Madagascar - Fourth Highway Project

FILE C)OP Y Document of The World Bank FOR OFFICIAL USE ONLY Report No.P-1862-MAG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A FOURTH HIGHWAY PROJECT June 2, 1976 This document has a restirieted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwinse be disclosed without World Bfank authorization.  Currency Equivalents Unit Malagasy Franc (FMG) US$1 FMG 215 FMG1 US$0.005 FMG1,000 US$4.65 FMG1,000,000 : US$4,651 Fiscal Year January 1 - December 31 ABBREVIATIONS BADEA = Banque Arabe pour le Developpement Economique en Afrique (Arab Bank for Economic Development in Africa) DAC - Development Assistance Committee (of the Organization for Economic Cooperation and Development)  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A FOURTH HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed credit to the Democratic Republic of Madagascar for the equivalent of US$22.0 million on standard IDA terms to help finance a Fourth Highway Project. The Arab Bank for Economic Development in Africa (BADEA) has agreed to provide parallel financing with a loan to Madagascar of US$5.0 million equivalent for a period of 25 years, including a 5-year period of grace, at an interest rate of 3 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "The Economic Development of Mada- gascar: Main Issues" (Report No. 167a-MAG) was distributed to the Executive Directors on July 15, 1974. An economic updating mission visited Madagascar in October/November 1975 and its report is being completed. A summary of the mission's findings is set out below. Country data sheets are attached as Annex I. 3. With a GNP per capita estimated at US$150 in 1973, Madagascar is one of the poorest countries in the world. It is predominantly an agricul- tural country and 85 percent of its 8.3 million people live in rural areas with an average per capita income below US$100 per annum. Although the country is sparsely populated (an average of 15 inhabitants per square kilometer), there is great pressure on cultivable land in some regions. In these areas the standard of living is close to subsistence level; nutrition is deficient and child mortality is high. Owing mainly to different ecological conditions, the highlands are more advanced than the coastal areas, and the south is particularly poor with a harsh, arid climate and infertile soils. The east coast is rich agriculturally, but crops are frequently devastated by cyclones. Internal migration is common and has accelerated as improved roads have provided access to new areas. However, poor roads remain a major con- straint to development; only one third of the main highways are passable in all weather in a country where production centers may be as far as 1,200 km from main points of consumption. Many areas are cut off from the rest of the country for several months each year. 4. The structure of land holdings does not give rise to large in- equalities in income or wealth, but in a number of instances traditional share cropping practices are resented. Rice, the staple food, accounts for about one third of agricultural production and is mostly consumed on the farm. The major cash crops include coffee, sugar and cloves; there is a wide variety of other crops. Animal husbandry is also important, with a national herd estimated at 8 to 10 million head. Fishing, too, now makes an important contribution to national income. 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.  - 2 - 5. Madagascar has passed through a period of fundamental political change over the past four years. A referendum held in December 1975 ap- proved a new constitution and confirmed President Ratsiraka as Head of State and President of the Supreme Revolutionary Council. The basic poli- tical program of the present Government has been outlined in the Charter of the Socialist Revolution published in September 1975. Major institutional and policy changes aim at: (i) Decentralization: greater local responsibility for development is to be encouraged by giving the provincial administrations considerably increased authority; furthermore, the compre- hensive reorganization of the system of local government based on the fokonolona, begun in 1973, is to be consolidated. (ii) Land reform: the few large estates left unexploited are to be broken up and sharecroppers would receive the land they actually work. (iii) Rural development: high priority is to be given to increas- ing incomes and services in the poorest areas. (iv) Basic education: all children of school age are to be gradually enrolled in a new five-year primary education program with a curriculum which is to be made more relevant to local circumstances. (v) Greater national participation in commerce and industry: the commercial banks, insurance companies and a number of other key businesses in foreign hands have been nationalized and Government may become a majority shareholder in all major enterprises. 