Madagascar - Mangoky Agricultural Development Project

Document of The World Bank r!L '., pt : ' FOR OFFICIAL USE ONLY Report No. 2178-MAG MADAGASCAR MANGOKY AGRICULTURAL DEVELOPMENT PROJECT STAFF APPRAISAL REPORT February 14, 1979 Eastern Africa Region Central Agriculture Division This document bas 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.  CURRENCY EQUIVALENTS Currency Unit = Malagasy. Francs (FMG) US$1.00 = FMG 225 /1 FMG 100 = US$0.44 WEIGHTS AND MEASURES Metric System Metric British/US Equivalents 1 meter (m) = 3.3 feet 1 cubic meter (m3) 3 = 35.31 cubic feet 1 cubic meter per second (m /sec) 35.31 cubic feet per second 1 hectare (ha) = 100 ares = 2.47 acres 1 kilometer (km) 2 0.62 mile 1 square kilometer (km ) = 0.39 square mile (sq. mi.) I kilogram (kg) = 2.20 pounds (lb) 1 liter (1) = 0.26 U.S. gallon (gal) 0.22 British gallon (imp. gal) 1 metric ton (m ton) = 2,204 pounds (lb) ABBREVIATIONS BTM Bankin'Ny Tantsahe Mpamokatra - National Rural Development Bank CENRADERU/ Centre national de recherche appliquee au developpement rural - FOFIFA Agricultural Research Agency CFDT Compagnie Francaise pour le Developpement des Fibres Textiles - French Textile Company FAC Fonds d'aide et de cooperation of the French Government FED Fonds europeen de developpement - European Development Fund IFAD International Fund for Agriculture Development SAMANGOKY Society pour l'amenagement et la mise en valeur de la Vallee du Bas Mangoky - Development and Production Agency for the Lower Mangoky Valley SINFA Societe d'interet national pour la production agricole - National Agricultural Production Company /1 Exchange rate prevailing at the time of appraisal.  FOR OFFICIAL USE ONLY - i.i - SODEMO Societe pour le developpement economique de la region de Morondava - Economic Development Agency for the Morondava Region FISCAL YEAR Government - January 1 - December 31 SAMANGOKY - October 1 - September 30 This document has a restricted distribution and may be used by recipients only in the performance of their officiai duties. Its contents may not otherwise be disclosed without Worid Bank authorization.  - iii - MADAGASCAR APPRAISAL OF THE MANGOKY AGRICULTURAL DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. I. PROJECT BACKGROUND ....... ................................. 1 II. THE AGRICULTURAL SECTOR .................................. 1 A. General .............................................. 1 B. Major Crops and Livestock (Except Rice and Cotton) .... 3 C. Government Services ... ............................ 5 D. Irrigation Systems. .... 8 E. Government Development Plans.. . 9 III. THE SUB-SECTOR - RICE AND COTTON PRODUCTION, PROCESSING AND MARKETING ............................................ 10 A. Rice ........................ ........................ id B. Cotton ..................... ......................... 12 IV. THE PROJECT AREA AND SAMANGOKY ........................... 15 A. Tulear Faritany ............................................ 15 B. The Mangoky - The Region and the River ............. .. 16 C. Mangoky Development Master Plan .............. ....1.... 1 D. Samangoky .............. .. ............................ 19 V. THE MORONDAVA IRRIGATION AND RURAL DEVELOPMENT PROJECT (CREDIT 322-MAG) ................... .... .......... 20 VI. THE PROJECT ............... ............. * ......................... 22 A. General Description . .... .... . ... .... .................. 22 B. Detailed Features .................................... 23 C. Project Costs ............................................. 29 D. Financing ............. ............................... 31 E. Procurement .......................................... 32 F. Disbursement ........ ................................ 33 G. Accounts and Audits ...... ........................... 33 H. Environmental Impact . . ...... ................. ....... 34 This report is based on the findings of an IDA appraisal mission to Madagascar in April 1978, composed of K. Marshall, L. Pham, S. von Klaudy (IDA) and P. Jutras (Consultant).  - iv- Page No. VII. ORGANIZATION AND MANAGEMENT ............................. 35 A. Project Management . ...... . . 35 B. SAMANGOKY ......36 C. Project Preparation .... 40 D. Project Implementation Schedule ..................... 41 E. Monitoring and Evaluation ..... ...................... 41 VIII. AGRICULTURAL PRODUCTION AND PRODUCER BENEFITS ........... 42 A. Technical Features .................................. 42 B. Producer Benefits ...... ............................. 44 C. Production Estimates ................................ 45 IX. GOVERNMENT AND SAMANGOKY BENEFITS ................... .... 45 X. MARKETS AND PRICES ....... ............................... 47 XI. ECONOMIC BENEFITS AND JUSTIFICATION .... ................. 48 XII. AGREEMENTS REACHED ....... ............................... 50 Supporting Tables and Charts: Table 1 Summary of Project Costs Table 2 Project Financing Plan Table 3 Estimated Schedule of Disbursement Table 4 Project Implementation Schedule Table 5 Farm Models Table 6 SAMANGOKY Cash Flow Table 7 SAMANGOKY Agricultural Cash Flow Table 8 SAMANGOKY Project Related Cash Flow Table 9 Economic Rate of Return Analysis Chart 1 Ministry of Rural Development Organization Chart 2 SAMANGOKY Organization List of Material Available in Volume II Maps Madagascar - Agriculture and Rural Development IBRD 13654R Mangoky Agricultural Development Project IBRD 13655  MADAGASCAR APPRAISAL OF THE MANGOKY AGRICULTURAL DEVELOPMENT PROJECT I. PROJECT BACKGROUND 1.01 The Government of Madagascar formally requested in March, 1978,that the Bank Group finance an agricultural development project in the Mangoky Valley. The proposed Project represents the fourth and final tranche of the first phase of a long-term master plan for the development of the Mangoky delta; previous investments have