Madagascar - Fifth Highway Project

Document of The World Bank FOR OFFICIAL USE ONLY ILE Copy Repon No. P-2577-MAG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION ON THE EXECUTIVE DIRECTORS ON PROPOSED CREDITS TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A FIFTH HIGHWAY PROJECT June 11, 1979 This document has a resdricted distribudon and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank muthorization.  CURRENCY EQUIVALENTS Calendar 1978 January 1979 Unit = Malagasy Franc (FMG) Malagasy Franc (FMG) US$1.00 = FMG 225.64 = FMG 212.06 FMG 1 = US$0.004 = US$0.005 FMG 1,000 = US$4.43 = US$4.72 (The Staff Appraisal Report is based on US$1 = FMG 220) FISCAL YEAR January 1 - December 31 ABBREVIATIONS MFP - Ministry of Finance and Planning MTP - Ministry of Public Works MTR - Ministry of Transport and Supplies RNCFM - Reseau National des Chemins de Fer Malagasy (Madagascar National Railway) CATP - Centre d'Application des Travaux Publics DE - Directorate of Equipment DPMT - Directorate for Programming, Management and Training EEC - European Economic Community vpd - vehicles per day  FOR OFFICIAL USE ONLY MADAGASCAR FIFTH HIGHWAY PROJECT Credit and Project Summary Borrower: Democratic Republic of Madagascar Beneficiaries: Ministry of Public Works (MTP); Ministry of Transport and Supplies (MTR) Amount: US$24.0 mi:Llion (IDA); and US$10.0 million (EEC Special Action Credit) Terms: Standard IDA (for both credits) Project (i) Objectives: The project would (a) prevent futther Description: deterioration of the paved highway network, thus reducing transport cost and avoiding early and costly reconstruc- tion works, (b) increase the maintenance capacity of MTP and (c) provide for an all-weather road connection between the regional district of Antomboka and the capital, Antananarivo. (ii) Components: The project consists of: (a) resurfacing and partial rehabilitation of about 500 km of paved roads and lthe provision of an initial stock of materials (bitumen) Ifor road maintenance; (b) construction of bridges for the Antsohihy-Ambanja road; (c) improvement of road maintenance operations by strengthening MTP's central administrative organization for road maintenance; improving routine and periodic maintenance in two regional districts, including a regravelling program for about 400 km of roads; and improving the mechanical workshops in five regional district centers; (d) a study to deter- mine the most appropriate mix of labor and equipment for road maintenance and improvement works and implementation of a two-year demonstration program; (e) feasibility and detailed engineering studies for a 170 km section of road; (f) training of MTP staff by technical assistance; and (g) fellowships for MTP staff. (iii) Benefits: Improved road maintenance resulting in reduced vehicle operation costs and increased efficiency of the road transport industry. The use of labor-intensive maintenance methods will, if proven economically feasible, increase job opportunities and save foreign exchange for equipment and fuel. Road improvement and bridge construc- tion will allow year-around access to the northern part of the countr,y and benefit about 1.2 million people. This documeint 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.  - ii - (iv) Risks: The successful implementation of the road maintenance component could be jeopardized by (a) the failure of Government to release adequate maintenance funds to the regional district offices on a timely basis; (b) interference of the regional political authorities in the implementation of an established maintenance program; and (c) Government slowness in timely consultant recruitment and nomination. During negotiations agreement was reached on budget allocations for road maintenance for 1980, review of these allocations until completion of the Project and on the project imple- mentation schedule. Estimated Costs: ------US$ million------ Local Foreign Total I. Road Rehabilitation 2.93 7.59 10.52 II. Bridges Antsohihy-Ambanja Road 4.12 7.04 11.16 III. Road Maintenance 1.97 12.58 14.55 IV. Labor-Intensive Works 0.47 0.30 0.77 V. Highway Feasibility and Engineering Studies 0.09 0.84 0.93 VI. Training by Technical Assistance and Fellowships 0.18 1.65 1.83 Total 9.76 30.00 39.76 Contingency Allowances Physical 0.65 1.27 1.92 Price 1.35 2.70 4.05 Total Contingencies 2.00 3.97 5.97 Total Project Costs 11.76 33.97 45.73 Taxes 4.81 4.81 Total Project Costs (net of taxes) 6.95 33.97 40.92 Financing: Government of Madagascar 6.95 IDA 24.00 EEC (Special Action Account) 9.97 Total (net of taxes) 40.92 Estimated Disbursement: 1980 1981 1982 1983 IDA Fiscal Year --------------US$ Million-------------- IDA Annual 1.0 16.8 5.7 0.5 Cumulative 1.0 17.8 23.5 24.0 EEC Annual 2.5 5.0 2.5 Cumulative 2.5 7,5 10.0 Rate of Return: 61% Staff Appraisal Report: Report No. 2355b-MAG, dated May 18, 1979 Map: IBRD 14098R1  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON PROPOSED CREDITS TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A FIFTH HIGHWAY PROJECT 1. I submit the following report and recommendation on two proposed credits to the Democratic Republic of Madagascar for the equivalent of US$34 million on standard IDA terms to help finance a Fifth Highway Project. One credit of US$24.0 million equivalent would be made from IDA resources; a second credit of US$10.0 million equivalent would be made from the EEC Special Action Account administered by the Association in accordance with the terms of the Agreement of May 2, 1978 between the Association and the European Economic Community. PART I - THE ECONOMY 2. A Bank Group economic mission visited Madagascar in July 1978. Its report is expected to be distributed to the Executive Directors by the end of June. A summary of its findings is set out below. Country data sheets are provided in Annex 1. 3. With a GNP per capita estimated at US$210 in 1977, Madagascar is one of the poorest countries in the world. It is predominantly an agricultural country and 85 percent of its 9.4 million 1/ 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 (arn average of 16 inhabitants per square kilometer), there is great pressure on cultivable land in some regions. Owing mainly to different eco- logical 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 const:raint to developmLent; many of the main highways are not passable during the rainy season 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 resi: of the country fior several months each year. Note: Part :[ is identical to Part I in report P-2520-MAG (Second Railway Project) dated April 26, 1979. 1/ According to the latest: available census data, mid-year population in 1977 :is estimated to be only 8.0 million, which would raise the GNP per capita to US$240. New population figures will be used on revision of Social Indicators Data Sheet.  - 2 - 4. Over the past few years the growth of the economy continued to be slow and uneven. Having risen but marginally in the preceding year real GDP fell in 1976 by 2.9 percent owing to a slight decline in agricultural produc- tion and a steep drop of about 14 percent in manufacturing output. GDP is estimated to have increased by 3.9 percent in 1977; even so, output of goods and services showed only a slight increase over the period since 1974; and, with population increasing by about 2.5 percent annually, per capita GDP fell by about 5 percent. Budgetary investment outlays were stepped up con- siderably after 1975; but the investment rate remained practically unchanged at about 14 percent as the sharp rise in Government capital expenditures was largely offset by a substantial decline in private investment. The savings rate also continued to be fairly stable and fluctuated around 10-11 percent. The resource gap as a consequence has been maintained at a low level. 