6. The Charter makes the reform of local government a central feature of the new development strategy. The fokonolona system, which is an original adaptation of the traditional village council, aims at enabling citizens to participate actively in improving local conditions. The fokonolona are engaging in cooperative activities such as the marketing of crops, the retail- ing of essential commodities and the channeling of credit. They have begun to collect levies on marketed produce and to use the proceeds to finance schools and other services. During the last two years, fokonolona have al- ready been established throughout the country - about 10,000 in all - and some have begun development activities such as the construction of roads, communal buildings and small irrigation works, in addition to marketing activities. 7. Between 1966 and 1971 GDP in real terms rose by about five percent per annum, while the investment rate was close to 15 percent. Following the change in Government in 1972, a comprehensive reappraisal of economic policies  -3- was undertaken. Over the past three years the rapid malagasization of the economy has been accompanied inevitably by initial management problems. These combined with the recession in the world economy, have had an adverse impact on overall economic performance. Real GDP now stands at the level reached in 1971, after a drop in 1972 and 1973 in construction and services, and a marked recovery in 1974 when GDP rose by over 6 percent mainly owing to an excellent harvest. Since 1971 gross fixed capital formation has declined and in 1974 amounted to only 11 percent of GDP. 8. Agricultural output grew by about 10 percent between 1970 and 1974, mainly on account of commercial crops, including fruit and forestry products. The expansion of coffee and cotton production in particular has been encourag- ing. Coffee, the main export crop, now accounts for nearly one third of total export earnings; it is grown almost entirely by smallholders. Cotton production has doubled since 1970. On the other hand, livestock production has suffered as a result of a decline in cattle numbers between 1970-74, mainly due to drought and an increase in the incidence of disease. This, combined with expanding domestic consumption, has caused a serious drop in the exports of meat and meat products. 9. The expansion of rice production is one of the Government's major tasks. Rice is largely grown for on-farm consumption; less than 15 percent enters commercial channels. Nevertheless, over the last decade rice produc- tion had grown by only 2 percent per year, which was insufficient to keep up with population growth. The urban population has increased by about 5 percent annually, and its demand for rice has led the country to be a net importer of rice since 1971. To stimulate production, in 1973/74 the Govern- ment doubled the producer price of paddy. The impact of this measure could not be accurately ascertained since, although production increased substan- tially in 1974, weather conditions were unusually favorable in that year. Indications are, however, that in this very poor country, price incentives have to be accompanied by related measures covering marketing, roads, exten- sion, inputs, equipment and credit. 10. Since Independence in 1960, manufacturing has made steady progress, raising its contribution to GDP from about 5 percent to 12 percent. Output is mostly processed agricultural products and consumer goods for domestic use. As manufacturing has expanded, imports of non-food consumer goods declined as a percentage of total merchandise imports from 42 percent in 1960 to 19 percent in 1974, while imports of intermediate and capital goods, and on occasion raw materials, have increased. The Government considers that there is still some scope for further import substitution, but for long term growth Madagascar will need to develop export industries. In particular there is potential for the further processing of domestic agricultural products. Pro- duction has not been too much affected by recent political changes; although value added in manufacturing stagnated in 1972 and 1973, it grew by 9 percent in 1974, mainly on account of textile, sugar and dairy industries.  -4- 11. Political uncertainties over the past three years have resulted in a sharp downturn in foreign private investment. At the same time the Malagasy themselves have been hesitant to invest in manufacturing. A sub- stantial number of potentially viable investment projects have been iden- tified, and the Government's immediate concern is to find suitable private partners with the necessary expertise. The investment code is currently being revised to provide standard sets of conditions for most investors. In the case of major investors, special agreements may be negotiated. 12. As part of the policy of malagasization, the use of foreign tech- nical assistance has been greatly reduced. In 1970 there were some 1,500 foreign experts employed by the Government; by 1974 the number had fallen to about 600. Pressure is being exerted similarly on private firms to localize their staff. The departure of numerous foreign managers has been accompanied by an expansion in the demand for nationals with commercial, entrepreneurial and managerial skills. This transitional period will no doubt be accompanied by management problems, and it is likely that the Government will have to rely to a greater extent than now on foreign consultants and technical assistants in a non-executive capacity. 