been financed by the Fonds D'Aide et de Cooperation (FAC) of the French government and by the European Development Fund (FED). The Project proposal was prepared by the Ministry of Rural Development and by the Societe Malgache d'Amenagement du Mangoky (SAMANGOKY), the parastatal development agency responsible for land development and man- agement in the area, with assistance from consulting engineers (SOGREAH and SOMEAH 1/). This report is based on the findings of an IDA appraisal mission in April 1978, composed of K. Marshall, L. Pham and S. von Klaudy (IDA), and P. Jutras (Consultant). II. THE AGRICULTURAL SECTOR A. General 2.01 About 85% of Madagascar's population of about 9.22/ million live in the rural areas, and agriculture dominates the economy. Agriculture contri- butes about 40% of total GDP, accounts for more than 80% of export earnings, and supports directly over 80% of the population. Madagascar's agricultural sector is striking in its diversity. The rural economy varies with the sharply different geographic regions; Madagascar produces a very wide range of crops and other agricultural produce, and a variety of production systems are employed, ranging from large-scale mechanized and sophisticated production systems to the simplest, small-scale traditional farming. This diversity has to some extent protected Madagascar against the vicissitudes of international commodity prices and adverse climate (drought and cyclones being ever-present hazards). It also contributes to wide disparities in wealth and level of development among geographic regions. In many areas, the standard of living is close to subsistence level, while in others, the population is relatively prosperous. 2Although the country is sparsely populated (average of 16 inhabi- tants per km ), there is great pressure on cultivable land in some regions. Owing mainly to different ecological conditions, the central highlands and particularly the area around Tananarive are more developed and prosperous than the coastal areas, and the south is particularly poor. 1/ SOGREAH - Societe Grenobloise d'Etudes et d'Applications Hydrauliques SOMEAH - Societe Malgache d'Etudes et d'Applications Hydrauliques. 2/ According to the latest available census data, mid-year population in 1977 is estimated to be only 8.0 million which would raise GNP per capita to US$240.  2.02 Geography has had a vital influence on Madagascar's agricultural development. Climate, topography, soils, and natural vegetation vary widely among different regions of the island, and have influenced the development of quite distinct production systems. In addition, communications links in many parts of Madagascar are very difficult, and the road network is in general poorly developed; this has contributed to regional distinctiveness and to the isolation of many areas. Rice cultivation and cattle husbandry are two common denominators found in almost every part of Madagascar, but most other agricultural activities are concentrated in a few specific areas. There are five major agricultural regions: (a) the central plateau includes the highlands extending north - south in the center of the island; the plateau is hilly, bisected by small valleys and a few larger basins, and climate ranges from sub-tropical to temperate. Population is concentrated in this region, and most suitable land is under intensive cultivation. Rice is the dominant crop, supplemented by other food crops (notably manioc), fruits and vegetables, and cattle; (b) the east coast constitutes a long, narrow belt; climate is tropical, rainfall is high, and the cyclones which strike Madagascar annually concentrate their force in this area. Population here is relatively dense; coffee is the dominant cash crop, with rice the staple food crop; (c) the northern zone also has a tropical climate and high rainfall, but topography is more varied than on the east coast. Population is less dense, and is concentrated in the major production zones. Many of Madagascar's export and industrial crops are concentrated here, notably spices (vanilla, cloves, pepper) and sugar; (d) the west coast constitutes a vast plain intersected by broad river valleys. Climate is drier, although rainfed cultivation is possible in most areas. The region offers excellent natural pastures while the valleys have rich potential for irrigated crops or culti- vation on the flood plains, but most areas remain relatively underdeveloped and population is sparse; (e) the south is Madagascar's least developed region; climate is relatively arid and agricultural potential is limited also by soils and topography. The population depends largely on traditional cattle re2ring for their livelihood. Madagascar's total land area is about 592,000 km ; about 5% of land is under cultivation, 60% is used as natural pasture, and the remainder is classified as mountains, deserts, forests, lakes, and urban areas. 2.03 The growth of Madagascar's agricultural production over the past 15 years has been disappointing, with the average rate of increase somewhat less than the population growth rate of 3% a year; from 1970-75, the annual rate of increase was about 2%. This performance largely reflects the low rate of growth of rice production and the stagnation or even decline of the national cattle herd. During this period, production of some crops increased significantly, notably cotton and coffee. In addition, favorable commodity prices have increased the value of key exports (coffee, cloves). The impact on the overall economic picture has, however, been limited because of the paramount importance of rice and livestock. Madagascar was a net exporter of rice in the past, yet rice imports may exceed 200,000 tons in 1978, while the volume of meat exports has steadily declined in recent years. Reasons for the slow growth of agriculture are complex, but