Madagascar - Irrigation Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY C R /'-s 5? P_F Report No. P-3977 MAG *. REPORT AND RECOMENDATION OF THE PRESIDENI OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT IN AN AMOUNT OF SDR 12.6 MILLION(EQUIVALENT TO US$ 12.0 MILLION) TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR AN IRRIGATION REHABILITATION PROJECT April 9, 1985 This document bs a restricbtd distibutio and -y be usd by recipits ouly in the perfomace or hir offiad dudeL its contemts may d oherwis be dscosed withb World Dank aathorimtioa.  CURRENCY EQUIVALENTS Currency Unit - Malagasy Francs (FMG) US$1.00 - FMG 650 (lst Quarter, 1985) FMC 1,000 ' US$1.539 (lst Quarter, 1985) WEIGHTS AND MEASURES I are (a) * 0.0247 acres I hectare (ha) - 2.47 acres I kilometer (km) - 0.62 miles I square kilometer (kmi2) - 0.39 square miles 1 kilogram (kg) - 2.20 pounds 1 liter (1) D 0.26 US gallon 1 ton (t) - 2,204 pounds ABBREVIATIONS BTYI Bankin' Ny Tantsaha Npamokatra (Rural Development Bank) CCC!. Caisse Centrale de Cooperation Economique (France) CFDT French Company for Textile Development CIRVA District Extension Services DP Programming Department of Ministry of Agriculture DFP Finance and Personnel Department of MPARA DIR Department of Rural Infrastructure DVA Department of Agricultural Extension EDF European Development Fund FAC French Technical Assistance Program FNDE National Development Fund IFAD International Fund for Agricultural Development MPAEF Ministry of Livestock, Fisheries, and Forests MPARA Ministry of Agricultural r7oduction and Agrarian Reform MTP Ministry of Public Works SAMANGOKY Society for the Development of the Lower Mangoky River Valley WMC Water Management Committee GOVERNMENT ADMINISTRATION Fokontany = Village Firaisam-pokontany = Group of Fokontany Fivondronam-pokontany = Group of Firaisana Faritany Group of Fivondronana FISCAL YEAR January 1 - December 31 PADDY: RICE CONVERSION One ton of paddy gives about 670 kg rice. One ton of rice is derived from about 1.5 tons of paddy.  FOR OFFICAL4 USE ONLY MADAGASCAR IRRIGATION R* AILITATION PROJECT Credit and Project Suary Borrower: Democratic Republic: of Madagascar Beneficiaries: 34,000 farm families whose annual income is less than one-third of the average national income Amount: SDR 12.6 million (US$12 million equivalent) Terms: Standard IDA terms Project Description: (i) Objectives: The Project would help develop a systematic approach to rehabilitacion of medium size irrigation schemes, which comprise more than 140,000 ha of rice fields. It thus constitutes the first phase of a long-term program to rehabilitate approximately 116 such medium-size irrigation schemes. It would develop new institutions for local administration to assist the farmers to organize and finance the maintenance of the schemes rehabilitated after project completion. In addition the project would provide for the rehabilitation and improved management of one large scale irrigation scheme. (ii) Components: a) strengthening of existing institutions to select, organize and supervise the rehabilitation of priority irrigation schemes; b) rehabilitation in the first phase (covering six years) of 16 medium irrigation schemes covering about 17,000 ha.; c) rehabilitation of the large scale SAMANGOKY cotton and rice scheme. (iii) Benefits: The first phase of the project covering 17,000 ha would increase rice production by 32,000 tons per year. The project would reduce Madagascar's dependence on imported rice and enhance the incomes as a group of over 2% of the farm population whose income per capita is less than half the country average. (iv) Risks: Project benefits depend on water users effectively operating and maintaining the irrigation schemes. This risk is reduced by requiring substantial water user participation in the review of engineering design and preparation of scheme manuals for operation and maintenance; self-finance and prepayment of part of maintenance costs; formation of water user associations; and technical assistance to support these activities. Part of the benefits is dependent on the development and diffusion of higher yielding new varieties and of increased double cropping. Even if the benefits from better varieties and double cropping are not realized, the economic rate of return would exceed 14%. This document has a restriced distribution and may be used by recipients only in the performance of their officia dutie Its contents may not otherwise be disclosed wiLhout World Bank authorization.  - li - Estimated Project Costs US$ million local foreign total Management Support to Ministry of Agriculture 0.9 3.0 3.9 Scheme Rehabilitation 4.3 8.9 13.2 SAMANGOKY Rehabilitation 3.0 1.8 4.8 Total Baseline Cost: 8.2 13.7 21.9 Physical contingencies 0.9 1.8 2.7 Price contingencies 2.3 2.7 5.0 Total Project Cost 11.4 18.2 29.6 Financing Plan US$ (million) Percentage Total 29.6 100.0 IDA 12.0 41.0 CCCE* 6.0 20.0 EDF 4.0 14.0 FAC 0.1 - GOM 7.1 1/ 24.0 Srcheme Farmers 0.4 1.0 1/ Taxes on project expenditures are estimated at $4.7 million. Estimated IDA Disbursements US$ million FY1986 FY1987 FY1988 FY1989 FY1990 FY1991 Annual 1.4 2.5 3.2 2.8 1.4 0.7 Cumulative 1.4 3.9 7.1 9.9 11.3 12.0 Economic Rate of Return: 24Z Staff Appraisal Report: 5379-MAG Map: IBRD 18285 * US$2.4 million committed in October 1984.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR 1. I submit the following report and recommendation on a proposed Development Credit to the Democratic Republic of Madagascar for SDR 12.6 million (US$12.0 million equivalent) on standard IDA terms to help finance a first irrigation rehabilitation project. The French Caisse Centrale de Cooperation Economique and the European Development Fund are expected to co-finance the project with credits of about FF 60 million (US$6.0 million equivalent)l/ and ECU 5.3 million (US$4.0 million equivalent) respectively. The French Fonds d'Aide et de Cooperation is also providing technical assistance in an amount of about $100,000. PART I - THE ECONOMY 2. A report entitled "Current Economic Situation and Prospects" dated Occober 25, 1984, was distributed on November 6, 1984 to the Executive Directors and to participants in the November 1984 Madagascar Consultative Group Meeting. This report is available as document 5154-MAG. Country data sheets are provided in Annex I to this report. Main Features of the Economy 3. Madagascar, with a population of 9.4 million and a GNP per capita of about US$320 in 1983, is among the poorest countries in the world. It is a sparsely settled country, with a population density of about 18 persons per square kilometer. Although generally well endowed with natural resources and a variety of soils, there are considerable regional variations in ecology and climate. The central plateau, the most economically advanced region, has a subtropical to temperate climate. The south is the poorest region with an arid climate and infertile soils. The eastern region has a tropical climate and, although rich agriculturaUly, crops are frequently devastated by cyclones. Agriculture accounts for about 35% of GDP; about 85% of the population lives in rural areas, and agricultural products account for about 80X of the country's export earnings. Economic Developments in the 1970s 4. During the past 25 years Madagascar's development has been sluggish and erratic. For about a decade following independence in 1960 the economy grew at an average annual rate of 3%. Agriculture was responsible for much of this GDP growth while manufacturing, under 1/ FF 24 million (US$2.4 million) have already been committed.  - 2 - increased protection, gained in relative importance. For the period 1970-1983, however, there was, on average, virtually no growth in real GDP. Wlth an average population growth of about 2.8% per annum, per capita real income in 1983 was about 28% below its 1973 level. 5. The poor economic performance stemmed in large measure from inappropriate economic policies. First, the Government undertook a widespread nationalization of economic activity. This policy was initiated following the 1972 military coup and was intensified after 1975, when the present Government came into power. A second and related theme was the adoption of an interventionist attitude towards the economy. Most of the 1970s were marked by the vigorous pursuit of official policies which sought to reduce foreign involvement in the econowm and, through nationalization and various economic eontrols, to extend the Government's role in economic activity. Under these political and economic conditions, private sector initiative was discouraged. Third, the Government embarked on a strategy which accorded high priority to the development of industry with protective policies but neglected agriculture and, in effect, fostered the growth of an inward-looking and sometimes uneconomical manufacturing sector. The adverse effects of these policies were compounded by the deterioration of the terms of trade following the world oil price increases. 