5. Agricultural production has not recorded any marked growth over the last three or four years. Even over the longer period since 1970 it has increased at an annual rate of only about 1 percent. Despite periodic good crops, paddy production did not keep pace with demand; and production in 1977, estimated at 2.0 million tons, was only about 7 percent higher than in 1970. Groundnut production, after rising significantly in 1976, fell again to 47,000 tons in 1977, while meat production did not register any significant rise. Imports of rice and edible oils have been increasing; at 105,000 tons and 16,000 tons, respectively, they were about three to four times as large in 1977 as in 1970-71. Sugarcane production continued to stagnate as there has been no addition to the refinery capacity for several years. Among other cash and export crops, coffee production, except for a 6 percent drop in 1976, has been rising steadily, reaching some 89,000 tons in 1977. However, raw cotton production, which had been increasing fairly fast, levelled off after 1975 due to shortages of fertilizers and pesticides; vanilla output declined, while pepper showed no noticeable increase. 6. Fostered by fiscal incentives, protection against competition from imports and provision of institutional term financing, manufacturing normally accounts for about 14 percent of GDP. Industrial output, which still consists mainly of textiles and processed foods, declined in 1975 and 1976; and despite some recovery in 1977, remained below the level attained in 1974. However, while output of processed foods and textiles has followed a stagnant or a downward trend, some of the minor industries - chemicals, tobacco manufactures, rubber, paper products - maintained fairly steady growth. The setback to industrial growth in recent years was caused by a number of factors: capacity bottlenecks and aging equipment, owing partly to declining private investment, uncertain and inadequate availability of agricultural materials for processing industries, shortages of imported inputs, and, in some cases, even deficient demand. These factors reflect to some extent the effects of uncertainty accompanying the shift through greater Government control from a predominantly free market system to a mixed economy. In particular, private investment in industry was discouraged and maintenance of industrial plant suffered. 7. With the sudden and sharp rise in current budget expenditure and Government spending on capital development, the fiscal situation deteriorated considerably after 1975. Current expenditures rose steeply with the rising wage bill of the Government and increasing outlay on maintenance; and the current budget surplus, which used to be substantial, dwindled as revenues  failed to keep pace with the growth of expenditures. Furthermore, as Govern- ment intensified its efforts to raise investment levels and stimulate the economy, public investment expenditure rose from 11.2 billion FMG in 1975 to 20.5 billion FMG in 1977. The outlays on the consumer rice subsidy, although they declined in 1976, rose again to 3.6 billion FMG in the subsequent year. The overall Treasury deficit, which more than doubled to 20 billion FMG between 1975 and 1977, was financed increasingly through recourse to Central Bank advances. The budget for 1978 envisaged a 26 percent increase in total outlay as compared to the estimated actual expenditures in 1977, while capital spending was proposed to be raised by nearly 80 percent to 36.4 billion FMG. Revenues also were expected to go up sharply, partly as a result of tax reform measures. Ihe overall deficit, however, might turn out to be somewhat larger than the prcjected 16.1 billion FMG owing to underestimation of expenditure on personnel and the settlement of payments deferred from 1977, on the one hand, and shortfalls in revenues on the other. Even so, the overall fiscal situation is likely to have shown some improvement in 1978 as compared to the preceding year. The Government is contemplating economies in current expenditure, particularly by paring consumer subsidies, so as to minimize the burden of unproductive outlays in the future. 8. Monetary and credit developments since 1975 have been influenced mainly by the Government's detficit financing needs. Outstanding domestic credit went up by more than 50 percent to 126 billion FMG during 1975-77, due, for the mosi: part, to the steep and continued rise in net claims on Government. As a result, money supply, whiich had been increasing moderately, rose by 15 percent in L976 and as much as 25 percent in 1977. Despite this monetary expansion and little growth iLn the output of goods and services, the annual inflation rate has been moderate -- about 9-10 percent during 1976-77, largely because of increasing demand for cash balances and the consequent accumulation of idle funds. 9. The balance of payments situation which had been deteriorating showed a substantial improvement in 1976, when a surplus of 2 billion FMG was recorded; but the payments surplus in 1977 is now estimated to have been much smaller. The turnaround in ithe balance of payments situation occurring in 1976 is attributable more to exogenous factors than to any significant im- provement in the structure of the balance of payments. Trade surpluses were recorded in 1976 and 1977 as a result of (a) a sharp rise in prices of exports, particularly coffee, which reversed the continuing deterioration in the terms of trade, and (b) the imposition of more strict quantitative restrictions on imports in 1976. There was a substantial decline in the availability of imports after 1975. On the other hand, the volume of exports dropped sharply in 1976, and continued to fall in 1977, while there was no lasting reduction in the services deficit, nor any sustained rise in capital inflows. 10. The growth and development of the Malagasy economy have over a fairly lonE period been affected by constraints resulting from shortage of savings, slow growth in markets for major primary exports and low productivity of traditional agriculture. The country, however, is relatively well-endowed with natural resources and has a well-established administrative set-up. With  -4- appropriate policies and adequate external capital assistance, medium and long-term prospects for the economy should be favorable. There is consider- able scope for the expansion of agriculture and livestock production. Only about a fifth of the arable land is at present being cultivated, while fer- tilizer 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 avail- able materials is promising. On the whole, sustained growth at an average annual rate of 4-5 percent appears to be feasible. 11. The Government has been taking far-reaching steps to strengthen national control of the economy. As a part of this process, economic and financial institutions, productive sectors, foreign trade and internal market- ing have undergone extensive reorganization. Inspired by the basic needs approach, the Government has also formulated long-term development objectives which envisage a more egalitarian income distribution and satisfaction of specified minimum consumption requirements of the population by the end of the century. The Government also stresses national self-sufficiency and the eventual establishment of an industrial base large and diversified enough to meet the entire domestic demand for equipment and other manufactures. 