Madagascar - Mangoro Forestry Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1539-MAG REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO THE MALAGASY REPUBLIC FOR A FORESTRY PROJECT December 5, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Equivalents Unit = Malagasy Franc (FMG) US$1 = FMG255 FTMIG1 = Us$o0.o39 F4G1,OOC = US$3.92 FMG1,OOO,OOO = US$3,921 FMGl,OOO,OOO,OOO= US$3,921,569 Fiscal Year January 1 - December 31 At the time of project appraisal in November/December 1973.  INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMEDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT AND LOAN TO THE MALAGASY REPUBLIC FOR A FORESTRY PROJECT 1. I submit the following report and recommendation on a proposed Development Credit for the equivalent of $6.75 million and a proposed Loan for the equivalent of $6.75 million to the Malagasy Republic to help finance a forestry project. The credit would be on standard IDA terms. The loan, which would be utilized after the credit, would have a term of 25 years, including 10 years of grace, with interest at 8 percent per annum. PART I - THE ECOTOMY 2. An economic report entitled "'The Economic Development of Madagascar: Main Issues" (Report No. 167a-MAG) was distributed to the Executive Directors on July 15, 1974. Country data are attached as Annex I. 3. Madagascar, the fourth largest island in the world, has a popula- tion of nearly 8 million, with an average per capita income of about $140. Its economy is dominated by the agricultural sector. In the 1960's agricul- tural production only rose at the same rate as population and lagged behind the growth in the domestic demand for foodstuffs. Agriculture supports directly about 85 percent of the population and contributes approximately one third of GDP. Recent fluctuations in GDP may be attributed in part to changes in weather. In 1973, harvests were poor and real GDP fell sharply. In 197h, there was a good harvest and a modest increase in real GDP is forecast. 4. The two main crops are rice, which is the staple food, and coffee,which is the most important export. Rice is grown on more than half of the area under cultivation and accounts for about half of the country's crop production by value. Nevertheless, Madagascar has increasingly imported rice to make up a domestic deficit. The quantity of rice marketed in 1973 was well below the 1970-72 level, not only because of the poor harvest, but also because a low producer price discouraged farmers from selling their crop. Consequently, shortages led to the import of an exceptional 124,000 tons of rice, equivalent to about 9 percent of annual consumption. In the past year, to provide improved incentives to the farmers, the price of paddy has been increased by nearly 90 percent. The producer prices of beef, groundnuts, pepper and coffee have also been substantially raised. Rice production in 1974 was about 15 percent higher than in 1973 and the quantities of most other crops produced also increased.  5. While the country is sparsely populated--?3 inhabitants per square kilometer--there is great pressure on cultivable land in specific regions. In these areas, people have standards of living close to subsistence level; nutrition is deficient and child mortality is high. A particular difficulty is the lack of an adequate inland transportation network. Despite the heavy irnvestments which took place in the last decade, only one-third of the highway network is all-weather and only 3,000 kilometers of road are paved in a country where production centers may be as far as 1,200 kilometers from the points of consumption. 6. Manufacturing has made only a small contribution to overall economic growth although it has expanded faster than GDP. It provides employment for no more than 42,000 people or under 2 percent of the total active population; it contributed about 12 percent of GDP in 1972. Produc- tion is almost entirely devoted to consumer goods for domestic use. As manufacturing expanded, the imports of non-food consumer goods declined as a percentage of total merchandise imports from 42 percent in 1960 to 28 percent in 1972. However, the scope for further import substitution is limited by the smallness of the monetized domestic market. In addition, this industrial growth has required high protection against competitive imports and has resulted in a sharp increase in imports of raw materials and intermediate products utilized for local processing. 7. Between 1966 and 1971, real GDP per capita rose by only 1 percent per annum. During this period Government policies did not sufficiently support economic and social development. They favored urban consumers through price controls on domestically produced commodities and they favored high income groups through liberal imports of luxury goods. At the same time, reliance on foreign technical assistance was substantial and recourse to external borrowing was limited. This relative conservatism can be explained in part by the inertia of a tradition-bound society, regional fragmentation and ethnic diversity. It can also be partly explained by an institutional framework inherited from the colonial period which did not favor rapid development. 