6. Through 1977 the poor growth and development performance and the extensive institut4onal changes which were being effected were nevertheless accompanied by continued cautious policies regarding the balance of payments, public finances and external debt. The external resource gap was kept at low levels (about 3% of GDP from 1970-78), the overall Government budget deficit fluctuated around 2.5Z of GDP and recourse to external borrowing was strictly limited. Total external public debt (outstanding and disbursed) at the end of 1977 was equivalent to about 13% of GDP, compared to an average of about 22Z for low income developing countries, and the ratio of debt service payments to export earnings at the end of 1977 was only about 3%. The Public Investment Boom of 1978-81 and its Impact 7. In 1978 the Government adopted a significantly different economic policy orientation, undertaking a large expansion in public sector investment with greatly increased reliance on external sources for its financing. The increased investment resulted in increased imports and coincided with virtually stagnant export earnings and a further deterioration in the terms of trade. As a result, Madagascar's balance of payments deteriorated sharply in 1979 and 1980 and the resource gap reached almost 17% of GDP. Madagascar began to run into difficulties in meeting its external debt obligations in 1980 and foreign exchange shortages grew increasingly severe through 1981 and 1982, largely as a result of the rapidly growing burden of external debt service. 8. With the rapid expansion in external borrowing and a hardening of average terms, Madagascar's public external debt service obligations increased dramatically from about US$19 million in 1978 (equivalent to about 4% of exports of goods and non-factor services in that year) to about US$265 million in 1982 (equivalent to about 72% of exports of goods and NFS). In 1981 and again in 1982 Madagascar sought and obtained a  -3- rescheduling of a part of debt service obligations due. These reschedulings reduced payments due in 1981 and 1982 by over 50% so that actual service payments on external public debt made in 1982 were equivalent to about 35% of export receipts. In April 1984 a further rescheduling was accorded by the Paris Club and together with debt rescheduling by London Club creditors reduced debt service due in 1984 from the equivalent of 80% of export earnings to around 38%. Recent Developments 9. Economic developments over recent years reflect the need to correct serious imbalances which arose in 1978-80 on external account and in the Government budget. With generally declining exports, the imbalance on external account has had to be corrected by cutting back imports. Imports declined in 1981, 1982 and 1983 and for 1983 were about 35% below the 1978 level. Imports of raw materials and spare parts have been particularly affected, with disruptive consequences for the economy's production. The volume of GDP declined by about 9% in 1981, and by about an additional 2% in 1982; estimates for 1983 and 1984 suggest a growth of close to 1% and 2%, respectively. 10. Up to 1980 the balance of payments gap was financed primarily through external borrowing and running down foreign exchange reserves. In 1980 substantial external payments arrears were incurred; they increased somewhat in 1981 and 1982. New commitments of external loans have decreased significantly since 1980; in 1983 net disbursements from medium and long-term loans only financed about 16% of the current deficit. In 1983 substantial payments arrears were again accumulated. In 1982 and 1983 Consultative Group meetings were organized under Bank chairmanship and were successful in mobilizing exceptional support to fill the balance of payments gap in each of these years. A third Donors Meeting under IMF chairmanship was held in April 1984 and secured additional commitments to fill the estimated balance of payments gap for 1984, but the November 1984 Consultative Group meeting failed to confirm support that would close the then estimated 1985 gap. 11. Madagascar has had, however, considerable success in correcting the imbalance on Government budget account. The overall budget deficit which was equivalent to about 17% of GDP in 1980, was more than halved in nominal terms by 1983, when it was equivalent to about 7% of GDP. This has been achieved both by containing expenditures and by efforts to increase budget revenues. Government recurrent expenditures increased by about 9% per annum in nominal terms from 1980-1983 while average prices in the economy increased by more than 25% per annum. The level of capital budget expenditures was substantially cut back, and in 1983 capital expenditure in nominal terms was less than half its 1980 level. Current budget revenues in nominal terms increased by about 16% per annum from 1980-83, considerably faster than budget expenditures. 12. Since 1979 the drop in industrial production, including mining, has been especially sharp. Production at the end of 1982 had dropped to 70% of the level in 1979, lower than in any year of the 1970s. Output in every branch of production was lower in 1982 than in 1979. A particularly serious aspect was that the output of some basic consumption items (soap,  - 4 - shoes, matches, batteries) had dropped by well over one half since 1979. Preliminary figures for 1983 indicate a modest pick-up of abcut 1.5% in manufacturing output. 13. The performance of the agricultural sector since 1979 has been less disappointing than in the immediately preceding years, but has been nevertheless unsatisfactory. In addition to the effects of poor weather, there have been shortages of inputs such as fertilizers, pesticides and improved varieties of seeds. Output grew by 7% in 1979, fell by 4.5Z in 1981 but resumed growth by 4.0% in 1982 and 2.5% in 1983. In the case of coffee the increase was only about 2.5%, but output reached the highest level so far obtained. Clove production almost tripled between 1979 and 1980 and declined slightly thereafter. Vanilla also picked up from a low in 1979 and almost doubled by 1982. These three crops accounted for over 70Z of merchandise exports. 14. In production of the staple, rice - as with other crops - the Government's marketing monopoly and price controls from the early 1970s to 1983 led to wholesale disruption of marketing. By the early 1980s, official prices were so low and official marketing so disorganized that much rice entering into trade was sold on the parallel market. Simultaneously, lack of modern inputs and credit, deteriorating extension service, and poor irrigation scheme management and maintenance left farmers few means to increase production, even if price and market incentives had been adequate. Hence, notwithstanding Government allocation of some 40% of the public investment budget for rice production in recent years, production stagnated. Paddy production in Madagascar, which grew 5% per year in the 1960s and increased from 1.2 million tons in 1960 to almost 2.0 million tons in 1970, did not grow thereafter in spite of the growth of population and the labor force. Madagascar, a net exporter of rice until the early 1970s, thereafter imported increasing quantities, reaching a peak of 350,000 tons in 1982, over 20% of total consumption. Since then reduced rice imports reflect changed policy but also an overwhelming foreign exchange shortage: 183,000 tons were imported in 1983, and about 110,000 tons are estimated to have been imported in 1984. Government's New Strategy in Agriculture 15. By 1982 the Government had acknowledged the failure of agricultural development policies and the need for basic policy change. For the period of 1983-85 it set the restoration of production of key crops to levels reached in past years as an overall goal. For rice, the goal is an eventual return to self-sufficiency. For the past two years the Government has been discussing with the Bank and other aid agencies, how to achieve these goals. By early 1983 the main elements of a new strategy were agreed upon between the Government and the donor community and presented at the April, 1983 meeting of the Consultative Group for Madagascar. The main elements are: Short-term - concentration on rehabilitation of agro-industrial enterprises and large-scale production units, including the very large parastatal irrigation schemes;  -5- - emphasis squarely on rehabilitation through existing agents, including private enterprises, with priority to rice, cotton, coffee, and livestock; - regular price reviews and increases to ensure adequate producer incentives, particularly of rice, cotton, coffee and sugar; and - rehabilitation of rural infrastructure, particularly rural access and feeder roads. Longer Term - concentration on smallholders and other privately owned production units; sharp curtailment of investment in large scale, and Government-owned and operated, farming ventures; - balanced development strategy promoting a range of crops and taking into account regional variations; encouragement of diversification of production systems; - conversion of unsuccessful and unprofitable parastatal ventures through sales to private operators and use of management contracts; - reduction in state marketing; increased reliance on commercial companies; and - improvement of agricultural extension in key production areas and re-establishment of agricultural research. 16. By 1984 some progress had been achieved in the implementation of the overall strategy. The prices of rice and beef were allowed to rise to market clearing levels, and free trade in these products was re-introduced. Significant increases in producer prices and improvements in price setting mechanisms were made for cotton. Studies were completed on rice and export crops to provide the basis for pricing and marketing reform in these areas. Input supplies have been imported with external aid. Input subsidies are being phased out, and fertilizer distribution by commercial firms has re-started. Veterinary product supply has improved, again with external aid. A review of ways to revive extension services is underway and under Bank supervision IFAD is financing a Training and Visit extension program. A detailed review of the agriculture investment program has been carried out. New legislation for irrigation water charges has been enacted. In 1983 the Ministry of Agriculture reduced staff by about 3,000. 