among the key contri- buting factors are serious marketing problems for many crops, agricultural pricing policies, poor roads which hinder extension services, input supply and marketing, and a profusion of institutions responsible for development which lack staff and funds, and whose policies and areas of jurisdiction are poorly  -3- defined. These problems and the sector's disappointing performance should not obscure, however, the fact that the potential for agricultural development in Madagascar is very substantial. Many commodities now being produced offer excellent scope for expansion, while intensification of production in vir- tually all parts of Madagascar could significantly increase output. Par- ticularly on the west coast there are large areas of undeveloped yet fertile land which can be brought into production. In many cases the technical base for expansion or intensification exists already, the result of intensive research and trials. In other areas, notably rice production, limited applied research on new varieties must precede introduction of a number of promising high-yielding new varieties. B. Major Crops and Livestock (Except Rice and Cotton) 2.04 Madagascar produces an extraordinarily wide range of agricultural products: it is quite difficult to find crops, fruits or other species which do not flourish somewhere in Madagascar. Rice, however, occupies the preemi- nent position in the agricultural sector; it is grown on almost one half of all cultivated land, and is the staple food of most of the population. Cattle also play a vital role: long the traditional symbol of Madagascar, cattle are reared throughout the country, while beef is regarded as a supplement to rice in the staple diet of the people. The most important cash crops (which are also the largest contributors to exports) are coffee, cloves, vanilla and pepper. Major industrial crops include sugar and cotton. Exports of major crops may be summarized as follows: Volume Value (tons) (million FMG) 1975 1976 1977 1975 1976 1977 Coffee 67,437 73,000 47,900 14,073 24,738 42,666 Vanilla 858 1,065 1,600 2,966 4,432 8,105 Cloves 22,246 4,700 3,500 17,344 5,813 5,866 Pepper n.a. n.a. 1,990 n.a. 1,311 2,184 Butter Beans n.a. 14,900 10,080 n.a. 792 1,257 Luxury Rice 4,544 n.a. n.a. 1,043 475 376 Sisal 23,086 17,800 15,600 2,134 1,382 1,389 Raffia n.a. n.a. n.a. n.a. 722 407 Meat - Frozen and Canned 6,284 n.a. n.a. 2,429 1,658 1,761 Sea Foods n.a. n.a. n.a. n.a. 2,948 3,798 Sugar 39,897 29,400 26,350 4,770 2,085 2,560 Textiles n.a. n.a. n.a. n.a. 2,065 2,689 Total Exports 63,044 65,369 85,977 2.05 After rice (paras. 3.01-3.07), manioc is the most important food crop; most production is consumed on the farm. Other food crops are naize, beans, sweet potatoes, and potatoes, but these are less important in terms of total output. Coffee is grown mainly on the east coast, and by small- holders; production has increased in the past few years, largely as the  - 4 - result of a program to rejuvenate coffee plantations and introduce new cul- tivation techniques. Production was estimated at about 79,000 tons in 1976 and 89,000 tons in 1977; as a result of the recent boom in coffee prices, coffee contributed almost 50% of Madagascar's total export earnings in 1977. Cloves, vanilla and pepper occupy relatively small land areas in specific geographic areas, but are of major importance for exports. Madagascar is a leading world producer of cloves, which are concentrated on the east coast, north of Tamatave. Production has increased steadily in the past decade, despite variable production reflecting a normal four-year cycle; 1977 output was estimated at about 15,000 tons. Vanilla production is also concentrated in the northeast, and Madagascar is the world's leading producer. Most is grown by an estimated 38,000 smallholder vanilla growers, and production is about 5,000 tons (green vanilla) a year. Pepper is also produced in the northeast and west; production ranges between 3,000 and 5,000 tons a year. Sugar is produced in four existing estates, one on the east coast, and three in the northwest. Sugar production has remained relatively constant, and new investments have not been made for some time. About two-thirds of sugar production is consumed domestically and the remainder is exported, most to the EEC. Cotton production is discussed below (paras. 3.08-3.13). Tobacco was formerly an important cash crop, particularly in the current cotton production areas; however, production has declined recently, largely because of competi- tion from cotton. Oil seed production has increased slowly in recent years, and Madagascar imports increasing quantities of fats and oils. Oil palm and coconut schemes are being implemented on the east coast, and in the west efforts are being made to promote peanut production, which has declined in recent years. The inefficiency of the processing industry, limited extension services, and controls on prices have curtailed growth. Madagascar produces a wide range of minor commodities, including wine, tung oil, medicinal plants, ylang ylang, raffia and aleurites; none makes a major contribution to total output, but they have important local effects and collectively could make a significant impact on total agricultural production and exports. 