8. In 1972, the Government of President Tsiranana was replaced by a new Government led by General Ramanantsoa. The economic policies of the present Government have been set out in a new National Development Plan covering the period 1974 to 1977 published in May 1974. The Plan proposed a target rate of growth of GDP of 3.2 percent per year, calling for an investment program totaling $700 million over the four year period. The Directorate of Planning is currently preparing a detailed public sector investment program in conformity with the policies elaborated in the Plan. The two most important objectives of the Government's development strategy are clear. First, the rural people are to be much more closely involved in the development process. To achieve this, regional and local government is being reorganized using the traditional village councils or "fokonolonas". The fokonolonas are being associated with the management of small scale development projects, the marketing and processing of agricultural commodities and the distribution of agricultural inputs, including credit. Second, Malagasy nationals are to take control of the management of the economy.  - 3 - Foreign executive staff in private enterprises, most of which are foreign- owned and managed, are being replaced as far as possible by Malagasy, in keeping with schedules agreed upon with the owners. To achieve the same objective, the Government is gradually extending its control over important sectors--namely banks, insurance companies, external trade, domestic and external transport, energy and mines--by purchasing majority interests in existing firms, and by establishing public corporations to be run commercially. 9. Uncertainties about economic policies associated with the change in Government in 1972 adversely affected private investment. There was a downturn in the economy in 1972 and 1973 which was reflected in lower public savings and a decline in public investment. Consequently, total capital formation amounted to only 13.2 percent of GDP in 1972 and 12.3 percent in 1973. There are indications of a small increase in total investment in 1974, mainly as a result of a rise in public capital formation. 10. To further its aim of bringing the economy more fully under Malagasy control, Madagascar left the Franc Zone in July 1973. This withdrawal has been accompanied by the introduction of exchange control regulations and the establishment of an autonomous central bank. Imports of non-essential commodities have been curbed by licensing and an increase in import taxes. In 1973, despite Madagascar's internal economic difficulties, the overall balance of payments showed a surplus of about $10 million. However, over the past twelve months, the cost of rice imports has approached $50 million, and imports of oil products have cost about $15 million. These and other factors are likely to result in an overall balance of payments deficit in 1974. Net foreign exchange reserves currently account for about three months of merchandise imports and are likely to decline further in ine short term. The Government is actively considering ways to redress the situation, including measures to restrain domestic consumption and to promote investment and exports. Nevertheless, it is likely that there will be a severe shortage of foreign exchange over the next two to three years. 11. The long-term prospects of the balance of payments are favorable. The country's export trade is already diversified. Coffee, cloves and vanilla face inelastic demands on international markets, but they account for only half of Madagascar's total merchandise exports. Investments and policies favoring the production of meat, high quality rice, fish and sugar should permit Madagascar to improve its export position. In addition, the association with the European Communities should provide in the long run markets for industry more oriented towards exports. There is also some potential for tourism. 12. Disbursements on medium and long term official aid averaged about S12 million in thie 1970-71 period and reached $23 million in 1973. As a result of concessionary external assisLtance and a 1972 agreement canceling about 45 percent of debt owed to France, the current level of Madagascar's  indebtedness is relatively low. The external public debt disbursed and out- standing at the end of 1973 was estimated at about $117 million, of which the Bank Group's share was 33 percent. The service on public debt amounted to $11 million in 1973 or about 4.9 percent of export earnings, of which the Bank Group's share was S0.8 million. In the next few years, the need for foreign exchange will be greater than the imported component of the public investment program. It would therefore be appropriate for external assistance to be used to finance a substantial share of local costs. 13. If one assumes that about one-fifth of Madagascar's future borrowing will be financed on soft (IDA-type) terms, three-fifths on IBRD-type terms and the balance on commercial terms, the debt service ratio would remain below 1IJ percent by 1980, but would rise steeplv thereafter, to reach close to 20 per- cent by 1985. This points to the need for most external assistance to continue to, be provided on concessionary terms, although Madagascar is considered credit- worthy for moderate amounts of Bank lending. Even with some increase in our program, the Bank Croup's share in Madagascar's disbursed foreign debt is ex- pectod to decline gradually over the next 10 years to reach about 25 percent by 1985. Over the same period, the Bank Group's share in Madagascar's debt service is expected to increase somewhat but would not exceed 15 percent. PART II - BANK GROUP OPERATIONS 14. Madagascar has received eight IDA credits totaling $76.8 