13. Recent developments in public finance have reflected the rela- tive conservatism of the various governments which exercised power over the last four years. Current government revenue amounts to about 14 percent of GDP while current expenditure declined somewhat in real terms mainly on account of lower purchases of goods and services by the Government. The current budgetary surplus increased from about FMG 4.6 billion (US$18 million) in 1972 to FMG 6.8 billion (US$30 million) in 1975, and financed about one third of capital expenditures during this period. The Government's capacity to implement investment projects has not been as high as its expecta- tions; actual expenditure has increased little since 1972 and has fallen short of budgetary allocations. 14. It was only in 1974 that the Government reversed its traditional position of being a net depositor with the banking system. The Treasury then borrowed about FMG 10 billion (US$45 million) to finance emergency imports of rice. In 1974, money supply increased by about 18 percent and consumer prices went up by 22 percent. Since then claims of the monetary system on Government, money supply and consumer prices have been relatively stable. 15. The Government is aware that it needs a more aggressive develop- ment strategy. The 1976 budget provides for an investment budget nearly double actual expenditures in 1975. It remains to be seen, however, if its administration will be geared to such higher levels. Current expenditure is also estimated to increase by 22 percent, partly to upgrade the minimum wages of junior employees (up to 40 percent for the lowest paid). One of the major items of the budget is education, which accounts for 25 percent of current expenditure. On the other hand, expenditure for police and  - 5 - military related activities are very low. Current revenue is estimated to grow by 17 percent, an increase to be achieved by some increases in customs duties and improved collection. As the current surplus wouild disappear, special contributions are to be levied on the crop stabilization funds and public enterprises to finance part of the capital budget. In the foreseeable future, budget surpluses are estimated to be lower in real terms than in the early 1970s. To the extent the Government will step up its investment, it will have to make greater efforts to mobilize domestic financial resources and to rely to a somewhat greater extent than at present on external capital inflows. 16. In July, 1973 Madagascar withdrew from the Franc Zone. An autono- mous Central Bank was established and exchange control imposed on all external transactions. Imports of non-essential commodities were curbed by licensing and by an increase in import taxes. In 1973 the balance of payments' current account showed a small deficit of about US$11 million. But in 1974 the exceptionally high rice imports and the increased cost of oil products, accompanied by generally worsening terms of trade, led to a current account deficit of approximately US$53 million. While export prices rose by only 16 percent between 1973 and 1974, import prices jumped by 45 percent. In 1975, international reserves dropped by US$15 million to US$35 million, the equiva- lent of only five weeks of merchandise imports. 17. It is not expected that capital requirements will substantially increase over the 1975-80 period. A relatively slow growth of GDP at an annual rate of 4 percent is projected, while the resource gap would remain close to 1 percent of GDY. Historically, Madagascar has experienced a very low import elasticity but it is assumed that with the increase in the invest- ment rate, imports of goods and services will grow by 5 percent annually. At the same time, the terms of trade would not improve over the adverse position obtained in 1974. The current account deficit would increase in current prices from an estimated US$50 million in 1975 to about US$82 million in 1980. After modest allowances for capital grants and private direct investment, net disbursements of external assistance should increase from US$40 million in 1975 to US$50 million in 1980, which is virtually no growth after allowance for international inflation. This would call for commitments of about US$80 million annually in the late 1970's. 18. On the basis of the capital inflow described above, the debt service ratio would remain 4 percent during the remainder of the 1970s. Beyond 1980, however, capital requirements may increase if the economy recovers the impetus it had in the late 1960s. At the same time, some decline in the grant element of external assistance is projected and the debt service ratio would reach 7.5 percent in 1985. For a long time to come, however, external aid agencies should, in view of the poverty of the country, be prepared to continue provi- ding assistance on concessionary terms. In view of the lack of local capital resources, they should also be prepared to finance a high proportion of total project cost, including a part of local costs. 