2.06 Livestock. Cattle are the traditional symbol of Madagascar (the curved horns of the Malagasy zebu are pervasive emblems of the nation), and much of the population is heavily dependent on livestock production. Madagascar has important natural advantages for livestock production, with a comparatively Rood position regarding animal diseases and vast areas of natural pasture. The cattle herd, variously estimated at between 7 and 11 million head, virtually all raised on an extensive basis, is owned by traditional herders who use almost no modern techniques and make minimal cash investments for livestock. Herd productivity is low and only a small part of the herd enters commercial channels (perhaps 3-4% of the total herd a year); production is stagnating, and marketed supplies are probably declining, while domestic demand has rapidly increased. The principal causes are lack of a clear national program to aid traditional livestock producers, pricing policies which limit financial incentives to producers, and a marketing policy, aimed at reducing the role of private intermediaries, which does not function effectively. If these problems are resolved Madagascar could be restored to its previous position as a major beef exporter. Madagascar, which has traditionally exported beef,  - 5 - primarily to France and to other Indian Ocean islands, obtained a quota for duty free exports to the EEC under the Lome Convention. There is excellent potential for other forms of livestock production in parts of Madagascar, notably pigs, poultry and dairy; the Middle West region, west of Tananarive, in particular offers good potential for mixed farming. 2.07 Forestry production is of major importance in two areas, along the east coast escarpment east of Tananarive, and in the southern plateau area around Fianarantsoa. Here about 100,000 hectares have been reforested with pine. Major projects based on forest industries are currently under study. Fishing is increasing in importance; Japanese fleets fish Malagasy coastal waters, and have been largely responsible for a marked increase in shellfish exports. Otherwise fishing, both sea fishing and inland fishing, offers excellent potential, but it has not yet been exploited. Farming and Production Systems 2.08 Agricultural production systems vary from sophisticated, mechanized production systems, as for cotton in the northwest, to very simple subsistence agricultural techniques. Farming techniques for smallholders vary quite widely among regions, ranging from relatively sophisticated rice cultivation techniques involving elaborate terracing and partial water control systems to slash and burn cultivation and semi-nomadic cattle husbandry. Private enter- prise has dominated agricultural production in the past, but the Government is playing an increasingly active role; most noteworthy is the nationalization of the sugar industry in December 1976, and the Government's assumption of responsibility for marketing of rice and other foodcrops, for cattle market- ing, and for meat processing and exports. The Malagasy government is empha- sizing the role of parastatal enterprises in its new political orientation ("socialist enterprises"). State farms under the Ministry of Rural Develop- ment also are involved in a range of crops. The Government is now emphasiz- ing socialist cooperatives for farmers, but very few have been established to date; the same applies for collective production within the fokonolona system. Traditional, largely subsistence farming dominates Madagascar's agriculture despite these developments, and most of Madagascar's estimated 1.5 million farm families are smallholders. Traditional land rights prevail in most of Madagascar; these recognize individual rights to cultivated land, with rights passed on to heirs, and collective (fokonolona) rights to pasture. C. Government Services 2.09 A large number of institutions have responsibilities for agricul- tural production and development, and their organization reflects both the complexity of the sector as a whole, and the historical evolution of insti- tutions and production patterns. The Ministry of Rural Development and Agrarian Reform is the central institution for rural development programs. The Ministry has four major operating departments; they are organized sepa- rately at a regional level, normally down to the fivondronan-pokonolona (sub- prefecture). The Agriculture Department provides the basic extension service, concerned principally with plant protection and to some extent extension;  - 6 - Agricultural Engineering (Genie Rural) develops and operates official irri- gation systems, provides other services such as tractor hire and water devel- opments, and oversees Ministry construction projects; the Livestock Department is principally concerned with provision of veterinary services, and is also responsible for marine fisheries; and Forestry is responsible for reforesta- tion programs, but also seeks to control brushfires (a widespread problem), and to promote inland fisheries. A fifth Department of Programming is respon- sible for planning, and for overseeing semi-autonomous regional authorities, which are part of the Ministry itself, and parastatal agencies. The Depart- ment of Agrarian Reform is principally concerned with redistribution of land formerly farmed by expatriates. In addition to the Ministry's basic ser- vices and departments, several regional extension agencies provide services to farmers in parts of Madagascar. These are formally part of the Ministry but tend to function quite autonomously. Most were part of the GOPR (Groupe- ment d'Operation des Productions Rizicoles), a large extension project, now discontinued, which was financed by the FED. The extension organizations include the URER's (Unite regionale d'expansion rurale) of Itasy, Tananarive, Antsirabe, Ambositra, and Fianarantsoa, the ZER (Zone d'expansion rurale) of Ambilobe, and ODEMO, a development agency for the Middle West. An on-going UNDP rural development program in the south is developing its own basic ex- tension organization and services (Operation Androy). About 26 parastatal agencies operate under the aegis of the Ministry of Rural Development; some are regional development authorities, normally created in conjunction with externally-funded development projects (5 of these financed by the Bank Group); others are more akin to state farms organized