Madagascar - Cotton Development Project

Document of The World Bank FOR OFFICIAL USE ONLY LE 0 Report No 4514-MAG STAFF APPRAISAL REPORT MADAGASCAR COTTON DEVELOPMENT PROJECT November 30, 1983 Eastern Africa Projects Central Agriculture Division 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  CURRENCY EQUIVALENTS Currency Unit = Malagasy Francs (FMG) US $1.00 = FMG 475 FMG 100 = US $0.27 WEIGHTS AND MEASURES (Metric System) Metric British/US Equivalents 1 hectare (ha) = 2.47 acres 1 kilometer (km) = 0.62 mile 1 square kilometer (km2) = 0.39 square mile 1 kilogram (kg) - 2.20 pounds 1 liter (1) = 0.26 US gallon 0.22 Imperial gallon 1 metric (tonne) = 2,204 pounds ABBREVIATIONS AND GLOSSARY BTM Agricultural Credit Bank CCCE Caisse Centrale de Cooperation Economique (French development fund) CFDT Compagnie Francaise pour le Developpement des Fibres Textiles CSPC Caisse de Stabilisation du Prix de Coton FOFIFA Center for Agricultural and Rural Development Research HASYMA Hasy Malagasy, cotton parastatal MIC Ministere de l'Industrie et du Commerce (Ministry of Industry and Commerce) MPAEF Ministere de Production Animale et des Eaux et Forets (Ministry of Animal Production, Fisheries and Forests) MPARA Ministere de la Production Agricole et de la Reforme Agraire (Ministry of Agricultural Production and Agrarian Reform) MTP Ministare des Travaux Publics (Ministry of Public Works) GOVERNMENT ADMINISTRATION (Fokonolona Terrirotial Divisions Fokontany = group of villages Firaisam-pokontany (or Firaisana) group of fokontany (former canton) Fivondronam-pokontany (or Fivondronana) = group of Firaisana (former sub-prefecture) Faritany = group of Fivondronana (former province) FISCAL YEAR Government January 1 - December 31 HASYMA April 1 - March 31 (until 1983) January 1 - December 31 (from 1984) 1/ The exchange rate between the US dollar and the Malagasy franc used in this report is the rate obtaining in the fourth quarter of 1983.  FOR OFFICIAL USE ONLY MADAGASCAR COTTON DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. BACKGROUND A. Project Background .. .................. .............. . to1 B. The Agricultural Sector ...... ........................ 1 C. Recent Performance ...................................... 2 D. Government Policy and Actions ........................ 4 E. Government Services *...................................*.. 6 F. Bank/IDA Projects in Agriculture and Irrigation ...... 9 II. THE COTTON SUBSECTOR A. Production ................. 10 B. Markets and Prices ........ .............. . .13 C. Government Policy and Issues for Development ........15 III. THE PROJECT AREA A. Location and Physic-l Characteristics ... ............. 20 B. Population and Labor Supply ...............*....... ....21 C. Land Tenure .... .......... ....................... 21 D. Production Systems . .............. o............ 22 IV. THE PROJECT A. General Description . ............................ 26 B. Detailed Features ............... ................... .26 C. Project Costs . .. ............................ 31 D. Financing ............................... 32 E. Procurement .................................... 33 F. Disbursements ................... ..... . .34 G. Accounts and Audits ....# .... *.. .................... 35 H. Project Completion Report ....... ................. 35 I. Environment and Health ....... f.. ................... . 35 V. PROJECT IMPLEMENTATION A. General ........................... 37 B. HASYMA ........................................ .. 37 C. Management of Project components . . ................. 40 D. Annual Work Programs and Reports ..................... 42 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.  - ii - Page No. VI. TECHNICAL ASPECTS A. Yield Contraints ......................... ............ 44 B. Extension of Areas .................................. 47 C. Farm Models ......................................... 48 VII. FINANCIAL ASPECTS A. HASYMA . . . 5 .. . .... 50 B. Government ...53 C. Farmers .54 VIII. ECONOMIC BENEFITS AND JUSTIFICATION . . 55 IX. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS . . 58  - iii - SUPPORTING TABLES, ANNEXES, CHARTS AND MAPS Table I - Project Cost Summary (by Component and Time) Table 2 - Project Financing Plan Table 3 - Estimated Schedule of Disbursements Table 4 - Yield Increases and Incremental Crop Production Table 5 - Farm Budgets: Large Farms Table 6 - Farm Budgets: Smallholders Table 7 - Farm Inputs Requirements Table 8 - Agricultural Machinery and Table 9 - HASYMA: Historical and Projected Balance Sheets Table 10 - HASYMA: Historical and Projected Profit and Loss Accounts Table 11 - Government/HASYMA Cash Flow Table 12 - Economic Analysis: Cost and Benefit Streams Table 13 - Economic Analysis: Sensitivity Analysis Chart 1 - Ministry of Agricultural Production and Agrarian Reform Chart 2 - HASYMA Organization Chart Map - IBRD 15921  MADAGASCAR COTTON DEVELOPMENT PROJECT I. BACKGROUND A. Project Background 1,01 First discussions on a possible cotton project were held at a round table conference on the cotton subsector organized by the Government of Madagascar in November 1980. Subsequently, HASYMA (cotton parastatal) prepared a technical note which was submitted to and discussed with IDA. IDA missions visited Madagascar in 1981 and 1982 to discuss Project preparation with Government and a preparation report was submitted by Government in June 1982. This report is based on the findings of the appraisal mission in November 1982 which was composed of Messrs. Y. Wong You Cheong, S. von Klaudy, C. Ward, and Ms. Lem Truong (IDA) and Mr. J. Villeneuve (Consultant). A representative of the French bilateral aid agency, the Caisse Centrale de Cooperation Economique (CCCE), accompanied the mission and participated in discussions. During appraisal the focus of the Project was changed to increase the role of the efficient large private farms and to eliminate extension of HASYMA's direct production as a Project component. Negotiations were held in Washington in November, 1983. 1.02 The main objective of the Project would be to increase cotton production in Madagascar in order to meet domestic cotton fiber demand. To meet this goal, the proposed Project would provide for: (i) increasing the production capacity of cotton producers through the provision of equipment and inputs; (ii) strengthening cotton development institutions, extension services and pest control programs; (iii) implementation of an adaptive cotton research program; and (iv) rehabilitation of cotton tracks in the Project area. B. The Agricultural Sector 1.03 General. Madagascar's total land area is about 592,000 km2; about 5% of land is under cultivation and 60% is natural pasture. Agriculture dominates the economy, contributing about 40% of total GNP and over 80% of export earnings, and supporting directly over 80% of the population, which numbers around nine million. The rural economy of Madagascar is as varied as the climate, topography and soils of the different geographic regions; the country produces a wide range of agricultural produce, and, although traditional small-scale agriculture is predominant, production systems range right up to large-scale mechanized farming. The country is sparsely populated (averaging 16 inhabitants per km2) but there is great pressure on cultivable land in some regions.  - 2 - 1.04 Major Crops. Rice is by far the most important crop. It is followed by cassava, which is mostly consumed on the farm. The most important cash and export crops are coffee, cloves, and vanilla. In 1980 coffee exports contributed almost half of Madagascar's total export earnings, and cloves and vanilla earned another 20%. Other important cash crops, not currently exported, include sugar, cotton and tobacco. Madagascar also produces a wide range of minor commodities, including wine, tung oil, medicinal plants, ylang ylang and raffia. 1.05 Livestock. Cattle raising is a traditional activity in Madagascar, and much of the population is heavily dependent on livestock production. The cattle herd, estimated at around 10 million head, is almost entirely owned by traditional herders employing extensive husbandry systems. As a result, productivity and offtake are low, while the export trade has declined in the face of increasing domestic demand. Nonetheless there is excellent potential for augmenting production through improved herd management and increased offtake, and for increasing output of other forms of livestock, notably pigs and poultry. 1.06 Farming Systems. Most of Madagascar's estimated 1.5 million farm families are smallholders engaged in subsistence farming. Traditional land rights prevail in most of Madagascar; these recognize individual, heritable rights to cultivated land and collective rights to pasture. Smallholder farming techniques range from relatively sophisticated rice cultivation techniques involving elaborate terracing and partial water control systems to slash and burn cultivation and semi-nomadic cattle husbandry. During the 1970s, the Government's role expanded substantially; most noteworthy were the nationalization of the sugar industry in 1976, and takeover of input supply, foodcrop marketing and meat processing and export. C. Recent Sector Performance 1/ 1.07 Sector Performance. The growth of Madagascar's agricultural production over the past 15 years has been disappointing, in marked contrast to relatively rapid growth in the 1960s; the average annual growth rate is estimated at less than 2% since 1970. Sluggish growth in two key subsectors, rice and livestock, together accounting for over 50% of agricultural output value, is the most important factor in the sector's recent stagnation. Export and industrial crop production overall has also grown only slowly. There have been problems in export crop marketing and a precipitous decline in some industrial crops, notably sugar and groundnuts. 1/ Sections C and D of this chapter are an edited version of the Executive Summary of the recent Agricultural Sector Memorandum (Report No. 4209-MAG June 30, 1983).  1.08 The balance of payments picture for agriculture illustrates the impact of these problems. The economy is heavily dependent on agriculture for foreign exchange earnings; agricultural export earnings represented an estimated FMG 70.3 billion (US$204 million equivalent) or 82% of total export value in 1980, and amounted to 90% if processed agricultural products are added. However, prospects for sustaining or expanding exports are uncertain, both because of slow production growth combined with growing domestic demand (for sugar and meat, for example), and uncertain world markets and world market prices, particularly for coffee, cloves, and cocoa. Meanwhile imports of food products are a heavy and growing burden; rice imports in 1982 exceeded 350,000 tons, costing over 20% of the total value of imports. 1.09 The current economic crisis is both an underlying cause and a result of the poor performance of the agricultural sector; recent production declines are increasingly explained by foreign exchange shortages, the deterioration of transportation infrastructure, disruptions in traditional trading circuits, and the scarcity of consumer goods in rural areas. Nevertheless, the sector's problems go far beyond these relatively recent developments, and poor performance over the past decade is also a consequence of Government policies, including desimentive price policies, which have caused serious disruptions in agricultural production systems (notably input supply and marketing), and in institutions responsible for rural development. 1.10 Government policies in recent years have aimed at increasing the state's role in economic management. For agriculture, Government intervention has focused on control of processing industries, marketing systems, and the banking system, rather than on the production base, which remains overwhelmingly in the hands of smallholder farmers. Direct Government intervention, however, has had a major impact on commercial, large and medium scale farming and agro-industrial ventures, both by direct take-overs and through policy measures affecting commercial operations. Government policies have also actively discouraged private investment in agriculture, particularly foreign investment, primarily through selective credit policies and take-overs of private concerns. A critically important area of intervention is the effort to control marketing by nationalizing marketing companies, establishing public marketing monopolies, and strict enforcement of a controlled price environment. These policy interventions have had the widest-reaching and most deleterious effects on the agricultural sector.At the same time, the individual farmer has been neglected, and resources have tended to be allocated to state farming and production ventures and to promotion of cooperative ventures at farmer level.  - 4 - 1.11 Madagascar's long term potential for agricultural development is excellent. However, in the immediate future, intensification of production on land already under cultivation offers the best prospects. The current deteriorated state of the transportation network limits access to most areas where fertile land is underexploited, and heavy infrastructure investments will be needed to develop much of this new land. There is wide scope for increasing yields on existing farms, and development strategies focussed primarily on the smallholder sector offers the best chance of rapid expansion of output. D. Government Policy Orientations and Recent Actions 1.12 Over the past two years there has been general recognition of the failure of agricultural development policies and of the need to revise policies and implement a short term recovery program as the start of a long term growth path. As the overall objective for the agriculture sector in the 1983-85 period, Government has set the restoration of production of key crops at least to levels which have been achieved in past years. In the case of rice, Government's objective is to replace imports within a reasonable time frame. In the longer term Government's objective is to exploit the productive potential of agriculture as the foundation of the country's economic growth. 1.13 Over the past year Government has been discussing with the Bank the elements of a strategy to achieve these objectives. Although the dialogue continues, the following main elements were agreed between Government and the donor community at the Consultative Group meeting in early 1983 as most likely to contribute to achieving the objectives: Short Term emphasis squarely on rehabilitation and urgent recovery measures, with priority to the rice, cotton, coffee, and livestock sub-sectors; - appropriate action to ensure adequate producer incentives, including regular price reviews and increases; focus on prices of rice, cotton, coffee and sugar; - implementation of recovery programs by existing agencies which have the capability; - attention to rural infrastructure, particularly rural access and feeder roads; - support for private enterprises, where appropriate; - emphasis on intensification; and - concentration on rehabilitiation of agro-industrial enterprises or selected large-scale production units of demonstrated priority.  -5- Medium and Long Term - Clear focus on smallholders and privately owned production systems; - balanced development strategy promoting a range of crops and taking into account regional variations; encouragement of diversification of production systems; - sharp curtailment of investment in large scale, and particularly Government-owned and operated, farming ventures; - efforts to divest Government of unsuccessful and unprofitable parastatal ventures, including some sales to private operators or use of management contracts; - reduction in state marketing ventures; and - improvement of agricultural extension in key production areas and reestablishment of agricultural research. 1.14 Over the past year Government has begun to reformulate policies in these directions and to develop a strategy for recovery and future development that follows these lines. Important measures already taken include: (1) Price increases for paddy and rice in May 1982; (2) Reorganization of the Ministry of Agriculture (MPARA) in September 1982; (3) Efforts to clarify responsibilities for carrying out policy in the agricultural sector; (4) Action programs for key parastatals drawn up and implementation begun; (5) Passage of cost recovery legislation for irrigation systems; (6) Action taken to reduce overstaffing in MPARA and parastatals; (7) Comprehensive study for the rice subsector begun; (8) Portfolio review to support investment programming exercise for the agricultural sector underway; (9) review of agricultural research in cooperation with the International Service for National Agricultural Research (ISNAR). 