Madagascar - Emergency Cyclone Support Project

Report No. PID9214 Project Name Madagascar - Emergency Cyclone Support Region Africa Sector Multi-sectoral Project ID MGPE70556 Implementing Agencies Ministry of Finance Environment Category A Date Prepared May 9, 2000 Projected Board Date July 18, 2000 Background 1. Many of the storms and cyclones that devastated Mozambique also struck Madagascar in February and March 2000. In addition, Madagascar was also struck in early April by a cyclone, Hudah, which reached gusts of wind of over 300 km/hour. Hudah brought about significant additional destruction, particularly in regions with key export crops. Although not as highly visible in the international media as the situation in Mozambique and while the widespread displacement of people that occurred in Mozambique did not take place in Madagascar, it is now evident that the combined impact of winds and rains has caused significant damage across sectors and is a serious blow to the economy of Madagascar, with the poorest people bearing the largest brunt of the devastation. More than 1 million inhabitants were affected, resulting in over 200 people dead and almost 300,000 people in need of emergency aid assistance. In response to the situation, the Government set up an emergency relief program managed by the National Disaster Management Committee (CNS) and supported by international aid agencies and NGOs. 2. A Bank identification mission visited Madagascar in April to assess ways in which the Bank might be most helpful in medium- to long-term response and recovery efforts. The mission reported that the wake of the cyclones effectively gave rise to severe direct damages in the following areas: agriculture, education, health, transport and infrastructure. Physical and social infrastructure in the affected areas was reported to be in disarray. Roads and other infrastructure has also been affected and many areas remain inaccessible by traditional means of transport. An appraisal mission, scheduled for May 2000, aims at defining the modalities of Bank assistance. Preliminary Damage Assessment 3. The extent of the damage (and, in particular, lack of access to the affected groups) has meant that relief operations have been extremely difficult and costly in logistical terms. In addition, the Government has in a preliminary fashion determined total direct and indirect costs at close to US$75 million. The agricultural, transport and social sectors have been struck the most. 4. Agricultural Sector: Significant crop losses in the affected regions, including staples (primarily rice), fruit, and export crops (cloves, coffee and, most significantly, vanilla for which estimates indicate a 40 percent  loss of the country's total vanilla crop). This is compounded by the fact that the areas most affected are those that produce a large proportion of the country's export crops. In some instances the loss is seen as having multiple year consequences, as many of the trees (cloves, coffee) have been badly damaged or lost. In addition, agriculture-related infrastructure has been affected, particularly irrigation and drainage systems, and feeder roads. 5. Social Sectors: Significant damage has occurred to public structures, ranging from nursery schools to high schools and technical colleges amongst the education facilities, and clinics to regional hospitals amongst the health facilities. Government estimates indicate that the education facilities have experienced by far the greatest damage, and these have been put by the government at over 60 percent of the total reconstruction costs across all sectors. A majority of affected schools have been built with local materials and did not follow standards of construction against cyclones. With the devastation of many schools, thousands of school pupils are being precluded from attending class. Although the population has responded by re- opening classes using tents as temporary classrooms and providing many of the needed teaching materials, these are temporary solutions that need to be consolidated by timely reconstruction efforts. 6. The health status of the most vulnerable groups (children, elderly, pregnant women and displaced people) is particularly precarious due to a shortage of medicine. Food shortages could have severe consequences for the nutritional status of the population and, in particular, of the high-risk categories (children under five, pregnant women and nursing mothers and elderly people). Moreover, a combination of stagnant pools of water and collapsed latrines has worsened a health situation which is already poor - a cholera epidemic was already afflicting Madagascar and could easily spread in these conditions. According to CNS survey results, diarrhoeal diseases and acute respiratory infections began to be reported seven days after the last cyclone. 7. Transport Sector: Damage has mainly centered in provincial and secondary roads and bridges, though there is serious damage in the national road leading north out of Antahala, a region where many of the key export crops are located. Both the northern and southern railway lines have been severely hit, with reparation costs having been assessed by government at about US$ 5.5 million. The ports of Manakara and Antahala also require rehabilitation. 