12. A Three-Year Plan, which is to be the first of a series of medium- term investment programs designed to attain these long-run development objec- tives, 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 of GDP by 1980 from the Plan estimate of 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 is expected to be financed through external loans and grants. Greater emphasis will be placed on the development of food crops; and household con- sumption 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. Madagascar's external public debt, outstanding and disbursed, amounted to US$202.8 million at the end of 1977. Slightly over half of it (US$102.3 million) was owed to the Bank Group, and as much as 37.8 percent to IDA alone. The Bank Group share of debt service in 1977 was 20.8 percent. Among bilateral donors France and the Federal Republic of Germany are the most prominent, each holding about 14 percent of the disbursed debt. Japan and the People's Republic of China rank next in importance (about 5 percent each) followed by the USA (3 percent) and Italy (1.1 percent). Suppliers' credits and commercial borrowing (4.6 percent of the disbursed debt) have been rela- tively unimportant. The Government, in fact, has been generally prudent with regard to external indebtedness; the outstanding disbursed debt at the end of 1976 thus amounted to nearly 11 percent of GNP as compared to the average of 21 percent for low-income countries. Because of relatively limited reliance  - 5 - on external assistance and concessionary terms of most loans and credits, debt service payments have remained small. The estimated debt service ratio of 3.5 percent in 1976 was only marginally higher than in 1970. 14. The Bank Group should be prepared, in appropriate cases, to provide some local cost financing. In terms of performance, Madagascar appears to have performned about as well as other countries at the same level of develop- ment encountering similar constraints. Its current domestic savings rate of 10 - 11 percent compares favorably with the average of 8 percent for countries in the low-income group, indicating that Madagascar has made a reasonable effort to mDbilize domestic savings; but its savings fall far short of the country's requirements. The Government's policy of emphasizing self-reliance has contribated further to scarcity of external resources. Despite consid- erable restrictions on imports, the country's balance of payments and reserve position have continued to be weak. PART II - BANK GROUP OPERATIONS IN MADAGASCAR 15. Madagascar has received fourteen IDA credits amounting to US$158.2 million and five Bank loans totaling US$32.6 million. About 48 percent of Bank Group lending has been for transport, 21 percent for electric power, 22 percent for agriculture and 9 percent 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 expansion of a textile mill; other projects in. leather and ferrochrome are under consideration. Annex II contains a summary statement of Bank loans and IDA credits, and of IFC investments as of April 30, 1979, as well as notes on the execution of ongoing projects. 16. The priority given to transport investment recognizes that improve- ment in communications is a precondition for Madagascar's development. Four projects have been for the construction of all-weather highway links between the island's different regions, one for improvements to Madagascar's main port of Toamasina and one for the modernization of the railway line between Toamasina and the capital, Antananarivo. A second project supporting the railways' modernization efforts was approved by the Executive Directors on May 8, 1979. Bank Group lending for agriculture consists of two livestock develop- ment projects, two irrigation projects and a forestry project. A credit for an agricull:ural development project in the Mangoky delta was signed on May 17, 1979. A study of the problem of agricultural marketing and meat pricing is being executed with the assistance of an international consultancy firm. Bank Group invoLvement in the utility sector includes the financing by IDA of part of the cost of the large Anclekaleka hydroelectric project for which substantial bilateral assistance was secured by the Government. 17. In the past, prob:Lems have arisen in the course of execution of several projects. There were delays in execution, cost overruns and defici- encies in institution building, especially in agriculture. The Morondava Project had to be substantially cut, and the Government has prepared a plan of  - 6 - action to deal with the remaining problems. The main aspects of this plan include a redefinition of the implementing agency's (SODEMO) responsibilities and financial structures, completion and audit of overdue accounts, and pre- paration of an investment program and budget for development of the Morondava area. Implementation of the plan of action has started and is being closely monitored by the Government and the Association. Implementation of the Village Livestock Project has improved substantially. The first three highway projects have been completed and the fourth project is still being implemented. 18. In our future lending to Madagascar, we expect agriculture to absorb an increasingly larger share of Bank Group lending, in line with Government strategy, which is stated in its long-term development plan and which recog- nizes that expansion of agricultural production is one of the prerequisites of further development of the country. A pipeline of possible projects has been identified. We are currently assisting the Government in preparing an agri- cultural credit project, two rural development projects, a small-scale irriga- tion project, a third livestock project and a second forestry project. We intend to continue supporting infrastructure development. The Antananarivo Water Supply and Sanitation project has been appraised and is expected to be negotiated shortly. In addition, a DFC project which will include assistance to artisans and small-scale industries will also be negotiated shortly. Projects in education and urban development are being prepared. We expect the Government to seek cofinancing from external lenders for some of the projects, and we intend to assist the Government in its efforts to mobilize new external sources of financing. PART III - THE TRANSPORT SECTOR Transport Planning, Policy and Coordination 19. The country's rugged topography, its tropical climate and the lack of suitable construction materials in some parts of the island have made road construction and maintenance relatively costly; this has contributed towards the isolation of some of the regions and towards uneven population distribution in the country. 20. Government policy towards transport development, stated in the "Charter of the Revolution" (1975), aims at connecting regional capitals by all-weather roads, improving road maintenance, and developing the transport organization and services. 21. Transport planning and coordination does not yet pose any serious problems since the country's transport infrastructure is still very under- developed and new investments are concentrated on providing only a very basic system. But, when completed, the Moramanga-Toamasina road, now being con- structed with financing from the People's Republic of China, will provide an all-weather road link between Antananarivo and Toamasina which will compete with rail and air transport servicing this area; thus greater intermodal coordination will be needed on this corridor in order to optimize use of the  transport system. Future investments will require a much greater planning effort than in the past to ensure that use of the most economic mode by commodity is encouraged. The Ministry of Finance and Planning (MFP) is expected to be able to undertake these tasks in the near future. During project supervision the AssocLation will review the adequacy of MFP's planning and coordination capabilities and may consider providng assistance to MFP under future projects, should the need arise. 