million and four Bank loans totalling $25.8 million. About 64 percent of the total lending has been for transport, 32 percent for agriculture and the balance for education. There have been no IFC investments. Annex II contains a summary statement of Bank Loans and IDA Credits as of October 31, 1974 and notes on the execution of on-going projects. Project execution is generally satisfactory, with three exceptions. The Livestock Project (Loan 585-MAG) has encountered major problems but remedial measures, agreed upon between the Government and the Bank are being implemented. The Morondava Irrigation Project (Credit 322-MAG) and the Third Highway Project (Loan 876-MAG and Credit 351-MAG), both of which are covered in greater detail in Annex II, are facing serious problems due to heavy increases in implementation costs. 15) The emphasis in our lending for transport and agriculture conforms to Madagascar's development requirements and objectives. Our program in trans- port is geared to: (i) the development of the main road network; (ii) the construction of penetration roads into promising agricultural areas: (iii) the improvement of port facilities; and (iv) the strengthening of the railroad which provides the most economic means of transportation in certain areas and for certain commlodities. The Tamatave Port Project, currently in execution, will soon provide an improved outlet for exports. Roads financed by the Bank and IDA in the central, northern and part of the western regions have helped to increase all-weather land connections within the island. A secondary net- work, however, is largely lacking and secondary roads in existence are in poor physical condition; this hinders the development of potentially rich agricul- tural areas. Under the Railway project, assistance is given to prepare a program of secondary road improvement.  16. In agriculture, Madagascar's development objective is to regain self sufficiency in rice by expanding production, and to diversify and increase production for export. The Bank is assisting the Government in the implementation of this policy by two ongoing projects whose principal production will be rice, while the recently approved livestock project will increase beef exports. Additional projects for agricultural development are at various stages of preparation and should result in Bank Group financing in the next three fiscal years. The Government is currently preparing, with Bank assistance, a scheme to rehabilitate various irrigation works that would enable Madagascar to expand rice production. Consideration is being given to devising mechanisms whereby financial assistance could be provided to local communities to finance small development projects. Project preparation in agriculture, however, is hampered by a serious shortage of expertise. The proposed project therefore includes funds that would enable the Government to hire, as and when needed, individual experts to strengthen its own services in this respect. In education, an important reform is under- way, on the basis of which a project, suitable for Bank Group financing, may materialize in FY 1976. Finally, a hydro-electric power project and a devel- opment finance company project are also under preparation. PART III - THE AGRICULTURAL AND FORESTRY SECTOR IN MADAGASCAR 17. Agriculture is the most important sector in the economy of Madagascar. It directly supports about 85 percent of the population, contributes about one- third of GDP, and is the source of about 85 percent of foreign exchange earn- ings. On-farm consumption absorbs about 60 percent of total agricultural pro- duction. Basic food crops are rice, maize and manioc. The principal agricul- tural exports are coffee, cloves, vanilla, pepper, beef, sugar and sisal. Livestock production accounted for about 10 percent of total GDP in 1972, and contributed about 11 percent of total exports. lF. There are five major agricultural production regions in the country: the central highland, accounting for most of the irrigated rice grown; the east coast, where the main products are coffee, cloves, pepper, vanilla and bananas; the northern zone, which has a tropical climate, growing mainly cash crops such as sugarcane, cocoa and spices; the middle west, where soil and climate conditions are ideal for livestock development; and the west coast, where the population is scarce and where food crops (maize, cassava) and livestock are the main traditional activities. The high fertility of some of the alluvial flood plains in this latter region has led to the development of cotton and tobacco cultivation as well as to the production of hiigh qualiyv rice for export. 19. One of the main objectives of the Malagasy Government over the next few years is the expansion of marketable production of agricultural commod- ities in order both to satisfy the basic needs of the rural population and  to generate foreign exchange resources. Agricultural exports, including exports of forestry products, will have a special significance in this context, as alternative means of meeting the countryts growing foreign ex- change requirements are limited. 