Madagascar - Public Management Capacity Building Project

Document of The World Bank Report No. T-6774-MAG TECHNICAL ANNEX TO THE MEMORANDUM AND RECOMMENDATION (Report No. P 6774-MAG) ON A PROPOSED CREDIT IN THE AMOUNT EQUIVALENT TO SDR 9.6 MILLION TO THE REPUBLIC OF MADAGASCAR FOR PUBLIC MANAGEMENT CAPACITY BUILDING PROJECT August 1, 1996  CURRENCY EQUIVALENTS Currency Unit Malagasy Franc (FMG) US$ 1.00 FMG 4,266 (end-1995) SDR I US$ 1.49 WEIGHTS AND MEASURES Metric System MALAGASY FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CAFC Constitutional, Administrative, and Financial Court CBI Cross Border Initiative CEDE Committee of Experts on Effective Decentralization COMESA Common Market for Eastem and Southem Africa COREMEF Comite des Reformes Macro-Economiques et Financieres CORES Comite des Reformes Sectorielles CREC Comite Regional pour les Echanges Commerciaux CRIC Comite Regional pour l'industrie et le Commerce CSP Comite de Suivi des Projets DIP Direction des Investissements Publics ESAF Enhanced Structural Adjustment Facility EUROSTAT European Institute for Statistics GDP Gross Domestic Product EMSAP Economic Management and Social Action Project ENM Ecole Nationale de la Magistrature ICB Intemational Competitive Bidding IDA Intemational Development Agency IEJ Institut d'Etudes Judiciaires INSTAT National Institute of Statistics IOC Indian Ocean Commission MFB Ministry of Finance and Budget NCB National Competitive Bidding NGO Non-Govemmental Organization OGT Operations Globale du Tresor PCU Project Coordination Unit PEP Public Expenditure Programs PFP Policy Framework Paper PIP Public Investment Program SAM Social Accounting Matrix SOE Statement of Expenditures STA Technical Secretariat for Adjustment TOR Terms of Reference TWG Technical Working Group UJNDP United Nations Development Agency USAID Agency for Intemational Development  MADAGASCAR PUBLIC MANAGEMENT CAPACITY BUILDING PROJECT Table of Contents Page SECTION A. DETAILED PROJECT DESCRIPTION ...................1 1. Country and Operation Background .................................................................1 II. The Project ..................................................................3 Project Rationale ................................................................. .3 Project Description ................................................................. . 3 A. Strengthening Economic Management ............................................................. .4 1. Monitoring and Implementing Economic. Reforms ...............................................4 2. Support to the National Institute of StatisticsjIINSTAT) ...................................... 7 3. Support to the Departments of Finance, Budget, Planning and Economy .............9 a) Objective and Strategy for the Finance & Budget Component .................... 10 b) Objective and Strategy for the Planning and Economy Component ............ 11 B. Strengthening Public Administration ................................................................. 14 1. Civil Service Reform ................................................................ 14 2. Decentralization ................................................................ 18 3. Legal and Judicial Reform ................................................................ 21 C. Project Benefits and Risks ................................................................ 28 SECTION B. PROJECT COSTS AND ADMINISTRATION . ............................................. 30 1. Project Costs and Financing ................................................................ 30 11. Procurement ................................................................. 31 Employment of Consultants and Training ................................................................ 32 Procurement of Goods ................................................................ 32 111. Disbursements ................................................................. 33 IV. Accounting and Auditing ................................................................ 35 SECTION C. IMPLEMENTATION AND MONITORING . ................................................ 35 1. Organization and Management ................................................................ 35 11. Implementation Schedule ................................................................ 36 III. Reporting and Monitoring ..................... 36 IV. Supervision Plan ...................... 36 V. Mid-term Review ..................... 36  Schedule A: Timing of Monitoring Indicators Schedule B:: Project Implementation Plan Schedule C: Project Cost Tables Schedule D: Timetable for the Procurement of Goods and Services Annex A: Declaration of Government Strategy for Public Sector Reform Annex B: Supervision Plan This repo is based on the findings of an appasasl mission undertain OctobOr :995 by a team comprising of Messrs/Mies. Piere Domagl (County Economist MissiovlepdlerX Vera Wilhelm (Economist), Ali Mansoor(EcOOOM Phili Icht) Hele Tbrahim (Operations Assistant), Ra; Soopramanien i (Senior Counsl, and Rbt (aron (Legal Consultant). Poer review was carried outbyit bM. Mark Schafte,r Secrerial and editorial Oassisne were provided by Ms, Lilisne Yomclp. T: ouny Direto Maascar is Michael N. Sarris.  