22. Responsibility for transport planning is divided between the Minis- try of Public Works (Ministere des Travaux Publics, MTP) for roads and the Ministry of Transport and Supplies (Ministere des Transports et Ravitaillement, MTR) for air-, water and rail transport; overall planning and coordination of investments is the responsibility of the MFP. There is a shortage of qualified transport planners in both MTP and MTR and insufficient data to analyze trans- port demand. It is expected, however, that the data collection needed for highway plaLning will improve with the recent resumption of annual traffic counts and the preparation of an annual inventory of road conditions to be started under the proposed project. In addition, a team of transport planners (SETEC-France/Berger-US) was financed under Madagascar's First Railway Project (Cr. 488-MAG) to assist MTR's planning effort and thus improve highway planning through better coordination between MTR and MTP. The team, which finished its assignment Ln August 1978, carried out a number of transport studies, including a modal allocation study of road/rail traffic in the Antananarivo-Toamasina corridor, but did not succeeci in training a sufficient number of local staff since counterpart staff were not provided in adequate numbers and with the required qualifications. The MFP is therefore assuming most of MTR and MTP's planning functions. The Transport Network 23. Madagascar's translport network consists of about 27,500 km of roads of which only 4,500 km are paved; 2 unconnected railway systems total- ling 860 km; 4 alongside ports and 11 ports handling lighterage; and 56 airfields of which 17 are all-weather standard. Highways 24. The paved network consists of a main north-south artery, connecting Mahajanga, Antananarivo and Fianarantsoa, an east-west road linking Moramanga, Antananarivo, and Tsiroanomandidy, and several short stretches around the major coastal towns. Other roads are generally low standard, dry-weather earth roads and tracks which are frequently impassable during the rainy season in the north and part of the west. Traffic volume on paved roads ranges from about 100 vehicles per day (vpd) in rural areas to more than 1,000 vpd near the main cities. On unpaved roads, traffic flows reach a maximum of 75 vpd. 25. The Ministry of Transport and Supplies is responsible for setting inter-provincial road transport rates while rates for intra-provincial freight transport are set by provincial authorities within a minimum-maximum rate system established by Government. The Ministry of Finance's Tax Office estimates that in total there are about 5,000 public freight transporters, including large trucking firms, owner-operators, private carriers and a few  - 8 - cooperatives. The majority of these transporters own only one truck. While the larger companies are well-run and generally provide good service, indivi- dual transporters lack experience in operating efficiently. Passenger tran- sport regulations are the responsibility of MTR and the provincial authorities. Service is provided by cooperatives and individual carriers. Although entry into the industry is nominally screened by Government on the basis of supply and demand considerations, in practice all applicants are admitted. 26. MTP's present routine and periodic maintenance operations are inadequate because of shortages of trained staff, maintenance equipment and funds, and equipment repair facilities. As a consequence, about a third of all paved roads (1,500 km) have deteriorated to such an extent that only full rehabilitation of pavement can restore them to serviceable condition, while about a quarter (1,100 km) require resurfacing to avoid further deterioration and costly repair. Efforts to improve road maintenance have been started under the Fourth IDA Highway Project and will be continued under the proposed Fifth Highway Project. During negotiations, annual budget allocations for road maintenance, which are financed from general revenues to which road users contribute through duties on vehicle imports and taxes on vehicle ownership and on use, were agreed for 1980 and Government and the Association will from time to time exchange views on these allocations until completion of the Project. For 1980, at least US$18.0 million equivalent will be allocated for road maintenance operating expenditures and at least US$5.0 million equivalent for equipment renewal; Government will make its best effort to obtain external financing for an additional US$5.0 million equivalent for equipment renewal. Agreement was also reached with Government that these funds will be made available to the regional district offices as required for uninterrupted operations. (Section 4.02, the draft IDA Credit and EEC Special Action Credit Agreements). Railway 27. The Reseau National des Chemins de Fer Malagasy (RNCFM) operates 860 km of main line, and 175 km of branch lines and private sidings. It has so far provided the main means of transportation between the east coast and the high plateau where most of the population and economic activities are concentrated. In 1977, RNCFM carried a total of 823,000 tons of freight (with an average haul of 334 km) and 3.9 million passengers (with an average journey of 69 km). Air Transport 28. Madagascar has 56 airfields, 17 of which are built to all-weather standards. Only two airports can handle large aircraft of the Boeing-707 type. Large aircraft such as the Boeing-747 can only land at Antananarivo's airport. The national airline, Air Madagascar, is owned 70 percent by the Government and 30 percent by Air France. It owns 18 aircraft including one B-707 and two B-737s. It has recently purchased a Boeing-747 which is being operated jointly with Air France.  -9- Ports 29. Among the four major ports, Toamasina handles about two-thirds of the total. national port traffic; Mahajanga on the west coast, 11 percent; Antomboka in the north and Toliara in the south, about 4 percent each. The other ports mainly serve coastal shipping, which is important because of the inadequate inland transport infrastructure. Bank Group Rle 30. The Bank Group is aLssisting the Government in restoring and improv- ing transport infrastructure and institutions, in training staff, and in planning for the future development of the sector. Bank Group lending to the transport sector has amotnted to some US$93 million, about 80 percent of which has been for the highway subsector. 31. Bank Group involvement in Madagascar's transport sector began in 1966 when the First Highway ]?roject (Credit 90-MAG, US$10 million, 1966) provided for construction to paved standards of two sections of the Antananarivo-Mahajanga road, totalling 145 km. A Project Performance Audit Report (PPAR, No. 1409) dated January 3, 1977 found that the cost of the road construction was far below original estimates and the recalculated rate of return was greater than estimated at appraisal. Surplus funds were used to finance supplementary works and studies, which necessitated a delay in project completion. 