20. About a third of Madagascar's land area is covered with forests consisting mainly of indigenous tropical hardwood and some pine and eucalyptus plantations. About 12 million ha are state forests, a third of which has been demarcated as Forest Reserve. However, most of the indigenous forests have limited economic significance because of difficult access and low value of the wood. 21. The Government has initiated afforestation programs in various areas where soils are inadequate for agriculture or livestock. The afforestation programs are also expected to create employment opportunities and help control Madagascar's serious erosion problem. By 1973 about 65,000 ha of commercial pine plantations had been established, of which 56,000 ha are mainly in three areas: 7,500 ha in Antsirabe, 30,000 ha in Matsiatra and 18,500 ha in the Mangoro valley. The Mangoro valley offers encouraging prospects for a large scale afforestation program, to which the Government has given the highest priority. The program provides for the planting of 96,000 ha with pine trees to be used as raw material for a pulp mill to be constructed in Moramanga. The pulp mill is expected to be operational by 1985 with a planned annual production of 200,000 tons of bleached sulphate pulp, most of which is expected to be sold in W4estern Europe. The proposed project would finance the planting of 35,000 ha under this afforestation program. 22. Forest-related industry in Madagascar is in an early stage of development. About 400,000 cubic meters of hardwood saw timber are annually extracted from the forests. Most of the logs are converted to lumber in the forest by hand sawing, which causes substantial waste. The forest industry consists of about 60 saw mills, which processeed 48,000 cubic meters of timber in 1972, a fiber board plant at Moramanga and a small pulp and paper mill at Tananarive and some smaller factories producing furniture, parquet floor- ing and matches. A particle board mill is being constructed in Tananarive. 23. The Ministry of Rural Development is responsible for forestry through its Directorate of Forestry (DF). The Directorate plans and imple- ments forestry development and administers the state forests and provincial forest service. It is also responsible for the protection of national parks and wildlife, fresh water fisheries and soil conservation. Its tasks are carried out by three departments: (i) reforestation and forest industries management; (ii) national parks, wildlife and fisheries: and (iii) soil conservation. The DF is efficiently organized with a competent staff con- sisting of 45 professional foresters and forest technicians, 400 forest rangers and guards, and a small research unit. In 1973, the DF's budget amounted to $6.3 million of which about 60 percent was used for afforestation projects throughout the country. The DF also collects Government's revenues from wood extracted from the state forests, which are paid directly to the Ministry of Finance.  - 7 - PART IV - THE PROJECT 2b. A report entitled "Madagascar - Appraisal of a Forestry Project" (No.-50-F4LG),dated December 6, 197lL, is being circulated to the Executive Directors separately. A loan/credit and project summary is provided in Annex III. 25. The project, which would be the Bank Group's first for forestry in Madagascar, was prepared by the Government with the assistance of the FAO/ IBRD Cooperative Program and the Bank Group and appraised in November/December 1973. Negotiations were held in Washington in August 1974. The Malagasy delegation vas led by Mr. Pierre Rajaonah, Secretary General of the Ministry of Rural Development and included Mr. Raphael, Director of Forestry, Mr. Razakaboaha, Director at the Planning Department, Mr. Ravelonarivo of the Ministry of Finance and Mr. Randrianasolo, First Secretary of the Malagasy Embassy in Washington. The Project Area 26. The project area is located in the Mangoro Valley which runs parallel to the eautern coast of the island at about 75 km from Tananarive (see maps IBRD 10923/4 attached). The valley is about 130 km long and about 20 km wide, with an altitude varying between 900 and 1,100 meters. Annual rainfall aver- ages 1,400 mm with the wet season occurring between December and March. It ig surrounded by high mountain ridges and features rolling grasslands affected by heavy soil erosion. The Mangoro and Sahabe rivers provide the major water sources. The valley is served by a railroad which runs from Lake Alaotra to Moramanga, the main city in the area, and then connects with the Tananarive- Tamatave railroad. About 3,n00 peasant families, grouped in 36 villages, live in the project area around and between the areas earmarked for the plantations and practice rice farming for subsistence on small plots of about 1.5 ha. They keep about 8,000 cattle mainly as work animals and for- milk production. Much of the land in the Mangoro Valley is almost totally unsuitable for agri- cultural production other than extensive poor quality grazing for cattle. Employment possibilities in the valley are limited and the only cash incomes are derived from some temporary work in the afforestation program. 27. To avoid possible conflicts with villagers over customary grazing rights, the boundaries of the plantations thus far established have been drawn in agreement with the village communities in the project area. This practice would be continued during the Mangoro afforestation program. Valley bottoms would continue to be used for rice cultivation and neither these areas nor the better grazing lands would be included in the areas to be planted under the project. Thus any interference with local land use patterns as a result of the project is expected to be minimal. Nonetheless, should some of the farmer's land be affected by the afforestation program, the Government would compensate the farmers in accordance with Malagasy law (Section 3.08 of the Loan Agree- ment and corresponding supplemental letter). In addition, all farmers in the  project area would benefit from expanded health and educaTion facilaiiva and irproved rice cultivation through existing and future Government programsa. 