1.15 These measures indicate that Government is taking action to work out and implement a recovery and development program. However, the process will inevitably be a long one and will require a firm and sustained political commitment and a high degree of management skill. An IDA Credit (Cr. 1249-MAG) is financing the Agricultural Institutions Project that provides for necessary studies, training and technical assistance. IDA is also continuing its dialogue with Government at both sector, subsector and project level to monitor the development of the strategy and identify areas where support may be necessary.  - 6 - 1.16 The proposed Project fits very closely into the agreed strategy outlined in Para 1.13 above. Based on smallholder and private farmer production, it will arrest the decline in cotton production of recent years and, through intensification and a modest expansion of areas, provide a rapid boost to output, raising incomes, substituting for imports and employing processing capacity that is already installed. It is designed as a quick disbursing project that will not place a burden on Government funds and will yield rapid returns. Several key policy issues for the cotton sub-sector are also addressed through the Project, notably pricing, rural infrastructure and subsector management. E. Government Services Ministry of Agricultural Production and Agrarian Reform (MPARA) 1.17 The Ministry of Agricultural Production and Agrarian Reform (MPARA) has the lead responsibility among Government institutions for management of the agricultural sector. Its jurisdiction covers basic farmer extension services, rural infrastructure, input supply, plant protection services, soil conservation and irrigation management. It is also responsible for agricultural planning, supervision of many parastatals and for land reform. Between 1979 and September 1982 when it was reorganized, MPARA adopted an essentially decentralized structure, which was intended to support the "fokonolona" institutions2/. However, much of the detail of the activities of these decentralized units and their relations with central units was never thought through. Particular problems arose from the blurring of the functional line of authority between the central technical services of MPARA and field staff. In addition, decentralized budget procedures were complex and time consuming while the tight budgetary situation allowed funds to cover salaries and office expenses and little else. As a result of the many problems associated with the decentralized system, the Ministry was reorganized in September 1982. The new structure is centralized, and staff are organized into line departments representing the major functional disciplines: extension rural works (irrigation systems and mechanization) and input supply. The structure also contained departments dealing with animal production, fisheries and forests, but from July 1, 1983 these were constituted into a separate ministry (MPAEF). A central finance and 2/ The "fokonolona" institutions are the local government units created since 1972 in an effort to decentralize decision making and associate local people with the development process.  administration department has also been established. In the field, staff are organized into their separate functional disciplines and are responsible to their respective department headquarters at Antananarivo. The current structure of MPARA is shown in Chart 1. Technical assistance for a training program to support the institutional changes is being provided under the IDA-financed Agricultural Institutions Technical Assistance Project (Credit No. 1249-MAG). The Ministry of Industry and Commerce (MIC) 3/ 1.18 The Ministry of Industry and Commerce (MIC) has responsibilities which affect the secondary and tertiary levels of agricultural production. On pricing, MIC's Pricing Service makes recommendations on official producer, wholesale and retail prices for a number of crops. These recommendations are in theory based on an analysis of production costs, but pricing decisions have often been taken more with a view to keeping consumer prices down than to maintaining incentives in the production chain. However, beginning with a round of price increases on rice in 1982, Government is implementing a more realistic pricing policy, and considering relaxing price controls for some crops. Another important role of MIC affecting agriculture is allocation of foreign exchange, where MIC is responsible, with the Central Bank, for issuing quotas and licenses. MIC's administration of this system during recent years has been complicated by the extreme shortage of foreign exchange, and the system has failed in its objective of channeling available foreign exchange in a predictable fashion to priority needs. Finally, MIC plays a key role in its responsibilities for-"industrial investment as much of this investment is designed to process primary products from the agriculture sector. Lack of coordination between MIC and MPARA in policy and programs, and conflicting initiatives, have plagued several subsectors, notably livestock, cereals, cotton (para 2.12) and edible oil production. The Ministry of Public Works (MTP) 1.19 MTP is responsible for building and maintaining the country's primary and secondary road network. Its operational capacity has been severely limited in recent years by lack of funds and qualified field staff. As a result, the country's primary and secondary road network is deteriorating and poses substantial obstacles to the exchange of goods and services within the economy. Although local government authorities are officially responsible for the tertiary or feeder road network, their limited resources and organizational ability have meant they have done very 3/ With the July 1983 reorganization of ministerial responsibilities, MIC was divided into two new ministries, of which the respective functions are not yet finalized - the Ministry of Industry, Energy and Mines, and the Ministry of Commerce.  -8- little to maintain and upgrade the road network. As a result many rural communities are finding themselves increasingly isolated. In light of current financial constraints, Government has decided to focus on sections of the road networks that have demonstrated economic importance (the 'economic network") and an IDA project (Sixth Highways) that would support this strategy has been negotiated. Agricultural Research 1.20 The National Center for Applied Research on Rural Development (FOFIFA) was established in 1974 to bring together research activities previously conducted by a number of specialized research institutes, mainly overseas stations of French research organizations. FOFIFA was under the supervision of the Ministry of Higher Education between 1977 and 1981, which severely weakened the relationship between research and field applications. As a first step towards correcting the situation, Government transferred the research function back to MPARA in January 1982. Due to severe shortages of qualified staff, equipment and funds, FOFIFA has been forced to limit its research program to the principal food and cash crops. Reviving effective production-oriented research is now a top Government priority. A study of FOFIFA, financed under the Agricultural Institutions Technical Assistance Project, has recently been carried out and a report is being prepared, which will serve as the basis for a thorough rehabilitation of the institution. Agricuitural Credit 1.21 Formal credit available to farmers is limited at present, largely for reasons linked to the economic crisis and the deterioration of rural institutions. The National Rural Development Bank (BTM), which is being assisted under the Agricultural Credit Project (Credit No. 1064-MAG), is a relatively strong institution that has generally been able to maintain its banking principles and its profitability in a difficult environment. Lending to the smallholder has always respresented a very small percentage of BTM's lending, never more than 5% of total lending. For some years BTM loans to smallholders were made in cooperation with the fokonolona institutions in a collective credit program designed to reach the maximum number of small farmers. However, recovery rates have dropped in recent years and BTM has suspended the scheme in many areas, resulting in a significant drop in lending activity. In addition, due to the scarcity of foreign exchange, few inputs are available in Madagascar. To help remedy the current situation, part of the IDA Credit is being used to finance fertilizer imports destined for smallholders in selected rice growing areas. These fertilizers will be provided to farmers under lending operations directed to individuals, a program that BTM is developing in conjunction with extension services in those areas where it is convinced of the soundness of institutions and the value of the extension package.  - 9 - F. Bank/IDA Projects in Agriculture and Irrigation 1.22 To date, the Bank Group has supported nine agricultural development projects in Madagascar. Four projects have closed: The Lac Alaotra Irrigation Project (US$5.0 million), the Morondava Irrigation Project (US$15.3 million), the Beef Cattle Development Project (US$2.8 million) and the First Forestry Project (US$13.0 million). The First Village Livestock and Rural Development Project (US$9.6 million) has been completed and will shortly be closed; six other projects are under implementation: the Mangoky Agricultural Development Project (US$12.0 million); the Agricultural Credit Project (US$10.0 million); a Technical Assistance Project to identify means of developing the Plain of Antananarivo (US$2.3 million); a Second Forestry Project (US$20.0 million); an Agricultural Institutions Technical Assistance Project (US$ 5.7 million); and a Second Village Livestock Project (US$ 15.0 million). A Lac Alaotra Rice Intensification Project (US$ 18.0 million) has just been approved. 1.23 Experience with project implementation has been mixed, reflecting the difficult experience of the agriculture sector in general over the last few years. The Bank Group's involvement in two irrigation projects involving rice and cotton production provides striking illustrations of the impact of policy and the general economic environment on project implementation. Both the Morondava and the Mangoky projects were designed to increase production through extension of cultivable land under irrigation. Both experienced substantial cost overruns which necessitated reductions in the irrigated area under development. Production too has slumped on both schemes. The Morondava project, approved in 1972 and closed in 1981, was a serious problem project. Even after incurring cost overruns of 70% over appraisal estimates, only 60% of planned land development was carried out and agricultural production fell far below appraisal estimates. The rate of return is likely to prove negative. At Mangoky, yields of seed cotton, the most important crop grown on the network, plummeted from about 3 tons per ha in the early 70's to less than one ton per ha and the area cultivated decreased. The deterioration of agricultural and land development performance had a direct impact on the financial situation of SAMANGOKY which has accumulated debts of more than FMG 1.5 billion (US$3.3 million). An additional effect of the company's difficulties has been a loss of part of the cultivated area due to flooding and salinity and increasing deterioration of the state of the irrigation network. Key factors in the performance of these two projects were: (i) the weakness of the parastatal managing institutions; (ii) the incentive structure, both at scheme level and in the official pricing systems; (iii) inadequate arrangements for maintenance and cost recovery on the schemes; and (iv) the macroeconomic environment, particularly the availability of foreign exchange. The hard-learned lessons of these two projects are being applied to the Mangoky project, which has recently been restructured to reflect implementation experience and Government's recovery policy (para 1.13). The accent in the restructured project is on getting the incentives right so that both producers and parastatal find production attractive, and on making the best use of existing investments without undertaking further expansion. In contrast to this experience, after  - 10 - initial delays, the executing agency for the First and Second Village Livestock Projects, FAFIFAMA, developed into a satisfactory institution with technically competent and dedicated management. Similarly, the project agency for the First and Second Mangoro Forestry Projects, FANALAMANGA, established a strong record, with execution of components ahead of schedule and in line with appraisal cost estimates. However, technical problems over tree growth have led to a cutback in the planting program. In general, most projects are now being adversely affected by the worsening economic conditions and particularly by shortages of foreign exchange. 1.24 Two agriculture projects financed by the Bank Group have been completed and audited by the Operations Evaluation Department. The Audit Report and the Impact Evaluation Report on the first Lac Alaotra Project both criticized poor project design and supervision and insufficient attention to socio-economic and institutional aspects of the project. In the recently-approved Lac Alaotra Rice Intensification Project, these weaknesses have been taken into account in project design, with more focus given to institution-building and to farmer involvement, increasing farmer incentives and self-management to reduce recurrent costs. The Audit Report on the Beef Cattle Development project concluded that the project had encountered a host of problems, the most important of which included: (a) project design poorly suited to local conditions; (b) neglect of land tenure and socio-economic issues; and (c) differences of approach between Bank and Government. While these deficiencies substantially reduced the project's anticipated impact, the experience made a positive contribution to a rethinking of cattle development projects in Madagascar and a reorientation of Bank Group subsector lending to focus on the traditional extensive livestock system. II. THE COTTON SUBSECTOR A. Production General 2.01 Cotton production and the textile industry form one of the most important economic activities in Madagascar. The textile industry is one of the country's largest industries, contributing about 33% of the value added in the manufacturing and extracting industries. Cotton seed is similarly an important raw material of the vegetable oil industry, satisfying 15-20% of the local demand for cooking oil, and is a source of cattle feed in the form of cake. About 20,000 families are involved in the farm production of cotton, and about 500 persons work for HASYMA, the cotton processing and marketing firm. The five textile factories and a score of large garment manufacturers employ another 10,000 persons. Institutions 2.02 HASYMA. The dominant institution for cotton production activities is the parastatal Hasy Malagasy (HASYMA). Its remit broadly covers cotton processing and marketing, input supply, extension, coordination aind planning. HASYMA, as the implementing agency for the proposed Project, is described in detail in Chapter V (paras 5.02 ff).  - 11 - 2.03 Cotton Price Stabilization Fund (CSPC). Created in 1962 as an "Etablissement Public" under the supervision of MIC, the Cotton Price Stabilization Fund (CSPC) was intended to stimulate cotton production and fiber export, and to ensure coordination between upstream and downstream activities in the sector. Its revenues derive from (i) the net proceeds of the sale of cotton seed; and (ii) a levy of FMG 30/kg seed cotton paid by the textile companies. These funds have been largely used to subsidize chemical inputs for farmers (para 2.18) although CSPC has made minor payments to support HASYMA's smallholder extension effort. Cotton Production 2.04 Cotton production in Madagascar started in 1958 on about 300 ha but spread rapidly. Until 1968 cotton remained a plantation crop, being grown on large farms in the north west owned by companies or individuals. In 1968 smallholder production started and has developed very fast, principally in the south. Cotton production reached a peak in 1977; thereafter poor price incentives and technical diffulties largely due to foreign exchange shortages have contributed to a decline from these peak levels. Production figures have been as follow: Tons of Average ha. Seed Cotton Yield 1965 3905 5809 1.49 1970 10313 18714 1.81 1977 20403 37081 1.82 I- 1980 16985 23210 1.37 1981 18724 27962 1.49 1982 17500 25900 1.48 Cotton production is concentrated almost exclusively on the west coast in dry areas. There are two well-defined production areas: the northern zone which is dominated by large, private farms using highly-mechanized techniques on the flood-recession system of production and the southern zone which is predominantly smallholder production under irrigated or rainfed conditions. In spite of serious difficulties in procuring equipment and spare parts, the large farms have succeeded in maintaining high yields (average 2.3 tons/ha in 1982). Smallholder production on the other hand has been erratic with area cultivated sensitive to prices, and yields more subject to climatic vagaries. Yields have recently averaged around 1.0 ton/ha. The different production systems are discussed in greater detail in Chapter III (para 3.06 ff). Ginning 2.05 HASYMA has a monopoly on marketing and ginning cotton, although in some areas it has delegated responsibility for buying seed cotton to other parastatals. HASYMA buys either at its own buying centers or at the large private farms, and organizes transport, largely by private and by parastatal transporters. With the deterioration of the rural road network,  - 12 - shortage of spare parts and problems in the replacement of worn-out trucks, transportation of seed cotton has become increasingly difficult. HASYMA gins the cotton in the eight saw ginneries which it owns. Ginning capacity is presently a nominal 39,000 tons per year but much of the new area that has come into cotton production in recent years is situated at an uneconomic distance from existing ginneries. HASYMA has therefore undertaken an expansion program with a CCCE loan that will add 35,000 tons of new annual capacity, most of which is at Port-Berge and Toliara. With these new installations ginnery capacity will be adequate to process forecast production. Oil Extraction 2.06 Cotton seeds are an important raw material for Madagascar's vegetable oil industry. There are about 13 plants equipped to extract oil from cotton seeds and groundnuts with a total capacity of 60,000 tons of oil seed a year. Almost all these companies are privately owned. Yields in cotton seed oil are low, largely because extraction plant is old and inefficient. The decline in domestic production of cotton seed and groundnuts in recent years has led to a raw material shortage that palm kernels and copra have been unable to fill. Annual domestic oil production declined from 7,000 tons in 1970 to under 3,000 tons in 1981. Cotton seed production in 1981 of 16,000 tons yielded around 1,500 tons of oil, 60% of total production of vegetable oils. There is high unsatisfied demand for oils and fats estimated at up to 20,000 tons a year, and Government is considering-alternative strategies to meet this demand. Possible rehabilitation of edible oil plants is being examined by the Government in the context an industrial sector investment program. The Textile Industry 2.07 Cotton fiber is the principal raw material of Madagascar's textile industry which transforms it into yarns, fabrics and garments. The two largest factories are majority owned by Government and represent over 85% of total installed capacity. IFC has an investment in one of them, SOTEMA. The production of the textile industry was fairly stable during the period 1974-82 at 80-90 million meters of fabrics per year. The drop in domestic fiber production in 1979-82 together with the shortage of foreign exchange for the import of fiber and chemicals threaten to constrain production. However, the mills have so far contrived to maintain and even expand production to a record 92 million meters in 1982 by reducing fiber content and recycling chemicals. Utilization of spinning and weaving capacity in 1982 was a about 84%.  - 13 - B. Markets and Prices Markets, Supply and Demand 2.08 Domestic fiber production has long supplied the domestic textile industry. In the 1970s small surpluses were available for export, but the expansion of the textile industry during the decade led to mounting demand that could not be satisfied by domestic production. Total consumption of fiber by the textile industry averaged 15,000 tons annually between 1979 and 1982, equivalent to 40,000 tons of seed cotton. Domestic cotton fiber production during the same period averaged only about 11,000 tons per year and the gap has had to be made up by imported fiber, which has placed a heavy burden on Madagascar's slim foreign exchange resources. The domestic fiber shortage has led to the establishment by MIC of a quota system based on installed factory capacity. Disputes have arisen over the criteria for establishing quotas and external arbitration is being sought by all parties concerned. 2.09 Domestic consumption of fabric rose steadily to reach 72 million meters in 1980. Thereafter a combination of factors has reduced both per capita and aggregrate domestic consumption: drop in real incomes, difficulties in the distribution system, particularly in rural areas, and poor market appeal of the product as shortage of fiber and dyes has led mills to produce a coarser less colorful fabric. In addition textile firms have been encouraged by 4lovernment to export and mills have been obLiged to recover losses on exports through higher prices for domestic sales, which has had a further dampening effect on the domestic market. 2.10 Future trends in the domestic market are likely to be steady growth as population expands and the economic situation improves. Prospects for the export market are also favorable if profitable product lines can be developed. Government policy is to export production in excess of domestic demand up to present mill capacity production, and to allow textile firms to cross-subsidize losses on exports through domestic sales. From small beginnings in the early 1970s (1.2 million meters in 1972), fabric exports averaged 25-30 million meters 1975-78, dropped off 1979-81 (with a low of 13 million meters in 1980) and picked up again to 25 million meters in 1982. According to figures supplied by textile firms, the aggregate export financial loss calculated on the basis of average production cost would put a notional burden of FMG 77 (16 cents) per meter on domestic cloth sales. However, data on marginal cost of production are not available apart from some crude indications that, on a sunk cost basis, the domestic resource cost of foreign earnings is below the official exchange rate. In the future, increased capacity utilization and the export of more profitable confectioned goods in place of fabrics should make export financial losses smaller and permit the reduction of domestic prices. However, beyond present installed capacity, the domestic resource cost of textile exports would be significantly higher. The most  - 14 - appropriate policy for the foreseeable future is thus to restrain further development of the textile industry and to invest in cotton production upstream. This policy, which has been adopted by Government and which is supported under the present Project, is the one that best exploits both comparative advantage in cotton production and unutilized capacity in the textile industry. Projected production and demand are as follows: 1982 1985 1988 --million meters of fabric-- Domestic Consumption 67.1 81.9 89.0 Exports 24.7 20.0 20.0 Total Fabric Production 91.8 101.9 109.0 Mill Capacity Utilization 84% 93% 99% -'000 tons seed cotton equiv- Domestic Production 28.9 33.4 45.2 Imports 13.2 11.8 2.6 Total Seed Cotton Consumption 42.1 45.2 47.8 Prices 2.11 Under a law of 1973 Government has the power to fix prices for most agricultural commodities, including cotton. Under its charter, HASYMA is required to make annual proposals on seed cotton and fiber price levels. In the case of fiber, HASYMA's charter clearly defines the elements that can be counted in to reach the price proposed, but there is no such provision for the setting of seed cotton prices. In practice, HASYMA uses farm budgets for two cotton production systems (the large scale intensive system and the smallholder system), to compute average seed cotton production cost levels. A margin of 15% is then added, representing profit on investment (10%) and a reserve for new investment. However, the final decision on both producer and fiber prices has been largely political and until 1982 was aimed at keeping the fiber price down. This policy depressed production and squeezed HASYMA's margins severely. Since 1982, however, Government has adopted a clearer strategy on cotton pricing (para 2.19). Official seed cotton prices have been substantially increased and have been supplemented by a production bonus paid by textile factories (para 2.18). Effective producer and fiber prices now represent over 90% of import parity price. Textile prices are controlled by MIC and price increases have to be individually justified. The cost of developing the justification, the lengthy response time for approval, and in many cases denial of the request, have caused companies to circumvent the regulations. This is done by the simple expedient of creating new fabrics by changing the size of yarn or fabric construction. In essence, any small variation creates a new fabric which allows the company to establish a new market price.  - 15 - C. Government Policy and Issues for Development Government Policy 2.12 Government policy towards cotton in the 1970s was ambiguous. On the one hand, MIC actively pursued a policy of expansion of textile factory capacity well beyond domestic cotton fiber supply while MPARA efforts to develop cotton production were limited. Towards the large private farms, policy was one of passive tolerance. Government did not make positive moves against them, but the economic climate in which they operated became insecure and their access to credit and foreign exchange was tenuous. Even for smallholders, there was no well-defined policy to promote cotton production. In fact, a commitment to develop cotton production only became evident after the expansion of the textile industry had started when it was realized that its new capacity would remain under-utilized or be heavily dependent on imports. 2.13 In the late 1970s the absence of a coherent development strategy for cotton became evident through the depression of producer and fiber prices, which led to a production slump. At the same time the generally deteriorating economic environment had a major impact on cotton. Insufficient allocations of foreign exchange to cotton parastatals, such as SAMANGOKY, and to the very important large cotton producers for the import of urgently-needed machinery and spare parts also contributed to the decline in cotton production. The rapidly deteriorating state of rural roads has hampered input supply, access to extension services and collection of seed cotton. Break-down of the national agricultural research system has resulted in virtually no technical improvement of the subsector for many years. Issues .for Development 2.14 Government was compelled to rethink policy toward the subsector by the slump in seed cotton production and by the increasing burden of fiber imports. Farmers can produce cotton at a lower price than imports, and Government has shaped its development policy to take account of this comparative advantage. Present plans are to increase cotton production to the level necessary to satisfy the fiber demands of the local textile industry. This program will also have an important employment creation impact. As a first step, Government has addressed producer incentives and HASYMA's financial viability through a round of price increases that, if maintained, will ensure adequate remuneration to farmers and restore HASYMA's financial position. Government has also taken measures to improve smallholder access to credit and has shifted to a policy of active support to the large farmers. The present Project is conceived as the vital first stage of investment in implementing the recovery and expansion program.  - 16 - However, there are a number of key issues which will have an impact on the success of this program; these issues are discussed in the succeeding paragraphs. 2.15 Foreign Exchange Allocations. The present scarcity of foreign exchange affecting all sectors of the Malagasy economy has had a severe impact on the cotton subsector, which is a high consumer of imported inputs. Until 1981, HASYMA, which is responsible for input supply for all cotton producers, had no difficulty in obtaining sufficient foreign exchange but thereafter allocations of foreign exchange through normal channels have been inadequate and HASYMA could only procure its requirements under bilateral aid programs. The large planters, who account for 60% of total cotton production and are dependent upon the use of mechanical equipment, have also been unable to obtain foreign exchange for spares and equipment renewal. Most of their equipment pool is past its useful life and the likelihood of disruption to this production system is increasing. Smallholder production has already been disrupted as equipment for animal traction has become scarce. 2.16 It is essential for the future of the cotton subsector that adequate and timely foreign exchange is made available. Foreign exchange allocation procedures are under review by Government. Under any new system the favorable foreign exchange balance of the cotton subsector as a whole, the enormous forward linkages of cotton production, and the low domestic resource cost of future textile exports should entitle cotton to the highest ranking. As foreign exchange flows are vital to the continuation of Project actions, specific assurances on future foreign exchange allocations were received at negotiations (para 5.10). In addition, proposed improvements in the foreign exchange allocation system will be discussed and monitored in the context of the overall dialogue between Government and IDA (para 1.15). 2.17 Producer Price Structure. Until 1983, the price structure of seed-cotton was complicated and confusing to the producer as the official seed-cotton price was only one element of the final price received by the producer. The final producer price consisted of three elements: (a) an official price announced by Government decree; (b) a bonus paid to the producer by the textile factories; (c) a subsidy on chemical inputs used. The effective prices paid to producers over the period 1977-83 have been as follows:  - 17 - FMG/Kg 1977 1979 1981 1983 Producer Price 85 91 105 150 Production Bonus - - 30 30 Input Subsidy (average) 19 23 30 30 Total 104 114 165 210 Approximate Import Parity Price 170 187 196 227 Percentage 61% 61% 84% 93% Thus although official producer prices have risen in nominal terms each year, the price of cotton remained low in relation to the import parity price until the end of the 1970s. In addition, during the 1970s the price of cotton was increased far less than that of other crops, by only 56% 1972-80, against rises of 170% and more for sisal, vanilla and paddy. This comparison clearly indicates a drastic decline in the profitability of cotton. This has been further exacerbated by inflation, indicated by a 180% increase in the price index for private consumption 1972-80. Unattractive prices were a major factor contributing to the fall of cotton production during those years. In 1981, and again in 1982 and 1983, official prices were substantially increased. Present final seed-cotton prices (including the bonus and subsidy) are attractive in relation to production costs and returns for other crops, and are close to the import parity price at the official exchange rate. However, these price increases were made as a haphazard response to declining production and a coherent approach to producer pricing is only now being established (para 2.19). 