on long-term marginal costs. JIRAMA, with external assistance, is presently preparing such a tariff, based on terms of reference satisfactory to the Association. Assurances have been obtained that tariffs based on principles of long-term marginal costs will be introduced by July 1, 1979 (Section 4.05, draft Project Agreement). 45. Over the 1978-82 period, JIRAMA will be able to finance about 30 percent of the electricity construction program out of cash internally generated in its electricity operation. JIRAMA's electricity tariff will be reviewed periodically to enable it to continue to earn 8 percent on its net revalued fixed assets for its electricity operations (Section 4.03(a), draft Project Agreement). Assurances were obtained that: (i) JIRAMA will maintain separate accounts for the two operations, electricity and water supply; and (ii) during the Andekaleka construction period: (a) no funds will be transferred from the electricity to the water operation, (Section 4.06, draft Project Agreement) and (b) no dividends will be paid (Section 3.04, draft Development Credit Agreement).  - 14 - 46. While in the past the electricity operation has been profitable, leaving a reasonable surplus to finance expansion, revenues of the water operation have only been sufficient to cover operating costs, including depreciation, but with little surplus for expansion. As a result, the electricity operation helped finance the water construction program. The return on the net revalued assets of the water operation is expected to decline from nil in 1977 to -4 percent by 1982, causing a financing gap of about US$20.0 million in the water construction program. The Government is well aware of the problem, and undertook to provide or cause JIRAMA to be provided with the necessary funds to finance deficits and construction requirements of the water operation (Section 3.03, draft Development Credit Agreement). 47. During the 1977-82 period, JIRAMA's overall debt-equity ratio will increase from 11/89 to 39/61, which is still satisfactory. In order to ensure that adequate debt service coverage will be maintained, assurances have been obtained that JIRAMA will consult with the Association prior to incurring new long-term debt, should the projected ratio of debt service to consolidated net revenue fall below 1.5 (Section 4.04, draft Project Agreement). Procurement 48. Agreement has been reached on the allocation of the different bid packages among the co-financing agencies. The civil works are to be financed on a joint basis by the four Arab funds and IDA. Civil works contractors have already been prequalified, and procurement is being carried out in accordance with IDA guidelines for international competitive bidding. IDA will also finance turbines, valves, transformers, gates and linings, as well as tech- nical assistance, drilling and pre-engineering. 49. The contracts to be financed by CIDA and Caisse Centrale will be awarded in compliance with their procurement regulations. CIDA, which is already financing JIRAMA's contract with Cartier, will also finance the transmission line. The Caisse Centrale will finance electrical equipment, generators, and substations. Disbursement 50. Proceeds of the IDA credit would be disbursed against: 22 percent of total expenditures for civil works; 100 percent of total expenditures for turbines, gates and transformers (supply and erect contracts); 100 percent of foreign expenditures for technical assistance and training. The balance of the civil works would be financed by the four Arab agencies under a pro- posed joint financing scheme. Madagascar would send withdrawal requests to each colender, which after review and approval would disburse funds in the following proportion: BADEA, 21 percent; Kuwait Fund, 21 percent; Saudi Fund, 25 percent; Abu Dhabi Fund, 11 percent, and IDA, 22 percent. The lending agencies will coordinate closely on the progress of disbursements.  - 15 - Ecology 51. The diversion dam is too low to have an important effect on the upstream channel because the area is not populated and the impoundment extends only 700 meters upstream. With the first two units in operation the flow will be minimal or nil for about 4 km downstream of the dam to the mouth of the tributary, the Sahantsiva River, about 120 days per year. Little effect is expected from this because the 25 m high Tarariana rapids prevent migration of fish in this reach in any event, and the pools formed by the rapids are expected to support the fish populations during the days of zero flow. The change in water flows will not affect the water supplies of any villages. The first stage of construction requires no further ecological study. Such a study will be required when the future Ankorahotra storage dam is constructed, as wildlife is present and the area is populated albeit sparsely. Justification 52. Several power market surveys have been made for the Interconnected System in recent years. The long-term trend method was adopted for the proj- ect analysis, forecasting a yearly growth rate of 7.6 percent as "probable", while the "high" and "low" forecasts were derived by advancing, or deferring, the probable forecast by two years (+ 15 percent). The "probable" forecast indicates that the Interconnected System would face both energy and capacity shortages around 1981-82 if generation facilities are not increased. 53. Several hydro and thermal plant alternatives to meet the demand growth of the Interconnected System under various scenarios were compared at various discount rates. The least-cost solution under all reasonable scenarios has been adopted for the project. The economic return represents a minimum estimate as the full economic benefits of the project are not reflected by the electricity revenues alone. The return on investment would be approximately 11 percent, or 15 percent should the ferrochrome plant be commissioned in 1982. The lowest return obtained under sensitivity analysis is still a satisfactory 9.6 percent. The project will permit substantial savings in fuel imports. Risks 54. The risks of this project are those normally associated with hydro- electric plants, namely (i) unforeseen bad geological conditions; (ii) over- investment; and (iii) institutional and financial difficulties. In order to reduce these risks geological investigations were carried out, which concluded that the rock is generally good, and a preliminary feasibility study was undertaken at Ankorahotra, showing that construction of a storage dam is technically possible and economically justified. Although a first phase consisting of three units instead of two appears slightly better in the case of the probable forecast, the decision has been deferred until end-1978 in order to reassess demand forecast at that time. JIRAMA has also agreed to take a number of steps to improve institutional deficiencies, particularly in the Accounts Section.  - 16 - 55. The various risks have been minimized to the extent feasible, and they are worth taking, considering the potential benefits. A new source of power will be needed by 1982 and the adopted plant is the least-cost solution. PART V - LEGAL INSTRUMENTS AND AUTHORITY 56. The draft Development Credit Agreement between the Democratic Republic of Madagascar and the Association, the draft Project Agreement between the Association and JIRAMA, and the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 57. The draft Development Credit Agreement and the draft Project Agree- ment conform to the usual pattern of agreements on power projects. Special conditions of the project are listed in Section III of Annex III of this Report. Execution of the Subsidiary Loan Agreement between the Government and JIRAMA, as well as fulfillment of conditions of effectiveness of the external loans providing the balance of external funds to be obtained by Madagascar are additional conditions of effectiveness of the proposed credit (Section 5.01(a) and (b), draft Development Credit Agreement). 58. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 59. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments May 18, 1978  ANNEX I Page TABLE 3A MADAGASCAR - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) ~-------------- MADAGASCAR REFERENCE COUNTRIES (1970) TOTAL 5-92.0 MOST RECENT AGRIC. 368.6 1960 1970 ESTIMATE KENYA SYRIA MALAYSIA ** GNP PER CAPITA (USS) 110.0 150.0 200.0 140.0 450.0 440.0 POPULATION AND VITAL STATISTICS _______________________________ POPULATION (MID-YR, MILLION) 5.9 7.6 9.1 11.2 6.3 10.B POPULATION DENSITY PER SQUARE KM. 10.0 13.0 15.0 19.0 34.0 33.0 PER SQ. KM. AGRICULTURAL LAND 16.0 21.0 25.0 113.0 56.0 185.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 50.1 49.7 50.2 49.0 47.6 42.2 CRUDE DEATH RATE (/THOU,AV) 28.6 24.2 21.1 17.0 16.2 12.9 INFANT MORTALITY RATE (/THOU) 133.0/a 102.0/a .. .. 123.1 40.B/a LIFE EXPECTANCY AT BIRTH (YRS) 35.9 - 40.9 43.5 49.1 53.0 56.7 GROSS REPRODUCTION RATE 2.9/a 3.2 3.3 3.4 3.5 2.6/a POPULATION GROWTH RATE (%) TOTAL 2.4 2.6 3.1 3.1 3.3 2.9 URBAN 4.0 6.2 5.2 6.3 5.0 3.0 URBAN POPULATION (% OF TOTAL) 10.0 14.1 14.5 9.9 43.5 26.9 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 39.0 46.1 47.3 48.4 44.7/a 15 TO 64 YEARS 57.5 50.2 49.2 48.0 46.3 52.173W 65 YEARS AND OVER 3.5 3.7 3.5 3.6 4.4 3.2 /a AGE DEPENDENCY RATIO 0.7 1.0 1.0 1.1 1.2 0.9/a ECONOMIC DEPENDENCY RATIO 1.1A1,c 1.1/b 1.0/a 1.1/a 2.1/a 1.6/a FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .. ., .. 66.1 . 222.2a USERS (% OF MARRIED WOMEN) .. .. .. .. .. 8.0/a EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 2100.0/b- 3800.0 4400.0 5100.0/b 1600.0 3600.0 LABOR FORCE IN AGRICULTURE (X) 93.0 83.0 83.0 90-0/b 47.8 49I5 UNEMPLOYED (% OF LABOR FORCE) .. .. .. .. 6.4 7.0 INCOME DISTRIBUTION % OF PRIVATE INCOME REC D BY- HIGHEST 5% OF HOUSEHOLDS 41.0 /d .. .. 20.2 /c .. 28.3 HIGHEST 20% OF HOUSEHOLDS 60.1 / ., .. 52.6 / .. 56.0 LOWEST 20% OF HOUSEHOLDS 5.2 / .. .. 3.9 / .. 3.5 LOWEST 40% OF HOUSEHOLDS 13.0 / .. .. 11.7 - *- 11.2 DISTRIBUTION OF LAND OWNERSHIP % OWNED BY TOP 10% OF OWNERS .. .. .. .. % OWNED BY SMALLEST 10% OWNERS .. .. .. HEALTH AND NUTRITION POPULATION PER PHYSICIAN 10400.0/e 11390.0 10820.0/b 7810.0/d 3860.0 POPULATION PER NURSING PERSON 3930.0 /-ef 3760.0 3640.0tR 1470.0 4500.0 POPULATION PER HOSPITAL BED 510.0 400.0 420.0 770.0 1010.0 270.0/a PER CAPITA SUPPLY OF - CALORIES (X OF REQUIREMENTS) 104.0 108.0 105.0 98.0 98.0 110.0 PROTEIN (GRAMS PER DAY) 55.0 53.0 57.0/d 71.0 70.0 49.0/b -OF WHICH ANIMAL AND PULSE 17.0 /1 17.0 29.0 16.0/b 20.0 / DEATH RATE (/THOU) AGES 1-4 .. 33.3/a *- 1.9 4.1 4.4 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 52.0 83.0 .. 64.0 89.0 89.0/a SECONDARY SCHOOL 4.0 11.0 9.0 39.0 34.0/a YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 13.0 13.0 13.0 13.0 12.0 13.0/a VOCATIONAL ENROLLMENT (X OF SECONDARY) 9.0 9.0 7.0 2.0 3.3 ADULT LITERACY RATE (%) *- 39.0 40.0 30.0 40.0 55.0 HOUSING PERSONS PER ROOM (URBAN) .. .. .. .. .. 2.3/a OCCUPIED DWELLINGS WITHOUT PIPED WATER (X) .. .. .. ,. .. 65.0 /a,c ACCESS TO ELECTRICITY (X OF ALL DWELLINGS) .. 5.0 .. * *- 43.0 /a RURAL DWELLINGS CONNECTED TO ELECTRICITY (%) .. .. .. . .. 30.0/a CONSUMPTION RADIO RE'EIVFRS (PER THOU POP) 15.0 60.0 11. 48.0 224.0 41.0 PASSENGER CARS (PER THOU POP) 4.0 6.0 * 9.0 5.0 27.0 ELECTRICITY (KWH/YR PER CAP) 20.0 36.0 44.0 68.0 151.0 382.0 NEWSPRINT (KG/YR PER CAP) 0.3 /h 0.04 0.1 0.5 0.2 4.0