Madagascar - Ports Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY C Q4? Report No. P-4421-MAG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT EQUIVALENT TO SDR 13.2 MILLION (US$ 16.0 MILLION) TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A PORTS REHABILITATION PROJECT November 25, 1986 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  DEMOCRATIC REPUBLIC OF MADAGASCAR CURRENCY EQUIVALENTS Currency Unit - Malagasy Franc (FMG) Average 1985 September 1986 US$ 1.00 = FMG663 FMG752 FMG 1,000 US$1.51 US$1.33 SDR 1.00 = FMG673 FMG907 The Staff Appraisal Report uses the exchange rate at the time of appraisal, US$1.00 = FMG630 (see paragraph 3.20 of the Staff Appraisal Report). WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS AND ACRONYMS CCCE - Caisse Centrale de Cooperation Economique DAC - Directorate of Civil Aviation, Merchant Marine and Meteorology FAC - Fonds d'Aide et de Cooperation (France) KfW - Kreditanstalt fur Wiederaufbau (Federal Republic of Germany) MTRT - Ministare des Transports, du Ravitaillement et du Tourisme ODA - Overseas Development Administration (United Kingdom) SEPT - Societe d'Exploitation du Port de Toamasina SOLIMA - Malagasy national petroleum company  FOR OFFICIAL USE ONLY MADAGASCAR PORTS REHABILITATION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Democratic Republic of Madagascar Beneficiaries: Government; Societe d'Exploitation du Port de Toamasina (SEPT); coastal shipping and cargo handling companies. Amount: SDR 13.2 million (US$16.0 million equivalent). Terms: Standard IDA terms. Relending: About US$2.7 million would be onlent to SEPT, over 20 years, with six years' grace, at 9.1 percent p.a. interest, a commitment fee of 0.75 percent p.a., and the foreign exchange risk borne by the Government. Project Objectives: The objectives of this project are: (i) to rehabilitate infrastructure in selected ports so as to reduce cost of shipping; (ii) to strengthen sector management and to improve institutional performance; (iii) to reduce delays and safety hazards to shipping; and (iv) to reestablish full cost recovery for the port sector. Project The project would. consist of the following components: (i) Description: rehabilitation of ports infrastructure; (ii) modifications and improvements to cargo handling; (iii) strengthening navigation and other services to shipping, and (iv) institutional development and reform, including a comprehensive training program. Benefits: The project is expected to reduce the cost of international and coastal shipping through improved cargo handling. Quantified benefits include improved ship utilization. Non- quantified benefits include improved safety of navigation, institutional and technological improvements. Risks: The main risk facing the project concerns the capability of institutions concerned to carry out the project. Most seriously the Toamasina component depends on the continued commitment of Government and SEPT to the Action Plan. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Banh authorization.  -il- Local Foreign Total ------- US$ Million ------- Estimated Coats Port Infrastructure 1.8 2.7 4.5 Cargo Handling 1.0 7.3 8.3 Navigation and Other Shipping Services 0.8 3.4 4.2 Institutional Development 0.6 4.8 5.4 Engineering, Bid Documents, Supervision 0.2 2.1 2.3 Base Cost 4.4 20.3 24.7 Contingencies: Physical 0.4 2.0 2.5 Price 1.4 6.3 7.6 Total Project Cost (not of taxes) 6.2 28.6 34.8 Total Project Cost (including taxes) 13.5 28.6 42.1 Financing Plan (net of taxes) IDA 2.4 13.6 16.0 France (CCCE) 0.0 10.0 10.0 France (FAC) 0.0 2.6 2.6 Federal Republic of Germany (KfW) 0.0 2.3 2.3 Great Britain (ODA) 0.0 0.1 0.1 Government, SEPT, other local 3.8 0.0 3.8 beneficiaries Total 6.2 28.6 34.8 Estimated IDA Disbursements Bank Fiscal Years 1987 1988 1989 1990 -U________ uSS Million ----- Annual 1.6 2.9 3.2 3.1 Cumulative 1.6 4.5 7.7 10.8 Bank Fiscal Years 1991 1992 1993 -- US$ Million ------ Annual 2.6 2.0 0.6 Cumulative 13.4 15.4 16.0 Economic Rate of Return: 29% Appraisal Report: 6294-MAG IBRD 119595, Madagascar: Ports Rehabilitation Project  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A PORTS REHABILITATION PROJECT 1. I submit the following report and recommendation on a proposed IDA credit of SDR 13.2 million (US$ 16.0 million equivalent) to the Democratic Republic of Madagascar on standard IDA terms to help finance a Ports Rehabilitation Project. Cofinancing for the project will be provided by the Federal Republic of Germany and by France through the Caisse Centrale de Cooperation Economique (CCCE) and the Fonds d'Aide et de Cooperation (FAC). Britain (ODA) also contributed to project preparation. PART I - THE ECONOMY 2. A report entitled "Current Economic Situation and Prospects" (Report No. 5996-MAG) was distributed to the Executive Directors and to participants in the Madagascar Consultative Group in March 1986. Its conclusions as well as the results of IMP negotiations on a Sixth Standby Program are reflected below. Country data sheets are provided in Annex I. 3. With a population of 10 million and a per capita income of US$250 in 19B5,1 Madagascar is one of the poorest countries in the world. The country is sparsely settled, with a population density of about 17 inhabitants per square kilometer. While generally well endowed with natural resources and a variety of soils, there are large regional variations in ecology and climate. Agriculture is the mainstay of the economy, providing employment for 88 percent of the population, creating two-fifths of GDP and generating more than 80 percent of export earnings. 4. The years following 1972 marked a turning point in Madagascar's political and economic development. The government that took office in 1972 emphasized national control of the economy. It introduced inward- looking policies aiming at self-sufficiency in industry and agriculture, nationalized most of the larger private companies (which were essentially foreign-owned), and established direct or indirect state control over the greater part of agriculture marketing. A new system of regional and local government (the fokonolona system) was introduced, intended to provide for decentralization within a framework of centralized control. The present regime, which came to power in 1975, intensified, extended, and codified these policies. Pricing policies became biased in favor of urban consumers. However, fiscal and external economic policy remained cautious 11 Provisional Atlas estimate.  through most of the decade, and the level of public external debt was extremely low. In 1978, however, Government decided to diversify the economy, taking advantage of Madagascar's borrowing potential, and adopted a policy of "all-out investment.' Many new parastatal companies were created. Unfortunately many of the projects selected made very little contribution to GNP, exports, or debt-servicing capacity, so that by 1980 the debt service ratio was rising sharply. 5. From 1973 to 1982, real per capita GDP fell by an estimated 28 percent. The main factors behind this decline were: (a) the persistent climate of uncertainty within the private sector created by the nationalizations of the mid-1970s, combined with the rapid expansion of an inefficient and unmanageable public sector; (b) excessive market regulation, through price fixing and controls that favored urban consumers, restrictive licensing legislation, quantitative import restrictions and exchange controls, and the establishment of national and regional marketing monopolies (cereals, agricultural inputs, basic commodities, road and sea transport, financial institutions); and (c) the neglect of smallholder agriculture in favor of import-substitution manufacturing, including enterprises of dubious economic value. 6. The financial crisis that started in 1980 was the result both of inappropriate policies and of external shocks. While export prices flagged and international oil prices doubled, GDP and export volumes continued to decline, the budgetary deficit rose to 18 percent of GDP, domestic inflation reached 30 percent per year, external debt service obligations (before rescheduling) relative to exports escalated from about 4 percent in 1978 to a peak 90 percent in 1985, and the current account deficit of the balance of payments reached 18 percent of GDP. As resource constraints tightened, domestic investment plummeted. Under the impact of heavy external payment obligations, declining export earnings, and reduced creditworthiness, severe foreign exchange shortages prevailed. Import constraints, the severe rationing of foreign exchange, and an overvalued exchange rate contributed to a sustained decline in industrial and agricultural production. 7. Faced with an unsustainable external current account gap, Government began to implement stabilization measures in 1981 with IMF assistance. From 1983, aggregate expenditure was steadily reduced and gross domestic savings increased. Among the notable measures taken to control demand were the abolition of consumer subsidies and tight monetary management. Sustained austerity combined with measures to boost revenues helped reduce the budget deficit and inflation. Measures were also taken to restore production incentives. Throughout 1982-85, the FMG underwent a real depreciation of 25 percent vis-a-vis the SDR, and a further 20 percent depreciation was implemented in August of this year. Realistic tariffs in the public sector were established while a program of liberalization of prices and markets was undertaken in the agricultural, industrial, and transport sectors. 8. Between 1980 and 1985, agricultural output fluctuated. Production of rice remained at around 2 million metric tons of paddy per year. Madagascar had to continue importing rice throughout the period, although the volume imported declined steadily from a peak 356,000 metric tons in  - 3 - 1982 to about 105,000 metric tons in 1985. The decline in rice imports, however, was due to foreign exchange scarcity rather than any marked increaso in doniestic self-sufficiency. Production of other food crops (maize, potatoes, cassava, sweet potatoes) grew steadily and significantly, following higher demand for these crops as a result of incroased rice prices. Cotton production grew rapidly in response to increased producer prices and, with the support of a project financed by IDA and France, Madagascar became a net exporter of cotton fiber. The production of other industrial and export crops generally stagnated (e.g., tobacco, coffee, pepper) or declined (e.g., groundnuts). The output of two other principal export crops, vanilla and cloves, was stagnant in the face of limited world market demand. 9. Industrial output declined sharply 'etween 1980 and 1984 with a modest recovery in 1985. Industrial manufacturing capacity has been heavily underutilized in recent years owing to shortages of domestically supplied and imported inputs and spare parts. The construction industry also remained slack. On the policy front, Government initiated positive changes, easing pricing controls, improving the administration of foreign exchange allocation, and legislating a new Investment Code aimed at attracting foreign private investors. An export earnings retention system (the EPI scheme) was established that provided incentives to exporters. A liberalized import regime is being implemented that would reduce the number of goods covered by quantitative restrictions. 10. Owing to the slow growth of agriculture and industry, transport activity also stagnated. Costs escalated due to the dilapidated state of the transport system. Low administered tariffs reduced incentives to private transporters, thus further discouraging the provision of services. To improve the transport system and the policy environment, Government selected an "economic network" of about 10,000 kms of primary and secondary roads for priority rehabilitation; established a road fund for maintenance; and permitted tariff increases for the roads, railways, and the national airline. A naeional transport plan is now being prepared with IDA support. 11. Public Finance. The "all-out investment" campaign of the late 1970s caused an unprecedented growth in public capital expenditures. It was largely financed by external loans and substantial budget deficits leading to the accumulation of arrears. Between 1981 and 1985, the bulk of the fiscal adjustment was accomplished by cutting capital expenditures, reducing general Government activity, containing the expansion of the payroll, and phasing out budgetary subsidies to parastatals (many of which subsequently became indebted to the banking system). Given the low level of activity of the economy, attempts to increase revenues were generally less successful. The magnitude of the overall budgetary deficit, which stood at 18 percent of GDP in 1980, was reduced to 4.5 percent in 1985. Current budgetary deficits were eliminated from 1983 on, so that the Government was in a position to contribute to development expenditures. Nevertheless, the size of the current surplus remains small relative to public investment needs, and the execution of some foreign-financed projects is slowed by the lack of local cost financing.  -4- 12. Monetary developments during 1980-85 were generally in line with fiscal developments, reflecting Implementation of stabilization measures. Throughout the period, the growth of credit to Government was reduced and, beginning in 1982, credit to the non-government (i.e., parastatal and private) sectors generally expanded faster than credit to the Government. Domestic inflation was reduced, from about 30 percent in 1981 and 1982 to approximately 11 per,-ent in 1985. The reduction of inflation during the period was all the more remarkable in that it occurred at a time when the Malagasy Franc was depreciating. 13. Madagascar's balance of ;avments remained weak throughout 1980-85. Although annual reductions in the volume of imports ware so great that they adversely affected economic activities, they were outweighed by poor export performance and heavy debt service payments. Nevertheless, there were steady and marked improvements in the resource and current balances. In 1985, the resource gap (US$140 million) and current account deficit (US$258 million) had fallen to 25 percent and 45 percent of their respective 1980 levels. 14. Based on the external debt portfolio at end 1985 and after taking into account pipeline disbursements, Madagascar will need new net capital inflows of about US$380 million per year during the 1986-90 period to cover current account deficits, to meet scheduled debt repayments, and to maintain a modest amount of gross reserves. The conditions under which Madagascar is able to obtain new finance and reschedule the debt are of crucial importance and will determine whether the country will be able to overcome present external payment constraints, even with a high-quality policy program. 15. Financial Stratexy. Since the emergence of the debt crisis at the beginning of the 1980s, Madagascar has managed the balance of payments by cutting imports, through the demand management measures described above, complemented by substantial debt rescheduling. These measures are very costly, involving disruption of economic activity and refinancing of some originally concessional loans at less concessiona]l terms. Even more important, they have yet to lead to a viable balance of payments, which can only be achieved by restoring growth in export earnings. Madagascar now has probably reached a limit to further cuts in imports as these are down to bare essentials. While the country's creditors may continue to accord debt rescheduling, to generate significant amounts of debt relief, the rescheduling arrangements wotuld need to be more concessional than previously. In the future, therefore, Madagascar must attempt to boost export earnings as a means of strengthening the balance of payments and reducing the debt burden. Concessional balance of payments support will continue to be needed. 16. Relationship with the IMF. The Government complied with the performance criteria of the fifth standby agreement signed in April 1985. Most of the important program targets were achieved. A sixth standby program was approved by the Fund Executive Directors in September 1986. While continuing measures to stabilize the economy, the program emphasizes the promotion of economic growth by means of further liberalization of the external account, the rehabilitation of selected parastatals, improved domestic producer prices and marketing systems, and a substantial step devaluation of the FMG. Madagascar is eligible for IMF Structural Adjustment Facility resources, and a medium-term program is being formulated with the help of the Bank and the IMF.  17. The third meeting of the Consultative Group for Madagascar took place on April 25 and 26, 1986. The meeting agreed that the Government's program of policy reforms was on the right path and it was urgent that it be pursued and developed further. It was racognised that if Government's efforts were to succeed, Madagascar needs substantial external support. This would be provided by a combination of higher official development assistance, particularly in the form of quick disbursing aid, and debt rescheduling. Agreement on rescheduling was reached at a meeting of the Paris Club in October 1986, and the Consultative Group is expected to meet again late in 1987. PART II- BANK GROUP OPERATIONS IN MADAGASCAR 18. Overall Lending Levels and Sectoral Composition. As of September 1986, IDA credits to Madagascar amounted to US$597.93 million (including US$29.9 million from the Special Fund) and Bank loans totaled US$32.6 million. Bank Group assistance to Madagascar has been concentrated on infrastructure, including urban and social infrastructure (48 percent of lending), agriculture (35 percent), and energy (10 percent). IFC has fou- investments in Madagascar, in textiles, footwear, and fisheries. Annex II contains a summary statement of past loans and IDA credits as of June 30, 1986. 19. Infrastructure Lending. The Bank has supported ten transport projects with IDA credits totaling US$189.78 million. Six (US$147.2 million) were for the construction, maintenance, and rehabilitation of highways; one (US$11.65 million) in 1970 to improve Madagascar's main port of Toamasina; and three (US$31 million) to support the railway's modernization efforts, in 1974, 1979 and 1986. All except the sixth highway project and the recently signed third railways project have been completed. Urban infrastructure development benefited in 1980 from a Water Supply and Sanitation Credit for the capital city of Antananarivo (US$20.5 million), and an urban development project (US$12.8 million) in 1984. In 1984 IDA responded to the need to reconstruct cyclone damage with a US$15 million credit, and a supplemental credit of US$10 million, following the March 1986 cyclone damage, was signed in August 1986. 20. Agricultural Lending. The Bank has supported 15 agricultural projects, of which five have been completed and ten are under execution. This has included three livestock development, four irrigation, two agricultural institution development, two forestry projects, and one for each of agricultural credit, rice intensification and cotton development. After intensive preparation, an Agricultural Sector Adjustment Credit was approved in March 1986. The program on which it was based included major liberalization ot rice marketing, improved public expenditure programming, and actions to promote export crops. 21. Energy projects have 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  -6- 1982. Two credits (for US$12.5 million and SDR 10.7 million) for petroleum exploration support the Government's efforts to develop a domestic supply of hydrocarbons and to improve planning in the energy sector. In both projects the technical components have proceeded well. Over US$250 million in exploration development by foreign oil companies was generated by promotion under ona of the projects. Energy planning romaine weak, although the recent decision by Government to give prime responsibility for energy planning to the Ministry for Industry, Energy and Mines has sot the scene for improved use of resources in this sector. An energy projcot has been appraised. 22. Other Lending. In 1980, a US$5 million credit was made to the Industrial Development Bank of Madagascar. An Industrial Sector Adjustment credit of US$40 million became effective in August 1985, and a supplemental credit of US$75.0 million from the Special Fund for Africa was approved in December 1985. In the social sectors, education has been the major recipient of Bank assistance, with two Credits in 1967 and 1976 totaling US$11.8 million. A credit of SDR 9.4 million (US$11.5 million) for an accounting and audit training project was approved in 1981; and a second credit of US$10.3 million for management and accounting training in February 1986. 23. Implementation Problems. Problems have arisen in the execution of a number of projects, mainly delayFi, cost overruns, deficiencies in management, and inadequate financial performance. Current problems center un difficulties linked to the country's economic crisis, notably the acute shortage of foreign exchange and budget funds, and institutional problems with the parastatal system. The Baik has addressed generic issues through Country Implementation Reviews, most recently in June 1985. The Government has been responsive and there have been improvements in Government portfolio management. 24. Project Evaluation. Eight completed projects have been audited by the Operations Evaluation Department. Audit Report No. 1622 of December 1976 on the first Lac Alaotra project concluded that the project was generally successful. However, the Impact Evaluation Report No. 3600 of August 1981 concluded that earlier assessments of project performance had been over-optimistic, and that the actual rate of return was probably negative. Audit Report No. 1143 of April 1976 of the first Education Project concluded that the education and manpower training objectives were satisfactorily achieved. Report No. 2143 of July 1978 concluded that the Third Highway project was well justified and had a satisfactory 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. Report No. 5434 of January 29, 1984 on the first Railway Project concluded that due to overruns and delays, the scaled-down project had an estimated rate of return of less than 10 percent. Report No. 5403 of December 28, 1984 covered two agricultural projects: the Morondava Irrigation and Rural Development Project was a profoundly disappointing operation, but the Village Livestock and Rural Development Project contributed to laying the groundwork for more effective services for traditional livestock owners, with good prospects for sustainability.  - 7 - 25. Bank Strategy and Futura Program. Thi Bank strategy ia to support the Government'z- efforts to rehabilitate and restructure the economy byt (a) promoting policies and programs aimed at reforming incentive structures, setting a more favorable climate for private sector initiative and investments, and providing financial and other support for appropriate policy programs; (b) supporting sectoral strategies aimed at rehabilitating productive infrastructure and establishing condltions for long-torm growth, and providing financial and technical assistance for these programs; (c) strengthening the institutions responsible for soctoral policy formulation and management; and (d) helping Madagascar to mobilize and to make effective use of donor financial, technical, and debt relief support. 26. Lending Program Development. On the assumption of continued Government responsiveness, the Bank plans to support Government adjustment efforts with sectoral and, possibly, structural adjustment lending as its main vehicle of financial assistance. Further sector adjustment operations in agriculture and industry are being prepared. These would support continued market deregulation, export promotion, cost recovery, private investment, parastatal reform, and rehabilitation of productive and economic assets. The program would also address longer term issues in human resource development, health, agricultural research, and environmental degradation. Overall, future lending would concentrate mainly on agriculture, industry, and transport. 27. The main vehicle for aid coordination has been the Consultative Group. An important part of the Bank's country assistance strategy is to make the Consultative Group a more effective means of addressing Madagascar's economic and financial problems. Donor and creditor support of a comprehensive financing strategy, combined with a sound Government program to stimulate real growth, offer the best prospects for future development. 28. Economic and Sector Work. Our econoziic and sector work program for the next three years is intended to support the identification of future adjustment measures, as well as donor coordination within the CG framework. It is directed at parastatal reform, improvement in sector planning and public investment program formulation, and development of a core medium-term lending program. A project for technical assistance to the Directorate-General for Planning in planning and aid coordination is under discussion with UNDP and the Government. A study of the population, health and nutrition sector has recently been cnrried out. The Bank is also providing technical assistance ini policy analysis and selected institution-building. Two Bank staff members have been seconded to assist the Government (in public investment programming and in the management of the livestock sector), and the Bank's Resident Mission has been augmented by a resident economist. The Special Project Preparation Facility has and will continue to be used to provide technical support for policy studies, as well as to strengthen investment planning, progranming and budgeting.  PART III - THE TRANSPORT SECTOR The Transport Network 29. The fourth largest inland in the world, Madagascar covers an area of 590,000 km. Tho imland is sparsely populated (about 17 per km2), and the population is unevenly distributad, with about one-half of all inhabitants occupying tho central one-quarter of the island. The transport infrastructure includes an extensive but low-standard road network, two rail systems of considerable longth, a wvll-developed air network, four international ports, 14 coastal shipping ports, about 15 minor ports, and a navigable canal along the east coast. Apart from the central plateau, where half of the population is concentrated, Madagascar's transport infrastructure is inadequate and fails to provide proper access to all productive areas of the country. 