2.18 In 1981 in response to declining production, the textile factories took the initiative to award a productivity bonus of FMG 30/kg seed-cotton in addition to the official producer price. This bonus was awarded uniformly to all producers and has been maintained in 1982 and 1983. A subsidy on the use of chemical inputs has been paid to cotton producers and averages about 50% of the cost of these inputs. This subsidy, initially designed to support a stabilization fund and to encourage input use, is financed by the CSPC from the proceeds of the sale of cotton seeds and by a levy paid by the textile factories (para 2.03). This policy has, however, tended to favor the large farmers who use higher levels of inputs, while smallholders tend to cultivate lower potential land where use of inputs at high levels is not justified. The present subsidy system therefore appears unecessarily complex and tends to confuse price signals and to favor input intensive production systems. 2.19 Thus, until 1983 some basic problems of produce pricing had not been tackled: (i) producer prices had been in the past inadequate; (ii) price policy was incoherent and the price fixing mechanism inefficient;  - 18 W (iii) apparent subsidy payments were not subsidies at all, had a distorting effect on input use and favored the large producer; and (iv) the incentive element in the price system was dissipated by unclear signals. Government indicated to IDA, following appraisal, that future price reviews, commencing with the 1983/84 season, would provide for the progressive reintegration of the bonus into the producer price. In addition, inputs will in future be sold on a full cost recovery basis (para 5.10) and Government confirmed to IDA at negotiations that future price reviews will set the producer price in relation to the import parity price to maintain at least the present level of producer incentives. Producer pricing in relation to project implementation is discussed in Chapter VII (para 7.05). 2.20 Planning and Coordination Mechanism. Mainly as a result of weak planning at the central level and of the absence of mechanisms for consultation and coordination of activities between cotton and textile producers, the large expansion of the capacity of textile factories in recent years took place without provision for parallel expansion of cotton production. In fact, cotton production actually dropped and further aggravated the supply situation. The only structure that at present includes representatives of the whole subsector is CSPC (para 2.03) but it was never intended to play a planning or coordinating role. Government has confirmed the need for an effective coordination mechanism and has presented a proposal for a new planning and coordination committee that would be responsible for overall supervision of subsector programs and particularly for fiber distribution and pricing proposals. Members of the committee would be drawn from ministries, cotton producers, and the textile and oil industries, under the chairmanship of MPARA. Elements in the proposal, particularly the relationship with the CSPC, remain to be defined and it will therefore be a condition of Credit effectiveness that a structure acceptable to IDA has been set up. 2.21 HASYMA's Financial Situation and Structure. Entrusted by Government with the supply of services to the cotton subsector, HASYMA is supposed to derive its profits from a margin on its marketing operations. HASYMA is thus dependent on two annually variable factors, in addition to its own efficiency, for its financial equilibrium:on the size of the margins determined by Government, and on the level of sales. In recent years both these factors have been adverse to HASYMA, with Government squeezing margins and turnover declining with the slump in cotton production. As a result, HASYMA has, since 1980, incurred mounting losses on its marketing operation and only covered losses in these years by profits on other operations. The effects of low profitability on HASYMA's cash flow have been compounded by heavy obligations for debt repayment on loans contracted for expansion of its ginning capacity. In order to restore HASYMA's financial equilibrium and to provide the company with adequate financial resources to carry out the Project and service its debt, HASYMA required (i) an injection of permanent capital and (ii) a revision to the system of margin setting to ensure revenues adequate to cover costs and build up reserves. Government injected fresh capital into HASYMA in early 1983. It has also provided for adequate margins in the fiber cost  - 19 - structure to cover HASYMA's operating costs and build up reserves. HASYMA's financial status and forecasts in relation to the Project are discussed in more detail in Chapter VII (para 7.01 ff). 2.22 The State of Rural Roads. As elsewhere in Madagascar, the road and track network in the cotton-producing areas is in poor condition due to inadequate maintenance arising from the weakness of rural institutions and from lack of funds. In theory, the main roads are maintained by MTP (para 1.21) and the access roads by the local authorities. The rehabilitation of the main roads in the Project area, including the Mahajanga to Port Berge trunk road in the north-west and the Toliary to Tanandava and Toliary to Ihosy trunk roads in the south-west, is already provided for under present Government plans for rehabilitation of the "economic network (para 1.19). However, there is no plan for rehabilitation of the cotton tracks which play a vital role in the supply of inputs, transport of seed-cotton and the opening-up of new production areas. In the north, where many roads pass through the flood plain, access to areas of very high production potential has dwindled as tracks have deteriorated; transport costs have risen and some areas risk becoming inaccessible with consequent impact on production. In the south, tracks have also deteriorated from lack of maintenance. In both zones, some rehabilitation and subsequent maintenance of cotton tracks is thus essential if cotton production is to be maintained and expanded. Arrangements under the Project are discussed in detail in Chapter IV (para 4.04). 2.23 Government Policy towards Large Private Farms. For years the large private farms, _particularly those owned by non-Malagasy nationals, have operated in a climate of uncertainty (para 2.12). In the cotton subsector the technical strength and efficiency of the large farmers did win them some protection as the backbone of cotton production, but even cotton farmers have suffered from official neglect and, most recently, from foreign exchange shortages (para 2.15). Government has recently taken steps to reassure these farmers of their key role in cotton production and development and to recognize that role through support under the present Project (para 4.02, 4.05). 2.24 Research . Technical support to the cotton production subsector is provided by IRCT through periodic missions but there is no research capacity within FOFIFA (para 1.22) for the introduction and testing of new varieties, the design and testing of effective pest control programs and the testing of improved cultural practices. Such a capacity needs to be established in order to improve the technical efficiency of the subsector.  - 20 - III. THE PROJECT AREA A. Location and Physical Characteristics 3.01 The Project area (Map IBRD 15921) comprises a number of scattered production areas in four faritanys (provinces). These areas fall into two broad zones characterized by contrasting production systems, located to the north and south of the Tsiribihina River, totalling about 131,200 km2. The northern zone, where production is on the "flood-recession" system, consists basically of two areas, the region around Ambilobe in the faritany of Antsiranana and the triangle around Maevatanana, Ambato-Boeni, and Port Berge, in the faritany of Mahajanga. The whole area is flat except for some low hills, and does not rise much above sea level. The landscape is dominated by many wide rivers and severe floods occur in the rainy season cutting off many cotton farms for months. The southern zone, where production is rainfed or irrigated, includes the regions of Mangoky, Morondava, Toliara in the faritany of Toliara, and Ihosy in the faritany of Fianarantsoa. It stretches from the coast at Toliara and reaches inland with increasing altitude up to Ihosy. The landscape is varied, being flat at lower altitudes but becoming more undulated inland. There are also some small, dispersed cotton production zones such as the Middle West, but they have relatively little economic importance. 3.02 Climate. In the northern zone, rainfall varies from 1500 mm per year at Mahajanga to 1800 mm at Ambilobe, concentrated over a period of four months from November to April. The average daily temperature is 280C in the summer and 230C in the winter. By contrast, in the southern zone, particularly around Toliara, rainfall is less than 500 mm per year but rises with increasing altitude to over 700 mm inland at Ihosy. On average, soil water deficits occur from March to December, decreasing inland with increasing altitude. Daily mean temperatures vary from 230 to 250C. Annual potential evapo-transpiration in both zones is around 1300 mm. 3.03 Soils. The soils have been thoroughly surveyed and soil maps of both the northern and southern areas have been prepared. Soil surveys in the north indicate that a total area of about 20,000 ha would be suitable for cotton production around Bemarivo and in the valleys of the Sofia River and of the Kimangoro-Mahajamba Rivers. Around Ambilobe, alluvial soils exceed 1300 ha. The cotton soils are highly productive alluvial soils, hydromorphic, with a sandy to silty clay texture, and rich in bases, notably calcium and magnesium. Available phosphate, sulphur and organic matter contents are low. In the south, surveys also indicate the availability of significant areas suitable for cotton production, totalling 13,000 ha, around Manombo, Befandriana Sud, Ankazoabo, Bas-Fiherenana and Moyen-Fiherenana. Soils range from alluvial sands and sandy loams around Toliara in the delta to tropical ferruginous soils, which make up the bulk of cotton soils, and vertisols around Ihosy. Available phosphate and organic matter contents are low. The production potential of these soils under rainfed conditions is low to medium.  - 21 - B. Population and Labor Supply 3.04 The population in the Project area is predominantly rural with low density, varying from 3.1 per sq km in Ihosy to about 17.5 per sq km in Bas-Fiherenana in the southern zone; and from 3.6 per sq km in Tsaratanana to 10.1 per sq km in Ambilobe in the northern zone. Total Project area population of slightly over 800,000 gives an average density of 6.1 per sq. km. The average family has six members. Although population densities are low, availability of labor is not a constraint for the large farms in the northern zone as there is significant seasonal migration of casual labor from the central highlands, mainly for cotton harvesting. Also, permanent labor has been provided by spontaneous settlement of whole- villages of migrants, mainly from the central highlands, around the large cotton farms. In the southern zone, which is dominated by smallholders, most agricultural activities are carried out by family labor and there is little demand for hired labor except for specific tasks such as weeding. Cotton production tasks in this zone are clearly defined between men and women, with the men carrying out the majority of tasks and the women being primarily responsible for planting and weeding. C. Land Tenure 3.05 The system of land tenure differs greatly between the northern zone and the southern zone. In the north, about four-fifths of the cotton production area consists of large farms. These farms were originally granted on a non-transfe-rable basis by the colonial administration to individuals or firms, mainly of non-Malagasy origin. After independence, many of the beneficiaries of land granted on a non-transferable losses left Madagascar and their holdings reverted to the state. Cotton farms, however, have been an exception to this process and the large farms remain the motor of production in the sub-sector. Legislation passed in the 1960s, however, prohibits further grants of land to non-nationals. Outside these large farms, land belongs either to the state or to smallholders under traditional tenure rights. These rights are acquired by continuous cropping over a period and are supervised by local authorities. There has been no general cadastral survey of these lands and registration of rural holdings has been practiced only in the immediate vicinity of large towns. Holdings in the south are almost entirely smallholder plots on this pattern. Farmers who wish to extend their cropping areas but have no more land usually rent from other proprietors and apparently have no problems in obtaining such lands. The large expansion of the total cotton areas between 1958 and 1978 took place smoothly without reported land tenure conflict. Finally, the cotton areas on the Mangoky and in the Ihosy area are state lands on which cotton growers remain tenants. This tenancy system seems to have dulled incentives and inhibited improvement of land. Land tenure in relation to the proposed Project is explored in more detail in Chapter V (para 5.12).  - 22 - D. Production Systems 3.06 Production systems vary a great deal between the northern and southern zones and between large farms and smallholders. In the northern zone, cotton is growri during the dry winter season from April to October on the flood-plains after the retreat of the flood-waters. Other cropping activities are carried out also on the flood-plains during this season or on high ground during the rainy season. The southern zone follows the normal cropping cycle of the wet season from December to March under both rainfed and irrigated conditions. All cropping activities are concentrated over this season, except on the large scale irrigation schemes where a secondary crop may also be cultivated during the dry season. In 1981, the relative importance of the zones and production systems was as follows: Flood Recession Irrigated Rainfed Total Northern Zone Large Farms 5837 - - 5837 State Farms 612 - - 612 Smallholders 1480 - - 1480 7929 - - 7929 Southern Zone Large Farms - 44 681 725 State Farms 40 - 906 946 Smallholders - 6590 2534 9124 40 6634 4121 10795 Total Area 7969 6634 4121 18724 Average Yields (ton/ha) 2.08 1.20 0.97 1.49 The Northerrn Zone 3.07 Production in the north is dominated by the 43 large cotton plantations, which have accounted for a steady 6500 ha over the past five years, while smallholdings cover about 1700 ha. The size of large farms ranges from 40 to 1500 ha. Average size is 170 ha but four farms cover more than 50% of the total area. About a dozen of these farms are limited companies registered in Madagascar, the others operate as sole farmers or partnerships. Owners include a number of Malagasy nationals, and non-Malagasy of diverse origins, including French, Greek and Indian. SOTEMA, one of the textile firms, recently purchased a minority interest in one cotton farm. These farms used to grow tobacco and groundnuts in  - 23 - addition to cotton but, due to low producer prices and problmEs wivdrh payment by marketing parastatals, they have recently conventrated their efforts on growing cotton. Mechanized cultural operations and ..itensive use of fertilizers and insecticides characterize these large plantations and enable them to account for 60% of total production. Smallholder production is practised in the northern zone in three separate areas: (i) in the extreme north, around Ambilobe, where about 800 ha are cultivated on an average plot of 1 ha; (ii) around Mahajanga, where there was no cotton cultivation by smallholders until 1978; it now covers 200 ha in approximately 200 farm units; and (iii) around Port Berge, where about 200 smallholder farms cultivate approximately 400 ha of cotton. The same system of "flood-recession cultivation" as employed by large farmers is practised by the smallholders. However, yields are much lower, only averaging about 1 ton/ha against over 2.0 tons/ha obtained by the large farms in the same area. Land preparation on smallholdings is carried out by tractor or by oxen, but planting, thinning, weeding, insecticide application and harvesting are all done by family labor. The other major cash crops traditionally grown in the northern zone are tobacco and groundnuts but production of both has declined dramatically in recent years. The main subsistence crops are cassava, maize and rice. Rice is cultivated during the rainy season (December to May) at the same time as maize and cassava which are grown on higher ground. The Southern Zone 3.08 Cotton production in the southern zone is predominantly by smallholdets and accounts for about a third of total domestic production. Production is under both rainfed and irrigated conditions, with the irrigated area accounting for 60% of total area. 3.09 Rainfed Areas. (I) Toliara. In Toliara rainfed areas cover: Moyen Fiherenana, Analamisampy and Ankazoabo. The rainfed area cultivated has been highly volatile, sensitive to relative prices and returns. In Toliara, there was a dramatic increase in rainfed area cultivated from 3100 ha in 1973 to 8700 ha in 1978 but the area fell back to 4000 ha in 1979. Crop production patterns throughout these areas are similar and are based on four cropping activities. Cotton production is by far the most important activity, covering between 1/3 and 2/3 of total cropped area. The typical farm covers 2 ha with 45% of the area under cotton, 20% under maize, 15% under cassava and 20% under butter beans. Farmers start planting cotton in November-December, immediately followed by maize, cassava and butter beans. There is, therefore, competition between cropping activities and the farmer's decision is dictated by factors such as staple food requirements, relative prices and availability of markets. 