23. The project to be implemented over a period of five years (1974/75- 1978/79) would be Part of the ongoing Government program to afforest 96,000 ha in the Mangoro valley. Specifically it would include: (a) afforestation of 35.000 ha of pilne plantations; (bl fire control and maintenance of all plantations within the project area, (c) construction and maintenance of about 60 km of service roads, and 1,750 km of plantation rcads (d) construction of project headquarters and three divisional h.ead quarters and staff and labor facilities; (e) technical assistance in research, training and preparation of future forestty projects; and (f) pasture improvement on about 2,000 ha within the project area. 29. As indicated in paragraph 16 above, the project would also include funds to assist the Government in preparing additional projects in agriculture. Detailed Features of Prpiect Compnents Establishment of Plantations 3Y. The methods used thus far in .adagascar to establish tree pl&atations were developed jointlv by the DF, INDP/FAO and French bilateral assistance. They have proved successful and would be continued under the proposed project. About 7,000 ha would be planted each year. The works would start with land and soil surveys, which would be based on earlier surveys made with the assist- ance of the IJTD/?FAO. About 12 million seedlings would be needed to complete the annual planting program and would be provided by several nurseries in the project area. To ensure a rapid growth of the pines, a small application of fertilizer would be required prior to planting. To facilitate the implementa- tion of the prograr., the project area would be divided Lnto Nlor-:hern,Central and Southern Divisions. Mhe project provides for -he procurement of anuir- reor, including btulldozcrs, graders, tractors and other vehicles to carry out the programu.  -9- Fire Control 31. To control fires, a permanent fire unit would be created and equip- ned in each of the three divisions. Nine fire towers would be constructed at i5 km intervals and various water points would be installed. About 400 km of fire breaks would be constructed throughout the project area, while slopes of hills and valley bottoms would serve as natural fire breaks. The fire breaks would be cleared annually, including those in about 25,000 ha already planted under the Mangoro afforestation program. Construction of Roads and Buildings 32. About 60 km of gravelled service roads would be constructed linking the project area with the outside all weather road network. In addition, about 840 km of plantation truck roads and 910 km of access roads would be built. rhe fire breaks would be connected with the plantation road system. 33. The project would provide housing, schools, stores, water supply facilities and village halls in each of the three Divisions to accommodate the project staff and laborers permanently employed under the plantation program. In addition, the quarters would have offices, a garage and a work- shop. The main quarters of the project area would be located in Moramanga. Buildings for the Central Division have already been constructed, while those for the Southern Division would be improved and expanded. The Northern Division, however, has not yet been established and new buildings would be constructed there. Research and Training 3L. A considerable amount of research has been carried out by the Government in the Mangoro plantation area. This research would be continued under the project to facilitate further development of the afforestation program. It would include studies on yields, growth, use of fertilizers and disease control measures. 35. A training center would be established at the central division, headed by a professional forester. Plantation staff would be instructed on the establishment and maintenance methods of large scale plantations. The project includes funds for the provision of staff and equipment for the center. Pasture Improvement 36. During project implementation the Government plans to improve pastures and rice cultivation for subsistence in the project area. In support of this program the project would provide $100,000 mainly for the introduction of stylosanthes (a subtropical legume, which remains green and provides good feed during the dry season) on 2,000 ha of pasture within the project area. The use of stylo has been successfully tested in Madgascar and should considerably increase the carrying caDacity of the natural pastures used by the villagers for communal grazing.  -10 - Future Project Preparation 37. The project includes funds for technical assistance to the Government to prepare a second phase of the project. About $500,000 is included for the preparation of other projects within the agricultural sector as referred to in paragraph 16, This would enable the Government to hire experts when needed to strengthen its own services. Project Implementation 3P. The project would be executed by FANALAMANGA, a corporation (Societe d'Economie Mixte) to be established by the Government with substantial admin- istrative and financial autonomy. Initially, all shares of FANALAMANGA would be owned by the State, except for one percent of the shares, which will be held by the Banque Nationale Malgache (BNM), the Malagasy Development Bank. The structure of FANALAMANGA would allow for local and foreign private partici- pation at later stages of the Mangoro afforestation program. As a contribution to its equity capital, the Government would make available to the corporation: (i) the existing plantations, facilities and equipment of the Mangoro plantation scheme; (ii) the Government's own contribution to the cost of the proposed pro- ject, and (iii) an amount equivalent to the proceeds of the Bank loan and IDA credit as they are withdrawn from Bank/IDA for project implementation. The establishment of FANALAMANGA would be a condition of credit and loan effectiveness (Section 6.01 (b) of the Loan Agreement). 39. The Director General of FANALAMIANGA would have overall responsibility for project implementation, and the appointment of a suitable candidate to this post would be a condition of credit and loan effectiveness. (Section 6.01 (c) of the Loan Agreement) He would be responsible to a Board of Directors, including representatives of the Directorate of Forestry (DF) within the Ministry of Rural Development, as well as representatives of the Ministries of Economy and Finance, Interior, Planning, Public Works, and Tranport. The Board would have full responsibility for policv and financial matters. FANALAMAINGA would take over part of the existing organization of the Directorate of Forestry, and would take over the budget, personnel and functions of the existing Mangoro plantation scheme. The Director General would be supported for two years by an internationally recruited Forestry Specialist who would advise on overall project implementation. bo. The day to day management of the project would be under the direct supervision of three Assistant Project Directors -- the Plantation Director, the Engineering Director and the Financial Director. The Plantation Director would oversee the afforestation program, fire control and village development. The Engineering Director would be responsible for the construction of roads and fire breaks and the maintenance of equipment in the workshops and would supervise a Workshop and an Electrical Engineer to be stationed at the Central Division. At the Government's request, the Workshop Engineer would be re- cruited abroad and assisted by a local counterpart. The Financial Controller would be responsible for the project accounts, cost control and procurement.  - 1J - The Plantation Director, the Financial Controller, the Forestry Expert and the Workshop Engineer whose qualifications and experience should be satis- factory to the Bank, would be employed within 7 months of the signing of the Development Credit and Loan Agreements (Section 4.03 (b) of the Loan Agreement). Ecology 41. The Mangoro afforestation program would improve the ecology of the Mangoro Valley by reducing erosion and improving soil fertility and water retention. The Government has given assurances that during implementa- tion of the program sound environmental practices would be followed, in partic- ular with respect to the eventual construction and operation of the pulpmill in order to minimize any adverse ecological effects (Section 3.07 (a) of the Loan Agreement). Project Costs and Financing L2. The total cost of the project, exclusive of taxes, is estimated at $17.2 million with a foreign exchange component of $4.5 million. Imported materials and equipment required for the project are exempt from taxation. While some value added tax is levied on the purchase of local materials, their impact is negligible. The costs of the project include about S3.2 million for the afforestation program (including $0.9 million for fertilizer to be applied before first planting), $2.9 million for roads and tracks and fire protection, $5.8 million for project management, buildings, vehicles and equipment, $0.8 million for research, training and studies and $0.1 million for pasture improvement. Cost estimates are based on 1974 price levels; physical contingencies and provisions for expected price increases amount to $4.4 million. The proposed IDA credit and Bank loan would cover 78 percent of the total project cost, including a substantial portion of the local cur- rency cost. The Government would finance the balance of the local cost esti- mated at $3.7 million. Procurement and Disbursement 2J3. Contracts for service roads and staff houses and for vehicles, eluip- ment and fertilizers exceeding $30,000 would be awarded after international competitive bidding in accordance with Bank/IDA guidelines. Domestic contrac- tors would be granted a margin of preference of 7.5 percent. Domestic manufac- turers would be granted a margin of preference equal to the amount of customs duties or 15 percent of the c.i.f. price of these goods, whichever is lower. Orders below $30,000 would be awarded in accordance with Government procurement procedures which are satisfactory. In view of the remo eness of the project area, and the nattire of the work, other infrastructure- work anid the ei:tablish- ment of the platntations are unlikely to attract either Iccal or international competitive bidding and would thierefore be carried out under fcrct acc(c.nt.  - 12 - J4!I. The proceeds of the Bank loan and the IDA credit would be disbursed over a period of six years, first from the credit and then from the loan, against (a) 75 percent of both foreign and local expenditures for civil works by contractors and by force account, (b) 100 percent of foreign expenditures or 75 percent of local expenditures for vehicles, equipment and fertilizer, (c) 100 percent of foreign expenditures and 75 percent of local expenditures for pasture improvement, consultant services for research, training, for pre- paration of a second phase project, as well as other projects within the agricultural sector. Since the afforestation program for 1974-1975 has already begun, an amount up to $100,000 would be retroactively financed to cover salary expenditures and administrative costs after November 1, 1974. Economic Benefits and Rate of Return )5. As indicated in paragraph 21, the purpose of the 35,000 ha of pine plantations is to produce raw material for a pulp mill to be constructed near Moramanga. The economic justification of the project is therefore based on the entire Mangoro afforestation program including the plantation of a total area of 96,000 ha, logging operations over 6,000 ha of 15-year-old pines each year, the construction of the pulp mill and the subsequent wood processing. The economic benefits of the program are chiefly determined by the revenues from the expected pulp sales. 46. On the basis of experiences obtained in similar afforestation pro- grams in Madagascar and other countries, it can be expected that by 1985 the pines of the Mangoro plantations will have grown sufficiently to permit log- ging operations and pulp production to start. The construction of the mill at Moramanga would begin in 1982 and would be completed in 1985. The site of the mill has been projected at the junction of the Mangoro river and the highway and railway from Tananarive to Tamatave Seaport. Total construc- tion costs are estimated at about $140 million with a foreign exchange component of about S80 million. The mill is expected to operate at a satisfactory profit. FANALAMANGA will eventually be in charge of the construction and operation of the pulp mill and the Government will explore and request the financial partici- pation of the private sector in the corporation for this purpose. L7. While prices for pulp remained stagnant over the last two decades, in 1972 increasing demand reached the point where shortages started to occur, resulting in a significant price increase. Although consequently pulp produc- tion is expected to expand, a recent analysis by FAO based on current projec- tions of consumption and production indicates that the current shortage of pulp will continue at least during the next decade. Tests of pulp produced from pines grown in the project area compare favorably with pulp produced in other parts of the world. In addition, the location of the plantations and the pulp mill close to the Indian Ocean, provides Madagascar with an advantageous position for exports of pulp products. As most of the pulp is expected to be sold on the West European markets, the reopening of the Suez Canal would strengthen the competitive position of the mill. At ftll develop- ment (21 years after project inception), the annual value of production of  - 13 - the Mangoro afforestation program (including the pulp mill) is expected to reach S56 million. After deducting the cost of production, the net annual incremental economic benefits attributable to the program would be about $31 million. I8. The economic rate of return of the program is estimated at 13 per- cent. The project would provide regular employment for about 1,600 workers who to the extent feasible would be recruited from the villagers living in the Mangoro valley. The villagers would also gain opportunities to sell agricultural products to project laborers. The ecology of the valley would be substantially improved by preventing further erosion, increasing soil fertility and water retention. In addition rural roads in the project area would be upgraded and pastures improved. 4O. The main risk involved in the project concerns the projected price of pulp and consequently the viability of the proposed pulpmill. Therefore, although present. price forecasts for pulp are favorable, a conservative market price has been used in the economic evaluation to take into account the possibility of a slower price increase than expected. A substantial re- duction in pulp prices, however.is not likely in view of the projected in- crease in demand for pulp and the limited possibilities for expanding mill capacity and wood resources in the world in the next ten years. Another element of risk is that the projected yields of the plantations,and hence the production rate of the pulp mill,are based on yields from the first years of the Mangoro afforestation program and from programs in comparable areas in Madagascar and elsewhere in the world. A slower growth rate of the pines than expected would necessitate a larger plantation area than the 96,000 ha envisaged or a reduction in the size of the pulp mi11. If growth and price conditions during the further development of the Mangoro afforestation pr6- gram were to alter present forecasts significantly, sufficient flexibility as to the size of the plantations, the scope of the mill and the type of pulp to be produced would still be available at the beginning of the second phase of the plantation program when growth and market conditions would be reevaluated.Comparative calculations at present price levels show hatn. there are several alternative uses of the plantations' output for different vpes of pulp or pulD and paper mills with rates of return at acceptable levels. 