19. Official development assistance to Madagascar averaged about US$56 million per annum in the 1970-74 period, half of which were technical assistance grants. Gross official flows from DAC countries slightly increased from US$32  - 6 - million to US$38 million, with France's share declining from 77 percent to 60 percent. Disbursement on long and medium term loans more than doubled to US$23 million. In 1974 external aid commitments totaled approximately US$56 million, some 30 percent below the 1973 level. Half of these commitments were for Bank loans and IDA credits. New major sources of external finance are the European Development Fund and China; in 1975 the latter committed US$55 million to be disbursed over the next ten years. As a result of concessionary terms under which most external assistance was granted and of the 1972 agree- ment cancelling about 43 percent (US$27 million) of the debt owed to France, Madagascar's current level of indebtedness is low. External public debt disbursed and outstanding at the end of 1974 was US$132 million, of which the Bank's share was 8 percent and IDA's was 30 percent. Service payments on this debt amounted to US$9.5 million in 1974 (or about 3.6 percent of export earnings), of which payments to the Bank Group represented 11 percent. PART II - BANK GROUP OPERATIONS IN MADAGASCAR 20. Madagascar has received nine IDA credits totaling US$89.2 million and five Bank loans totaling US$32.6 million. There have been no IFC invest- ments. About 65 percent of Bank Group lending has been for transport, 32 percent for agriculture and the balance for education. Annex II contains a summary statement of Bank loans and IDA credits as of April 30, 1976 and notes on the execution of ongoing projects. The priority given to transport investment recognizes that improvement in communications is a precondition for Madagascar's development. Three projects were for the construction of all-weather links between the island's different regions, one was for improvements to Madagascar's main port of Tamatave and one for the moderni- zation of the railway line between Tamatave and capital. Bank Group lending for agriculture consists of two livestock development projects, two irriga- tion projects and a forestry project. The balance of our lending has helped to expand technical education and teacher training. 21. Problems have arisen in the course of execution of several projects. Although, as far as construction works are concerned, physical implementation is generally satisfactory, substantial cost overruns have occurred which necessitated major reductions in the scope of several projects and, in the case of the Tamamatave Port and Third Highway Projects, led to supplemental IDA financing. In addition, project execution has, during the last 18 months, been affected by political events which led to a slowdown of the decision making process as well as on matters such as effectiveness formalities or the processing of withdrawal applications. 22. In our future lending to Madagascar, we intend to continue focusing primarily on infrastructure development, agriculture and education. Priority will be given to the highway sector, where we will increasingly emphasize the construction of feeder roads and road maintenance activities. The Government is also preparing a hydroelectric power project and has asked the Bank Group to assist in identifying sources of financing.  23. Gradually, we expect to shift our lending from infrastructure to agriculture. However, the absence of a comprehensive agricultural strategy has slowed down the preparation of specific projects and in the immediate future we will, therefore, concentrate on the implementation of ongoing projects, particularly of the complex Village Livestock and Rural Develop- ment Project and of the Morondava Irrigation and Rural Development Project. These two projects have encountered serious implementation problems for which solutions are being sought (see Annex II). We have also agreed to assist the Government in identifying and preparing a second phase project for the development of the Morondava area which may lead to Bank Group financing. In education, the Government has recently taken steps to decentralize educa- tional control and to improve the quality of basic education . A project which would support these efforts has been appraised and should be ready for consi- deration by the Executive Directors towards the end of this year. PART III. TRANSPORT SECTOR IN MADAGASCAR 24. Madagascar, the world's fourth largest island (590,000 km 2), is situated 400 km off the east coast of Africa. A number of factors make develop- ment of an adequate transport network extremely difficult and expensive: (a) the size of the country, (b) the ruggedness of its terrain, (c) the prevailing climatic conditions with frequent devastating tropical storms, (d) the dearth of suitable road building material and (e) the tendency of the population