8. Other Damages: Housing has been hard hit, particularly amongst the poorest households. Water and power sustained only some damage. There also has been a fair amount of damage to public buildings, but many of these buildings were already in poor condition given the lack of maintenance and the fact that cyclone mitigation measures had not been implemented. Finally, one of the consequences of the high winds was major loss of forestation, including those in protected regional parks. It is also necessary to evaluate the environmental impact of the cyclone through erosion and silting, mainly resulting from damaged infrastructure. Poverty Impact 9. A key pressing need of the government and its partners in the short-run is to mitigate the urgent need for help of the extremely poor. More than 80 percent of the poor in Madagascar live in rural areas and rely on subsistence - 2 -  agriculture, activities which are now affected by flooding and crop destruction. In some cases, these crops require several years to reach their maturity, such as in the case of coffee and vanilla plants. This, together with the destruction of rural infrastructure, implies that the means of living of the most marginalized groups of the population have been destroyed. To complicate matters, an already sparse distribution of education and health centers is now further hampered by the destruction of the few existing infrastructures. If government and donors do not respond swiftly and effectively to this emergency, the poor of affected regions may continue to be negatively affected long after the floods recede, in turn compromising the accumulation of human capital required for Madagascar's sustained growth. Economic Effects 10. In the coming months, the main challenge for Madagascar is to respond quickly and effectively to the economic devastation brought about by the cyclones. This damage occurred at a time when the economy has been performing well overall in recent years. Reform policies since 1997 have triggered annual growth rates averaging slightly above 4 percent, consolidating three years of growth in excess of population growth for the first time in a decade. Nonetheless, higher economic growth is needed for Madagascar to reduce poverty. 11. Economic growth, which had been projected to reach 5.3 percent in 2000, is now likely to be about 4.8 percent, mainly as a result of crop losses and decreased production due to capital losses and damage to infrastructure. Transport and other infrastructure bottlenecks combined with lower supply of goods, which have already pushed up prices, could also lead to one-time increases in inflation rates. Inflation is now expected to be about 10 percent compared to earlier forecasts of about 7.6 percent. Similarly, the balance of payments is expected to worsen. Key export commodities, such as vanilla, cloves, and coffee, are reported to be affected and import needs are expected to be higher due to the impact of public and private reconstruction efforts. Fiscal deficit is expected to be higher than previously anticipated, 5.5 percent of GDP compared to initial projections of 4.7 percent. In the absence of external assistance, larger public deficits and a worsening balance of payments would damage the achievements of the macroeconomic stabilization efforts put forth by the government and the Malagasy population in recent years. Post-cyclone rehabilitation project 12. A number of agencies and donors are currently assisting in rescue and relief efforts and providing humanitarian aid. Many of the same donors have signaled their willingness to provide support. With Bank assistance, the Government is carrying out a damage assessment that would serve as a basis for the various donor responses. Donors and international organizations involved in the effort include the EU, AfDB, UNDP, UNICEF, USAID, the Red Cross, Doctors without Borders, FAO, Care International, WHO, the French Development Agency, and the IMF. Bank Response and Strategy 13. Following the cyclones, the Bank received a request from the government for emergency assistance. After an identification mission in early April, the -3 -  Bank agreed to prepare for an appraisal and negotiation mission in May while the Government, with donor support, would carry-out a more detailed damage assessment. The Bank mission of May will: (i) review the damage assessment being carried-out; and (ii) determine the modalities of Bank assistance best- suited to help Madagascar recover from this natural disaster. 14. At this stage, the Bank is considering a two-pronged approach to concurrently deliver the assistance required by the reconstruction effort and sustain the achievements in economic stabilization of recent years. This approach envisions the provision of financial assistance through investment projects, when possible through the restructuring of existing operations, and the provision of balance of payments support aimed at maintaining macroeconomic stability. (a) Portfolio Restructuring 15. In collaboration with Government counterparts, the Bank team intends to restructure existing projects in its portfolio. Given the need for timely financial support, the Bank team believes that restructuring of the existing portfolio, as opposed to designing a new multi-sector cyclone relief investment project, is the fastest and most flexible way to meet Madagascar's immediate needs. Projects in the existing portfolio are likely to contribute to the reconstruction effort in education and health and, with multi-sectoral features, an existing social fund may be used to assist in the rebuilding efforts of local communities, such as damages in the agricultural sector and other minor infrastructure needs. When appropriate, amendments to the Credit Agreements will be determined in order to provide high-priority, financial assistance. When necessary, supplemental financing for these projects will be considered, thus ensuring the concurrent timely access to financing and the achievement of original project objectives. 