50. In the unlikely event that neither the proposed pulp mill nor any other type of wood processing facility were built, the raw material from the project plantations could be exported as logs or wood chips. There is an increasing demand for these products on the world market, and current indica- tions are that there should be little difficulty in marketing the project output. If the output from the Mangoro plantations were to be exported as wood chips, it is estimated that the economic rate of return of the project would be about 10 percent.  - 14 - PART V - LEGAL INSTRUNENTS AND AUTHORITY 51. The draft Loan Agreement between the Malagasy Republic and the Bank, the draft Development Credit Agreement between the Malagasy Republic and the Association, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association and the text of draft resolutions approving the proposed loan and credit are being distributed to the Executive Directors separately. 52. Features of the Loan and Development Credit Agreements of special interest, dealing with the protection of the rights of the villagers in the project area and the creation and management of FANALAMANCA, are referred to in paragraphs 27, 38, 39 and 40 of this report. In addition attention is drawn to Schedule 1, para. 4 of the Development Credit Agreement, which pro- vides that disbursements will be made first from the Credit and then from the Loan, except in regard to special commitments provided for under Section 5.02 of the Bank's General Conditions. 53. I am satisfied that the proposed Loan and Credit would comply with the Articles of Agreement of the Bank and of the Association. PART VI - RECOMMENDATION 5~4. I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President Attachments December 5, 19/4  ANNEX I Peg. 1 of 3 pges IUJNTRY DATA-- MALAGASY REP. ARIU k 2 POPULATION DENSITY 592,000 k42 77 illion (mid-1973) 85 Per 1n2of arable land SOCIAL flDICATORS Reference Countries Mala3 e 5nw SyrrMic/oalOJ _g a. 1.20 19 970 19 f0 fNlP PER CATA US$ (ATLAS IXASIS) .. 140/a 170 /a1 320 /a 1.30/a DfEMGRAPITC Crd3iTrth rate (per thousand) 44 /n 46 /c 4l /d ,.i /d 3I /e Crude death rate (per thousand) 256T 1S77 [5 / 77 Infant mortality rate (per thouand live birtha) 133 /b 102 T 55 2 4I T tLfe expectancy at birth (years) 42- 4d /d 51b S9 Oross reproductime rate 2 2.9 /b 3.2 J 3.S 2.l Population growth rate /3 2 - 2.5 /3 2/ 29 /g PImpulatios growth rate - urba 4/h 5 T, 5 Age struoture (percent) O-14 39 /1 4; 4d /w g 43A 15-6b 5 77 52 iTh "d 7e3T 65 and over 37T 3 0T 3 477 10.eodency ratio A o1 0 ,n 0.9 /n 1.2 7T 1.0 in 1 7.nP Urban populatio- a0 percent of total 11 /h h!, / j gn IV, /k 2 /e - Family planning: N. of acceptors naoulativ- (thoo. .. 20 T No. of ueers (% of married asoonn) iS 7T 91lPL0Y)WX Mt b- force (thouoande) 2.1X() /r 3,200 /n 5,103 /IC , 2,100 /m, j ) /e Percentage ewplcyed in agricoltors 93 77T T 90 /m,o /5. 77 Percentage unewployod . - 4 T, t 7T INOOhB DISTRINUTIIN Percent of national Lcose roceiced by highest 5% 39 .22 / n,a Percnat of national income received by higheot 20% h1 .2 /0,vu Percent of national inceoe recnived by lowest 20% c . . / w Pereent of national income raceivod by lowest 50% 14 12 /m,v DlSlRIWTI3O OF LAND OIEN3RSM S ownad by top 10% of oneors % owned by semallet 10% of owoers HEALTH AND NU1TITION Population per ydsicion 9, /10 /o 10,120 lab 'y 3 ,,0 3 r00 /e Popelatioc per nursing per-so 2,42077 a 3 300 l,30 T a,4fC 1,Od) 77t0 Population per bospital bed 4,70 T 30 770 1,010 30 Per capita calorie supply as % of requirements /5 .r /ab 91 "lo 10 /ac /e an Per capita protein supply, total (grams per dayrf6 S1 777 51 d0 :o9 /ac ' /e 7t Of which, animal and poise 1' los 1' 250 3 laT 20 /0,0 Death rate 1-8 years /7 3, 6^ /ad ZEDCATION AdJuated /8 primary school earolilent ratio 52 4 6. A8Jak - e Adjusted Z! secondar,y schol scrollmnt ratio L1 9 /ao 39/7ak Ia T Tears of schooling previded, first end second leve1 13 31 13 129 k 33 Vocational enrollment 00 S of saec. chool enrollment 9 2 1 3 /c Adult literacy rate % ; / 30lL af 4 a 09 T.a hOUSDIC Average No. of persons per room (Crban) Percent of occupied units withxt piped water Access to electricity (as % of total population) Percent of ta-r population connected to electricity R2adlo reroI-- per loro population 1S / do /t 4c /n- a 220 /t 56 Passenger oars per 1000 pnpulation 4 77T 7t,h 9 777ai 5- 2 al e Electric poer cmemption (kwh p.o.) 20 3o al 152 3.7 Newsprint con-omption p.c. kg per year C 33 0,0 0.5 0.2 3.; 77 Noteos Figures refer either to the latest periodo or to account of onniro-anntal tenperatore, body weights, and the latest year, latent perioda refer in principle to, diatribatlon by age and osx of national populations the yea-. 1956-60 or 1966-70; the latest yaars in prin.. / Protea s- n.ad (requirwtant) for all countries an eotab- ciple to 1960 and 1970. loibd by UKIA Eoonmlin Reaearch Service provide for a sininam /I The Par Capita GNP e.tioate ia at mrrket prices for slLovca-, of 60 graote of total protein Per day, and 20 grams of yraro other tko, 1960,calcu.ated by the anse coovaraion a-i-u .L.__ psIse protein, of which 10 grvan hoald be anaml technique as the 1972 World Beak Atlaes protein. Tese atandard. are somwehat lower than thoas of 75 12 Average smber of daughters per woano of reproductive graos of total protein and 23 grars of aninrl protein as an age. average for the world, proposed by FAO in the Third World Food