for specific produc- tion activities (silk culture, coffee, citrus, and ranching, for example). SAMANGOKY, the agency responsible for the Mangoky developments, is among these institutions. Promotion of the principal export crops is principally the responsibility of stabilization funds: these finance extension services, road development, and crop protection (among other activities) from their own resources; these services are supervised at present by the Ministry of Economy and Trade. In addition, several Government-owned companies are involved in marketing of agricultural products. Agricultural Research 2.10 Agricultural research has been centralized since 1972; previously, research was carried out by a large number of semi-autonomous agencies and institutions, most managed by external (largely French) institutions. All research now comes under the Ministry of Higher Education and Scientific Research; CENRADERU (Center for Agricultural Research for Rural Development) or FOFIFA, as it is also known, is a semi-autonomous body responsible for all agricultural research (including socio-economic analysis); it has few formal links with extension services, as it comes under the central research autho- rity. CENRADERU has been severely over-burdened with the wide range of responsibilities and activities it has inherited, and suffers from a severe lack of qualified staff and funds. It carries out a number of research schemes with direct support from the Government budget; other projects are implemented on a contractual basis. The Government has recently requested UNDP assistance for CENRADERU, to assist in strengthening infrastructure and in training skilled manpower required for a wide range of research activities. The most critical area where assistance is required is in programming of ap- plied research in rice production, notably field trials of new rice varieties.  - 7 - other areas also operational research has lapsed because of staff shortages; an important instance is the case of cotton where routine research on renewed cotton varieties has lapsed in recent years. Local Government 2,11 The Malagasy Government has undertaken since 1972 a major reorgani- zation of local administration and government. This reform involves the establishment of representative institutions at four levels, replacing the territorial administration of provinces, prefectures, sub-prefectures and cantons. The new "fokonolona" system reflects an effort to associate tradi- tional institutions and practices with a more representative and responsive local governnent, and to provide a vehicle for decentralization of power as part of Madagascar's socialist revolution. The reform has been implemented gradually, and many details of the new system, notably regarding local finance, the role of cooperatives within the fokonolona system, and the role of foko- nolona institutions in the control of industry and parastatals, are still being considered by the Government. However, the new entities have assumed important responsibilities, notably for marketing of rice and other agricul- tural products, and for planning and implementation of small-scale development projects. The hierarchy of fokonolona institutions comprises the fokonolonas or fokantanys, which coincide roughly with traditional village units (about 11,400 in Madagascar), the firaissam-pokonolona, at the former canton level (about 1,250), the fivondronan-pokonolona, at the former subprefecture level (about 110), and six faritanys, which have replaced the former provinces. The Ministries of Interior and of Information and Ideology have primary responsibility for supporting the fokonolona institutions. Agricultural Credit 2.12 The BTM (Rural Development Bank) 1/ is the principal source of credit for agriculture, and since 1977, when banking functions were reorgan- ized and private banks nationalized, it is the official and sole institution authorized to lend in the rural areas. Credit for specific commodities is also extended in the form of inputs with costs recovered at harvest time, and through parastatal agencies (such as SAMANGOKY). It is likely that in- formal credit channels supply the needs of many farmers, but no systematic information is available on such lending practices. The BTM was established by Decree of December 27, 1976; the new Bank took over the "agricultural" and "social" portFolios of the BNM (Malagasy National Development Bank) (rep- resenting about 47% of BNM's activities) which was dissolved at the same time. In June, 1977, the BTM absorbed the BAMES, a large commercial bank which was nationialized. BTM inherited a large part of the staff of the BNM and of BAMES, and in virtually all respects has to date continued the lending practices of the predecessor organizations. The BTM is organized into six regional sub-divisions, one per faritany, and operates through a network of branches (41 branches and 30 offices). The Government's objective is to establish one branch per fivondronan and one office per firaissam. At head- quarters, the General Manager and Deputy General Manager, Operations, assisted by three Directors, orient and supervise all operations. BTM employs about 1/ BTM is the Malagasy acronym for Rural Development Bank.  -8- 1,050 staff, including 98 professionals. Resources at present comprise BTM's equity (FMG 4.5 billion), deposits, Central Bank rediscount facilities, and outstanding loans from the CCCE to BNM. BTM's lending has expanded rapidly in the past three years. BTM is, however, limited in its rural development lending by shortages of resources. Loan approvals for 1976 were FMG 21.8 million (US$100,000) for long-term loans, FMG 548.4 million (US$2.4 million) for medium term loans and FMG 231.8 million (US$1.0 million) for short-term loans. A high proportion of short and medium term credit has been extended for marketing. In addition, BTM has recently increased very substantially its credit to farmers through the fokonolona institutions (as moral guaran- tor). BTM is likely to increase its activities rapidly in the future, as the Government views it as a key institution to support its rural development policies and the primary source of rural credit. BTM promises well to fulfill this role as it has a competent and experienced staff, a relatively large branch network, and sound financial experience, lending practices, policies and procedures. A project to support the BTM's credit activities is currently under preparation with RNEA assistance. D. Irrigation Systems 2.13 Large areas of land in Madagascar are irrigated or involve some form of water control system, including most land used for production of rice. There are three categories of irrigation or water control systems: official systems, small irrigation schemes, and family rice fields. Official systems are those developed and managed by the Government, either with external finan- cial support or with local funds. These systems range in size from about 300 to 10,000 hectares, and the total number is estimated at 145 systems, with a total of about 260,000 hectares. Many systems, however, are incomplete or poorly designed, while maintenance problems severely impair the effectiveness of virtually all systems. The Ministry of Agriculture estimated that in 1976 only about 125,000 ha out of the 260,000 ha developed for irrigated agriculture was actually cultivated; this illustrates the severity of operating and main- tenance problems and the need for repair or rehabilitation in many networks. The largest official systems are in the Lac Alaotra area and in the Betsiboka Valley south of Majunga. Small irrigation schemes are those developed with local funds with varying degrees of support by the Government; there are an estimated 900 such schemes. The average area is about 125 ha, but they range in size from about 5 ha up to 1,000 ha. Since they are not official, classi- fied systems, the Government does not maintain or operate these systems; in many cases these systems are operated by local communities, but in virtually all cases operation is inefficient and funds for maintenance inadequate. Family rice fields cover up to 750,000 hectares and range in size from one are to perhaps five hectares. All were developed by farmers themselves, and involve some water control measures, from basic terracing of valley bottoms to simple storage dams. All are maintained by farmers with varying extension assistance from Government services.  - 9 - E. Government Development Plans 2.14 The Government of bMadagascar's broad objectives for rural develop- ment are articulated in a development plan approved in November-December 1977. It includes a long-term strategy, for the period 1978-2000, a three-year plan for 1978-80, and a program for 1978. The new plan does not represent an abrupt departure from the previous 1974-77 plan, but is more expansive in its treatment of socialist institutions and objectives. In essence, Madagascar's stated objectives for the year 2000 are to transform the society and to develop a strong and self-sufficient basis for development; the period 1978-84 is seen as a period of laying the foundations, 1985-92 are for consolidation, while 1993-2000 are to be years of expansion and growth. In the long-term plan, three goals are emphasized: (a) attainment of self-sufficiency in food and development of basic industries, largely supplied by the agricultural sec- tor; (b) decentralization of all economic activities, through the fokonolona system, and assumption of a more active and direct Government role in the economy; and (c) narrowing the gap in distribution of incomes, and promoting more balanced growth among regions. Agriculture is to represent the basis of all developments, and will receive a major share of investment and effort. The plan emphasizes the linkage of Madagascar's economical, political, social and cultural development to the establishment of a socialist regime. For agriculture, the major proposed changes entail promotion of an agrarian revolution and creation of socialist cooperatives; the agrarian revolution principally involves Government assumption of control of cultivated land, particularly estates or plantations which have been lying idle for some time, or newly-developed land; socialist cooperatives would theoretically be re- sponsible for this land. The plan foresees state control over basic indus- tries, particularly those related to agriculture, and states that at a later stage the fokonolona institutions (para 2.11) and the socialist cooperatives should manage these basic industries. 2.15 The 1978-80 plan includes specific objectives for agriculture. Agriculture is expected to grow more slowly than other sectors: average growth rate of value added is expected to be 4.3%, while the rates for mines and energy and industry are estimated at 8.8% and 10.7% respectively. Value added of processed agricultural products such as sugar, rice, fats, and textiles are forecast to grow at higher average rates than the sector as a whole. In 1980 individual farms are expected to contribute about 80% to value added generated in agriculture, cooperatives 10%, socialist enter- prises 2.5% and private enterprises 2.5%. About 15% of total investments in real terns are assumed to be allocated to agriculture, most of it by the Government. The plan recognizes that, in spite of the growth rates assumed for production, employment possibilities in agriculture will increase very little, reaching about 3.9 million in 1980 (versus 3.5 million in 1975). Industrialization is considered the only feasible long-term solution for the problem of unemployment. The plan aims to improve rural living conditions, thereby limiting migration to the cities.  - 10 - III. THE SUB-SECTOR - RICE AND COTTON PRODUCTION, PROCESSING AND MARKETING A. Rice Production 3.01 Rice is grown on about 50% of permanently cultivated land in Madagascar (about 1.1 million ha), and it is the staple food of the Malagasy diet; Madagascar's per capita rice consumption (190 kg per year) is among the highest in the world. Total production fluctuates around 2 million tons a year; yields thus average somewhat less than 2 tons of paddy per hectare. Total production varies considerably from year to year, in large part as a result of weather conditions; the production trend since 1960, however, has been an average annual increase of somewhat less than 3% a year. Rice is grown throughout Madagascar, but is concentrated in the high plateau area and in the northwest. Of land under rice, family rice fields represent about 70-80% of the total area; these are generally terraced rice fields in valley bottoms, ranging in size from a few ares to perhaps 5 hectares, relying on partial water control systems developed by farmers themselves. Most farmers produce a single crop a year, relying almost exclusively on traditional pro- duction techniques; only occasional surpluses of paddy are sold for cash, as rice is produced primarily for family consumption. Despite extension programs aiming to improve cultivation techniques and introduce new varie- ties, average yields do not appear to have increased significantly in recent years, and most production increases appear to have resulted from bringing new land into cultivation. The remaining 20-30% of land under rice represents organized irrigation schemes developed or supported by the Government (para 2.13). These schemes vary in size and complexity and in the method of organi- zation and land tenure; in the more sophisticated schemes, two crops of rice a year are produced and yields per crop exceed 2.5 tons; in general, however, poor maintenance and incomplete or inadequate irrigation and drainage systems seriously impair the effectiveness of these schemes, with the result that much land is underutilized and yields are little above those of traditional rice areas. The largest and most productive irrigation schemes are in the Lac Alaotra basin and around Marovoay, south of Majunga; these and other large schemes supply a high proportion of Madagascar's marketed rice production. Marketing, Processing and Imports 3.02 Most rice production is consumed by farm families; surpluses are sold in good harvest years, with the bulk of marketed production coming from a few large irrigation schemes. Total marketed production of paddy ranged between 217,000 tons and 309,000 tons in the years 1970-77, representing an estimated 11%-16% of total production. Rice marketing and processing were in the hands of private traders with minimal Government intervention until the revolution of 1972. Subsequently, rice marketing has been entirely national- ized. From 1973-77, the Societe d'Interet National des Produits Agricoles (SINPA), a parastatal company, had a monopoly on marketing - collection, imports, processing and distribution of all agricultural products but par- ticularly of rice. SINPA's marketing operations encountered serious problems, however, with shortages of rice in many areas, increasing requirements for rice imports, and high costs of all marketing activities. In 1977, the Gov- ernment assumed direct responsibility for rice marketing and a marketing  - il - committee, under the chairmanship of the Prime Minister and including repre- sentatives of the key ministries concerned was formed to establish marketing policies and to allocate operational responsibilities among different agencies. The current system functions roughly as follows. Madagascar is divided into 12 marketing regions, and different agencies have been assigned responsibility for rice marketing in these regions; SINPA retains responsibility for the largest area, but various export-import firms (recently nationalized) and other parastatal agencies (including SAMANGOKY) have been assigned marketing responsibilities in various regions. The fokonolona institutions have primary responsibility for collecting paddy within their territorial jurisdiction; they sell paddy to the authorized marketing agency (collecting a commission of Fmg 2/kg). Shipments of rice to deficit regions or storage are directed from a central level, with the Central Bank, the Ministry of Transport and Supply, and the Ministry of Finance all involved in these decisions. This system was instituted only during mid-1977, and it is therefore premature to judge its potential effectiveness. However, since 1972 marketing problems have become progressively worse, necessitating increasing intervention by the Government and the army to assure basic food supplies. There appears to be a growing unofficial market for rice in many parts of the country. 3.03 Paddy is milled into rice in a large number of mills scattered throughout the country; many have been nationalized and are operated by SINPA; others are still operated by private traders but charges are fixed by the Government. There is excess capacity in existing mills for the cur- rent volume of marketed production but equipment is generally old and out- dated and significant new investments in milling capacity are likely to be required in the near future. 3.04 Madagascar has historically been self-sufficient in rice, and between 1960 and 1970 up to 66,000 tons of rice a year was exported; much of this was luxury quality rice which fetched high prices on the world mar- ket, but on balance Madagascar was a surplus producer. Since 1970, however, this position has changed; rice exports have virtually ceased, and Madagascar imports significant quantities of rice to meet the growing deficit in domestic production. Rice imports have evolved as follows (in tons): 1973 1974 1975 1976 1977 27,758 130,134 63,643 71,243 105,190 Rice imports represented an estimated 7% of the total value of imports in 1977. The situation threatens to grow worse, as a serious deficit in produc- tion, the result of adverse weather, is forecast for 1978, and imports of up to 250,000 tons of rice may be required. Prices and Subsidies 3.05 The Government currently fixes prices of paddy and rice at the pro- ducer and retail levels. Prices are normally reviewed on an annual basis; the final decision on the price of rice is normally announced by the President. The producer price of paddy is currently FMG 35/kg (US$0.16): the retail price of rice is FMG 55 (US$0.24). These prices apply throughout Madagascar. Fur- ther, the Government fixes margins for marketing, processing and wholesale  - 12 - transactions. Current price levels involve a significant direct subsidy to consumers. For domestically produced rice, this subsidy is currently FMC 15-25 per kilo; 1/ the direct consumer subsidy was introduced in 1977 when the producer price of paddy was increased (from FMG 30 to 35) while the price of rice to consumers was reduced from FMG 65 to FMG 55. It is government policy that the Central Bank reimburses marketing agencies for direct losses from marketing resulting from this subsidy; the Central Bank has provisionally estimated the subsidy at FMG 15/kg of rice. For imported rice the subsidy to consumers is larger; 1977 average cif import costs for rice were about FMG 73/kg (equivalent to US$325 per ton), implying a subsidy of at least FMG 25/kg when transport costs, losses, etc. are taken into account; import costs rose sharply in early 1978 and in April, 1978, the direct consumer subsidy was estimated at at least FMG 40/kg. In addition to these direct subsidies the Government has subsidized marketing operations of SINPA and other agencies by covering losses. 3.06 Rice subsidies for domestic marketing operations are financed by a subsidy fund (Fonds unique de perequation), managed by the Central Bank. Profits from stabilization funds for major export crops (coffee, vanilla, cloves) have been paid into this fund; to date, only about FMG 1.3 billion has been disbursed, which amounts to less than 25% of the direct losses of marketing companies from rice marketing in 1977. Subsidies for imported rice are financed directly by the Government, although a large part of sums committed to date have been converted into a long term loan to the Government by the Central Bank. 3.07 The Government of Madagascar recognizes the grave implications of the present situation of rice production and marketing. Essentially, produc- tion is stagnating, marketing is inefficient and costly, and consumer subsi- dies represent an increasing burden on the Government budget; there is even some evidence that low consumer prices have encouraged an increase in con- sumption of rice in replacement of other food crops. The Government is seeking solutions to these problems, and programs to increase rice produc- tion are accorded the highest priority. The problems are, however, highly complex, with important political implications, for the price of rice, par- ticularly to urban consumers, is an explosive issue. Intensive efforts to increase production of rice offer the best long-term solution, while in the -mmediate future the Government must act to reorganize rice marketing and to rationalize pricing policies. These problems and their implications for the proposed Project are discussed further in paras. 10.01-10.02. B. Cotton Production 3.08 Cotton is one of the major industrial crops in Madagascar, and the steady increase in cotton production is one of the most encouraging features 1/ This subsidy is computed as follows by SAMANGOKY (per kilo): cost of paddy FMG 35, commission to fokonolona FMG 2, transport FMG 3.5, drying FMG 0.5, losses (3%) FMG 1.2, milling cost FMG 3, conversion paddy/rice 65%, marketing, interest costs etc. (6%) FMG 4.2 equalling a wholesale cost of about FMG 74.  - 13 - of Malagasy agriculture in the recent years. Cotton is produced almost ex- clusively on the west coast, mostly on flood plains as floods recede, but also under rainfed conditions and under full irrigation. Cotton production has increased rapidly during the past decade, from about 9,000 tons in 1967 to more than 37.000 tons in 1977; in 1975 cotton production declined because of adverse weather conditions. Average yields have decreased since 1974; they averaged about 1.8 t/ha in 1977 which was equivalent to the yields in 1967; this was partly the result of uncertainties about future political developments which limited investments by the large privately owned planta- tions. Cotton production, area, and average yields for 1976-1977 are sum- marized below: Production Area Yield (tons) (ha) (tons/ha) 1967 9,106 5,205 1.8 1968 11,469 7,646 1.5 1969 16,784 8,762 1.9 1970 18,714 10,313 1.8 1971 21,695 10,851 2.0 1972 23,882 10,101 2.2 1973 30,628 13,361 2.3 1974 33,290 16,089 2.1 1975 30,729 16,342 1.9 1976 34,731 17,515 2.0 1977 37,400 20,400 1.8 3.09 Cotton is produced by private expatriate companies, Government farms (fermes d'etat), and smallholders. While private companies still con- tribute nearly 50% of total cotton production, their share has decreased considerably. The share of Government farms has diminished also whereas smallholders produced 42% of the cotton in 1977 as compared to about 28% in 1971. Smallholder cotton has predominated in the southwest, around Tulear and Ihosy, under rainfed conditions. However, SAMANGOKY's smallholder irri- gated production is playing an increasingly important role and organized settlement schemes based on cotton have been initiated in the northwest. The shares of the different groups are summarized below: 1971 1972 1973 1974 1975 1976 1977