17. The measures represent a major reversal in the thrust of policies and, therefore, were politically very difficult. The Malagasy Government's stabilization and recovery efforts have been supported by successive IMP standby arrangements. Madagascar has met all conditions set under the standby agreement which expired in March 1985. A new standby is to be considered by the IMF Board at the end of April. The new standby, in addition to establishing performance targets for external borrowing, domestic credit, reduction in external arrears and maintenance of exchange rate adjustment, will require increases in the prices of major agricultural  products, further measures to liberalize the marketing of these products and progress towards a market-determined system of ilterest rates. In November 1984 a Consultative Group Meeting was informed of the Governmpnt stabilization efforts and expressed support of the Government's adjustment program in industry. PART II - BANK GROUP OPERATIONS IN MADILGASCAR 18. IDA credits to Madagascar amount to rS$443.05 million (including US$29.9 million from the Special Fund) and Bank loans total US$32.57 million. Since 1975 about 39% of Bank Group lending has been for transport, 27% for agriculture, 14% for electric power and petroleum, 6% for industry and water, 4% for technical assistance and 4% for education, 3% for urban development and 3Z for cyclone rehabilitation. IFC has three investments in Madagascar in textiles, footwear and fisheries. Annex II contains a summary statement of Bank loans, IDA credits and IFC operations as of September 30, 1984. 19. Bank Group assistance to Madagascar has been concentrated in the key areas of infrastructure (including urban and social infrastructure), agriculture and energy. In infrastructure, three Credits have provided for the constructioj of a:)-weather highway links between the island's different regionk-and-three Credits for road maintenance and rehabilitation. There have been Credits to improve Madagascar's main port of Toamasina and to support the railway's modernization efforts. Urban infrastructure development has benefited from a water supply and sanitation Credit for the capital city of Antananarivo (US$20.5 million). In the social sectors, education has been the major recipient of Bank assistance with two credits totalling US$18.8 million. In addition, studies for urban development financed by the UNDP with the Bank as Executing Agency led to an urban development project (US$12.8 million in FY84). A first US$5 million DFC Credit was made to the Industrial Development Bank of Madagascar (BNI) in 1980. In addition a Credit of SDR 9.4 million for an accounting and audit project was made in 1981. In November 1984 a US$15 million Development Credit for cyclone damage rehabilitation was signed with the Government. 20. Energy projects have also received growing Bank Group attention. IDA participated with several co-lenders in the financing of the large Andekaleka hydroelectric project, which was successfully completed in June 1982. A US$12.5 million Credit for petroleum exploration promotion is supporting the Government's efforts to develop a domestic supply of hydrocarbons and to improve planning in the energy sector. A heavy oil exploration Credit (Tsimiroro), in the amount of SDR 10.7 million was approved by the Executive Directors on November 16, 1982. 21. The Bank Group has supported 14 agricultural projects in Madagascar. Five projects have been completed: the Lac Alaotra Irrigation Project (US$5.0 million), the Morondava Irrigation Project (US$15.3 million), the Beef Cattle Development Project (US$2.8 million), the First Forestry Project (US$13.0 million) and the First Village Livestock and Rural Development Project (US$9.6 million). Eight are under  implementation: the Hangoky Agricultural Development Project (US$12.0 million); the AgricuJtural Credit Project (US$10.0 million); a Technical Assistance Project of studies to improve irrigation on the Plain of Antananarivo (US$2.3 million); a Second Forestry Project (US$20.0 million); an Agricultural Institutions Technical Assistance Project (US$5.7 million); a Second Village Livestock Project (US$15.0 million); the Lac Alaotra Rice Intensification Project (US$18.0 million); and a Cotton Development Project ($17.8 million). In addition, the Bank has appraised and is supervising the IFAD-financed Highland Rice Project (US$30.0 million) to increase rice IL production by providing agricultural inputs and by reorganizing and strengthening agricultural extension services using the Training and Visit system of extension. 22. Problems have arisen in the execution of a number of projects. The main problems encountered include delays, cost overruns, deficiencies in management and inadequate financial performance of project agencies. Recent problems have centered on difficulties linked to the country's economic crisis, notably the acute shortage of foreign exchange and budget funds and institutional problems related above all to the parastatal system. 233. Since the start of our programs in Madagascar five Credits have been completed and audited by the Operations and Evaluation Department. The Audit Report and a recent Impact Evaluation Report on the Lac Alaotra Irrigation Project (Audit Report No. 1622) criticized both poor project design and supervision, and insufficient attention to socio-economic and institutional aspects of the project. These lessons have been taken into account in the project design of the Lac Alaotra Rice Intensification Project, in which great emphasis is given to institution-building, to farmer involvement, to producer incentives and to self-management to reduce the burden of recurrent costs on the Government. The lessons of the Beef Cattle Project (Audit Report No. 3600), where large-scale cattle ranching failed dismally, have long since been reflected in our approach to agriculture operations in Madagascar. 24. The recently completed Project Performance Audit Reports for the Morondava Irrigation Project and the Village Livestock Project emphasize the enormous project implementation problems during the tumultuous 1970s. The Morondava project was a profoundly disappointing experience with cost overruns and poor management being the most serious problems. The Village Livestock Project fared much better and established a sound basis for veterinary and livestock services in a key cattle producing region. The Audit Report No. 2143 of July 1978 concluded that the Third Highway Project was well justified and had a good rate of return despite substantial cost overruns. Report No. 2299 of December 1978 concluded that the physical objectives of the Tamatave Port Project were satisfactorily achieved but pointed out that the institutional objective was not accomplished during project implementation because of inadequacies in the staffing of the port authority. 25. The program for Hadagascar has been broadened to include sectoral lending in support of current imports of a priority nature. This process started with the Sixth Highway project which included US$10 million for  spare parts for the road transport fleet. It was linked to significant changes in policy with regard to road tariffs and a basic decision to rehabilitate the private transport fleet. The recently signed Industrial Assistance Credit aims at supporting Government efforts to rehabilitate the industrial sector by providing spare parts and raw materials to key industries. It includes a package of measures to liberalize prices in the industrial sector, promote export and reduce import prohibitions. In addition, the Government has restructured the public sector investment program in industry and is preparing a new investment code. A Credit similar in design is under preparation for the agricultural sector. Discussions with the Government on this program are continuing in an active manner and could lead to a formal appraisal in mid-1985. 26. The program for Madagascar in the next three or four years will concentrate oa the rehabilitation of existing infrastructure and on policy based sectoral lending to assist the economic recovery by providing resources to increase capacity utilization. It will be closely linked with improvements in Government policies formulated to bring about supply responses from industry and agriculture. At the same time this program will assist the Government in improving the management of the economy through increased emphasis on training and technical support. 27. Besides the program of lending for rehabilitation and sectoral policy-based lending, the Bank's lending in the next two or three years will support important projects in education, training, and technical assistance. At the Government's request, the dialogue on the education sector has resumed. A project at the primary or secondary education level is under consideration and a second credit to support accounting and management training has been appraised. In technical assistance the principal operation will be a continuation of the Agriculture Services Project, which is providing support to the two Ministries of Agriculture. An agricultural research project is also a distinct additional possibility. 28. Few entirely new projects are under consideration at this time, but these are in critical areas. The first is energy. A fuelwood project is under preparation and further petroleum lending is a possibility, depending on the outcome of current exploration. Another area of interest is flood control and drainage in the Plain of Antananarivo, which is both important to the development of this key area and is linked to the previous IDA involvement in the urban development of Antananarivo. These projects will require substantial co-financing by other donors. 