32. Ihe Second Highway Project (Credit 134-MAG/Loan 570-MAG, US$8 mil- lion, 1968) helped finance construction of 146 km of two major trunk roads and construction of three bridges. The project did not completely meet its objectives,, and completion was delayed by about one year due to difficulties of the contractors who carried out the project. Actual project cost was US$15.2 million in contrast to the appraisal estimate of US$11.5 million, including contingencies. This represents an overrun of some 30 percent, of which about: half was due to price increases and half to increased quantities. The cost overrun was financetd in large part by Goverrment, but savings under the First Hlighway Project also contributed to financing. PPAR No. 811, dated July 18, 1975, found that the economic justification of one of the project roads, Ambilobe-Ambanja (91 km), was doubtful in view of its low rate of return (8%), primarily causetd by higher construction costs than foreseen at appraisal. 33. The Third Highway Project (Credit 351-MAG/Loan 876-MAG, US$30 million, 1973) provided for construction of 417 km of primary roads, detailed engineering of the Antsohihy-Ambanja road and a review of the traffic counting system. In 1975 the project had to be modified due to substantial cost increases and as result of 'price and quantity increases not anticipated at appraisal, as well as the devaluation of the US dollar. A supplementary credit of US$5.6 million was therefore provided while construction was reduced by 67 km. PPAR No. 2143, dated July 27, 1978, found that while the overall recalculated rate of return of 14% was acceptable and in line with appraisal estimates, two road sections had individual rates of return of 10% or less,  - 10 - since expected agricultural benefits failed to materialize due to the deter- iorating political and economic situation of the country. The PPAR further outlines the project's deficiencies, including an insufficient provision of funds for road maintenance and a failure to train Malagasy nationals and thereby contribute to institution building. These problems have been ad- dressed under the ongoing Fourth and the proposed Fifth Highway Projects. 34. The Fourth Highway Project (Credit 641-MAG, US$22 million, 1976) is currently helping to finance construction of 370 km of secondary roads between Tsiroanomandidy and Maintirano and the 67 km of primary roads from Arivonimamo to Analavory deleted from the Third Highway Project. A road maintenance component is also included which provides for a consultant's study to evaluate maintenance needs, including procurement of equipment and technical assistance for training of local staff in road maintenance at the Centre d'Application des Travaux Publics (CATP). The road construction component is nearly completed; the maintenance studies have been completed. However, initiation of the recommended training program has been delayed. Training of local staff is essential to improving maintenance operations under the proposed Fifth Highway Project. Agreement was reached during negotiations for the Fifth Highway Project that training consultants will be employed and that construction of training facilities will be started by January 1, 1980 (Section 3.10, the draft IDA Credit and EEC Special Action Credit Agreements)--both actions to be conditions of disbursement for all project components except road resurfacing and rehabilitation (Schedule 1, para 4, the draft IDA Credit Agreement and Schedule 1, para 5, the draft EEC Special Action Credit Agreement). 35. Bank Group assistance has also helped finance the construction of feeder roads under agricultural and rural development projects. A 1974 project for Village Livestock and Rural Development (Credit 506-MAG) financed the construction of about 170 km of secondary roads in Mahajanga province and maintenance of about 280 km of roads. Under the Mangoro Forestry Project (Credit 525-MAG, 1974) provision was made for construction and maintenance of 56 km of gravelled service roads, 840 km of plantation truck roads and 910 km of tracks. The Morondava Irrigation and Rural Development Project (Credit 322-MAG, 1972) included the improvement of 24 km of existing secondary rural roads and construction of about 90 km of feeder roads. Construction of farm roads was included in the Lake Alaotra Irrigation Project (Credit 214-MAG, 1970). Feeder road construction under these projects has generally been satisfactory. 36. Other transport projects include a port project (Credit 200-MAG, 1970, US$9.6 million) which provided for the extension of Toamasina Port, creation of the Toamasina Port Authority, and technical assistance for management personnel and training; in 1973 the Credit was increased by US$1.8 million to cover a shortage of funds resulting from a currency realignment. PPAR No. 2299, dated December 22, 1978, concluded that: (a) the physical objectives of the project were satisfactorily carried out; (b) a revised lower economic return at 7 percent was due to lack of traffic growth resulting from adverse local and international political and economic conditions that could not have been foreseen at the time of appraisal; and (c) although the  - 11 - technical assistance towards institution building purposes did not achieve fully satisfactory results, initially because of the low calibre of expatri- ate experts, progress in achieving autonomy and better management is now being made! by the port authority. The Bank Group also helped to finance a railway project (CR. 488-MAG, US$6 million, 1974) to assist RNCFM in replacing outdated equipment and to determine the railways' long-term prospects and requirements; the recently approved Second Railway Project will continue replacemenIt of outdated equipment and the track renewal program. 37. The first four Bank Group projects in the highway subsector helped Governmeni: to pursue its objective of providing better road access to regional capitals. However, the corLcern for new construction prevailed and the exist- ing network continues to deteriorate due to inadequate road maintenance and, to a lesser extent, to a failure to enforce vehicle weight regulations. Both problems were addressed under the Fourth Highway Project which provided for (a) purchase and installation of weighbridges to monitor vehicle weights and (b) a road maintenance study and implementation of part of the study's recommendations. The Government is convinced that a greater effort will have to be made at improving road maintenance. Capacity and know-how of the departments concerned with road maintenance will be strengthened and funds will be provided under the proposed Fifth Highway Project. The Government is expected to give road maintenance the priority it deserves. PART IV - THE PROJECT Background 38. The project proposal was prepared by the Ministry of Public Works and the Ministry of Finance andl Planning, with assistance from the IDA appraisal mission. The project was appraised in September/October 1978. Negotiations were held in Washington from May 8 to 11, 1979. The Government delegation was led by Mr. Leon Rajaobelina, Governor of the Central Bank. The main features of the Project are outlined in the Credit and Project Summary and the Supple- mental Project Data Sheet of this report. A detailed account of the Project background and components is contained in Staff Appraisal Report No. 2355b, dated May 18, 1979, which is being circulated separately. Project Objectives and Description 39. A study to identify maintenance and training needs, a long-term countrywide training program for MTP staff, the construction of a central maintenarLce workshop for equipment rehabilitation, and the general improvement of maintenance operations in one of the country's six regional districts (Antombola) were included in the Fourth IDA-financed Highway Project (Credit 641-MAG). The proposed Fifth Highway Project would continue the effort by improving the country's road infrastructure through a resurfacing and reha- bilitation program for paved roads aiming at preventing further deterioration of the paved network, increasing the long-run maintenance capacity of MTP and providing for an all-weather road connection between the regional district of Antomboka and the capital, Antananarivo.  - 12 - 40. The project would be implemented over a three-year period and would consist of: (a) rehabilitation and resurfacing of about 500 km of paved roads and the provision of an initial stock of materials (bitumen) for road maintenance; (b) construction of bridges for the Antsohihy-Ambanja road; (c) improvement of road maintenance operations and equipment repair facilities by: (i) strengthening MTP's central administrative organization for road maintenance; (ii) improving routine and periodic maintenance in two regional districts, including a regravelling program for about 400 km of roads; and (iii) improving the mechanical workshops in five regional district centers; (d) a study to determine the most appropriate mix of labor and equipment for road maintenance and improvement works and possible implementa- tion of a two-year demonstration program; (e) feasibility and detailed engineering studies for a section (170 km) of Road No. 13; (f) training of MTP staff through technical assistance; and (g) fellowships for MTP staff. 41. The components can be described as follows: (a) Resurfacing, Rehabilitation and Maintenance of Paved Roads. The project provides financing for resurfacing and partial rehabilita- tion of various sections of about 500 km of the Antananarivo- Mahajanga and Antananarivo-Fianarantsoa roads, which show extensive cracking, potholes, an uneven road surface and broken pavement edges. The length, location, and type of improvement works on road sections included in the project will be identified by a consultant's study to be financed under the Fourth Highway Project. Government will finance about 600 km of rehabilitation and resurfac- ing work (which is not part of the project) under its own mainte- nance budget. The project will also provide for the purchase of an initial stock of bitumen which will have to be replenished annually to improve maintenance of the paved network. During negotiations agreement was obtained from Government to ensure that adequate amounts of bitumen be made available as and when required for the rehabilitation and maintenance of its roads over the project period (1980-82) (Section 4.03, the draft IDA Credit and EEC Special Action Credit Agreements).  - 13 - (b) Construction of Bridges for the Antsohihy-Ambanja Road. The Antsohihy-Ambanja road (165 km) is part of the major trunk road connecting the country's northern region of Antomboka with Antananarivo, the capital. It is, at present, an earth road in poor condition and impassable during the rainy season (November- May) when many of its existing river-crossings and low-lying road sections become flooded. Improvement of this road to all-weather standards is essential for year-round transport and for improving the region's economic development. The proposed project will assist Government by helping to finance the construction of bridges and their approaches.. Government will upgrade the road to adequate driving condition and improve the road surface with selected materials to allow for year-round serviceability. At negotiations, agreement was reached with Government that improvement of the Antsohihy-Ambanja road to adequate driving condition will be com- pleted by the time bridge construction is finished (Schedule 2, Part B, the draft IDA Credit and EEC Special Action Credit Agreements). (c) (i) Improvement of Road Maintenance - Strengthening of the Central Administrative Organization. MTP's central administration does not yet have a unit in charge of the maintenance operations carried out by the regional districts. A central unit will be created within the Directorate for Programming, Management and Training (DPMT) to control and centralize data collected by MTP's regional districts; coordinate planning, programming and budgeting and evaluate costs and scope of maintenance work done by the regional districts for primary, secondary and tertiary roads; define corrective actions required and, if needed, monitor their implementation. The unit would be headed by a Malagasy engineer experienced in road maintenance and staffed by MTP's existing personnel. At negotiations, agreement was reached with Government on the establishment of this central unit within DPMT by January 1, 1980; the appointment of a qualified local engineer to head the unit by the same date; and the number and qualifications of supporting staff to be provided (Section 3.05, the draft IDA Credit and EEC Special Action Credit Agreements). (ii) Improvement of Maintenance in Two Regional Districts. Both routine and periodic maintenance operations throughout the country have been inadequate, but because of the limited resources available, it is not possible to improve maintenance to an adequate level simultaneously in all of the country's six regions. The proposed project will therefore expand the efforts begun under the Fourth Highway Project to improve maintenance! at the regional level by providing the following assistance under a two-year program to the two regional dis- tricts of Mahajanga and Toliara:  - 14 - (a) technical assistance in defining a detailed program for adequate routine and periodic maintenance, including introduction of efficient techniques for programming, budgeting and execution of works and cost accounting; and training local staff in proper work methods; (b) procurement of equipment and spare parts to set up the necessary recurrent and periodic maintenance brigades (regravelling); and (c) operation of one road regravelling training brigade in each of the two regions, including costs for spare parts, fuel and materials. (iii) Strengthening of Regional Workshop Operations. Workshop facilities, which are the responsibility of the Directorate of Equipment (DE) in the Ministry of Public Works, are not equipped for adequate maintenance and repair of the equipment fleet. To help correct this problem, the proposed project provides for improvement of buildings and procurement of tools, equipment and spare parts for the mechanical workshops in five regional district centers. Details of the scope of improve- ments to building facilities and needs for workshop tools, equipment and spare parts have been defined by Government and were agreed with Government at negotiations. (d) Labor-Intensive Work Program. The project includes financing of an identification study to determine which maintenance and improvement works, if any, might economically be carried out by more labor- intensive work methods than are currently used. The above study will define specific projects; the most economic equipment/labor mix; technical assistance requirements; needed equipment, spare parts, tools and materials; capital and operating costs, and the number and qualifications of counterparts and local staff required. Financing of a 2-year demonstration program to be based on the study has been provided for under the project and would include equipment, operating costs for fuel, spare parts and materials. An outline of the consultant's terms of reference for the identification study was discussed and agreed with Government during negotiations (Section 3.02, the draft IDA Credit and EEC Special Action Credit Agreements). Agreement was also reached that, following definition of the demon- stration program, Government and the Association will discuss and agree on specific works to be carried out, equipment and materials to be procured under the project, and the staff required for the demonstration program (Section 3.06, the draft IDA Credit and EEC Special Action Credit Agreements). The demonstration program will take into account the role and functions of local communities and the Government's objective of developing cooperatives responsible for road maintenance and improvement (Schedule 2, Part G, the draft IDA Credit and EEC Special Action Credit Agreements).  - 15 - (e) Feasibility and Detailed Engineering Studies. The project provides financing for a feasibility study and, if construc- t:ion is economically justified, detailed engineering for about 170 km of National Road (RN) 13, located between RN 7 and the Manandrotsy bridge., With daily traffic of about 60 vehicles, this road forms part of the country's major north-south axis l:Lnking the regionaLl district center of Toliara with Antananrivo. At: present this is an earth road in poor condition. (f) Technical Assistance and Training. Government's road maintenance e:Efort is presently constrained by a shortage of qualified staff at a:Ll levels. Technical assistance will therefore be provided under the project to assist Government in improving the maintenance organization and operations in two regional districts, strengthening equipment maintenance and repair in five regional districts, and training local staff. During appraisal it was estimated that a total of 168 man-months of consultant services will be needed over a 2-year period consiLsting of: (i) two civil eng:Lneers for a period of two years each; (ii) two cost accounting experts for a period of two years each; (iii) two road foremen for a period of two years each; and (iv) one mechanica:L engineer for two years. Training would primarily take place on-the-job. Each civil engineer would advise the regional district engineer (his counterpart) in matters related to road maintenance and would advise and train the remaining supervi- sory staff in each region (3-5 engineers and about 15 technicians). The cost accountants would advise supervisory staff and train about 48 chiefs of regravelling brigades in cost accounting methods. The road foremen would be responsible for training the project-financed regravelling brigade. The mechanical engineer would assist regional staff in implementing improvement of workshop facilities, introducing a more effective equipment maintenance and repair system, and training local personnel. In addition, a notional amount of 72 man-months of technical assistance to train local staff in labor- intensive methods has been included in the project. The average cost per man-month is about US$6,000, plus an average US$1,400 per field man-month of reimbursable expenses. Government has accepted technical assistance for project execution, and during negotiations agreement was obtained from Government on the scope and timing of consultant services for that technical assistance. During nego- tiations, agreement was also obtained from Government that all consultants financed under the project will be employed on terms and conditions satisfac- tory to the Association (Section 3.02, the draft IDA Credit and EEC Special Action Credit Agreements).  - 16 - (g) Fellowships. In order to improve MTP's long-term road maintenance capability, local supervisory staff will receive training in specialized aspects of highway maintenance and equipment repair. The proposed project will therefore provide fellowships abroad for suitable qualified Malagasies. Government has agreed that the number and types of fellowships required to train local staff will be defined by consultants under the project's technical assist- ance component during project implementation (Section 3.07, the draft IDA Credit and EEC Special Action Credit Agreements). Project Cost and Financing 42. The total Project cost is estimated at US$45.7 million equivalent including taxes (US$4.8 million); the foreign exchange expenditure is about US$34.0 million or 83% of net project costs. Physical contingencies of 10 percent have been allowed for paved roads and bridges on the Antsohihy-Ambanja road. Price contingencies for the foreign cost of civil works have been calculated at 7.5% for 1979 and 7% per year thereafter through 1982, and for equipment 6.5% in 1979 and 6% per year thereafter through 1982. Price contin- gencies for all local costs have been calculated at 9% for 1979 and 8% for 1980-82. 43. The proposed IDA credit of US$24.0 million would finance about 59% of total project costs, net of duties and taxes. It would cover 70% of the foreign exchange cost of the project. The US$10.0 million EEC Special A^ction Credit, to be administered by IDA, will cover an additional 24% of project cost, including the remaining foreign exchange cost, net of taxes. Government would finance the balance of US$6.9 million equivalent (for Govern- ment's recurrent expenditures for road maintenance, see para 26). Organization and Implementation 44. The Ministry of Public Works, assisted by consultants, would be responsible for overall project execution. Rehabilitation and resurfacing of paved roads would be by contractors. A consultant's study to be financed under the Fourth Highway Project will define the work to be carried out; work is expected to start in early-1980 and take about 12 months to complete. Length, location and construction standards of roads to be resurfaced and rehabilitated under the project will be agreed by Government and the Asso- ciation following completion of the consultant's study (Schedule 2, Part A draft Development Credit Agreement). Construction of bridges and approaches is expected to start in early-1980 and be completed within 30 months. The program for routine and periodic maintenance (1980-82), including a list of roads to be regravelled, will be defined by consultants during the first three months of their assignment, to begin in early-1980, and agreement was reached during negotiations that Government and the Association will subsequently agree upon the regravelling program to be implemented (Schedule 2, Part E, draft IDA Credit and EEC Special Action Credit Agreements). Construction and improvement of workshop buildings is expected to start in early-1980 and take about six months to complete. The identification study to determine an appropriate labor/equipment mix for rehabilitation and maintenance operations  - 17 - will be carried out by consultants, commencing in early 1980 and taking about three months to complete. During negotiations agreement was obtained from Government that if this methodology proves economically viable, Government and the Association will review details of a 2-year demonstration program to train local staff in these methods (Section 3.06, the draft IDA Credit and EEC Special Action Credit Agreements). Procurement 45. The contracts for rehabilitation and resurfacing of paved roads and the conStruction of bridges and approaches will be awarded on the basis of international competitive bidding (ICB) in accordance with Bank Group Guidelines. It is expected that contractors from EEC member countries will be awarded most of these contracts which will be financed by the EEC Special Action Credit. Supervision of construction will be by consultants selected by Government and employed on terms and conditions satisfactory to IDA. Bridge construction will be divided into three separate lots and will be bid concurrently in order to attract foreign participants. Contractors will be prequalified to bid on one or more lots. Minor improvements to existing regional wcrkshop buildings will be carried out by force account, and major