3.10 (II) Ihosy. This rainfed cotton area in the faritany of Fianarantsoa comprises about 1000 ha divided into 28 blocks of an average area of 40 ha (1 ha per family). The area is cultivated by smallholders under HASYMA management in a system of "association" similar to the one  - 24 - practiced in Mangoky (para 3.13). The lands belong to the state, having been put at the disposal of HASYMA for cotton production. Owing to the relatively higher rainfall (850 mm per year) than in Toliara, potential yields are higher and have in the past averaged more than 2.2 tons/ha. The limiting factor is the unreliable rainfall distribution over the growing year. HASYMA provides prepared land, arranges insect pest control by aircraft, and supervises the destruction of cotton plants after the harvest. Farmers are responsible for planting, thinning, weeding, fertilizer application and harvesting. Cotton is gromn during the rainy season from November to March together with maize and cassava. There are two crops of rice a year, during the rainy season and during the dry season (May to October). 3.11 (III) Morondava. This is a minor cotton producing area comprising (a) the SODEMO rainfed cotton farm of over 1000 ha established under the Morondava Irrigation Project (para 1.23), where, in 1982, about 600 tons of seed-cotton were produced on 500 ha; and (b) Bevantaza farm producing 145 tons on 45 ha in 1982. SODEMO practices the same system of association as SAMANGOKY (para 3.13) but has experienced chronic management and financial problems. The potential yield under the rainfed conditions is about 1.6 tons/ha but improved pest control and crop management are required. In addition, in the Morondava area, about 800 ha are cultivated annually by smallholders under rainfed conditions, with yields averaging 1 ton/ha. 3.12 Irrigated Areas: (I) Toliara. In this area, there are two main irrigated cotton production schemes: Bas-Fiherenana (3000 ha, constructed in 1961 under EDF financing) and Manombo (2700 ha, constructed in 1940). The climate is arid tropical with annual rainfall of about 400 mm distributed over only two months. Crop production on the red sands characteristic of the region is only possible with irrigation. Over 85% of the total area is cultivated by smallholders. Cotton yields under irrigation have tumbled from around 1.0 ton/ha in 1975-76 to about 0.4 tons/ha over the past three years. The drop in yields is mainly due to the poor condition of the irrigation infrastructure and the lack of interest arising from low cotton prices. 3.13 (II) Mangoky. The irrigation infrastructure at Mangoky covers over 4000 ha available for cotton. The ongoing IDA-financed Mangoky project (para 1.23), concentrating on rice, will bring a further 300 ha into cotton production by 1985. Construction is sophisticated, consisting of elevated concrete canals which require very little maintenance. Water distribution is effected through modulated gates. SAMANGOKY, a regional development parastatal created in 1961, manages the scheme. Production is on a tenancy basis, with a system of association between SAMANGOKY and the tenants, whereby mechanical land preparation, planting, fertilizer application, and aerial insecticide spraying are either provided directly  - 25 - or contracted by SAMANGOKY while the tenants carry out thinning, weeding and picking. Yields which averaged 2.6 tons/ha in 1971-5, have plummeted in recent years to a low of 0.8 tons/ha in 1982 as SAMANGOKY experienced severe financial problems and was unable to provide services to smallholders. A recovery program for SAMANGOKY is being financed under the IDA-supported Mangoky Project (para 1.23) and further technical assistance is to be provided under the present Project (para 4.07). Extension Services 3.14 Extension services in the Project area are provided by several agencies. Cotton production activities are handled by HASYMA's extension services throughout the Project area except on the Mangoky scheme where SAMANGOKY is responsible, and on SODEMO's cotton farm. Other crop production and livestock activities are supported by MPARA's fieldservices. These services are generally weak, are handicapped by lack of technical, financial and physical resources, and do not provide an adequate support to farmers. In the southern cotton zone, a regional development parastatal (FIFATO) provides extension services to non-cotton cropping activities on the irrigation schemes of Manombo and Bas-Fiherenana. Suffering from the same problems as MPARA's field services, FIFATO has been weak and ineffective. Credit 3.15 BTM, the agricultural credit bank (para 1.21), is responsible for extending credit in the Project area. Programs cover seasonal credit and medium term credit for equipment purchase and land development. Interest rates are considered positive at between 14% and 18% depending on terms and conditions. Unlike other subsectors, cotton's status as a cash crop, its profitability and the organization of the subsector have ensured that credit is generally available. The large farms have had no difficulty in obtaining credit, although some farms are in arrears from the years of low producer prices. BTM and the industrial bank BNI, which also maintains cotton loans in its protfolio, rely heavily on HASYMA's technical analysis of credit proposals. Both banks express optimism about the future of large farm production of cotton and propose to expand their lending. Similarly smallholders have had no problem in obtaining credit whether for equipment or for services and inputs. BTM has appointed HASYMA as its agent and HASYMA provides services and inputs to cotton farmers on credit terms according to an agreement signed between the two organizations. Payment is deducted from proceeds when farmers deliver their seed cotton to HASYMA's collection centers. Since HASYMA has the marketing monopoly, recovery rates are virtually 100%.  - 26 - IV. THE PROJECT A. General Description 4.01 The proposed Project would support Government's cotton development program aimed at expanding seed cotton production over a four year period from 1982 levels of around 26,000 tons to about 45,000 tons, thereby saving foreign exchange expenditures on cotton fiber imports. Increases in production would be achieved by increasing yields on existing areas and by extending cultivation through the development of a further 8000 ha. Smallholders and large private farms would contribute to these increases in production in about equal proportions. The Project would include the following components: (a) provision of equipment and vehicles to replace and expand existing pools and so improve yields and extend areas planted to cotton; (b) construction of workshops and stores to maintain equipment and vehicles and ensure input supply; (c) rehabilitation and maintenance of cotton tracks to improve communications for input supply and marketing; (d) provision of farm inputs to maintain and improve productivity; (e) adaptive cotton research and pre-production trials aimed at boosting yields and improving production techniques; (f) technical assistance to HASYMA (Project agency) and SAMANGOKY (cotton parastatal), training of their personnel and strengthening of the Project agency's data processing system; (g) monitoring and evaluation of Project activities, and (h) studies. B. Detailed Features Provision of Equipment and Vehicles 4.02 Lack of replacement equipment and vehicles, and chronic shortages of spare parts for existing equipment have been a critical constraint on the maintenance and expansion of cotton production. Equipment and vehicles would therefore be provided under the Project for sale to producers. For  - 27 - the large private farms, the equipment and vehicles would consist mainly of bulldozers, tractors and such tractor accessories as ploughs, harrows, ridgers, seed drills, sprayers and rotary slashers for cotton residues, and vehicles such as trucks and cars. With the use of this equipment, the large farms are expected to extend the area cropped to cotton by 3000 ha. Chronic shortages of spare parts have also been a critical constraint. however, spare parts for agricultural equipment are likely to become available through dealers in the near future with financing from various projects, possibly including the IDA-supported Agricultural Credit Project. For smallholders, equipment would comprise animal traction equipment. The total area cropped by smallholders is expected to increase by about 5000 ha. HASYMA, the cotton parastatal, would receive equipment for its own demonstration farms and seed production centers. In addition, HASYMA would receive essential transport vehicles (trucks, cars, motorcycles and bicycles) for its extension services and for the transport of inputs. It would also be provided with a passenger aircraft to facilitate access to widely scattered production locations. Acquisition of this 4-6 seater single engine plane is expected to reduce transport costs significantly by eliminating costly charters and to improve management and staff contact with the field, both in the north where most farms are cut off by flooding for several months and in the south where the rugged terrain makes access difficult year round. Most cotton farms and areas have landing strips and for a number of years HASYMA operated its own aircraft effectively. A radio-communication system to improve pest control programs is also included in the Project. Workshops and Stores 4.03 HASYMA does not have sufficient workshop space to maintain vehicles and equipment and two workshops, one in Mahajanga and the other in Toliara, would be constructed and the necessary equipment purchased with Project funding. HASYMA's office accommodation and input storage facilities at group of villages level would be reinforced through the construction of four combined office/stores of 200 m2 each at Ankililoaka, Tsianisiha, Makaboboka and Vineta. Rehabilitation of Cotton Tracks 4.04 Deterioration of tracks leading from the road network to the farm gates has become a serious constraint to the maintenance and development of cotton production (para 2.22). In the south these tracks are very simple and carry very little traffic except in the short season when the cotton harvest is collected and inputs for the next year delivered. Only minor improvements combined with regular maintenance are necessary to keep these tracks servicable and the project would therefore provide for (a) building of a few structures to alleviate key bottlenecks (base cost US$ 97,000) and (b) regular maintenance of the whole track network in the south (225 kilometers) by simple least cost means (base cost over the project period US$ 450,000). In the north tracks are also used mainly for cotton but as many of them pass through the flood plain they demand a higher standard of construction and maintenance if they are to remain servicable. Much more substantial quantities of cotton are transported along these tracks than along those in the south and a high level of investment is thus justified.  - 28 - The project would therefore provide for (a) building of structures to alleviate key bottlenecks together with new alignments on high ground for approximately 50 km of tracks presently inundated (base cost US$ 1.41 million), (b) supply of four ferries (base cost US$ 170,000), and (c) regular maintenance of the whole track network in the north (260 km) by simple least cost means (base cost over the project period US$ 450,000). Quantities are estimated from the results of field reconnaissance priced in line with recently let contracts from an acceptable basis for the cost estimates in the in normal tolerances except for new alignments where earthwork quantities have not been the subject of detailed survey. Because of comparatively high uncertainties of the track component in the north a special contingency of 60% of base costs has been built into the Project costs (para 4.12). Detailed engineering for structures and new alignments is expected to be ready by early 1984. Technical assistance to supervise construction and maintenance activities has been included in the costs (US$254,000). Provision of Farm Inputs 4.05 Owing to the foreign exchange crisis, HASYMA has been finding it increasingly difficult to obtain the necessary chemical inputs to supply the cotton producers. Under the Project, fertilizers, insecticides and herbicides would be imported for sale to producers, with Project finance of 100% in the first and second years of the Project, declining to 60% in the third year and about 20% in the fourth year. The Project would also provide for the reinforcement of on-going seed production programs. Research and Trials 4.06 To provide an effective technical back-up to cotton production an adaptive cotton research program would be implemented under the Project by the national research agency, FOFIFA. FOFIFA would be assisted by the French research agency, IRCT, which is already providing assistance to HASYMA for pre-production trials. The program would comprise trials on FOFIFA's three research stations in the cotton production areas, followed by pre-production trials on farmer plots. Topics would include introduction and testing of cotton varieties to improve quality, ginning rate and disease resistance; pesticide efficiency and application trials; on-farm fertilizer requirement tests to establish response curves for varying soil, available moisture, and farming system conditions; use of farmyard manure; and crop rotation trials with a view to the after-effect of fertilizer and manure applications on cotton. Particular attention would be given to the development of integrated pest control programs and the on-going insecticide testing programs would be reinforced and focussed on effective, selective new insecticides with lower health hazards to man and the environment. Assurances were received at negotiations that a detailed research program will be presented for IDA's comments by June 30, 1984 and a final program by September 30, 1984.  - 29 - Technical Assistance, Training, and Data Processing 4.07 Under a management contract with CFDT, HASYMA presently receives some technical assistance but this assistance needs to be expanded in five key areas: (a) management of the agricultural program, including design and testing of improved cotton production systems; (b) ginnery operation; (c) design and implementation of extension training programs; and (d) financial management and management information systems. Under the Project, therefore, the following technical assistants would be financed for four years: an agricultural manager for headquarters to coordinate programs, an agricultural manager for field operations in the north, a ginnery specialist, a financial manager and an agriculturalist for adaptive research and extension training in the south. In addition, the Project would provide for short periodic missions of external experts for the design and monitoring of research and pest control programs. Funds would also be provided under the Project to support the cotton producing parastatal SAMANGOKY, through the extension for two years (1985 and 1986) of the services of the three experts to be recruited in 1983/84 under the Mangoky Project (para 1.23); the experts would consist of a cotton agronomist, an irrigation engineer and a mechanical engineer. Total technical assistance provided under the Project amounts to 26 man years, all internationally recruited. Job descriptions were agreed at negotiations. Assurances were received at negotiations that terms of reference and curricula vitae of proposed candidates for technical assistance posts will be presented for IDA's prior approval. 