29. The Bank Group lending strategy for agriculture and specifically for irrigation is consistent with the Government's strategy discussed in paras 15-17. The Bank Group accepts that Madagascar has a strong comparative advantage - at realistic exchange rates - in the production of many agricultural commodities including irrigated rice. Consequently the Bank Group supports the Government's goal of self-sufficiency in rice production to be achieved over a period of several years. The emphasis on rehabilitation of both capital and institutions, including the strengthening of the Ministry of Agriculture (MPARA), is very important. In the context of such rehabilitation there is a need for a new  - 9 - institutional division of labor in which the burden on Government is much reduced through increased reliance on smallholders as the group which will benefit from production increases. The project proposed in this report would help implement this strategy. PART III - IRRIGATED AGRICULTURE A. Background 30. Agriculture. By far the dominant sector of the economy (38% of GDP), agriculture employs 85% of the population and accounts for three-quarters of export earnings. Over half of agricultural production is for subsistence (predominantly paddy, beef and food crops), while export crops (largely coffee, cloves and vanilla) account for about 15% of production, and industrial crops (notably sugar and cotton) represent about 7%. Eighty percent of total production value comes from smallholder activity. Recent sector performance has mirrored that of the economy as a whole. For the past six years overall agricultural production has been static, in contrast to the strong growth of the 1960s and early 1970s. Notwithstanding steady expansion of the labor force, production of the two basic foodstuffs (rice and beef) and the major export crops has stagnated, while cotton and sugarcane production have actually declined. A net exporter of rice until the mid-1970s, Madagascar's subsequent imports of rice and edible oils have become a heavy burden on foreign exchange earnings. The supply of raw materials to the predominantly agriculture-based industrial sector has also dropped. 31 Rice is by far the mDst important irrigated crop, although there are small areas of irrigated cotton and sugar cane. Irrigation is practiced throughout Madagascar, on about a third of the island's cultivated land. Most irrigation is carried out by smallholders on schemes which vary in size from a few hectares to large-scale Government schemes of several thousand hectares. 32. The kinds of irrigation which are feasible vary according to the three main ecological regions of the country: the Highlands, the west and the narrow east coast. Because of the high altitude in the Highlands the dry season is cool, which greatly reduces the yields of rice and many other crops grown in that season. Hence, in the Highlands most agricultural production occurs during the rainy season. The agricultural population of the Highlands is highly skilled. Population pressure on the limited cultivable land available has led to substantial emigration to the western part of the Highlands where land of somewhat lower quality is available. Soavina - a scheme completed in 1962 but now to be rehabilitated under the first tranche of the project proposed in this report -- is one such westward settlement, composed principally of immigrant rice growers from -he densely populated faritany of Ambositra. 33. The second region, the west, is hot; rainfall is usually under 700 mm annually; and the dry season is very long. There, farming conditions are excellent in the river valleys, the "baiboho", where much  - 10 - flood recession cultivation is practiced. Livestock rearing in this area is widel) practiced by populations which are somewhat nomadic. In Behara, another scheme to be rehabilitated under the first tranche, many cattle owners are slowly becoming sedentary farmers. The settlers in the Onilahy valley, which includes Belamoty (the third rehabilitation scheme In the first phase of the project) also in the west are an example of livestock owners who have become cult.va'.ors within the last century. In the west the main irrigated crops are rice and cotton, while pois du cap (butter beans) are produced for export. 34. The third region, the warm and wet humid east coast, has a highly productive agriculture. Westbound winds drop much of their moisture in this area before they reach the Highlands. Annual rainfall in excess of two meters is the rule. Certain areas receive three meters or more, such as the ports of Toamasina and Moroantsetra. Agriculture Is relative'ly intensive and most export crops, cloves, vanilla, coffee, are produced in this area. Rice irrigation is practiced in river bottoms; rainfed rice is also common. 35. Throughout the island family farms are small, nearly always less than ten hectares and frequently less than a hectare, including both rice paddies and the 'Tanety' or raiufed fields. Animal traction is common. Rapid population growth has contributed to the small size of individual farm plots, especially in the Highlands, where population has been sedentary for centuries. In the recenriy settled areas of the west, plots and farms tend to be larger. 36. Traditional yields of paddy on irrigated land are generally close to two tons per hectare in the warm (rainy) season, and about 1.5 tons in the dry season. As noted, in tUe Highlands low temperatures in the dry season make rice cultivation a risky and low yielding venture. In the lower parts of the Soavina scheme, at an altitude of 1,100 m, some double cropping is practiced, although the length of crop cycles may require land preparation for the second season before completion of the harvest of the first season. Irrigated dry season yields in Soavina are typically 1.3 t of paddy per hectare. On average, rainfed rice yields about 1 t paddy per hectare, although yields may be substantially higher if such rice is grown in the semi-irrigated conditions of river bottoms or in the water retaining paddies of the deteriorated schemes. Paddy yields on the large parastatal schemes probably exceed 2.5 t on average, and may exceed 3 t. This is, however, much below their potential because of substantial deterioration of these schemes. 37. Madagascar's irrigation schemes are classified into four types: a) Family rice fields developed and maintained by farmers themselves may cover as much as 500,000 ha and range in size from one acre to perhaps 5 ha. They involve terracing of valley bottoms, diverting water from streams and simple storage dams. b) Small schemes, developed through local initiative with and without Government support. They involve terracing of valley bottoms, diverting water from streams and simple storage dams.  - 11 - c) Medium schemes. There are about 116 such schemes with a total area under canals of about 142,000 ha (an average of 1,224 ha); in part because of deterioration of the irrigation works, actual land irrigated is about 79,000 ha. The Ministry of Agriculture has primary responsibility for running these schemes with some support from the local authorities. The proposed Project would concentrate on rehabilitating about 16 of these schemes. d) Large schemes are operated and maintained by parastatal authorities reporting to the Ministry of Agriculture (MPARA). Land irrigated is about 80,000 ha and most of the surplus rice production is consumed in the large cities. The most important schemes are SOMALAC (Lac Alaotra area), FIFABE (Marovoay area), SAMANGOKY (Mongoky scheme), SODEMO (Morondava scheme) and the Andapa Basin Authority. B. Physical Deterioration of Schemes 38. The deterioration of the schemes, both large and small, may take the form of a catastrophic event. The pressures on the various irrigation works are heaviest during the periods of maximum river flow during the high rainy season. Following storms the dikes, canals, intake works - any of these -- may suddenly collapse because of the water pressure, resulting in inundation, crop land covered with sand, and/or greatly reduced flow-through into the irrigation canals. The non-parastatal schemes have largely relied on their own devices for repairs after such events. The repairs have often been inadequate, so that the ability to withstand future shocks is diminished. Hence with the passage of time the probability of disaster and the economic loss associated with any given period of high water flow has increased. There is also slow deterioration, which gradually reduces the hectares which can be irrigated in any scheme: canals gradually silt up with sand carried into the system; they also lose water at leaky seams and breaks along their courses. As a consequence the capacity for carrying water by any given canal system has diminished. Finally, the drainage systems -- drains and outlets of various kinds - have deteriorated so that land has become marshy and unsuitable for cultivation or may be inundated at flood crests when the river backs into the drainage system or breaks through protective dikes. 39. In the three schemes of the Project's first tranche the combined effect of these various kinds of deterioration has reduced paddy irrigation to nearly half of design capacity. In Soavina, of the 1,200 hectares served by canals, about 200 hectares cannot now be used in the wet season because of regular back-up inundation by the river. Another 100 ha are lost because they have been covered with river sand. In Belamoty and in Behara, sand in the canal system has reduced the system's capacity for carrying water, so that much of the downstream land in the schemes does not receive enough water to permit paddy irrigation. Only about 60% of the areas served by canals can now be irrigated.  - 12 - C. Medium Schemes: Maintenance, Operations, Finances, Land Tenure 40. Most medium schemes were built between 1945 and 1970, typically during the colonial period. The approach to their operation has been a highly centralized one in which the cultivators on the schemes were initially considered as tenants or wards while the mobile construction brigades of the Ministry of Agriculture's Genie Rural were to perform required repairs and maintenance. The effectiveness of these brigades dropped dramatically during the 1970s, and they have been phased out. In addition, a "chef du rdseau" was posted to each scheme to provide scheme management. Scheme maintenance has been very defective and largely limited to the cleaning of the primary and secondary canals by the water users. The irrigation works (water intakes, desilting basins, weirs, dikes, drains, overpasses, access tracks) have consequently deteriorated. When damaged, they have frequently not been repaired, although in most cases had funds been available purchase of equipment and supplies would have been possible. Cost recovery has not been practiced on the schemes due in part to past Government policy and the power of local interest groups, but perhaps more recently also because of Government inability to collect the money. The problems of handling receipts through the public finance and accounting systems are grave, and the tax collection mechanisms in the rural areas are very weak: the national property taxes once collected at the local level have largely disappeared, as well as the tax rolls according to which they were levied. 41. By 1981 the widespread deterioration of the medium schemes had touched off a discussion within Government towards developing a viable alternative approach to scheme operation and maintenance. The result was a body of legislation of 1981-82. This legislation foresees establishment of scheme level Water Management Committees (WMC) consisting of Government representatives, including the "chef de reseau" and representatives elected by the users. The WMC takes decisions based on discussion in which user representatives would voice their demands; operations and maintenance proposals are presented by the "chef de reseau"; users receive guidance for management of the tertiary and quarternary networks. 42. The Government is aware that the responsibility for managing and maintaining irrigation schemes should lay with the users of such schemes. At negotiations, Government has indicated that current legislation permits the creation of water users associations within the framework of existing local and provincial government institutions (Fokotany and Faraisana). The legislation provides for the creation of structures d'operation with full legal status and financial autonomy. These structures d'operation, constituted of members elected by the water users, will be responsible for managing the operation and maintenance of the irrigation schemes. They will determine the amount of the user charges to cover the cost of maintenance, administer the funds collected, enter into maintenance contracts and oversee their proper execution. Amendment of the existing irrigation legislation is necessary and is a condition of effectiveness (see draft Development Credit Agreement, Section 6.01 (b)). The creation of the structure d'opgration for each irrigation scheme to be rehabilitated will be required before civil works start. Evidence of the creation will be submitted (see Draft Development Credit Agreement, Schedule 5, para. 4).  - 13 - 43. Most land is cultivated by the de facto owner on the majority of the schemes to be rehabilitated under the Project, and ownership rights have evolved according to Mladagascar's traditional land tenure rights. In some cases, such as Soavina, which was developed under the Government's program of "Aire de Mise en Valeur Rurale", land tenure contracts between the Government and the users were established at the time the schemes were constructed but are now out of date. D. The Mangoky Scheme 44. One component of the proposed project is the rehabilitation of the Lower Mangoky River Valley Development Agency (SAMANGOKY)alarge scheme in the fertile delta of the Mangoky on the western coast. An IDA credit to extend the scheme by 3,700 ha became effective in March, 1980. Because of difficulties in implementation, the extension was reduced to 2,000 ha and a management improvement and rehabilitation component was added. Completion is expected in 1985, at which point SAMANGOKY will be able to irrigate about 7000 ha. 45. Deterioration at SAMANGOKY, in large degree because of poor maintenance, is illustrative of the kinds of physical deterioration found on the medium schemes. The Mangoky scheme is a gravity irrigation network supplied by a river intake. A dike to protect the scheme from river flood waters suffered a break of several hundred meters in 1983 and required emergency repairs to avoid a second break in the 1984 rainy season. The intake on the Mangoky River feeds water into a main canal through a desilting basin. As the dredger for the desilting basin has broken down, the basin and much of the primary canal have silted up and are no longer effective. Irrigation is through concrete-lined and prefabricated concrete canals, most of which are above ground. Many of these leak and need to be resealed. The drainage system is extensive, but has become in part ineffective. The resulting high water table has caused soil salinisation and reduced cotton yields. 46. Deterioration at SAMANGOKY is also institutional and policy related. By the late 1970s poor labor discipline, overmanning, low Government prices on output, and weak administration led to the classic vicious circle: reduced output and negative cash flow. Maintenance stopped and basic inputs fell into short supply. Yields on cotton fell from 3 t per ha to less than one (1981-82); the surface cultivated also fell drastically because SAMANGOKY was able to plow only a small part of the total area served by canals. 47. SAMANKOKY has sustained large losses, which are continuing. In complement to the physical restoration, SAMANGOKY's management wili limit its role to providing wacer for irrigation (which requires managing and maintaining the irrigation network); to providing extension services; and to selling agricultural inputs and equipment. Management has also worked out a five year program with a view to obtaining full recovery of operating costs. If implemented successfully it would result in a positive cash flow as early as 1985. The plan includes a capital contribution by Government to cover the costs of reduction in force, import duties and reduction of  - 14 - the short-term debt, for a total of FMG 1040 million. Government will implement the five-year financial rehabilitation program agreed upon at negotiation. and make contributions to SAMANGOKY specified in it. Payment of the initial contribution is a condition for the disbursement of the SAMANGOKY component (see draft Development Credit, Schedule I, para 3). E. Sector Institutions 48. The operation, maintenance and repair of medium size irrigation schemes has been the responsibility of MPARA through its Department of Rural Infrastructure (DIR). Its Service de l'Irrigation is in charge of planning and implementing engineering works in all Government-managed schemes. The rehabilitation division is in charge of supervising rehabilitation work, whereas the irrigation infrastructure division, with the assistance of three expatriates, is in charge of supervising studies and works on new schemes. On large schemes managed by parastatals, the DIR is responsible for supervising feasibility and other studies, inviting and evaluating tenders and preparing contracts, and supervising irrigation works. The Department itself has usually prepared the detailed designs and supervised the contractors for medium schemes. It is clear that the DIR has much experience and competence in managing firms to carry out the engineering aspects of scheme rehabilitation (design work, execution, supervision). Nothwithstanding the existence of the Rehabilitation Division, following the transfer of most construction and land preparation equipment of the mobile brigades of Genie Rural to a parastatal, the Ministry has virtually ceased to carry out scheme repair and maintenance. 49. The Service de Gestion des Reseaux Hydrauliques is responsible for operation, maintenance and development of the medium irrigation schemes. Its functions include managing the DIR's irrigation personnel at the medium schemes, coordination with other agricultural services and assistance to the yet to be established scheme level water management committees. In 1983 the budget for operation and management of the service was FMG 600 million (US$1.1 million), almost all of which went to pay staff. 50. Each such service also has corresponding provincial level services. In turn the six regional services, one in each faritany, are responsible for the 17 administrative areas. The staff of 1,400 includes 33 engineers, many trained in France, as well as three French expatriate engineers. 51. The Department for Agricultural Extension (DVA) has a total staff of about 4,000 and a budget (in 1983) of FMG 927 million. As with the DIR, these services are also found at the regional levels. The 'circonscriptions de vulgarisation agricole" (CIRVA) are divided into extension zones (corresponding approximately to fivondroana) and finally the extension cells, with each cell having, ideally, five extension agents. Usually one or two cells work on a medium irrigation scheme. There are about 20 agronomists based in Antananarivo and about 50 in the provincial services and CIRVA. With over 80% of the DVA budget used to pay salaries, the extension service lacks funds for transport and field  - 15 - activities. Hence the field services are out of touch with the central services, and their activity is neither monitored nor evaluated. Applied research is very limited, and in the last decade DVA has developed few, if any, new extension themes. Lack of agricultural inputs, of improved seeds and of agricultural credit have compounded the problems of the extension services. The IFAD Highland Rice Project, active in two CIRVAs in the Highlands (Antsirabe and Ambositra), is providing operatlig and transport support and a new approach (training and visit) for extension work. Under the proposed project the DVA would work intensely to increase yields on schemes to be rehabilitated. Hence the proposed project would provide technical assistance to the DVA. 52. The Programming Department (DP) prepares the investment programs in agriculture. It has received IDA support under the First Agricultural Institutions Technical Assistance Project. Technical assistance is also being provided to improve the Department's monitoring and evaluation of projects. The DP is to be the coordinator for the proposed project. 53. MPARA's recently created Department for Finance and Personnel is responsible for establishing the Ministry's budget, for administering and controlling its execution and for managing all external financial resources supporting agriculture. Under the First Agricultural Institutions Technical Assistance Project the Department is receiving technical assistance to carry out these tasks. 54. To coordinate the role of the various Departments an ad hoc Committee chaired by the Secretary General of Agriculture has been established. The Committee consists of the four directors of MPARA plus the Director of Livestock and the Director of Forestry of MPAEF and a representative of the Ministry for Public Works. PART IV - THE PROJECT 55. The project results from a long and intensive dialogue with the Government on irrigation pol.Lcy. Agreement was reached with Government in 1979 on project objectives, and at that time preparation was started. In 1982 a preappraisal mission of the Bank and the Caisse Centrale visited Madagascar. The findings of this mission led to a joint appraisal mission (Bank, CCCE, FED) in April 1984. A staff appraisal report entitled "Madagascar: First Irrigation Rehabilitation Project (5379-MAG) dated April 3, 1985 is being distributed separately. Negotiations were held in Washington, D.C. from March 22 to March 28, 1985. The Malagasy delegation was led by H. E. Leon Rajaobelina, Madagascar's Ambassador to the United States. Project Objectives 56. The project is designed to develop a systematic approach to the rehabilitation of medium size irrigation schemes and thus progressively redevelop the country's 116 such schemes representing more than 140,000 hectares of irrigated rice fields. It includes a heavy technical assistance component to develop the Ministry of Agriculture's capacity to select, prepare, and implement scheme rehabilitation. Furthermore, the  - 16 - project would improve the organization and management of irrigation rehabilitation and thus encourage other external co-financiers to participate in the overall rehabilitation program. In its emphasis on self-finance and self-management at the scheme level, the project also attempts to develop an alternative to reliance on Government management and funding, which has led to widespread deterioration in the infrastructure of the schemes. This approach, if successful, should assure adequate operation and maintenance of the schemes. 57. The project includes the following elements: (a) management support to the Ministry of of Agriculture (MPARA) for selection of, planning for and supervision of rehabilitation; (b) civil works for reconstruction of about 16 medium irrigation schemes. Three schemes have already been selected, and their rehabilitation will be financed by the French Caisse Centrale de Cooperation Economique and the European Investment Bank. Thirteen other schemes will have to be selected by MPARA as a first phase of the rehabilitation program. This will also include preinvestment studies to be carried out by consultants; and (c) rehabilitation of the Mangoky scheme, including technical assistance, rehabilitation works, maintenance equipment and studies. 58. Management Support for MPARA. MPARA's management, broadly defined, is of critical importance for successful implementation of the project. The proposed technical assistance team to MPARA would provide a total of 29 staff years over a period of four years. It includes: (i) a senior advisor to the Project Coordinator to assist him in financial control, prepare the Project's work programs and budgets artd review the feasibility studies; (ii) an agricultural economist to assist the Department of Agricultural Extension to formulate the agricultural development plans for each scheme, introduce effective monitoring and evaluation mechanisms and prepare work plans and reports; (iii) a training/extension specialist to help implement a program to retrain the local extension agents; (iv) an advisor for the Department of Rural Infrastructure to assist in supervising the engineering consultant firms, review the list of priority schemes for future rehabilitation, review preliminary and detailed engineering designs and prepare the Department's annual work program and reports under the Project; (v) a rural institutions advisor to assist water-users to begin managing, maintaining and repairing their schemes; (vi) two senior irrigation engineers to assist with the various aspects of scheme rehabilitation; and (vii) an advisor in project evaluation and monitoring.  - 17 - 59. The short-list and terms of reference for this team have been approved. Logistic support for irrigation management and field services would also be provided. This will include construction and rehabilitation of office space. 60. Civil Works: Medium Schemes. Rehabilitation work is planned over the next five years for about 16 medium-size irrigation schemes covering 17,100 ha. Preliminary engineering designs have already been completed for three schemes: Soavina, Belamoty and Behara, with 3,100 ha. Their rehabilitation (financed by CCCE and FED) will constitute the first civil works tranche and will include reconstruction of canal embankments, flood-dikes, and service roads; cleaning and repair of de-silting structures; relining concrete canals; and repair or replacement of water control structures. The civil works for the remaining 13 schemes would be selected during the further planning for scheme rehabilitation. 61. Rehabilitation of the Mangoky Irrigation Scheme: The rehabilitation of SAMANGOKY, one of the large state owned and operated schemes which is not part of the network of medium size schemes, will include: (i) the cleaning of the de-silting basin, of the headworks, and of the access canal; (ii) resealing the joints of concrete canal sections primarily for the 100 km of raised canals which require special polyethylene and polyurethane seals; (iii) rehabilitation of 45 km of service roads; (iv) repair and maintenance of the river-intake and of irrigation gates; (v) improvement of the main drainage system; (vi) equipment to make possible improved maintenance of irrigation structures (spare parts for the floating dredger in the de-silting basin; power shovels to clean drains and canals; specially equipped boats to mow weeds growing in the larger drains; graders, trucks, motorcycles and other vehicles; small compressors and other small civil works equipment, and painting equipment); and (vii) technical assistance in cost accounting. Project Organization and Management 62. The project will be administered by MPARA. The ad hoc Coordinating Committee (see para 54) has the responsibility to approve the master plan for irrigation rehabilitation, the three year plan for rehabilitation, the annual work program and the five year agricultural development plan. It will also approve schemes selected for rehabilitation, consultant feasibility studies, bidding documents and contract awards and the program and maintenance renewals for the operation and maintenance of irrigation schemes. A project coordinator has already been appointed in the Programming Department to provide coordination among the various departments involved and act as the secretary of the ad hoc  - 18 - coordinating committee of MPARA. Any appointment of a new project coordinator will be made only after consultation with IDA on the terms of reference (see draft Development Credit Agreement, Section 3.04). 63. Selection of Schemes for Rehabilitation. The Department for Rural Infrastructure (DIR)is currently carrying out the inventory of all the medium irrigation schemes, which should be completed in 1987. The inventory provides basic agro-economic data for each scheme; a preliminary estimate of the costs of rehabilitating the civil works and the increase in hectares irrigated as a result. Selection from the inventory would involve judgment on several criteria: the cost of transportation; motivation of the scheme's cultivators; and the extent of supporting infrastructure, e.g., extension service and availability of credit. For a scheme to be selected, a minimum economic rate of return of 14% will also be required. Rehabilitation of access roads will not be financed under the project, but if access is a problem the perimeters selected will only be rehabilitated after repair or construction of the needed access roads has begun. The Programming Department will submit the evaluation of schemes to be selected to IDA for review and approval (see draft Development Credit Agreement Schedule 5, para 1). The Coordinating Committee will approve the schemes to be rehabilitated. 