improvement: work or new construction would be by contractor follawing local competitive bidding procedures which are satisfactory. Equipment and spare parts will be procured by ICB following Bank Group Guidelines; spare parts can also be procured by other means besides ICB if Government can demonstrate to the Association that ICB will not have satisfactory results. Contracts for equipment, tools, materials and supplies costing less than US$50,000 will be awarded on the basis of suppliers' quotations. The total amount of these items will not exceed US$500,000. A stock of 400 tons of bitumen will be purchased according to established local procedures acceptable to IDA. 46. The project is expected to be completed by the end of 1982. A project completion report will be prepared within six months of the Closing Date. Disbursements 47. Disbursement from the Credits will be made on the following basis: IDA Credit: (a) 70% of total expenditures for the resurfacing and rehabili- tation; (b) 62% of total expenditures for construction of bridges and their approaches on the Antsohihy-Ambanja road; (c) 60% of total expenditures for improvement of workshop buildings including materials; (d) 100% of foreign expenditures for equipment, workshop tools and equipment, spare parts, fuel and bitumen, or 75% of local expenditures if previously imported; and  - 18 - (e) 100% of foreign expenditures for consultant services and training. EEC Special Action Credit: (a) 70% of total expenditures for the resurfacing and rehabilitation; (b) 62% of total expenditures for construction of bridges and their approaches on the Antsohihy-Ambanja road; (c) 100% of foreign expenditures for consultants for construction supervision under (a) and (b) All disbursements will be fully documented (for conditions of disbursement, see para 34). 48. The road rehabilitation and maintenance works carried out under the project will provide for adequate drainage and thus help to decrease soil erosion, which is a serious problem in Madagascar. Otherwise, the project will have no influence on the ecology of the country. Project Benefits and Economic Evaluation 49. The project will continue the training and maintenance effort begun under the Fourth Highway Project. Reduced vehicle operating costs and in- creased efficiency of the road transport industry are expected to result. Furthermore, if labor-intensive maintenance methods prove economically feasi- ble, the use of such methods will enhance job opportunities and reduce the need for foreign exchange required to purchase equipment and fuel from abroad. Resurfacing and rehabilitation will help prevent further deterioration of the roads included in the program, all of which are key portions of the primary road network. The Antsohihy-Ambanja road, with an area of influence of about 1.2 million people, is the only section of the Antananarivo-Antomboka road not yet constructed to all-weather standards. The road improvement and bridge construction on this link would allow year-round access to the northern part of the country which is now cut off during the rainy season; Antomboka is the only provincial capital not currently accessible to Antananarivo year- round. Besides reduced vehicle operating costs and the generation of addi- tional traffic, the time and cost of getting crops to market will also be reduced. 50. It is expected that the reduced vehicle operating costs will be passed on to producers and consumers in the form of reduced transport costs and reduced prices for marketed goods. Because official tariffs are based on road conditions, they would take into account reductions in vehicle operating costs due to road improvement. While the official tariffs are intended for all transport, in practice, they are only applied to government-related transport. Tariffs applied to non-government transport do, however, reflect road conditions and such transport is competitive.  - 19 - Overall Project Rate of Return 51. The project's major components for which benefits have been quanti- fied include t:he paved road resurfacing and rehabilitation with rates of return in excess of 100%, the regravelling component with a rate of return of 37% and the bridge construction on the Antsohihy-Ambanja road for which the rate of return is 16%. The overall weighted return for the project is 61%. 52. Large increases in costs or decreases in benefits are unlikely to make the road resurfacing and rehabilitation uneconomical. For the road regravelling component, sensitivity tests reveal that a 50% increase in costs or a 25% decrease in benefits would both yield an 18% rate of return. For the bridge construction and road improvements on the Antsohihy-Ambanja road, sensitivity tests indicate that a 20% increase in costs or 20% decrease in benefits will still yield a 13% rate of return. Since generated traffic constitutes a major part of the benefits accruing from this project component, sensitivity tests have been carried out which reveal that a 35% decrease in generated traffic would still allow a 12% rate of return on the road improvement and bridge construction. Project Risks 53. However, the successful implementation of the road maintenance component could be jeopardized by (a) the failure of Government to release adequate mairntenance funds to the regional district offices on a timely basis; (b) interference of the regional political authorities in the implementation of an established maintenance program; and (c) Government slowness in timely consultant recruitment and nomination. During negotiations agreement was reached on budget allocations for road maintenance for 1980, review of these allocations until completion of the Project (para 26) and on the project implementation schedule. PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Development Credit Agreement between the Democratic Republic of Madagascar and the International Development Association, the draft EEC Special Action Credit Agreement between the Democratic Republic of Madagascar and the International Development Association as Administrator of the EEC Special Action Account established with funds contributed from the EEC member states, and the Recommendation of the Committee provided for in Article V, Section I (d) of the Articles of Agreement of the Association are being distributed separately to the Executive Directors. 55. Febatures of special interest are referred to in Section III of Annex III of this report. As a condition of disbursement for all components of the project, except road resurfacing and rehabilitation, the Borrower will have initiated the training prograLm for the Ministry of Public Works, financed under the Fourth Highway Projject.  - 20 - 56. A special condition for effectiveness of the IDA Credit Agreement would be that all conditions precedent to the effectiveness of the EEC Special Action Credit Agreement have been met other than the effectiveness of the IDA Credit Agreement. A special condition of effectiveness of the Special Action Credit Agreement would be that all conditions precedent to the effectiveness of the IDA Credit Agreement have been met other than the effectiveness of the EEC Special Action Agreement. 57. I am satisfied that the proposed IDA Credit would comply with the Articles of Agreement of the Association, and that the EEC Special Action Credit would comply with the criteria established by the Agreement of May 2, 1978 between the Association and the European Economic Community. PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed credits. Robert S. McNamara President Attachments June 11, 1979  - 21- PaSe 1 R*6AIASC.&3 - mOL l_tC*1O3 DASA S313A 3133I CU l! (AAJUBT