4.08 Training for HASYMA staff would include the following areas: (a) crop husbandry and extension methodology for extension personnel; (b) land preparation techniques; (c) plant and vehicle maintenance and repair for workshop and garage staff; and (d) accounting. Relevant parts of the training program would be opened to personnel of the large private farms and the two parastatal agencies, SAMANGOKY and SODEMO. Training would be done through short practical courses and on the job training either by the technical assistants or by subject matter specialists recruited on short term contracts as required. For management staff, training would consist mainly of on the job training, study tours to similar development schemes and seminars on management of agricultural development and on management techniques, including management information systems. Under the Project, a total of $200,000 would be provided to support these activities. This amount would cover the costs of three short-term overseas courses of 1-3 months for the General Manager and the two Regional Managers; ten short-term training courses of 1-3 months overseas or locally for technical staff; and six short courses of 1-3 months for managers and staff in  - 30 - personnel, finance and procurement. The Project would also provide $25,000 for the purchase of training materials and equipment to support the training of extension agents. The training program was agreed at negotiations, where it was agreed that by June 30, 1984 a training coordinator would be designated to help the General Manager plan and coordinate HASYMA's training program. 4.09 HASYMA has ar. elaborate computerized accounting system derived from standard systems employed in many West African countries. However, the system does not meet HASYMA's needs in two important areas, financial information for management purposes and timely accounting for smallholder transactions. The computer specialist to be recruited as a technical assistant (para 4.07) would work with HASYMA to identify appropriate modifications to the system, and a sum of US$125,000 has been provided under the Project to purchase the necessary hardware and software. Monitoring and Evaluation 4.10 This component would be the main tool for monitoring and evaluation of Project activities, to assess the impact of the Project on production, on the Project area and on the population. HASYMA's headquarters Research Unit will be responsible for monitoring Project activities in additon to its ongoing responsibilities for monitoring and evaluation. The functions of the unit would be: (i) to provide management information for decision taking; (ii) to coordinate monitoring of technical aspects of HASYMA's program, particularly the pest control programs; and (iii) to provide data for continuous and ex post evaluation of Project costs and benefits in relation to targets. The reporting formats would comprise regular quarterly reports on key parameters, major annual reports synthesizing data and conclusions over the year, and ad hoc reports on special studies. The unit would also prepare information necessary for inclusion in the annual work programs (para. 5.15). The quarterly and annual reports would be submitted on a regular basis to IDA for comment as an integral part of HASYMA's reports (para 5.18). Under the Project, baseline and follow-up surveys would monitor the evolution of the following broad parameters: (i) agricultural production survey, targeted on production practices under smallholder conditions, on production costs under varying production patterns, on adoption rates and input use on the respective returns to cotton, other cash crops and foodcrops, and on the comparative costs of animal and motor traction; (ii) socio-economic indicators for farms and farm households, including household composition, labor availability and labor use, inventory of household resources, off-farm exployment and sources of income, literacy, schooling, nutritional and health situation, physical mobility and relationship to community; (iii) organizational relationships between farmers and HASYMA; (iv) pesticide application and impact; and (v) road use. HASYMA is preparing a detailed program for this component through consultants, and it was agreed at negotiations that the program would be presented by HASYMA for IDA's  - 31 - comments by June 30, 1984 and that the finalized program would be submitted by September 30, 1984. Thereafter the work program of the unit would be agreed each year with IDA in the context of the annual work program (para 5.14). An indicative sum of US$240,000 has been provided under the Project for supplementary staff and equipment and for the cost of consultant services for special surveys. Studies 4.11 A total of US$ 335,000 would be provided for studies to be carried out for HASYMA. At negotiations draft terms of reference were discussed for two priority studies. The first of these is an institutional study of HASYMA, both internal (management audit) and external (role in the subsector vis a vis other institutions, local communities etc.). A team from CCCE (cofinanciers) was in the field in late 1983 carrying out a preliminary review of HASYMA and terms of reference for the proposed study will be further elaborated once the results of the preliminary review are available in early 1984. A second study for HASYMA would review prospects for future development of cotton production and assess the feasibility of a further stage in Government's cotton development program. Assurances were received at negotiations that, for all studies and project preparation work, the selection procedure of the consultants, their terms of reference and proposed contracts would be acceptable to IDA. C. Project Costs 4.12 Total Project costs are estimated at about FMG 16.3 billion (US$34.4 million), of which about FMG 13.8 billion (US$29.1 million), or 85%, represents foreign exchange costs. These cost estimates include only negligible amounts of taxes corresponding to sales taxes on locally produced goods. Government has not yet determined whether goods imported under the Project would be free of taxes and duties. If imported goods are not free of taxes and duties, project cost would increase by about FMG 1.2 billion (US$ 2.5 million). The following table is a summary of Project costs, with a more detailed breakdown appearing in Table 1.  - 32 - (FMG Million) (US$ Million) % of Foreign % of Total Local Foreign Total Local Foreign Total Exchange Base Costs Agricultural Equipment - Large Farms 480.2 4,323.9 4,804.1 1.01 9.10 10.11 90 33 - HAS)MA 46.1 416.1 462.2 0.10 0.88 0.98 90 3 - Smallholders 19.0 171.0 190.0 0.04 0.36 0.40 90 5 Workshops and Stores 159.1 254.1 413.2 0.34 0.53 0.87 61 3 Cotton Track Rehabilitation 491.9 846.2 1,338.0 1.04 1.78 2.82 63 9 Agricultural Inputs 583.3 5,228.8 5,812.1 1.23 11.01 12.24 90 33 Research and Development 25.4 227.8 253.2 0.05 0.48 0.53 91 2 Technical Assistance 100.7 854.5 995.2 0.21 1.80 2.01 90 9 Monitoring & Evaluation 28.7 144.6 173.4 0.06 0.30 0.36 83 1 Training 0.5 100.7 101.2 0.00 0.21 0.21 99 1 Studies 31.8 127.3 159.1 0.07 0.27 0.34 79 1 Total BASELINE (DSTS 1,966.7 12,695.0 14,661.7 4.15 26.72 30.87 87 100 Physical Contingencies 108.8 356.7 465.5 0.23 0.75 0.98 77 3 Special Contingencies (Track Component) 160.6 240.8 401.4 0.34 0.51 0.85 61 3 Price Contingencies 275.0 516.4 791.4 0.58 1.09 1.67 65 5 Total PR1aEC CDSTS 2,511.1 13,808.9 16,320.0 5.30 29.08 34.37 85 111 4.13 Project costs are estimated in late 1983 values on the basis of prices prevailing in January 1983 adjusted for inflation and confirmed or updated in many cases by recent contract prices. A physical contingency of 5% was applied to the cost of agricultural inputs, and at rates between 10% and 20% for civil works and track maintenance. A special contingency of 60% over estimated base cost was applied to the northern track rehabilitation sub-component (amounting to base costs of US$1.4 million) because of uncertainties over estimates, as outlined in para 4.04. No physical contingency was provided on equipment, vehicles and technical assistance, monitoring and evaluation, training or studies. Price contingencies were calculated on a cumulative basis, at 12% for domestic inflation, and for international inflation at 7.5% in 1983 and 1984, 7% in 1985, 6% in 1986 and 6% in 1987. D. Financing 4.14 The sources of funds to finance the Project are summarized below: FMG US$ % -millions- IDA 3752 7.9 23 IDA Special Fund 4417 9.9 28 CCCE 5795 11.3 33 HASYMA/Farmers 2090 5.3 16 Total 16320 34.4 100  - 33 - 4.15 The proposed IDA Credit of SDR 7.5 million (US$7.9 million) and IDA Special Credit of SDR 9.4 million (US$9.9 million) would be on standard terms to Government. The Credit would finance imports of vehicles and equipment and agricultural inputs (starting in the second year) and the costs of consulting services up to US$100,000. The proposed IDA Special Credit would finance the second and subsequent years of imports of vehicles and equipment up to US$1.0 million and of agricultural inputs up to US$3.0 million. The Special Credit would also finance the foreign exchange costs of civil works for the track rehabilitation, and of technical assistance, monitoring and evaluation, training and studies. Should, after detailed engineering, the special contingency for northern tracks prove too high, the corresponding Special Credit funds would be used for financing a small part of local costs for track maintenance. Financing of inputs would be provided on a declining share basis (para 4.05). The Credit and Special Credit funds provided to HASYMA under the Project would be in the form of a loan, in the case of capital expenditures, and in the form of a grant, in the case of costs not directly related to HASYMA's commercial operations (monitoring and evaluation, training and technical assistance). Lenuine terms wii be 14/o interest with principle repayable over seven years after two years grace. Funds used to purchase equipment, vehicles and inputs for farmers would be repaid by farmers on cash or commercial credit terms. Transfers to HASYMA would be made under a financing agreement between Government and HASYMA. Signature of this subsidiary agreement approved by IDA would be a condition of Credit effectiveness. It is expected that the CCCE loan of total 86.3 million French francs would be made to Government and would be repayable over ten years after a five year grace period, at an interest rate of 4-2%, and would finance the first year's vehicles and equipment, agricultural inputs and studies for the cotton track rehabilitation component. Onlending terms to HASYMA are expected to be comparable to those under the IDA Credit. The value of inputs paid by farmers for the first year of the Project is expected to be passed on to HASYMA on a loan basis to reinforce working capital during the investment period and effectiveness of this transfer would be also a condition of Credit effectiveness (para 7.05). The effectiveness of the CCCE agreement would be a condition of effectiveness of the IDA Credit. Funds resulting from the sale of equipment and vehicles to farmers would be put into a reserved account at BTM and serve to finance further development of the cotton subsector. Funds from the sale of project-funded inputs after the first year of the Project would be maintained in a separate trust account by HASYMA and used in part to finance the local cost portion of the cotton track rehabilitation and maintenance component. Assurances on all these procedures were obtained at negotiations. E. Procurement 4.16 Procurement for items to be financed from the IDA Special Fund Credit would be limited to contributory and Part II countires. Equipment and vehicles (including the small aircraft) over a value of US$100,000 would be procured with regular IDA funds (US$3.3 million) and Special Fund credit (US$1.0 million) from the second year of the project via  - 34 - international competitive bidding. Inputs would be procured from the second year of the Project with IDA Credit funds (US$4.1 million) and Special Credit funds (US$3.6 million) under international competitive bidding. In order to ensure that prices are competitive, orders will be bulked to the extent possible. In the case of certain items of equipment intended as complements to existing pools appropriate weighting would be given to standardization in the bid evaluation. Ferries (about US$ 200,000) would be constructed by local suppliers following local shopping procedures. In the case of insecticides, procurement may exceptionally be by direct purchase of formulated materials of proven effectiveness where there is only a single manufacturer. Rehabilitation of rural tracks and buildings construction (US$ 2.5 million) would be carried out by contractors selected in accordance with local competitive bidding procedures satisfactory to IDA. International contractors are represented in Madagascar and are active in many projects. Others not already involved in the country would be eligible to participate but are not likely to be interested by these small contracts. Local competitive bidding procedures would be used for purchases of equipment and supplies for amounts between US$ 20,000 and US$ 100,000 while prudent shopping would be employed for purchases under US$ 20,000 (total procurement under US$ 100,000 about US$ 0.6 million). Under the Project, HASYMA is responsible for procurement. Its procedures, as established by its Board of Directors, are in accordance with local laws and regulations and are acceptable to IDA. Technical assistants financed under the Special Fund credit (US$1.9 million) would be recruited from Special Fund countries according to Bank/IDA guidelines for the use of consultants. Terms of reference and conditions of employment would have to be satisfactory to IDA. Invitations to bid, proposed awards and contracts would be subject to IDA's prior review for all contracts over US$100,000. Assurances on these procedures were obtained at negotiations. For those items financed on a parallel basis by CCCE (about US$ 11.3 million, see para 4.15), procurement would be in accordance with its guidelines, which normally require procurement of goods of French origin. Prices of goods so acquired are expected to be within the range normally obtained under competitive bidding procedures. F. Disbursements 4.17 It is estimated that funds from the Credit account would be disbursed over four and a half years. This is faster than experience for similar projects in the country and region as the Project is a short (four year) project with the majority of investments made in the first two years. The Project is also relatively simple and represents a time-slice of a continuing program. Disbursements will be on the following basis:  - 35 - Amount Allocated % of Expenditures (US$ million) Foreign Local IDA Spec- IDA ial Fund Vehicles & Equipment 3.3 1.0 100 80 Civil Works - 2.5 100 80 Inputs 4.1 3.6 100 80 Technical Assistance - 1.6 100 0 Monitoring & Evaluation - 0,2 100 100 Training - 0.2 100 100 Studies by HASYMA 0.1 0.2 100 100 Unallocated 0.4 0.6 7.9 9.9 G. Accounts and Audits 4.18 HASYMA operates a computerized financial and management accounting system containing adequate internal control and check. This system, with Project support from a technical assistant specializing in financial management (para 4.07) is adequate to control and record expenditures under the Project. HASYMA's accounts are at present subject to an independent review by an accounting firm. HASYMA proposes to retain an experienced local firm as auditor of both entity and project accounts, beginning with the 1982/3 financial year. Assurances were received at negotiations that HASYMA would: (i) keep separate accounts for the Project; (ii) have these accounts and the accounts of the company as a whole audited each year by auditors acceptable to IDA; and (iii) submit these accounts to IDA no later than six months after the close of the financial year. H. Project Completion Report 4.19 MPARA and HASYMA would prepare a Project Completion Report no later than six months after the Project closing date. The Report would summarize Project performance, evaluate its successes and problems and underline lessons to be taken into account in the future design and implementation of similar projects. Assurances on this were obtained at negotiations. I. Environment and Health 4.20 The major risk from the Project stems from the environmental consequence of the use of agro-chemicals. In the past, insecticide mixtures made up of DDT and organophosphates which have a long residual effect were commonly used. As cotton pests developed resistance to these  - 36 - insecticides, the number of sprayings was increased, causing insecticide residues to build up. However, the substitution of DDT by pyrethrin-based insecticides in ULV formulation in recent years has decreased the persistence of toxicity, and thus the environmental impact. The Project would provide, under the on-going insecticide testing program, the establishment of a pesticide monitoring program to evaluate the effect on man and on the environment. Proposals for the program would be submitted for IDA's approval as part of the monitoring and evaluation program (para 4.10).  - 37 - V. PROJECT IMPLEMENTATION A. General 5.01 The Project would be implemented by HASYMA under the supervision of MPARA. HASYMA's zone of action consists of all the cotton growing areas in the country except for the SAMANGOKY irrigation scheme and the SODEMO cotton farm (paras 3.11 and 3.13). Input supply and technical assistance to these two production areas under the Project will be channelled through HASYMA. FOFIFA will implement the cotton research program under a contract with HASYMA, acceptable to IDA. Assurances to this effect were obtained at negotiations. B. HASYMA4/ Organization and Management 5.02 HASYMA is a societe 'conomique mixed-capital company created in 1979 to take over the functions of the Madagascar subsidiary of the French cotton producing company "Compagnie Frangaise pour le Developpement des Fibres Textiles" (CFDT). Government owns 70% of HASYMA's equity and CFDT the remaining 30%. HASYMA's responsibilities are defined in the Charter which accompanied its creation and include input supply, extension, the collection and ginning of seed cotton, and marketing of fiber. The company also fulfills an important banking function and provides land preparation services. 5.03 HASYMA is governed by a Board of Directors which includes seven representatives from Government and three representatives from CFDT. The Board appoints the General Manager, subject to approval by MPARA. It meets regularly twice a year to decide on operational policy matters, to approve annual work programs and budgets, to review financial statements and investment proposals, and to hear reports on HASYMA's performance and operations. Extensive responsibilities for day-to-day operations have been delegated to the General Manager who relies on Board members to inform the ministries and agencies of HASYMA's activities. The company has enjoyed substantial autonomy in its initiatives for development of the cotton subsector but maintains close relations and frequently consults with the two Government ministries mainly responsible for its supervision - MPARA on technical matters and MIC on pricing and marketing. 4/ Financial aspects of HASYMA's structure and operations are discussed in Chapter VII.  - 38 - 5.05 HASYMA's organization follows a simple line structure (Chart 2). At headquarters, the company is organized into two functional departments (Production and Processing) and four support units reporting directly to the General Manager. The company has two regional offices, in Mahajanga and Toliara, which provide supervision of the company's activities in their respective zones. The functiornal departments at headquarters provide technical support to the regional offices. The responsibility and authority of each unit are generally well defined and the structure is well-managed. 5.06 HASYMA employs about 500 staff. Of these, some 36 work at headquarters. Staff are generally well qualified, and include eight graduate agriculturalists, eight qualified accountants, five ginnery technicians, twelve agricultural technicians, and about 110 extension agents. Expatriate staff include two agronomists, an accountant implementing a training program, a ginnery specialist, and a cotton entomologist conducting trials on insecticides and supervising routine pest control programs. Staff employment conditions and salary scales are governed by Madagascar's labor law. However, HASYMA continues to apply CFDT's personnel policy and has kept employment with the company highly competitive by providing substantial fringe benefits, and opportunities for career development. This, together with management's concern for technical competence, have largely accounted for the company's ability to attract and retain qualified staff. HASYMA's employees, especially those in the field, generally belong to one of several unions with affiliations to major political parties. Extension 5.07 In addition to providing extension services, HASYMA's extension staff also organize the supply of farm inputs, land preparation services and pest control programs, and assist with the preparation of applications for agricultural credit. The ratio of extension agents to smallholder farmers is about 1:100. The agricultural technical assistance team (para 5.06) has no line responsibility but assists in drawing up extension programs, analysing results, training extension workers and monitoring results. This assistance has been effective and has contributed significantly to HASYMA's extension performance. Further technical assistance is provided under the Project (para 4.08) to adapt the extension service to its growing responsibilities. Operational Capacity under the Project 5.08 HASYMA has retained much of the professionalism of its CFDT forerunner and is considered one of the more dynamic and well-managed of Madagascar's parastatals. Its experience is greater with commercial activities than with agricultural production, reflecting its origin as a  - 39 - private marketing organization. However, technical assistance over the years has enabled the company to respond to the new emphasis on support to smallholder production. Areas in which HASYMA has used technical assistance in recent years include: setting up the extension system, improving ginning techniques, promoting insecticide testing and application, refining its financial information system, and training personnel. Further technical assistance under the Project would continue to strengthen HASYMA's development in these areas.  - 40 - C. Management of Project Components Provision of Equipment, Vehicles and Chemical Inputs 5.09 HASYMA would be responsible for the implementation of these components. Lists of items needed, on which Project costs are based, have been drawn up by HASYMA in consultation with farmers. HASYMA will prepare detailed specifications and bidding documents, call for tender, evaluate tenders and, for those purchases financed by IDA, make recommendations to IDA for award. After approval, RASYMA would place orders, arrange port clearance and transport to the Project area and handle the distribution. The list of equipment, vehicles and chemical inputs would be updated by HASYMA and requirements submitted for IDA's review as part of the annual work programs (para 5.14). HASYMA would also be responsible for the purchase and transport to the Project area of locally available goods. These are expected to include locally manufactured implements and equipment either from parastatal manufacturers or from artisans' cooperatives. If local supplies prove to be competitive, consideration would be given to signing supply contracts providing for fabrication to be done locally using raw materials to be imported by HASYMA. Distribution of inputs on the SAMANGOKY and SODEMO irrigation schemes would be handled by these companies, as at present. 5.10 Equipment and vehicles provided to Project beneficiaries would be sold for cash or for credit under the BTM credit scheme (para. 3.15). Prices would be fixed to cover the full cost including internal transport and applicable overheads. Repayments by farmers of principle and interest at prevailing rates less a service fee would be allocated to a special reserved fund ("fonds affectAF) at BTM for the financing of development actions in the subsector. During the Project implementation period it is expected that farmers would make significant demands on the fund to finance land development costs, chiefly on the large farms. Arrangements for the management of this fund would be made between BTM, HASYMA and MPARA in an agreement, which would provide for annual presentation of proposals for use of the funds for IDA approval. BTM would account separately for these funds in its annual accounts and BTM auditors would report separately on the accounts of the fund. BTM already has experience of managing similar funds. Elements for a draft agreement were discussed at negotiations and signature of an agreement acceptable to IDA would be a condition of effectiveness. For sale of inputs, farmers would pay the full cost, including internal transport and storage costs, the cost of storage losses, operating costs, administrative overhead and financial charges on the delivered value at the prevailing interest rate (currently 15% per annum) for the period between input delivery and seed cotton delivery. Assurances  - 41 - to this effect were obtained at negotiations. As outlined in Chapter IV (para 4.15), HASYMA would retain the value of CCCE financing of inputs in the first year of the Project on a loan basis to reinforce its working capital. The value of Project financing of inputs in subsequent years would be retained by HASYMA in a separate account on trust for MPARA to finance the rehabilitation and maintenance of cotton access roads. Assurances to this effect were obtained at negotiations. As part of the annual work program process, HASYMA would prepare a forecast each year of the foreign exchange allocation required from Government. Chapter VII (para 7.10) shows the likely foreign exchange flows to and from the cotton subsector in future years and the likely demands on Government by HASYMA. Assurances were received at negotiations that Government would make available to HASYMA foreign exchange in line with the agreed annual work program. 5.11 Equipment requirements will be established in relation to programs for cotton cropping on existing lands and for opening up new lands. In the case of smallholders, extensions are unlikely to raise land issues (para 3.05). In the case of the large farmers, particularly those of non-Malagasy extraction, it will be necessary for HASYMA to act as an intermediary in receiving land grants and subsequently to lease the lands on long lease to farmers. Technical Assistance and Consultant Services 5.12 HASYMA would be responsible for the recruitment of technical assistants (para 4.07). Job descriptions and proposals for recruitment were agreed at negotiations. The cotton research program (para 4.06) would be implemented by FOFIFA with consultant support for the design and monitoring of programs. Rehabilitation of Rural Roads 5.13 HASYMA would implement this component with the technical support of MTP and the cotton tracks would be included in the economic network of roads and tracks of national priority. HASYMA would be responsible for (i) preparation through consultants of bidding documents for rehabilitation works in the north and the building of minor structures in the south; (ii) supervision with MTP and consultant assistance of the execution of works; (iii) maintenance of tracks through two maintenance brigades provided with simple equipment, with technical assistance for training and supervision; and (iv) maintaining liaison with MTP. MTP would be responsible for (i)  - 42 - technical assistance in defining programs preparing bidding documents and evaluating bids; (ii)technical support to HASYMA in supervision; and (iii) carrying out if its programs permit any major maintenance works beyond the capacity of the HASYMA brigades. In order to economize on direct payment in foreign exchange a weighting would be given to local currency content of bids at evaluation. In certain areas of the north farmers have the equipment necessary to maintain tracks following rehabilitation and will be responsible for routine maintenance. For other areas where farmers do not have the capacity HASYMA in consultation with MTP will remain responsible for maintenance during and after the project period. D. Annual Work Programs and Reports 5.14 Annual work programs would be prepared by HASYMA. The main objectives of these programs would be: (i) to facilitate a full annual review of Project progress by both Government and IDA; (ii) to make adjustments possible as experience is gained; and (iii) to serve as a planning, implementation and monitoring tool. HASYMA's programs would be submitted to HASYMA's Board and MPARA for discussion and review. As programs will cover not only the calendar and fiscal year which corresponds to a complete harvest period but also the cropping year which begins in October, annual work programs will be submitted early (April 15), so that the program for the forthcoming cropping year can be established. However, the finalization of the whole program will take place once the Government budget is approved in December. Assurances were therefore received at negotiations that the annual work programs would be submitted to IDA for its review and comments no later than April 15 of the year preceding the year of the program. Final programs agreed by Government and IDA would be prepared and submitted promptly after finalization but in any case no later than December 31 preceding the year covered by the programs. IDA's approval of the annual work programs would be a condition of disbursement for the activities to be undertaken during that year. The approval by IDA of the finalized programs covering calendar 1984 would be a condition of effectiveness. 5.15 The annual work program would include a statement, by project component, of the specific objectives to be accomplished during the coming year, a description of the resources (human, financial and physical) available or to be acquired to achieve those objectives, a description of how the objectives would be achieved and an annual budget presenting all these elements in financial terms. Programs would include a discussion of achievements over recent periods and draw links between past performance and proposals for the future. In addition the program should include the following specific items, where relevant:  - 43 - (i) the proposed capital expenditures (e.g. on civil works, vehicle and equipment) for all Project components, including a list by farmer of equipment requirements and details by farmer of the proposed program; (ii) the proposed expenditures on salaries, materials, fuel, repairs and maintenance; (iii) proposals for purchase of inputs; (iv) a list of the personnel whose salaries would be financed under the Project, including technical assistants; (v) detailed financial projections for the year under consideration including an estimate of the financing requirements from each source, a calendarised projection of the net funds required from the Government investment budget, a forecast of the foreign exchange allocation required and a list of expenditures eligible for reimbursement by IDA and proposed allocation of funds by categories; (vi) seed cotton and fiber pricing proposals, (vii) proposed terms of reference for new staff or any changes in agreed terms of reference; (viii) procurement proposals; (ix) a list of proposed short-term consultancies including justification and proposed method of procurement; (x) a list of new areas to be cultivated and confirmation that these areas have been made available to farmers; (xi) detailed proposals for the road component and proposed disbursements from the trust fund (para 5.14); and (xii) the proposed monitoring and evaluation work program (para 4.10). 5.16 Reports. HASYMA would prepare semi-annual reports on the progress of the Project. Assurances to this effect were received at negotiations.  - 44 - VI. TECHNICAL ASPECTS A. Yield Constraints 6.01 With good management under the characteristic soil and climatic conditions of the different production zones, potential yields of seed cotton range from about 1.6 tons/ha in the rainfed areas to over 3.0 tons/ha under the flood-recession system and under irrigation. Actual yields obtained are substantially less; in the past six years, they have averaged 0.96 and 2.28 tons/ha, respectively. There is, therefore, still substantial scope for yield increase. Clearly for rainfed areas, the level and distribution of rainfall are vital factors. Average precipitation in rainfed cotton producing zones exceeds 700 mm annually, the level which is considered adequate for cotton production, and is concentrated in a well defined rainy season. Inter-annual variations around this level do not present an undue risk to cotton production: ten year series show on average a reduction in yields that may be attritutable to rainfall definite once every five years. This has been reflected in the economic analysis (para 8.04). The other main physical and technical factors inhibiting yields are the following: (i) lack of timely access to land preparation facilities; (ii) poor application of recommended crop husbandry practices (iii) inadequate and unbalanced fertilizer applications; (iv) inadequate pest control programs; and (v) communications. The last point is dealt with in Chapter II (para 2.22); the other points are discussed below. Land Preparation 6.02 For both the flood-recession system of the north and the rainfed system of the south, timing and speed of crop husbandry operations are critical. It has been estimated that every month's delay in planting past April 15 in the north, on the flood-recession system, results in a drop in yield of 0.5-1.0 ton/ha and in the south past December 15, on the rainfed system, in a loss of 0.4-0.7 ton/ha. In the "baibohos" (flood plains), the land has to be ploughed, harrowed, furrowed and planted in the short space of time between the withdrawal of the flood waters and the drying-up of the soil profile. When these operations are delayed, the germination rate drops significantly, big gaps occur in the field and the low plant density results in low yields. Harvest is also delayed and may have to be completed at the onset of the rainy season, resulting in quality losses. Under the rainfed system, the rainy season is so short that land preparation has to be completed immediately after the first rains so that the farmer can derive benefits from the early planting. Early land preparation is already an important extension theme on which HASYMA's extension workers put particular emphasis. Many farmers use trained bullocks for land preparation, as animal traction is a strong tradition in the south but there is a shortage of ox-ploughs and other implements. irn addition, in some rainfed areas other crops have also to be planted at the  - 45 - onset of the rainy season, which creates a peak demand for the available ox traction that some farmers have only been able to meet by using tractor services. Under the Project the main emphasis is on extending the use of animal traction whenever possible. Crop Husbandry 6.03 Simply by the strict application of recommended techniques farmers could realize appreciably higher yields (approaching potential yields). Yet there has been no improvement in the husbandry of smallholder cotton in recent years as low producer prices made the extra effort, particularly in labor and inputs, uneconomic. Thus, plant spacing was usually too wide, resulting in less than optimum plant spacing of 60,000 plants/ha, insufficient fertilizer was applied, thinning to two plants per hole was not carried out, weeding was neglected and insecticide spraying was not systematic. The producer price of seed cotton has since been substantially increased (para 2.17 ff). The economic incentive is therefore now present for smallholders to make appropriate efforts to obtain higher yields. Additional expenses would be in hired labor for weeding and picking and in the application of higher levels of fertilizers and insecticides. The large cotton planters have generally contrived to maintain a high level of husbandry but would benefit from using more effective herbicides. 6.04 The extension of recommended husbandry techniques is carried out by HASYMA's extension workers on a theme by theme basis (para 5.07). Thus, the information that has to be relayed by the extension worker to the farmer and be understood by him is very simple and clear. However, some extension workers still require further training as has been observed from the quality of their demonstration plots. The lack of adequate means of transportation has also been a handicap to the extension workers as a lot of their time is spent travelling from farm to farm. Monitoring of extension staff by supervisors has also been hindered by the lack of vehicles. Fertilizer Applications 6.05 Cotton production is highly demanding in chemical inputs, whether under an intensive or extensive system of production. HASYMA is entrusted with the role of providing seeds, fertilizers and insecticides to cotton producers, including parastatals, and has successfully fulfilled that role. Past research results obtained by IRCT have indicated that optimum cotton yields can only be obtained and sustained with the application of fertilizers. On the "baibohos" soils of the north-west, high levels of nitrogen and potassium are required and the recommended dosages per ha are 300 kg of urea and 200 kg of potassium sulphate, together with about 10 kg of a soluble boron. On the Mangoky irrigation scheme, the recommended dose  46 - is just 200 kg of urea. On the rainfed soils of the south, the recommendations are: 100 kg of urea, 150 kg ammonium phosphate and 100 kg potassium sulphate. In this area yield potential is comparatively low (1.6 tons/ha) and there is a higher risk of crop failure due to the low and erratic rainfall pattern. Nonetheless irn the higher-potential parts of this area, which benefit from comparatively higher, more stable rainfall patterns, there is scope for achieving higher yields than the 0.9 tons/ha presently obtained. Actual applications by farmers have averaged, for the large planters, 300 kg of urea and 190 kg of potassium sulphate per ha, against dressings of 50 kg of urea, 7 kg potassium sulphate and 15 kg ammonium phosphate by smallholders. There is, therefore, scope for smallholders to increase their yields through higher fertilizer applications, particularly in northern areas with high yield potentials. In rainfed areas and on poorly-operated irrigation systems with low potentials, increases in fertilizer applications would have to be limited. The Project is aimed at promoting increased fertilizer use, especially of nitrogen and phosphate, in high potential parts of the area. Pest Control 6.06 In Madagascar, numerous insect pests feeding both on leaves and bolls represent a serious problem. In fact, without an intensive and effective pest control program based on the use of chemical insecticides, cotton production would not be possible. These insect pests include bollworms such as Heliothis armigera (American bollworm), and Earias spp. (spiny bollworm), defoliators such as Spodoptera littoralis (Prodenia) and aphids (Aphis gossypii). In recent years Spodoptera has been the major pest. In the past, mixtures of DDT and organophosphate were used but DDT has been replaced by pyrethrin-based insecticides which are effective, except against aphids which have to be controlled by organophosphate insecticides. At present, it is recommended to carry out 5 sprayings of pyrethrin-based insecticides alternated with 5 sprayings of monocrotophos. Differences in insecticide levels used by large planters and smallholders are smaller than is the case for fertilizers because yields would be drastically reduced if pest control programs are not fully implemented. Thus, large farms use an average of 34 kg insecticides per hectare per year against 28 kg for smallholders. The present pest control program, relying on these multiple applications of broad spectrum pecticides, is unlikely to remain effective for long, as pests develop resistance. It is therefore essential to develop an improved technical package, which would probably be based on a soil-applied systemic material against leaf sucking insects. It is also necessary to link spray applications to economic pest threshold levels. For this purpose pest programs will form a vital part of the research and trials component under the Project (para 4.06) and incidence and economic impact of program will be a key focus of the monitoring and evaluation effort (para 4.10). There is in addition scope for improving the smallholder pest control program by increasing the use of ULV hand  - 47 - sprayers to apply pyrethrin-based insecticides in ULV hand sprayers with positive effect on yield and costs. Research 6.07 From 1952 to 1974, cotton research in Madagascar, conducted by IRCT, identified cotton production techniques appropriate to the different zones, which are still used today. Since FOFIFA assumed responsibility for researclh in 1974, little effective research has been carried out, except by HASYMA under its pre-production trials program, which concentrates mainly on the testing of new insecticides. The need for a revived research program is now being felt. In particular, new varieties need to be identified for the different environments that have now come into cotton cultivation. At present, there are only two commercial varieties, and a single variety - Acala - is being grown in several completely different environments, ranging from saline, irrigated soils to neutral, unirrigated soils. There is also a real need for a more drought-tolerant variety than the present variety (Stoneville) grown in the rainfed areas. Fertilizer recommendations need to be more specific for each production zone and need to be evaluated with greater attention to economic considerations, notably for the low-rainfall southern zones, with the establishment of response curves under farmer conditions. Trace element requirements need to be reviewed. Screening of insecticides and herbicides should be carried out on a systematic basis and the lag time between research and general introduction should be reduced. In the case of the pyrethrin-based insecticides, it took three years before the results were translated into practice. To meet these needs a program of adaptive research and pre-production trials would be set up as described in Chapter IV (para 4.06). B. Extension of Areas 6.08 In addition to increasing yields on existing areas, Project components are aimed at increasing the area under cotton. In the northern zone, there are still vast areas of "baiboho" soils suitable for cotton production. Many of these lands form part of former land areas granted to expatriate planters which have since been returned to the state. Others are state lands that have remained undeveloped. In addition, there is still scope for extending cropping areas by another 15 to 20%, or about another 1000-2000 ha on existing large farms. These lands possess high potential soils, capable of producing 2.5 tons/ha under intensive husbandry. It is unlikely that Government will be investing in new irrigation schemes in the near future, and development of irrigated cotton production will be limited to the ongoing Mangoky Project and to efforts to boost output on existing schemes. Prospects for expansion of rainfed areas are, however, considerable around Toliara right up to Ihosy. The major constraint is poor road access, which will be addressed under the Project (para 4.06).  - 48 - C. Farm Models 6.09 Two farm models have been designed, representing the typical large farm of the flood-recession system of the north (Model I) and the typical smallholder farm of the south (Model II). The average large farm is assumed to occupy 170 ha of cotton reflecting the size distribution of these farms. Non cotton activities have not been considered for these large farms as they have proved unprofitable and have been abandoned. The average area under cotton on the large farm would increase under the Project, to about 240 ha, or a total increase of 3000 ha of cotton. The smallholder farm is assumed to cover 2 ha, of which 0.9 ha is occupied by cotton, 0.4 ha by maize, 0.3 ha by cassava and 0.4 ha by butter beans. The non-cotton activities are assumed to remain unchanged under the Project as maize and cassava are mainly grown for on-farm consumption. The smallholder farm area would increase from 2.0 ha to 2.5 ha under the Project, due to an increase of 0.5 ha in the area under cotton. Total increase in smallholder rainfed cotton area will be 3100 ha. For irrigated areas, although potential yields are higher, actual yields given the state of irrigation networks and management are no higher than in rainfed areas and are unlikely to increase much more rapidly than those in rainfed areas. Therefore, no distinction has been made between irrigated and rainfed areas in the farm model. However, on irrigated areas, cotton will displace other crops on about 2,000 ha. These crops will be shifted from the irrigated to rainfed areas, as in previous years when cotton production was a more important activity. The average smallholder family size is assumed to be composed of six persons. Yields and Production 6.10 Present average yields of seed cotton of 2.17 tons/ha for the large farms and 0.8 tons/ha for the small farms are expected to increase to 2.45 tons/ha and 1.2 tons/ha, respectively, by year 5 of the Project. These projections are realistic considering average past yields of 2.4 tons/ha for the large farms, and smallholder yields which reached an average of 1.6 tons/ha in 1976. The increased yields would arise from such measures as improved access to equipment, improved and earlier land preparation, improved seeds, fertilizers, insecticides and herbicides, the adoption of improved cultural techniques such as optimum planting dates and plant densities, fertilizer application, weeding and pest control, and better communications. By contrast, it is clear that without the Project the tight foreign exchange situation and deteriorating transport situation would result in further yield and production declines. Net revenue from cotton activities for the smallholder farm will increase from FMG 98,000 ($260) to FMG 187,000 ($500) in year 5 of the Project. For the large farm, the increase will be from FMG 35.8 million ($95,000) to FMG 62.1 million ($166,000) over the same period. The incremental seed cotton production of the Project is expected to reach 19,000 tons, equivalent to 7,350 tons of fiber, in year 5 of the Project.  - 49 - Labor 6.11 The Project would generate employment on both large farms and smallholdings. On large farms, extra labor would be required, mainly for the extensions. All agricultural operations would require labor but the greatest demand would be in thinning, weeding and picking. It is estimated that an extra 3000 laborers would be required throughout the year for the 3000 ha of extension. For the smallholdings, both intensification and extension of production would result in extra labor demand. The average small farm would require an extra 26 man-days of family labor per ha per year by the end of the Project; in addition, hired labor would be required for cotton-picking, equivalent to about 16 man-days per ha per year.  - 50 - VII. FINANCIAL ANALYSIS A. HASYMA Financial Performance to Date 7.01 HASYMA as a "mixed capital" company operates under commercial law and is subject to company taxation. However, 70% of the share capital is held by the state and the role of the company is fixed in the charter which accompanied its creation. The company operates in a controlled price regime under which the major input (seed cotton) and output (fiber) prices are determined annually by Government. The mechanism for setting prices is described in Chapter II (para 2.05). In recent years, prices have never been set at a level adequate to allow HASYMA to make a profit on its cotton marketing and processing activites, and since 1979/80 HASYMA has incurred very sizable losses on these activities. It was only through profits on input supply that HASYMA managed to break even in the period 1980/82. In 1982/83, its margins further eroded, the company plunged into deficit. 7.02 HASYMA's financial performance since nationalization has thus been poor. Annual results (see Table 11) have evolved as follows: