Madagascar - Lac Alaotra Rice Intensification Project

Document of $ILL ( ORy The World Bank FOR OFFICIAL USE ONLY Report No. 3980-MAG STAFF APPRAISAL REPORT MADAGASCAR LAC ALAOTRA RICE INTENSIFICATION PROJECT February 25, 1983 Central Agriculture Division Eastern Africa Projects 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 375 1/ 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) CVA Circonscription de la Vulgarisation Agricole (Agricultural Extension Division) DDR Directorate for Rural Development DEP Directorate of Studies and Programming, MPARA EDF European Development Fund FAC Fonds d'Aide et de Cooperation (French technical assistance agency) FOFIFA Center for Agricultural and Rural Development Research MPARA Ministry of Agricultural Production and Agrarian Reform (Ministere de la Production Agricole et de la Reforme Agraire) SOMALAC Development Agency for the Lac Alaotra region GOVERNMENT ADMINISTRATION (Fokonolona Territorial Divisions, see para. 1.08) Fokontany = group of villages Firaisam-pokontany = group of fokontany (former canton) (or Firaisana) Fivondronam-pokontany = group of Firaisana (former sub-prefecture) (or Fivondronana) Faritany = group of Fivondronana (former province) FISCAL YEAR Government and SOMALAC January 1 - December 31 PADDY: RICE CONVERSION One ton of paddy gives about 670 kg rice. One ton of rice is made from about 1.5 tons of paddy. 1/ The exchange rate between the US dollar and the Malagasy franc used in this report is based on an average of the rates obtaining during the second half of 1982.  FOR OFFICIAL USE ONLY MADAGASCAR Lac Alaotra Rice Intensification Project Staff Appraisal Report Table of Contents Page No. I. BACKGROUND A. Project Background ...... ............................ 1 B. The Agricultural Sector ...... ...................... 1 C. Government Services .*.. ... ....... .. .. ........ ... 3 D. Irrigation in Madagascar ..... .................... 5 E. Government Agricultural Strategy ................... 6 F. Bank/IDA Projects in Agriculture and Irrigation 7 II. THE RICE SUB-SECTOR .................................... 8 III. THE PROJECT AREA A. Location and Physical Characteristics .............. 12 B. Population and Labor Supply .......... .. ............ 13 C. Land Tenure ........ ................................ 14 D. Agriculture and Irrigation ..... .................... 15 E. Development Programs in the Lac Alaotra Area ....... 17 F. The Lac Alaotra Irrigation Project (Cr. 214 MAG) 18 IV. THE PROJECT A. General Description ...... .......................... 21 B. Detailed Features ..................... ............ 22 C. Project Costs ........ .............................. 28 D. Financing .......................................... 30 E. Procurement ................................... 31 F. Disbursements ................................... 31 G. Accounts and Audits .. ........................ . 32 H. Project Completion Report ..... .................. 33 I. Environment and Health ...... ....................... 33 | 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. V. PROJECT IMPLEMENTATION A. General ...................... ..................... 34 B. SOMALAC ...... .......*... 34 C. CVA-Ambatondrazaka .............. .. ................ 39 D. Credit and Input Supply ............. * ............. 39 E. Annual Work Programs and Reports .. ................ 40 F. Mid-Term Review ................................. 42 VI. TECHNICAL ASPECTS ..................................... 42 VII. FINANCIAL ASPECTS A. Background ...... 46 B. Financial Rehabilitation of SOMALAC ............... 47 C. Government and SOMALAC Cash Flow .................. 49 D. Cost Recovery ................... .................. 49 VIII. MARKETING ............. # ............. 50 IX. ECONOMIC BENEFITS AND JUSTIFICATION .... ............... 51 X. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS .......... 53 SUPPORTING TABLES, ANNEXES, CHARTS AND MAP Table 1 - Project Cost Summary (by Project Component) Table 2 - Project Cost Summary (by Procurement Category) Table 3 - Estimated Schedule of Disbursements Table 4 - Adoption Rates and Incremental Crop Production Table 5 - Farm Budgets - SOMALAC Schemes Table 6 - Farm Budgets - SDR Schemes Table 7 - Farm Inputs Requirements Table 8 - SOMALAC - Summary Historical Financial Statements Table 9 - SOMALAC - Projected Financial Statements Table 10 - Government Cash Flow Table 11 - Economic Analysis - Cost and Benefit Streams Table 12 - Economic Analysis - Economic Price of Rice Table 13 - Economic Analysis - Sensitivity Analysis Table 14 - Draft First Annual Work Program Table 15 - Rent and Cost Recovery Percentages  - iii - Annex 1 - The Rice Sub-sector Chart 1 - Ministry of Agricultural Production and Agrarian Reform Chart 2 - SOMALAC 1981 Chart 3 - SOMALAC, Revised Organigram Chart 4 - Implementation Schedule Maps - IBRD 13654RI - IBRD 15665R  MADAGASCAR Lac Alaotra Rice Intensification Project I. BACKGROUND A. Project Background 1.01 The preparation of projects to intensify agricultural production in the Lac Alaotra region was first discussed between Government and IDA in 1978 in the context of the Lac Alaotra Master Plan prepared in 1976 (para. 3.19). Pre-investment studies on an intensification project were financed by French bilateral assistance (FAC) and carried out by the consulting firms SCET-International in 1978 and SOGREAH-SOMEAH in 1979-81, under the supervision of the Ministry of Agricultural Production. An