to cluster in dense but relatively small and isolated pockets. Transport needs are relatively well met on the central plateau, with the capital, Tananarive, generating or absorbing about half of the country's commodity flows, but the northern and part of the western regions have no all-weather land connections with the rest of the island, and the links with the southern regions are largely trails. For example, to transport goods by road from Tananarive to Diego-Suarez, a distance of 1,200 km, takes from four to six weeks; this could be reduced to a few days with an all-weather road of modest standards. These factors reinforce the relative isolation of the less populated regions, and have severely hindered the country's economic development. If Madagascar's agricultural potential especially is to be realized, considerable road improve- ment and expansion are required. 25. The Government's transport policy, as outlined in the 1974-77 Development Plan, and endorsed by the Charter, is to connect regional capitals gradually by all-weather roads, to improve transport services and to further agricultural development by assisting the fokonolona in selecting, construct- ing and maintaining local feeder roads. However, budgetary constraints are now severe and, as a result, the Government is undertaking projects only on an annual basis according to fund availability. Highway planning is the res- ponsibility of the Central Planning Service in the Ministry of Public Works. The Ministry of Transport has no general planning unit but, like the Ministry of Public Works, it being strengthened by the transport planning team financed under the Railways Project (Credit 488-MAG). This team has been fully opera- tional since end 1975 and is working in close collaboration with government  - 8 - officials who, it is expected, will be able to take charge when the team leaves. Highways 26. The total highway network comprises about 32,000 km of roads, of which 8,600 km are primary roads and 19,000 km secondary roads. With the exception of about 1,700 km of paved primary roads constructed since 1964, road standards are generally low, with poor alignment, narrow and weak pave- ment and often obsolete structures. The vehicle fleet is composed of about 60,000 units, of which half are registered in Tananarive. The road trans- port industry consists of numerous highly competitive small carriers and cooperatives, a few large companies, and some traders. Tariffs are close to cost, varying according to road condition, season, and demand. There are few regulations concerning these services. 27. Roads are administratively classified as national (primary) and provincial (secondary). Road regulations set vehicle weight and dimensions, inspection, speed limits, and vehicle and driving licenses. Vehicle dimen- sions and weight regulations are adequate, but their enforcement is generally lacking. The Government has, therefore, agreed (a) to ensure that the dimen- sions and axle-loads of vehicles using its national highway network shall not exceed limits consistent with the design standards for such roads; and (b) to exchange views with the Association on the proposed program for implementation (Section 4.02, draft Development Credit Agreement). In order to support these measures, the project will provide for portable scales and vehicles required to undertake a 12-month axle-weighing campaign on the paved network to deter- mine where permanent weigh bridges, also to be financed under the project, should be installed. 28. The New Works Department of the Ministry of Public Works is in charge of new construction, and the Infrastructure and Maintenance Depart- ment is responsible for highway maintenance. The engineering corps of the Army carries out limited maintenance on secondary roads, and has recently received a loan of about US$4.0 million from the Federal Republic of Germany to purchase road maintenance equipment. Maintenance of tertiary roads and tracks is the responsibility of the fokonolona; quality varies from village to village. 29. Through three projects financed in 1966, 1967, and 1972, the Bank Group has assisted in constructing some 650 km of roads and three major bridges. Physical execution of all these projects has been satisfactory. However, considerable cost increases were experienced in the course of ex- ecution of the Third Highway Project, resulting largely from price escalation and currency re-alignments. To help the Government to meet part of the cost overruns, the Association extended in September 1975 a supplemental credit of US$5.6 million. At that time, it was agreed to delete one of the roads from the project and to include financing for its construction at reduced standards in the proposed Fourth Highway Project. The other components of the project are now nearing completion.  - 9 - 30. Expenditures on road maintenance have been insufficient, and over the last several years budget allocations for maintenance on the primary and secondary road network were substantially reduced. As a result, many roads are poorly maintained. In its 1976 budget, the Government has allo- cated FMG 1,300 million (about US$6 million equivalent) for primary road maintenance, which is about twice the amount actually spent in 1975. For the future, the Government has agreed to maintain its roads adequately (Section 4.04, draft Development Credit Agreement). In future the Govern- ment will (i) each year establish the allocations for road maintenance on the basis of the requirements, taking into account, among other things, new road construction, road improvement, and inflation, and (ii) before approving its budgetary allocations, provide the Association with a reasonable opportunity to exchange views with respect to determining requirements. 31. Major road projects are executed by contractors which are either foreign firms or local subsidiaries of French-or Italian firms. A domestic contracting industry for highway construction has not yet developed, due to lack of professional skills and scarcity of capital and credit facilities. However, in early 1974 a government-owned National Public Works Agency was established as an independent and financially autonomous corporation and its first contract, for the reconstruction of a 42 km road north of Tananarive, is being implemented. A force account construction unit within the Infra- structure and Maintenance Department carries out earth works and graveling of secondary roads; although hampered by insufficient equipment, its performance is satisfactory. 32. Construction contracts are usually awarded on the basis of local or international competitive bidding. Administrative procedures for bid- ding and contract award follow well-established and appropriate regulations, and work specifications are comprehensive and precise. Construction super- vision is carried out either by the New Works Department itself or by consult- ing engineers. Railways 33. The state-owned railways, comprising about 900 km, the majority of which was built prior to 1920, are operated under the supervision of the Ministry of Transport. They serve primarily a narrow corridor between Tan- anarive and Tamatave, the country's major port. A US$6 million IDA credit of 1974 is assisting to renew about 60 km of main track and modernize the rail- roads' fleet of freight and passenger wagons. The project is slightly behind schedule and cost increases have made it necessary to reduce the number of wagons to be purchased. Technically, the railways are operating effi- ciently, but due to organizational problems, an uneconomic tariff struc- ture, and the lack of financial and commercial flexibility, they are ill- equipped to face increasing road competition and are currently incurring financial losses.  - 10 - Coastal Shipping 33. Coastal navigation is important and constitutes the only means of transport between many areas. In 1975, this traffic amounted to about 400,000 tons. The Association recognizes the importance of water trans- port in the country's transport system and in June 1970 made an IDA credit of US$9.6 million to assist in financing the expansion and moderniza- tion of various facilities in the port of Tamatave and in providing technical assistance for management and training. The project encountered severe cost overruns which in 1973 led to a supplementary IDA credit. This, however, was not sufficient and the Government decided to postpone construction of the tanker terminal, originally included in the project. The other physical works have been completed. Air Transport 34. Madagascar has a fairly extensive air transport network. Of its 59 airfields, 17 are built to all-weather standards. The airports at Tananarive, Majunga and Nossi-Be can handle international jet aircraft. Although to some extent air transport compensates for the absence of ade- quate land transport, its role remains necessarily limited. PART IV - THE PROJECT 35. A report entitled "Appraisal of a Fourth Highway Project - Demo- cratic Republic of Madagascar" No. 978a-MAG, dated June 3, 1976, is being distributed separately. A credit and project summary is provided in Annex III. The project was prepared by the Government and appraised in April 1975. Several issues, including the components of the project and the finan- cing plan required further discussions with the Government. Negotiations were held in Washington, D.C. from March 29 to April 2, 1976. The Malagasy dele- gation was led by Mr. Henri Raharijaona, Ambassador to France. Project Description 36. The project would be the Bank Group's sixth operation in trans- portation and the fourth for road construction in Madagascar. It will assist the Government in the construction of two major roads, with a view to reducing transport costs and providing access to areas with a high agricultural potential. The project would also provide training and strengthen the coun- try's road maintenance organization. Specifically, the project consists of: (i) Reconstruction of a 67 km two-lane paved road between Arivonimamo and Analavory (RN1); (ii) Construction to gravel standards of a 370 km secondary road between Tsiroanomandidy and Maintirano;  - 11 - (iii) Provision of consulting services for engineering and supervision of construction of the Tsiroanomandidy- Maintirano road; (iv) Purchase of maintenance equipment, spare parts, weigh bridges, portable scales and vehicles, fol- lowing a study to determine the exact needs; and (v) Training of the staff of the Ministry of Public Works, following a study to determine requirements. 37. Reconstruction of part of RN1, which had to be detered from the Third Highway Project (see para. 29), continues to have high priority. The overall design has been changed somewhat in order to limit the expense; thus parts of the road will only be strengthened by a bituminous overlay, and most of the road will now follow the old rather than a new alignment. These standards should adequately accommodate expected future traffic without major impediment. 38. The present link between Tsiroanomandidy and Maintirano is diffi- cult to pass even by four-wheel drive vehicles. Since its improvement is necessary to assist in the successful implementation of the IDA-financed Village Livestock and Rural Development Project (Credit 506-MAG), the Govern- ment had previously agreed to finance upgrading of the road out of its own budget, but subsequently requested external assistance. The road will be constructed to all-weather gravel standards and will provide access to several villages. A number of major bridges will be built to one lane width, which is adequate for present and forecast traffic. 39. Highway maintenance performance has been hampered by inadequate operational systems and budgetary constraints. Operations are largely mechanized, but available equipment is inadequate, often due to lack of spare parts. Equipment is procured, distributed and repaired by a central workshop in Tananarive, which is under authority of the Infrastructure and Maintenance Department, but is financially autonomous. The central workshop rents equipment to the divisions and subdivisions; it charges operating costs but no charge is made while equipment is idle. Minor repairs, the respons- ibility of division workshops, are often neglected or cannot be made due to lack of parts. In addition, subdivisions are not authorized to exchange equipment directly among each other, which could reduce total requirements. The Government has, therefore, agreed to prepare a work program and implemen- tation schedule to reorganize the maintenance equipment renting system and improve the spare parts supply system (Section 4.03, draft Development Credit Agreement). In order to facilitate the task, the Government has also agreed to employ consultants to help study the needs for spare parts and additional equipment, after which an agreed list of goods would be procured under the proposed credit (Section 3.04, draft Development Credit Agreement).  - 12 - 40. A training center (Centre de Maitrise des Ponts et Chaussees), established in 1963, has trained a large number of road supervisors, foremen, equipment operators and mechanics. In 1975, however, the center had to curtail its activities severely and was subsequently closed for lack of teachers and operating funds. The Government has, therefore, agreed to employ consultants, under terms and conditions satisfactory to the Association, to study the training needs of the Ministry of Public Works, and to consult with the Association on the decisions that it proposes to take in the light of their recommendations and on the means of implementation (Section 3.04, draft Development Credit Agreement). Project Cost and Financing 41. The total estimated cost of the proposed project is US$31.8 mil- lion, excluding taxes estimated at US$6.6 million, with a foreign exchange component of US$25.6 million. The proposed IDA credit of US$22.0 million would finance 69 percent of total net project cost. BADEA has agreed to provide parallel financing with a loan to Madagascar of US$5.0 million equi- valent for a period of 25 years, including a 5-year period of grace, at an interest rate of 3 percent per annum. The IDA credit and BADEA loan together would cover the entire foreign exchange cost of the project, with the IDA credit covering an additional US$1.4 million of local expenditures. The Government would finance the remaining project costs. 42. The BADEA loan has been earmarked specifically for the estimated foreign exchange cost of the earth works of the Tsiroanomandidy-Maintirano road which will be executed by a force account unit of the Ministry of Public Works. Although BADEA financing will be on a parallel basis, the Association intends to cooperate closely with BADEA, and will exchange a letter of agree- ment covering information sharing, coordination and consultation, with respect to the implementation of the project. The effectiveness of the Development Credit Agreement is conditioned upon the BADEA Loan Agreement having been signed and conditions precedent to initial disbursements under the BADEA Loan Agreement having been fulfilled (Section 6.01, draft Development Credit Agreement). Implementation 43. The New Works Department of the Ministry of Public Works, assisted by consultants, will be responsible for road construction and supervision; it has proven itself competent under previous projects. The Central Planning Service and the Infrastructure and Maintenance Department, also aided by consultants, will be responsible for implementation of the training scheme and road maintenance. 