16. The Government and IDA are also modifying, as necessary, projects and non-lending services currently scheduled or under preparation to ensure that future IDA support addresses the Government's development agenda while reflecting the new priorities resulting from the cyclone damage - such as the proposed Community Development Fund and Transport projects. For example, under the APL-1 of the proposed Transport Sector Reform and Rehabilitation Project, to be presented to the Board on June 1, 2000, an additional amount of US$2.5 million was allocated for the purchase by the Ministry of Public Works of emergency metallic structures (e.g., portable bridges). In addition, the terms of reference for the development of a strategy for the prevention and the mitigation of effects of natural catastrophes, including cyclones, was agreed with Ministry of Transport and the strategy will be financed under the APL-1. (b) Balance of Payments Support 17. The economic team of the appraisal mission will assess the consequences of the cyclones on the macro framework, the microeconomic aspects of the cyclone and reconstruction effort in key sectors, and the need for balance of payments support to cover import requirements from reconstruction (private and public) and the downturn of export proceeds generated by this emergency. Two options will be considered to provide this assistance; supplemental financing under an on-going adjustment credit (SAC-2) or the preparation of a new emergency credit. -4-  18. The use of the supplemental financing option could enable the Bank to deliver balance of payments support in a timely manner. Supplemental financing through SAC-2 would be considered if, at the time of completion of appraisal, the timing and readiness of our support closely matches the effectiveness timetable of this operation which is now scheduled for mid- 2000, thus providing a quick and easy vehicle for balance of payments support. The alternative to supplemental financing is the processing and negotiation of a stand alone quick-disbursing balance of payments emergency credit, such as has been done in Mozambique and Nicaragua. This instrument could be used to finance the purchase of equipment and commodities on a positive list of imports needed for the rehabilitation effort. The list of eligible imports could be determined in consultation with the Government, the private sector, and other donors. Both the composition of the positive list and the procurement rules to be applied would need to use maximum flexibility to accelerate disbursements and minimize distortions in the foreign exchange market. These options will be discussed and decided upon in consultation with Government during the mission. Benefits and Risks 19. Timely balance of payments support, whether by supplemental financing or through a new emergency credit, is crucial to the Government if additional import demands generated by the effects of the cyclone cannot be covered by on-going project funding. This urgency is further exacerbated by an expected marked decrease in exports. Thus, it is critical to maintain macroeconomic stability while rehabilitating and restoring Madagascar's productive capacity through ensuring procurement and delivery of adequate supplies of essential equipment, materials, and commodities for the transport, social, and agricultural sectors. Balance of payments support is an important source of foreign exchange and provides the Government with non-inflationary finance at a time when there will be need for additional government expenditures and unknown net impact on government revenues. It will thus complement the support for short- and medium-term rehabilitation that will be provided through the restructuring and reprogramming of ongoing operations in the portfolio, and assistance provided by other multilateral and bilateral agencies. 20. There are, however, several risks involved with the type of assistance being considered by the Bank based on experience from other countries and from the Cyclone Emergency Rehabilitation Project (ERP) in Madagascar (Credit 2625-MAG) approved in June 1994. a) Capacity and Implementation Risks: The government's administrative capacity in emergency or large-scale reconstruction situations is typically weak. The restructuring of on-going operations as a key modality of assistance will tie much of the implementation issues to existing project implementation units and could thus minimize this risk while strengthening consistency with existing sectoral strategies. Government commitment is also a necessary pre-requisite to ensure good and effective coordination of the project implementation units. b) Timeliness of Bank's Balance of Payments Support: Successful implementation of a free-standing balance of payments operation will depend on the existence of a strong coordination unit as well as rapid procurement arrangements. In contrast, supplemental financing under SAC-2 could - 5 -  facilitate disbursement against a negative list of imports, ensuring a more timely provision of support. c) Sustainability: In the absence of adequate arrangements to ensure sustainability and damage prevention, reconstruction and rehabilitation projects in a country subject to frequent cyclone damage may not be cost- effective. Thus, as a key aspect of the project, it is necessary to identify mechanisms to reduce and/or transfer the risks of cyclone losses to avoid losing these new investments to another cyclone. Contact Points: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Task Manager Bienvenu Rajaonson WB Country Office Antananarivo, Madagascar Note: This is information on an involving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending June 9, 2000. - 6 -