accounting and management audit of SOMALAC, development parastatal in the Project area, was carried out in 1981 by the consulting firm ICTAD under IDA financing. An IDA appraisal mission, composed of Frangois-Marie Patorni, Christopher Ward, Yves Wong You Cheong (IDA) and Jean-Aime Rakotoarisoa (Consultant) visited Madagascar in September 1981. A post-appraisal mission comprising Yves Wong You Cheong and Ulrich Kiuffner visited Madagascar in December 1981 to review the irrigation rehabilitation components. In August 1982, a Project Preparation Facility advance of US$1.0 million was made to finance key preparation and start-up activities, including: consultant services, training, rehabilitation of seed production facilities and construction of training for technical assistance personnel. Financed under this PPF, ICTAD assisted Government in preparing the detailed proposals for rehabilitation of SOMALAC and these were discussed with IDA in Madagascar during September 1982. Negotiations were held in Washington in December of 1982. 1.02 The main objective of the proposed Project would to be increase rice production for the domestic market in order to reduce Government expenditures on rice imports. To meet this objective, the proposed Project would provide for: (i) rehabilitation of existing modern and traditional irrigation schemes; (ii) reinforcement of agricultural development institutions and extension services in the Project area; and (iii) the supply of farm inputs. In addition pilot actions under the Project would lay the ground for further development of 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  - 2 - 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-sca'le mechanized farming. The country is sparseiy populated (averaging 16 inhabitants per km2) but there is great pressure on cultivable land in some regions. 1.04 Major Crops: The most important crop, rice, is described in Chapter II. After rice, manioc, mostly consumed on the farm, is the most important food crop. 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 include sugar, cotton and tobacco. Madagascar also produces a wide range of minor commodities, including wine, tung oil, medicinal plants, ylang ylang, raffia and aleurites. 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 intensification, 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. However the mediocre financial and management records of the institutions concerned, together with poor productivity have led the Government to question this policy and the size of the nationalized sector has not been increased significantly in recent years. The Government has also encouraged cooperative production by farmers, but with little success. 1.07 The growth of Madagascar's agricultural production over the past 15 years has been disappointing, with the average rate of increase somewhat less than the population growth rate of 2.8% per annum. This largely reflects the poor performance of the two most important agricultural products, rice and cattle. Madagascar has virtually ceased exporting rice, and in 1980 imported 175,000 tons. Meat production has grown only slowly and exports are stagnating. For the key export crops, production is below  - 3 - the levels of the mid-1970's. Among the complex reasons for this mediocre performance are serious marketing problems for many crops, agricultural pricing policies, lack of foreign exchange for essential imports, poor communications and a profusion of weak development institutions. Nonetheless, potential is substantial. Intensification of production in virtually all parts of Madagascar and rehabilitation of existing production infrastructure, particularly in irrigation, could significantly increase output, as could extension of the cultivated area, particularly on the west coast where there are large areas of undeveloped yet fertile land. C. Government Services Local Government 1.08 Since 1972 the Government has carried out a major reorganization of local administration. The new "fokonolona" system reflects an effort to associate traditional institutions and practices with a more representative and responsive local government. The reform has been implemented gradually, and many details are still being worked out by the Government. However, the new entities have assumed some economic responsibilities, notably in marketing of rice and other agricultural products, and for planning and implementation of small-scale development projects. The hierarchy of fokonolona institutions comprises the fokontany, which coincides roughly with the traditional village (about 11,400 in Madagascar), the firaisana, at the former canton level (about 1,250), the fivondronan, at the former subprefecture level (about 110), and six faritanys, which have replaced the former provinces. Government has in recent months been reviewing the impact of the whole decentralization process with a view to possible modifications. Ministry of Agricultural Production and Agrarian Reform (MPARA) 1.09 The Ministry of Agricultural Production and Agrarian Reform is the central institution in the agricultural sector. Its jurisdiction covers basic farmer extension services, rural infrastructure, input supply, plant protection, veterinary services, fisheries, forestry and soil conservation. It is also responsible for agricultural planning, supervision of many parastatals and a number of semi-autonomous agricultural agencies, and for land reform. Over the past ten years, the ministry has operated under both centralized and decentralized structures, but there has been relative continuity in basic functions and a strong tendency for services to be organized along functional lines. Prior to 1979, authority was centralized at Antananarivo, and ministry services were organized by functional discipline (agriculture, rural engineering, livestock, and waters and forests) down to the sector and cell level. In 1979, a far-reaching reorganization was introduced which decentralized MPARA staff and services along the lines established by the fokonolona reforms. This reorganization sought to bring about better coordination among field staff, to shift the focus of management and planning to the  - 4 - faritany and below, and to promote close cooperation with local governments. However, the reorganization was undertaken with virtually no planning or preparation of staff and without thinking through how to maintain technical discipline and authority within the new decentralized structure. Consequently, the reorganization resulted in a serious deterioration in the ministry's services. As a result of the many problems associated with the decentralized system, the ministry was again reorganized in September 1982. The new structure is centralized, and staff are organized into line departments representing the major functional disciplines: agricultural/crop activities, rural works (irrigation systems and mechanization), fisheries and forests, and livestock. A central finance and 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. Extension, rural works, livestock, and fishery and forestry staff are organized into services at the faritany and ex-pr6fecture (group of fivondronana) levels. The ex-prefecture level is known as either a "circumscriptlon" or "decentralized division", depending on the functional discipline, and they total 21 for the whole country. The current structure of MPARA is shown in Chart 1. It is the Government's intention to implement a training program to support the institutional changes outlined above. Technical assistance for these activities would be provided under the IDA-financed Agricultural Institutions Technical Assistance Project (Credit No. 1249 MAG). Agricultural Research 1.10 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 research institutes. FOFIFA was under the supervision of the Ministry of Higher Education 1977-81 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. Constraints to FOFIFA's effectiveness are being addressed under the Agricultural Institutions Project (para. 1.15), which provides for organizational studies, development of a production-oriented research program, and implementation of staff training programs; it would also support collaborative efforts with international agricultural research organizations. Agricultural Credit 1.11 The BTM (Agricultural Credit Bank), which is being assisted under the Agricultural Credit Project (Credit No. 1064-MAG), is the principal source of credit for agriculture. For some years the BTM operated largely in cooperation with the fokonolona institutions in a 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,  -5- 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, BTM has proposed with IDA approval that part of the IDA Credit be used to finance fertilizer imports destined for smallholders in selected rice growing areas. These fertilizers would 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. D. Irrigation in Madagascar 1.12 Madagascar, with Sudan, is one of two countries in Africa south of the Sahara where irrigated agriculture is practised on an extensive scale. In fact much of Madagascar's agricultural potential is due largely to the skills and long tradition of the Malagasy people in irrigation. Of the cultivable land in Madagascar, nearly a third, around 1 million ha, possesses some form of water control system. Rice is by far the most important irrigated crop, although there are small areas of irrigated cotton and sugar cane. In recent years, and especially since decentralization (para. 1.08), information on these systems has not been updated and management and services have been poorly coordinated by the Government. However, the Government has now reemphasized the paramount importance of irrigation to Malagasy agriculture and is actively studying ways of improving irrigation management and maintenance. Irrigation rehabilitation figures largely in investment plans. 1.13 Irrigation or water control systems can be broadly classified into three types: official systems, small irrigation schemes, and family rice fields. Official systems are developed and managed by the Government. There are about 150 of these systems, ranging in size from about 300 to 10,000 ha, and totalling about 260,000 ha. The largest irrigation schemes are managed by parastatals, in the Lac Alaotra basin (SOMALAC) and in the Betsiboka valley around Marovoay (FIFABE); an IDA-assisted project is under way in the Mangoky delta (SAMANGOKY) and IDA assistance to another project in the Morondava area (SODEMO) has recently finished. The effectiveness of many of these schemes has been seriously eroded by poor management and inadequate maintenance, resulting from inadequate financial allocations compounded by low cost recovery and from absence of a political will to enforce discipline. Government is now aware of the production consequences of this deterioration and is taking active steps to find remedies, The legal and administrative framework for management and cost recovery is being reshaped (para. 1.14), and a review is being carried out of a number of schemes where low-cost rehabilitation would pay high returns. An ongoing IDA-supported study is aimed at preparing a number of rehabilitation projects for smaller schemes, which may be included in a possible Irrigation Rehabilitation Project proposed for IDA appraisal in 1983. Rehabilitation programs for larger schemes are also in preparation or underway (para. 2.10). Government policy and  - 6 - actions in the irrigation sub-sector are c'.osely tied to ihe high priority now placed on inrireasing rice output and to the substantive policy changes made recently to achieve this (para. 2,05 ff). Small irrigation schemes developed with local fu-nds with varying degrees of support by Government, number about 900. The average area is about 125 ha, but they range in size from about 5 ha. .;p to 1 000 ha. In. many cases t,hese systems are maintained and operated by local communities. Government is current Ly carrying out a review of the condition of these schemes a-nJ Of arrangerments for their operation and ma,intenance. and an ongoing project, "`00ration Microhydraulque', financed with assistance from EDF. is aimed at rehabilitating aad expanding a number of these schemes. Family rice fields, developed and mairtained tv farmers themselves, c ver up to 500,000 ha and range in size from one are tG, perhaps 5 ha. Thtey inv3lve some water control measures, from basic terracing of vallev bottoms to simple storage dams. 1.14 Cost RFecovery. For some years existing legal provisions for management and cost recovery on official schemes have been inoperative, largely due to a decline in political will to enforce sanctions and to a deterioration in MPA"A's management capacity. As a first step towards reasserting discipline and providing a workable management framework, the Government enacted new legislation (Law 81-026) in December 1981 providing for a system of cbtarges to recover the costs of land development and of management and maintenance of irrigation schemes. The legislation also provides for the creation of local water user committees and for a disciplinary code. Government i's currently working out steps necessary to implement the law and to set the level of charges for each scheme. A number of pilot water users committees are being set up. Successful action on the law is critical for the future of t1he irrigation sub-sector and for the proposed Project and the possible Irrigation Rehabilitation Project (para. 1.13). E. Government Agricultural Strategy 1.15 Faced with mediocre production performance, nmounting food import bills and widespread disorganization i-n the provrision of basic agricultural services, the Government has recently set about defining its priorities and working out means to improve the present situation, The priorities are: (a) self-sufficiency in food supply (particularly rice); ,h) irncreased production of cash crops and beef for export; (c) expansion of basic agro-industries to process local raw materials; and (d) irncreasing rural employment. To work towards tI ese priorities, G-overlnment oCfficials are focussing on key institutional and techn1ical problems, including: (i) reorganization of MPARA and streigthening its ability to Provide servi.ces fpara. 1.09); (ii) reviving FOFIFA and strengthenLing links betrween its activities and M4PA-RA's extension worxK (,para. 1.10);  -7 - (iii) monitoring and coordination of agricultural parastatal activities; (iv) improving implementation and increasing productivity of existing investments; and (v) development of a realistic three year rolling investment program for agriculture (para. 2.05). The Government is also addressing broader policy issues (such as pricing, marketing arrangements, input subsidies, and cost recovery from beneficiaries), and is taking concrete steps to revitalize priority services to farmers, notably veterinary services, irrigation network management and input supply. The IDA-assisted Agricultural Institutions Technical Assistance Project is designed to assist with this process of change. The major components of the project include technical assistance in preparation of an agriculture investment program and of a short-term action plan for the rice sub-sector; support to a central rice coordination unit; financial and management audits for key parastatals; studies of marketing and input distribution systems; a review of MPARA's organization; and management and operational support for FOFIFA (para. 1.10). Assistance to the key investment programming effort (para. 2.05), the first studies for parastatal rehabilitation and a major study addressing critical marketing issues are already underway. The Technical Assistance Project thus contributes to the momentum of change and will help to sustain it. The present Project would fit into the process in focusing on the institutional and technical constraints to rice production in Madagascar's major surplus region and lend impetus to major policy reforms currently being carried through. The rice subsector and related policy issues, including new orientations in Government investment policy, are discussed in detail in Chapter II. F. Bank/IDA Projects in Agriculture and Irrigation 1.16 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). Five other projects are under implementation: the First Village Livestock and Rural Development Project (US $9.6 million); 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); and a Second Forestry Project (US $20.0 million). A Second Village Livestock Project and an Agricultural Institutions Technical Assistance Project have recently been signed but are not yet effective. 1.17 Experience with project implementation has been mixed. The  choice of institutional structure, relations with existing Government services, staffing policies, financial management, and management accountability have either delayed project start-up or complicated project implementation. The Morondava Irrigation Project is a particularly striking example. In addition to substantial cost overruns which necessitated a reduction in project scope, project performance was adversely affected by the unclear role assigned to the implementing agency (SODEMO), weak management, overstaffing, and lack of accounts and audits. Controlled prices and lack of a clear cost recovery policy compounded these problems and led to serious financial losses. By contrast, after initial delays, the executing agency for the First Village Livestock Project, FAFIFAMA, developed into a satisfactory institution with technically competent and dedicated management. Similarly, the project agency for the First Mangoro Forestry project, FANALAMANGA, has established a strong record, with execution of components ahead of schedule and in line with appraisal cost estimates. In general, most projects are now being adversely affected by the worsening economic conditions and particularly by shortages of foreign exchange. 1.18 Two agriculture projects financed by the Bank Group have been completed and audited by the Operation Evaluation Department. The Audit Report on the first Lac Alaotra Project, which was also the subject of an Impact Evaluation Report, is discussed in detail in Chapter III (para. 3.27). The Audit Report No. 1559 of April 11, 1977, 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 deveopment projects in Madagascar and a reorientation of Bank Group sub-sector lending to focus on the traditional extensive system. II. THE RICE SUB-SECTOR 1/ 2.01 Production Systems. Rice production is the most important economic activity in Madagascar. It is estimated that 70% of the population is involved in paddy cultivation, which occupies about 50% of cultivated land. Paddy is cultivated throughout Madagascar except in the south, where the rainfall is insufficient. Traditional rice cultivation in the coastal areas, where farmers also grow cash crops is largely for home consumption. Farmers typically produce a single crop a year, with yields averaging 1.2 tons/ha. In the central highlands, plots are very small (averaging 0.6 ha per family) but lack of alternative cash crops has 1/ The rice sub-sector is treated in greater detail in Annex 1. Paddy: rice conversion factor used in this report is one ton of paddy = 0.67 tons of rice.  9 led to higher cultivation standards. Yields with water control average about 1.5 tons/ha, but reach 3.5 tons/ha or more with use of inputs. On the organized irrigation schemes (para. 1.13), which account for about 20% of land under rice, improved production techniques have been accepted, particularly transplanting and mechanization. However, a combination of inefficient management and a shortage of inputs has impaired effectiveness. As a result yields, which can exceed 4 tons/ha, average little more than 2 tons/ha. 2.02 Supply and Demand. During the 1960s paddy production expanded dramatically, nearly doubling in the decade. Since 1970, however, new land has not been so readily available and intensification measures became increasingly costly. Even the productivity of existing paddy lands dropped and production stagnated at around 2 million tons. At the same time demand has continued to increase. Rice is the Malagasy staple and consumption is among the highest in the world. Since 1970 production increases have failed to keep pace with population growth and the country has become a net importer, 177,000 tons in 1980, at a foreign exchange cost of FMG 11.7 billion (US $42.5 million), representing over 10% of the value of Madagascar's total exports. Demand will continue to increase and just to contain imports at their present level, paddy production would have to go up by 60,000 tons a year. Markets and Prices 2.03 Marketing. Paddy and rice marketing, processing and distribution are in theory subject to a Government-controlled monopoly throughout Madagascar. However, in many parts of the country official marketing is inoperative, and Government offically eased the marketing monopoly in mid-1982 largely to recognize this fact (para. 2.07). In general, the official marketing system draws paddy from the major surplus areas, particularly the irrigation schemes, and supplies the major towns with rice from this and imported sources. Most responsibility for official marketing operations lies with a dozen parastatals, and with the Fokonolona institutions (para 1.08). All of Madagascar's rice mills are either controlled by the parastatals or operate under contract with them. Rice from the major surplus area of Lac Alaotra and imported rice from the port of Toamasina are usually transported by rail. Elsewhere rice transport is usually by road. The extent to which rice is actually available through these official distribution channels varies enormously between seasons and regions. In recent years officially traded volumes of rice have been around 165,000 tons or about 13% of total consumption. In many areas official networks are virtually non-existent and a vigorous private marketing network exists, probably handling more rice than the official market.' 2.04 Prices. Official producer and consumer prices are fixed annually by the Government. Until 1981, official producer prices for paddy moved upwards only slowly, failing to keep pace with inflation. In 1981 the Government set up an interministerial pricing committee to examine technical bases for establishing an official producer price. This  - 10 - committee recommended a move to the import parity price as the basic reference price. As a result Government raised the paddy price to FMG 60/kg in May 1982. Similarly, the official consumer price of rice was for years kept below the cost both of local production and of imports in order to favor low income urban dwellers. This resulted in huge subsidies, in 1980 around FMG 9.6 million (US$25.6 million), equal to the total investment budget of MPAhRA. Indications are that 1981 figures were around the same level. In May 1982, the Government acted to eliminate the subsidy by virtually doubling the official price of rice to FMG 140/kg. Prices on the unofficial market are highly variable, depending on season and locality. Government Policy and Issues for Development 2.05 Government policy emphasis on rice production (para. 1.15) is not new--40% of the agricultural investment budget has in recent years gone to rice. However, the productivity of this investment has been low as concentration was in ill-conceived and poorly managed programs for development of rice cultivation under rainfed conditions. The recent policy dialogue between IDA and Government has focussed on the need for elimination of weak or over-costly projects and an orientation toward low cost ways of increasing production, particularly rehabilitation and improvement of existing irrigation schemes, as proposed under the present Project, and input supply, as proposed under the Highlands Rice Project, recently appraised by IDA for IFAD. Government has adopted this strategy and is currently employing IDA-financed consultants to carry out a major house-cleaning of the investment portfolio in order to concentrate on fewer, less costly projects yielding high returns. However this change of investment strategy will be slow to work through to significant production increases and must at the same time be accompanied by action to remove the numerous constraints which have contributed to the mediocre performance of the sub-sector over the past decade. These constraints were identified at appraisal as critical to performance of the sub-sector and have been discussed extensively with Government in the context of this Project, the Agricultural Institutions Project and the Highlands Rice Project. As a result, essential conditions for future growth in the sub-sector have been highlighted and Government has defined and begun to implement a series of necessary actions. The main elements are discussed in the following paragraphs. 2.06 Pricing. In areas where official marketing channels exercise a monopoly, producer price levels probably distorted production incentives while the low consumer price entailed a huge cost in subsidies. The financial viability of the marketing parastatals was constantly eroded by losses. The bold round of price increases in early 1982 (para. 2.04 f) brought the producer price to a level equivalent to about 90% of the estimated import parity price and virtually eliminated the consumer subsidy. The Government has indicated that this represents the first step toward the introduction of a more flexible pricing system and this process will be supported by action on:  - 11 - 2.07 Marketing policy has been dominated by the attempt to establish Government monopoly. The inadequate resources and capacity of the marketing parastatals, combined with inappropriate pricing policy, led to failure to provide sufficient marketing services through official channels and to very heavy losses in the marketing parastatals. In mid-1982 Government eased the marketing monopoly by allowing private traders to take over marketing from parastatals, although price controls remain. A systematic review of current practice and future options for marketing being undertaken with technical assistance under the Agricultural Institutions Project is aimed at defining a clearer and more limited role for the state in marketing and pricing. 2.08 Input supply has been beset by the inadequacy of transport, weak institutional arrangements for supply and lack of subsidy funds and foreign exchange. As a result, input usage has dwindled and farmers have reverted to lower-yielding traditional production systems. Production of selected seeds is negligible, and little research has been done on new varieties. Government has begun to act on these constraints, input subsidies have been removed, except for minor subsidies on a few items which are to be phased out by 1984. This move has been given impetus by the recent increase in producer prices (para. 2.04). Priority is now given to the transport of essential inputs on the railways. Arrangements for seed production nationwide are being reorganized and research is being strengthened with help under the Agricultural Insitutions Project. These actions represent important first steps toward improving input supply. 2.09 Institutional credit has become increasingly hard to get due to poor repayment rates (para. 1.11) and farmers have had to revert to traditional, often costly lenders. BTM and MPARA have now worked out a new formula on future agricultural credit directed largely to individuals on the recommendation of the extension service. It is expected that actions taken to improve productivity in the rice sub-sector as a whole will gradually strengthen agricultural programs and allow the extension of this form of credit throughout the country. 2.10 Sub-sector parastatal performance has become a critical problem, with almost universally poor management and abysmal financial performance. Supervision of and support to parastatals by Government ministries is very weak and erratic. Government has recognized these problems and is reviewing the role of the parastatals. The ongoing IDA-supported study of paddy and rice marketing will highlight options, which are expected to include a scaling down of parastatal interventions and support for a r6le for the private sector in marketing. Government policy is still evolving but indications are that it does not rule out the possibility of reducing parastatal involvement. At the same time Government is taking action both to reinforce its capacity to supervise existing parastatals and to develop a recovery program for certain key parastatals, notably the irrigation management parastatals, for which no viable private sector alternative exists. With assistance under the Agricultural Insitutions Project, rehabilitation plans are being worked out and implemented. The Agricultural Institutions Project also provides support for strengthening  - 12 - training programs and reinforcing MPARA's supervision of these agencies. The problem of poor cost recovery which has plagued the irrigation management parastatals should be resolved by the measures Government is currently implementing under the Irrigation Law (para. 1.14). 2.11 Action on these key constraints is clearly not in itself a sufficient condition to increase paddy output. However these actions taken together with the reorientation of the Government investment policy provide the necessary preconditions for the restoration of growth in the sub-sector and provide an adequate context for investments such as that under the proposed Project to be productive. The major vehicle for further action on policy issues is the Agricultural Institutions Project, which also provides a continuing forum for exchange of views. Dated covenants under this project set a timetable for submission of results of studies on marketing, input distribution and sub-sector institutions and for preparation of an action plan for the sub-sector. These covenants are being closely monitored. In order to ensure that the constructive dialogue between IDA and Government continues, assurances were received at negotiations that Government would continue to consult annually with IDA during the Project implementation period on issues relating to the rice and irrigation sub-sectors. III. THE PROJECT AREA A. Location and Physical Characteristics 3.01 The Lake Area. The Project area comprises the flat region, total area about 7,000 kmin, surrounding Lac Alaotra, which is a major lake situated 150 km north-east of Antananarivo in the faritany of Toamasina in the central highlands of Madagascar. Broadly covering the fivondronan of Ambatondrazaka and Amparafaravola, the project area is shown in Map IBRD 15665. The lake, at an elevation of 750 m above sea level, is shallow, (1.2 m deep) and is surrounded by peats which are frequently flooded; the open water surface covers about 22,000 ha, and the surrounding marshes, mostly overgrown by Cyperaceae species, about 55,000 ha. The surrounding hills are characterised by eroded summits and slopes. The only outlet for the lake being a rocky threshold situated at 755 m, heavy stormflows cause the flooding of large areas of low-lying land. The lake is an important source of fish for the local population. The annual catch was around 4,000 tons in 1970 but present production is unknown. 3.02 Soils. Erosion from the hills influences soil composition in the low-lying areas. The alluvial soils in the upper floodplains are silty clays low in humus. On the valley floors and the wider plains that stretch to the lake the predominant alluvial soils are highly suitable for rice cultivation and practically all developed for that purpose. Poor drainage of these soils nearer the lake has produced marshlands and peat, about a meter thick. About 7,500 ha of these marshlands were reclaimed under the  - 13 - IDA supported Lac Alaotra Irrigation Project (para. 3.20). Further marshland is continually being reclaimed by landless farmers. The surrounding hills are covered by eroded lateritic soils low in organic matter and incapable of supporting sustained crop production. The main agricultural activity on these soils is cattle grazing during the rainy season, with limited cropping of cassava and groundnuts. 3.03 Climate. The climate is tropical with a long dry winter season. The rainy season, from November through March, is much influenced by the cyclone system coming from the east. Annual rainfall ranges between 1,000 and 1,330 mm over the Project area, with about 90% falling during the rainy season. Variations in annual rainfall are high, depending upon the frequency and intensity of the cyclonic rains which can amount to several hundred millimeters per day. The mean annual temperature is about 210 C, with a low monthly mean of 17