30. Road Transport. Affected by difficult terrain, heavy rainfall and lack of suitable construction materials in some parts of the island, road construction and maintenance in Madagascar is costly, and some regions remain relatively isolated. About 5,200 km of the 50,000 km of roads are paved. The paved highway network consists oft (i) a main north-south link connecting Mahajanga on the west const with Antananarivo (the capital) and Antsirabe, a main industrial town; and (ii) an east-west road linking Antananarivo with Toamasina, the main port. Under the Sixth Highway Project, IDA and Switzerland are assisting in rehabilitating the Mahajanga- Antananarivo road, while the African Development Bank, the European Development Fund, the Federal Republic of Germany, and Switzerland are financing rehabilitation of other priority road links. 31. Total vehicles in 1984 numbered 42,000. By contrast, there were 104,000 vehicles in 1976. Under the Sixth Highway Project, the Bank urged further liberalization of road transport policies. During negotiations of the Third Railway Project (Cr. 1694-MAG), in March 1986, Government agreed to the free movement of goods and to the freedom of transport pricing. 32. Rail Transport. The railways operated by the parastatal Reseau National des Chemins de Fer Malagasy (RNCFM) consist of two separate and unconnected single-track systems. The northern system (about 700 km) connects Antananarivo and industrial areas in the plateau region with the main port of Toamasina and the area of Lac Alaotra; the southern line (163 km) connects the southern highlands regional capital, Fianarantsoa, and the main coffee producing area, with the port of Manakara. The Antananarivo- Toamasina line is expected to remain the main means of tcansport for bulk commodities from Toamasina to the central highlands and will also continue to carry a substantial number of passengers. 33. Air Transport. Madagascar has developed a relatively dense air transport network in response to the distance between population centers and the poor condition of surface transport. Air Madagascar had been in poor financial health but has now successfully renegotiated maturities on its long-term debt obligations to foreign banks and in 1985 began a financial and operational improvement program, including divestiture of inappropriate subsidiaries.  -9- The Maritime Subsector 34. Madagascar depends on shipping for nearly all its foreign trade. Most high-value general cargo moves by regularly scheduled liner services and conference linos; the conference between Europe and the Indian Ocean is the most important. This conference, CIHACOREM, includes the Societe Malagasy des Transports Maritimes (SMTH). SMTM, the state-controlled shipping line, operates two modern container ships and one other cargo vessel used for inter-island trading. Both SMTM and the other state- controlled company, Compagnie Malgache de Navigation (CMN), are efficiently operated. CMN operates two modern 5,300 dwt ships, and an older one of similar size, serving trade between South*ia Africa and the Indian Ocean islands, as well as six coasters. There are about 25 small powered coastal vessels, owned by private and public companies, as well as a number of traditional sailing boats serving smaller ports. The parastatal oil company SOLIM& operates three tankors and a number of lighters and barges. 35. Coastal Shipping. Coastal shipping performs vital functions of distribution and collection of local produce, impor - and exports. In 1984, some 224,000 tons of dry cargo and 120,000 tons of petroleum products were carried by the 14 vessels above 530 ewt. Cargo handling rates in the ports are generally low. The major part of the Ma',agasy coastal shipping fleet is in poor condition. Ship ownera have had little incentive to invest and limited opportunity to obtain foreign exchange, so that many ships are old and poorly maintained. inclement weather increases the difficulties of coastal shipping service, and further decreases ship utilization. Peor port conditions have led to changes in coastal shipping patterns, such as the use of small landing craft. 36. Ports. Sea conditions are quite different on the east and west coasts, being protected in the west, 4tnd exposed to the Indian Ocean swells in the east; these conditions affect both the type of vessels that can operate safely, and the type and productivity of port operations. There are no good storm shelters on the east coast. Toamasina and Antsiranana to the north are the only deep water ports. Together with Vohemar, these ports are the only ones which do not require lighterage. Two other important east coast ports, Hanakara and Tolagnaro, are built in unprotected sites, and rely on lighterage cperations. On the west coast the most significant ports are Mahajanga, Toliara and Morondava. 37. Madagascar's most important international port is Toamasina on the east coast. In 1984, it handled 80 percent of total imports and 58 percent of total exports. The domination of ToamasinL is due to the fact that it is the only deep water port with easy road and rail access to the capital and the central plateau. Other ports with importarnt direct export &nd/or import traffic include Mahajanga (with 11 percent