64. After a scheme is selected from the inventory for further processing, the Department for Agricultural Extension would carry out a baseline survey of the scheme to determine its agricultural, economic and sociological characteristics. The Project provides for operational and travel funds to carry out the surveys and funding for consultant assistance should this prove desirable. These surveys will be used in the economic feasibility study and as basic inputs in developing a five year development plan for each scheme. Each five year development plan will be submitted to the co-financiers financing the scheme's civil works for review (see draft Development Credit Agreement, Schedule 5, para 2). 65. Pre-investment Studies, Construction and Supervision. Once a scheme has been selected consultant firms (joint ventures between Malagasy and expatriate consultant firms) would carry out: (i) preliminary engineering designs and feasibility studies; (ii) detailed engineering design, and revised cost estimates, which r should not exceed the initial cost estimates by more than 15%; otherwise IDA's approval of the the decision to proceed with scheme processing would be required; (iii) a survey of the capacity of local construction firms in the area, to carry out irrigation rehabilitation works and routine maintenance and repairs; (iv) final engineering design, preparation of bidding documents, tendering, bid evaluation and contract award; (v) supervision of works; and (vi) preparation of scheme operation and maintenance manuals.  - 19 - 66. The Service de l'Irrigation will supervise the work of the consultant firms. It will review feasibility studies, pre-select construction firms, evaluate bidding documents and draft contracts for construction. IDA will approve the tender documents for the schemes to be financed under the IDA Credit (see draft Development Credit Agreement, Schedule 5, para 2 and Schedule 3, part E). The Programming Department will prepare the annual work program and budget proposal, which will be submitted to IDA for approval (see draft Development Credit Agreemenit, Schedule 5, para 4). The DIR, with the assistance of the rural v institutions specialist, will develop manuals and budgets for operation and maintenance which will be reviewed by IDA for the schemes to be financed by the IDA Credit (see draft Development Credit Agreement, Schedule 5, para 3). 67. Following completion of preliminary engineering design and the feasibility study of each scheme, the Service de Gestion des Reseaux Hydrauliques would discuss with the water users through their structures d'operation the engineering rehabilitation plans. The structures d'operation will review the plans and may suggest desirable changes. If the water users wish the work to progress, their representatives through the structures d'operation will sign a document to commit themselves to fund and carry out the scheme maintenance as foreseen in the plans. The commitment would include an advance payment by the farmer beneficiaries to be deposited into an account in the name of the structure d'opgration before completion of the rehabilitation civil works and these funds would be reserved for scheme upkeep (see draft Development Credit Agreement, Schedule 5, para 3). 68. Monitoring and Program Evaluation. The Programming Department would prepare both the annual and semi-annual progress reports. MPARA will submit a Special Report in December 1988 which will provide feedback on lessons learned for possible formulation of a follow-on project of additional rehabilitation (see draft Development Credit Agreement, Schedule 5, para 5). SAMANGOKY will also submit semi-annual progress reports and completion reports. Project Cost and Financing 0 69. The total project costs for the five year implementation period 1985-88 are estimated at FMG 22.1 billion (US$29.6 million). Of the total cost, 61% is foreign exchange. Baseline costs are at mid-1984 prices and * were increased 13% for physical contingencies. Taking into consideration recent inflation rates in Madagascar, local inflation was estimated at 14% per year. International inflation was assumed to be 5% in 1985, 7.5% in 1986, and 8% per year in 19B7-89. Duties on locally procured imported equipment and materials are substantial, and all taxes, including import duties, were estimated at 16% of total cost. 70. IDA Credit. The proposed IDA Credit of SDR$12.6 million would finance 41% of Project costs. For the management support component (MPARA), this would cover 65% of civil works, 100% of expatriate staff and studies, 90% of trav-.l indemnities and training; and 100% of foreign expenditures and 90% of local expenditures for vehicles, equipment and furniture. Of the scheme rehabilitation component, IDA would finance 65% of civil works and 100% of pre-investment studies and consultant fees.  - 20 - Finally, the Credlt would finance 65X of the rehabilitation works on the Mangoky Scheme and 100% of consultant fees, vehicles and equipment. With the exception of funds for assistance to the Mangoky Scheme, which would be passed on to SAMANGOKY as a contribution to equity, the Government of Madagascar would pass on all funds to the Ministry of Agriculture (MPARA). The table below gives the disbursement percentages for all project categories financed under the IDA credit. SDR Percentage to be millions Financed by IDA Scheme Rehabilitation and Management Support Components (MPARA) Civil works 4.20 65% Consultant services 2.00 100% Vehicles, equipment and 0.50 100% of foreign office furniture 90% of local Travel costs and training 0.50 90Z Mangoky Scheme Rehabilitation Component (SAMANGOKY) Civil works 1.50 65% Consultant services 0.20 100% Vehicles, equipment, 0.70 100% of foreign office furniture 90% of local Special Account 0.85 Refunding of Project Preparation Advance 0.84 Unallocated 1.31 TOTAL 12.60 71. Co-financing. Under parallel arrangements CCCE would finance 25% of vehicles and equipment for the institution building component and FAC would finance the monitoring and evaluation advisor. The EDF allocation for 1985 is to be a grant of ECU 5.3 million (US$4.0 million) to cover the costs of rehabilitating the Behara and Belamoty Schemes in 1985/86; and the engineering studies of additional schemes in Tulear Province for rehabilitation in 1986 and 1987. CCCE committed FF 24 million (US$2.4 million) in October 1984 to the scheme rehabilitation component to cover the costs of the Soavina Scheme in 1985-86 and the engineering studies for four additional schemes for rehabilitation in 1986 and 1987. This credit will be reimbursed over 20 years with a grace period of five years and an interest rate of 4.5%. Pending the outcome of these studies CCCE has tentatively scheduled an additional FF 36 million (US$3.6 million) for rehabilitation of four additional schemes in 1986. FAC will finance  - 21 - technical assistance for the monitoring and evaluation of the project. The cost is estimated at US$100,000. 72. Financial Implications for Government.2/ Over the five year implementatron period coveriLment participation -- 10% of total project costs net of taxes -- is estimated at FMG 1,560 million (US$2.4 million). Government would make a cash contribution of FMG 1,486 million (US$2.2 million) to SAMANGOKY to cover its operational losses, as a condition of disbursement for this component (see Development Credir Agreement, Schedule I, para 3). It would also contribute to SAMANGOKY b FMG 2,535 million (US$3.9 million) for financing civil works and FMG 6,650 million (US$1 million) for incremental operating costs. Total Government cash outlays would amount to FMG 4,615 million (US$7.1 million), which would cover all of the import duties and taxes estimated at FMG 3,337 million (US$4.7 million), leaving a net participation of FMG 1,560 million (US$2.4 million). IDA approval of the annual budgets and financing plans of the project components would be a condition of disbursement for expenditures, financed under the IDA Credit (see draft Credit Agreement, Schedule 1, para. 3, Schedule 5, para. 5, and draft Project Agreement, para. 2.06). 73. Beneficiary Participation. Contributions by water users are estimated at FMG 260 million (US$0.4 million) or 1% of total project costs; except for the salary of the DIR engineer employed at each scheme, they would cover 100% of scheme maintenance and operation including additional labor and cash contribution of water users. Procurement, Accounting, Auditing and Disbursement 74. Procurement procedures are summarized in the table below. All civil works to be financed by IDA (US$10.9 million including GOM contribution) would be on the basis of bidding documents divided into lots to be proposed by the consulting engineers bidding would be allowed for one, several or all of the lots. Procurement for packages exceeding US$100,000 would be through international competitive bidding. On smaller packages either ICB or shopping would apply. Domestic civil works contractors would be allowed a preferential margin of 7-4% over the lowest evaluated bid of competing foreign contractors. Sub-contracting to small regional contractors would be encouraged on the basis of rules clearly r' stated in the tender documents. IDA would review: (i) bidding documents and bid award procedures; and (ii) the bid evaluation and proposed contracts prior to contract award for all civil works estimated to cost over US$100,000 (see draft Development Credit Agreement, Schedule 3). 