MADAGASCAR PUBLIC MANAGEMENT CAPACITY BUILDING PROJECT Technical Annex SECTION A: DETAILED PROJECT DESCRIPTION 1. The following section provides background and technical information on the proposed project and consists of four chapters: Chapter I presents the country background, Chapter 11 describes public sector issues, Chapter III presents the project rationale and a detailed description of the development assistance objectives it will serve, and Chapter IV describes project benefits and risks. I. Country and Operation Background 2. At US$430 in the early 1960s, Madagascar's per capita income was in line with that of Indonesia (US$480), and was close to that of Thailand (US$620). Thirty years later, at US$230, Madagascar's per capita income has declined to about half its level at the time of independence, is less than one-third Indonesia's (US$740), and is about one-tenth Thailand's (US$2,100). Indonesia and Thailand are just two among many other developing countries that have been able to grow at much faster rates than Madagascar which, in essence, has lost three decades of economic development. It is thus not surprising that Madagascar's economy has provided its population (now 13 million people, of which 80 percent live and work in rural areas) few opportunities to improve their living standards. Whereas the incidence of poverty has significantly declined in Indonesia, Thailand and other developing countries, it has increased in Madagascar. The proportion of the population living in poverty (that is, consuming less than what is necessary to meet basic nutritional requirements) has increased from 43 percent in the 1960s to close to 75 percent in the early 1990s. The evolution described by these statistics is matched by the population's palpable sense that its standards of living have declined over time. The population's sense of impoverishment is accentuated by a decline in its health and educational standards and, perhaps more importantly, by little evidence that the country's current development policies will significantly improve its economic prospects. 3. Two factors have contributed to this situation: ill-advised economic policies pursued in the last 25 years and population growth of almost 3 percent per year. For 10 years following its independence in 1960, Madagascar enjoyed modest average growth of about 3 percent per year. However, even that faltered in the mid-1970s, as the country underwent a socialist revolution that brought authoritarian rule and interventionist economic policies. Widespread nationalization and extensive controls led to a long period of economic decline, and large public investments in the late 1970s created "white elephants", severe macro-economic imbalances, and a heavy debt burden. In the mid-1980s, the government initiated reforms, supported by Bank- financed sectoral adjustment operations; although growth resumed, the decline in living standards was not reversed. 4. In mid-1991, demonstrations and strikes in support of political liberalization swept the country and signaled the start of a lengthy transition to pluralistic democracy. The adoption of a new constitution in August 1992 led to the election of President Albert Zafy and a new national assembly, as well as the accession of a new govemment under Prime Minister Francisque  2 Ravony in 1993. All these changes occurred peacefully after free and fair elections. During the transition period, however, the reforms and adjustment program derailed. 5. In 1994, the economic situation continued to deteriorate and the GDP stagnated. After floating the exchange rate in May and designing the complete policy agenda for a Policy Framework Paper (PFP), the government allowed inflation to mount through lax monetary management and an ill-conceived, large-scale program of petroleum and commodity subsidies that increased the budget deficit. In January 1995, the government replaced the management of the Central Bank, declared its intention to implement adjustment policies and agreed with the IMF on a stabilization plan to bring down the inflation rate. Tensions between the President and the Prime Minister (PM) led to a national referendum in September 1995, which shifted authority to choose the PM from the National Assembly to the President. As a result, the former PM stepped down and was replaced by Emmanuel Rakotovahiny, who formed a new government in November 1995. Economic performance in 1995 was still mediocre, with a further decrease in real per capita GDP. Political infighting continued in late 1995/early 1996, with increased debate centered on the issue of economic reform. In May 1996, the PM received a "no confidence" vote from the National Assembly, and the President appointed Norbert Ratsirahonana, previously head of the High Constitutional Court, as PM. The new PM has indicated that he wants to move quickly on an IMF/Bank-supported adjustment program, as well as on capacity building initiatives. 6. Economic measures implemented thus far include floating of the exchange rate, sharp price increases for energy and the elimination of commodity subsidies. Recently, the government began action to divest the state from the banking sector, prepare a full scale divestiture of public enterprises, strengthen the incentives for private sector development, and create a safety net to combat poverty. Public expenditures have remained relatively low at about 20 percent of GDP while the composition of the public investment program has improved (see below). These moves, if sustained, will help restore the government's credibility, while preparing the ground for further assistance by the Bank and IMF and possible debt relief from the Paris Club. 7. In the absence of a structural adjustment program, the policy dialogue with the new government has remained intense and fruitful. In spite of policy lapses, key decisions, such as the reform of the exchange rate system and the liberalization of the petroleum sector, have been achieved. These significant measures are still not enough to fully qualify for adjustment lending and for the confidence of the investor community. Key areas in which a consensus for reform is growing but are still the subject of a dialogue with the donor community include government disengagement from the banking system, privatization, and private sector development. The proposed project is a necessary underpinning of the efforts to help the Government get over that threshold by helping implement improvements in areas in which there is already strong government commitment and supporting consensus building in the remaining areas. 8. To take further reforms that are envisaged, there is a need for economic intelligence work. There is also a need to strengthen overall the public administration, which is unable to perform adequately basic public services. These needs were identified through the implementation of the Economic Management and Social Action Project (EMSAP), dialogue with the IMF and other donors, OED reports, and the Private Sector Assessment (PSA). The proposed project aims at enabling Malagasy institutions to implement needed reforms and improved management.  3 II. The Project Project Rationale 9. Since the political transition to democratic rule started in 1991, the political leaders have had difficulties in formulating a clear vision of an economic strategy for growth which would allow the population to emerge from its present situation of extreme poverty. Political infighting, lack of leadership and conflicting short-term goals have been the reason for this immobilism. After four years, the government seems to have reached an agreement on a reform program and is pursuing discussions with the Bretton Woods Institutions on a structural adjustment program. As a recent OED audit (February 1995) of structural adjustment programs in Madagascar points out, these programs can only be successful if they take into account capacity constraints in delivering technically complex reforms as well as the need for consensus building. This issue was also stressed in a 1995 Borrower Feedback Survey. This creates a need for well-targeted technical operations to prepare the ground for a wide-ranging economic reform program. 10. IDA's comparative advantage. The project focuses on capacity building in areas where IDA support has already been successfully provided under the EMSAP, which need to be consolidated to ensure long term sustainability of ongoing reforms. New areas of intervention are proposed in response to Madagascar's urgent need to improve governance. IDA is well positioned to provide this support due to extensive lessons that have been drawn from past experience with technical assistance operations and recent innovative initiatives, for example on a participatory approach to civil service reform. Close cooperation with donors that have significant experience in handling specific project components (such as EUROSTAT in strengthening of INSTAT, USAID in legal and judiciary reform and the communication strategy, and the French cooperation in strengthening the Ministries of Finance, Budget and Planning, and support to decentralization and legal and judiciary reform) has helped to improve project design. Project Description 11. Project purpose. The proposed project would provide assistance to the government to build capacity to implement economic reforms and improve public administration. * Economic management. By reinforcing the agencies responsible for macroeconomic management, the project would improve the government's capacity to design and implement an economic reform program and contribute to a sharper focus on poverty alleviation in allocating public resources. As insufficient information on adjustment and economic reform has been highlighted as an important reason for a lack of public support for adjustment, the project would help prepare a public information campaign. * Public administration. The project would facilitate a fiscally responsible implementation of the decentralization process, thus avoiding the waste of public resources; it would foster participation in local planning and management of the development process while also encouraging accountability; it would catalyze  4 consensus building on civil service reform within the administration, leading to greater commitment to reform. Finally, the project aims at making effective the "rule of law" and improving security of business transactions through the independence and increased effectiveness of the judiciary. Overall, the project would help the administration, civil service, and judicial system embrace a new vision of the role of government -- another critical precondition for a successful transition to a private sector driven economy. This is by essence a long-term endeavor. The project's goal is to start the process by focusing on a few achievable, but significant, areas where feasibility is demonstrated. A detailed description of the project components and sub-components is provided below. A. Strengthening Economic Management 1. Monitoring and Implementing Economic Reforms 12. In March 1995, the government, with an eye toward preparing a new structural adjustmnent program, decided to reinforce its capacity to design and analyze economic policy. A technical support unit, the Technical Secretariat for Adjustment (STA), was created. Initial STA activities have been supported with technical assistance under the ongoing EMSAP. The STA consists of three members: a Secretary General and two technical experts, one in charge of macro-economic policies and the other of sectoral policies. The STA has direct access to the Prime Minister and plays a crucial role in informing and advising on the timely implementation of reform measures and assures a steady flow of information between financial and technical ministries, the private sector, and donor agencies. Several technicai committees facilitate its work. The first, Comite des Reformes Macro-Economiques et Financieres (COREMEF), establishes the macro-economic framework, while the second, Comite des Reformes Sectorielles (CORES), deals with sectoral policies. A third committee, Comite pour la Dimension Regionale de l'Adjustement (CODRA), was created to insure consistency between the adjustment program and policies pursued under the regional integration initiatives, CBI, IOC and COMESA. The main purpose of its work will be to propose policy measures and follow up on their implementation. Objectives of the STA 13. The STA's responsibilities consist of (i) monitoring the ongoing economic and sectoral reform program, particularly the interpretation and analysis of macro-economic and social indicators; (ii) intensifying related economic dialogue and communication, and assisting the government in preparing discussions of a Policy Framework Paper (PFP) and SAC (ongoing); (iii) informing government agencies involved in the adjustment process, (iv) mounting a public information campaign on the adjustment program to mobilize broad based public support; and (v) organizing and supporting the dialogue between private sector organizations and the Government. 14. In monitoring the ongoing economic and sectoral reform programs, the STA regularly: (i) checks the status of reforms as defined in the government's policy matrix on--macro- I/ IDA funds under PPF, No. 919-MAG, have financed advisory services and equipment of the STA.  5 economic, structural, and sectoral measures; (ii) follows macro-economic indicators agreed on with the IMF and the World Bank and social indicators to be defined in cooperation with the national statistical institute, INSTAT and UJNDP; (iii) supervises the dissemination and analysis of statistical tables, such as the "Operations Globales du Trisor (OGT)", monetary accounts, balance of payments, and real-sector accounts. Furthermore, the STA helps prepare structural and sectoral reform programs and takes a leading role in coordinating and preparing the Policy Framework Paper 1996-98. It follows up on structural and sectoral policies and assists the authorities in the preparation of the policy dialogue that accompanies IMF/Bank-supported adjustment programs. Based on those activities, the STA produces such reports as a monthly assessment of the reform program (for the Government) and a quarterly bulletin (for the donor community). It also comments on and proposes corrections to all new draft legislation related to the adjustment program. 15. The second important STA function is to launch a wide-ranging public information campaigns to explain the adjustment process to the public. With technical assistance from two local communication specialists, and in close cooperation with the ministries concerned, it will organize seminars and workshops to familiarize members of the central and sectoral administrations, the private sector, and the public with the objectives of the adjustment process. USAID funded a participatory workshop in November 1994 and will support on-the-job training of the communication specialist. The workshop resulted in-the formulation of a communication strategy which has started being implemented. National media (radio, television, newspapers) will help disseminate the information. Issues to be Addressed 16. Working conditions. To fulfill its mission, the STA needs continuous, unimpeded access to economic and sectoral data plus the active support of the three associated committees, COREMEF, CORES and CODRA. COREMEF meets regularly to prepare monthly economic- indicator tables and a quarterly report on the implementation and impact of economic and financial reform measures. CORES works mainly on defining and executing sectoral strategies; it also supervises the activities of a committee (Comite de Suivi des Projets, CSP) designated to monitor the implementation of projects in the three-year rolling public investment program (PIP). This committee was first established in the context of the 1994 Country PortfQlio Performance Review of IDA-financed projects, and the government in