44. Construction works on RNI and the maintenance and training studies are expected to start in late 1976. The construction period for RNI is estimated at two years, against three and a half years for the Tsiroanomandidy- Maintirano road. The results of the maintenance studies should be available by mid-1977 and implementation of the recommendations will stretch over approximately three years. The project completion date would be mid-1980.  Procurement and Disbursements 45. Contracts for reconstruction of the 67 km section of RNI, construc- tion of all bridges, as well as for the purchase of maintenance equipment, (other than spare parts), weigh bridges, scales and vehicles will be awarded after international competitive bidding in accordance with IDA guidelines. Spare parts will be procured through local shopping. For construction works a 7.5 percent preference in bid evaluation will be allowed to local contractors. The earth works of the Tsiroanomandidy-Maintirano road are not suitable for competitive bidding since their scope and dispersion over the 370 km of the road would result in high costs if executed by contractors. They will be carried out by a force account unit of the Ministry of Public Works, with the assistance of a consulting management team. 46. Disbursement from the credit will finance 70 percent of construction works relating to RNI and the bridges on the road from Tsiroanomandidy to Maintirano, 100 percent of foreign expenditures or 80 percent of local expenditures for consulting services, and 100 percent of foreign expendi- tures or 90 percent of local expenditures for maintenance equipment, spare parts, weigh bridges, scales, vehicles, training and studies. 47. The US$5.0 million BADEA loan will finance 94 percent of the cost of equipment required for the force account works on the Tsiroanomandidy- Maintirano road (about US$4.0 million), and 20 percent of the operating cost of the force account tnit (about US$1 million). Benefits and Risks 48. Both all-weather project roads would provide a direct connection between Tananarive and the western part of the country. Reconstruction of RN1, the cost of which, including contingencies, is US$10.0 million, will result in savings through reduced transport costs, and its economic rate of return is estimated to be 13 percent. The Tsiroanomandidy-Maintirano road will open up an area with substantial agricultural potential. The justifi- cation for this road is thus primarily a developmental one, and the bene- fits will depend to a large extent on the implementation of the Village Livestock project, which is presently encountering some problems (Annex II, page 4). However, this situation should improve and the project should ultimately be implemented successfully. The transport benefits are expected to be passed on to the farmers, since the highly competitive structure of the transport industry will exert pressure to reduce tariffs. The rate of return for this road, the cost of which is US$12.5 million, is estimated to be 12 percent. The evaluation of benefits excludes the complementary value to the Livestock sub-sector. The economic rate of return for both roads combined, which account for 70 percent of total project cost, is 12.2 percent. This aggregate rate of return excludes the project components for training and improving road maintenance, the cost of which is US$7.3 million, which will safeguard existing investments in infrastructure, but for which no meaningful rate of return could be estimated because the exact programs have still to be determined. However, they will result in improved work organization, increased efficiency in operating and maintaining equipment, improved road maintenance procedures and improved capability to enforce axleload regulations.  - 14 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 49. The draft Development Credit Agreement between the Democratic Republic of Madagascar and the Association, the Report of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement of the Association and the text of a draft resolution approving the proposed credit are being distributed to the Executive Directors separately. 50. Special features of this project are referred to in paragraphs 26, 39, 40, 42 and 47 of this Report. The effectiveness of the BADEA Loan Agree- ment is a condition of effectiveness of the Development Credit Agreement (Section 6.01, draft Development Credit Agreement). 51. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 52. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments June 2, 1976  AIEX I COUNTRY DATA - MADAGASCAR Page 1 of 4 pages SOCIAL INDICATORS LARID AREA (THOU K EFRRC oUIIE 190 * --- REFEENCE COU-- MAME --;;IAI ft",~~~~~~~~~OSY RIECENT 48.L1 52160 e EeSTIMAT ItErA SnEa 0 A IMP. ALAVSIA CXP PEA CAPITA (Usti 110.0 10.0 10.0 L