75. Consultants to be financed by IDA (US$1.7 million) for the institution building component are being recruited in accordance with IDA guidelines. Consulting services for pre-investment studies and supervision of works to be financed by IDA (US$1.1 million) would be procured following procedures acceptable to IDA. Vehicles would be procured through ICB or shopping among all locally represented manufacturers with adequate repair facilities. Office equipment and furniture would be procured on the basis of price quotations from at least three local or foreign suppliers. 2/ The FMG costs are estimated using an exchange rate of US$1.00 = FMG 650.  - 22 - Grouped vechicle, *equlpment and furniture purchases exceeding US8100,000 would require IDA approval of bidding documents, bid evaluation and draft contracts. Purchase of specialLzed irrigation and drainage maintenance equipment (US$0.3 million) for the Mangoky schem from a mingle manufacturer would be allowed. Procurement Procedures (IDA-financed contracts in parentheses) OTHER ICB OTHER 1/ DONOR N.A. TOTAL PROCEDURES _ COSTS ------US$ million---- - - MPARA Management Support Component I. Civil Works 0.3 0.3 - - 0.6 (0.2) (0.4) II. Consultants - 1.7 0.1 1.8 (1.7) (1.7) III. Vehicles, Equipment and 0.3 0.4 0.1 - 0.8 Furniture (0.3) (0.4) (0.7) IV. Operating Costs 2/ - - - 1.4 1.4 (0.5)3/ (0.5) Scheme Rehabilitation Component I. Civil Works 7.2 - 8.5 - 15.7 (4.8) (4.8) II. Consultant Fees, Pre-Investment 2.8 - 2.8 Studies, Supervision of Works (1.1) (1.1) III. Scheme Maintenance and - - - 0.4 0.4 Operating Costs SAMANGOKY Component I. Civil Works 3.1 - - - 3.1 (2.0) (2.0) II. Consultants - (0.1) - - (0.1) II. Vehicles, Equipment 0.3 0.4 4/ - - 0.7 (0.3) (0.4) (0.7) Working Capital - - - 2.2 2.2 Total Costs (including contingencies) 11.2 5.7 8.7 4.0 29.6 (Total IDA) (7.6) (3.9) () (0.5) (12.0) 1/ Shopping (three suppliers), sole source or consultant shortlist. 2/ Increased local staff, labor, office rent and vehicle operating costs. </ Travel costs; training. 4/ Includes local competitive bidding and shopping.  - 23 - 76. Disbursement Procedures. No expenditures for vehicles, equipment, operating expenditures, civil works and consultant services relating to any year will be eligible for financing under the IDA credit (unless previously committed) until the program, budget and financing plan for that year have been approved by IDA (draft Development Credit Agreement, Schedule 5, para 4). MPARA's Department of Finance and Personnel (DPF) and SAMANGOKY would claim reimbursement on the basis of statements of expenditures for civil works and consulting contracts under US$50,000 and for vehicles, equipment, goods, services and operating costs under US$15,000. Withdrawals for local expenses above these limits and for expenditures in foreign currency in excess of US$5,000 would be fully documented. 77. Special Account. To facilitate disbursement and to reduce the number of withdrawal applications to be processed, IDA would advance to the Borrower US$0.8 million soon after the credic is effective. The advance would be disbursed in U.S. dollars by IDA into a Special Account with a banking institution acceptable to IDA. This account will be used by the Treasury to pay for expenditures in both local and foreign currency directly or through the commercial banking system. Accounting and Auditing 78. Routine accounting controls for the Project (excluding SAMANGOKY) will be carried out by DFP. The Project Coordinator working within the Department of Programming (DP) will, however, have ultimate responsibility for project budgeting and accounting. The coordinator will submit annually by September 30 a work program, budget and financial plan for the following year approved by IDA (see draft Development Credit Agreement, Schedule 5, para. 4). Project accounts and special accounts will be audited annually by independent auditors acceptable to IDA, and their report would be submitted six months after the end of the Government's fiscal year (draft Development Credit Agreement, Section 4.01(b)). SAMANGOKY 79. Budget review, auditing and disbursement procedures for the SAMANGOKY component would be similar to the ones described above and can be summarized as follows: ti) annual submission by June 30 of a work program, budget and financing plan, including Government cash contribution to maintenance and/or extension services for the following year for IDA approval (see draft Project Agreement, para. 2.06). This would be a condition of disbursement for the SAMANGOKY component (draft Development Credit Agreement, Schedule 1, para 3); and (ii) accounts will be audited annually and, the audit report submitted to IDA within six months of the end of SLMANGOKY's fiscal year. (See draft Project Agreement, para 4.01 (b)). Project Benefits and Risks 80. Benefits. Benefits include development of standard procedures for rehabilitating and maintaining medium-size irrigation schemes, finance and management of scheme operation and maintenance by the users themselves to reduce the excessive burden on the Government's human and financial resources. By increasing rice production by 32,000 tons per year the  - 24 - project will reduce Madagascar's dependence on laported rice and enhance income for a group of over 2% of the farm population whose income per capita is less than half the country average. The increased food oroduction would contribute to improved nutrition in the areas assisted. 81. The Economic Rate of Return for the entire project is estimated at 24% (excluding SAMANGOKY, it is 23%). The rate of return has been calculated by applying the rate of return of the three schemes to be rehabilitated in the first phase of the project (Behara, Belamoty and Soavina) to the remaining 13 schemes. It has been assumed that without rehabilitation the irrigated area would contract through progressive deterioration by 72 annually until 1992. The consequence is a 40% decline in rice produced over the 16 schemes to be rehabilitated under the first phase of the program. 82. Through rehabilitation of schemes and through Improving irrigation practices, the Project would have a positive impact on the environment through better control of surface waters and by arresting the degradation of fertile land. 83. Risks. Project sustain-bility depends on assumption of irrigation scheme operation and maintenance by water users, which requires substantial change in village behavior. This risk is reduced by requiring substantial water user participation at several stages: user review of engineering design; user commitment to finance of operations and maintenance; user prepayment of part of maintenance costs before rehabilitation is completed; technical assistance to support these activities as well as formation of water user associations; and development of individual scheme manuals for operation and maintenance. Part of the benefits is dependent on the development and diffusion of higher yielding new varieties and of increased double cropping. Research and extension may not be adequate for the fn-mer. Because double cropping requires substantial change in use of farmers' time and in cultivation techniques, the rate at which it increases may be lower than foreseen in the Project. Nevertheless, selection of schemes for rehabilitation would be such that even if the benefits from better varieties and double c-ropping are not realized, the economic rate of return would exceed 14X. PART V - LEGAL INSTRUMENTS AND AUTHORITY 84. The draft Development Credit Agreement between the Democratic Republic of Mad3gascar and the Association, and the Recommendation of the Committee provided for in Article V, Section 1l() of the Articles of Agreement of the Association are being distributed separately to the Executive Directors.  - 25 - 85. Special conditions of the Credit are listed in Annex III of this report. Additional conditions of effectiveness of the proposed IDA Credit are: (i) Amendment of the irrigation legislation in order to authorize the creation of water users associations; and (ii) Signature of a subsidiary agreement between Government and SAMANGOKY. 86. I am satisfied that the proposed Credit would comply with the Articles of Agreement to the Association. PART VI - RECOMMENDATION 87. I recommend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments April 9, 1985  - 26 - Annex 1 TAILS M Page I of 5 SDITL INIufi p atusim ttlMn) RIM Lo IN= t icONE HIDELSi 1ucl tmft .nmsntk UtH OUT II1*1 APRICA 5. OF 3*A3 muA iTuasM SQ. m) TOTAL 57.0 167.0 567.0 AORICULTURAL 301.2 323.7 370.5 ow M CAPITA Co") 130.0 190.0 320.0 249.1 1113.9 KEM CO_TUWIO mm CAPITA (RILOCRANS OF OIL EQUIVALET) 27.0 04.0 41.0 52.6 529.0 miTioa ao nTAL ITATISUcS POPULATION,N10l-YLA (TNOUSN) 5470.0 0761.0 9199.0 URBAN POPULATION (S OF TOTAL) 1O.1 14.1 l9.1 19.2 T2.7 PPULATIUN PROCTIONS POPULATloN IN YEAR 2000 (HILL) u. I. STATtONARY POPULATION (HILL) 54.1 POPULATION amnm 1.9 OPULATION DINSITY PeR SQ. lM. 9.3 11.0 15.3 32.5 55.3 PER SQ. mm. A. LAND 15.2 18.7 24.2 119.2 111.5 POPULATION AGE STRUCTURE (2) 0-14 nRS 41.0 41.6 43.9 45.b 41.4 15-6 INS 55.2 13.9 52.9 51.1 51.7 5 ASD ABOVE 3.2 1.3 3.1 2.9 2.9 PoruLATIoN CRwTH BATE (2) TOTAL t.8 2.1 2.5 2.8 2.6 URBAN 4.9 1.0 5.2 6.2 5.2 CRUDE B1RTH RATW (PER TOUS) 46.7 45.2 46.7 68.0