Madagascar - Second Agricultural Institutions Development Project

Ducomat of The World Bank FOR OMCUIL USE ONLY Report No. P-4198-NAG REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 8.7 MILLION TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR A SECOND AGRICULTURAL INSTITUTIONS DEVELOPMENT PROJECT May 15, 1986 IThis 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 discksed without World Bank authorization.  CURRENCY EQUIVALENTS/EQUIVALENCES MONETAIRES Currency Unit - Malagasy Francs (FMG) US$1.00 = FMG 700 FMG 1.00 = US$0.14 (exchange rates prevailing at appraisal) WEIGHTS AND MEASURES/POIDS ET MESURES 1 hectare (ha) 2.47 acres 1 kilometer (km) 0.62 miles 1 square kilometer (km2) 0.39 square mile 1 kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 US gallon 1 tonne (t) 5 2,204 pounds ABBREVIATIONS ASAC Agricultural Sector Adjustment Credit BTN Bankin' Ny Tantsaha Mpamokatra (Rural Development Bank of Madagascar) CCCE Caisse Centrale de Cooperation Economique (French Development Fund) EDF European Development Fund FAC Fonds d'Aide et de Cooperation (French Government Agency for Grant Aid) FIDA Fonds International pour le Developpement Agricole (also IFAD) FNDE Fonds National de Developpement Economique (Investment Fund) FOFIFA National Center for Applied Research on Rural Development (also CENRADERU) MPAEF Ministere de la Production Animale et des Eaux et For^ts (Ministry of livestock, Fisheries and Forestry) MPARA Ministere de la Production Agricole et de la Reforme Agraire (Ministry of Agricultural Production and Agrarian Reform) MRSTD Ministare de la Recherche Scientifique et Technologique pour le D-veloppement (Ministry of Scientific and Technological Research) SAMANGOKY Societe pour l'Amenagement et la Mise en Valeur de la Vallee du Bas-Mangoky (Society for the Development of the Lower Mangoky River Valley) SODEMO Socift6 de Developpement Economique pour la Region de Morondava GOVERNMENT ADMINISTRATION Fokontany = village Firaisam-pokontony = group of Fokontany (or Firaisana) (former canton) Fivondronam-pokontany = group of Firaisana (or Fivondronana) (former sub-prefecture) Faritany = group of Fivondronana (former province) GOVERNMENT FISCAL YEAR January 1 - December 31  FOR OMFCIL USE ONLY MADAGASCAR SECOND AGRICULTURAL INSTITUTIONS DEVELOPMENT PROJECT Credit and Project Summary Borrower: Democratic Republic of Madagascar Amount: SDR 8.7 million (US$10 million equivalent) Terms: Standard IDA terms Project Description: (i) Objectives: The project would continue the process of institutional reform and development for the agricultural sector which started under the Agriqultural Institutions Technical Assistance Projkt_feCr. 1249-MAG). Objectives are to improve human and financial resource management of agricultural institutions, strengthen financial resource management, develop agricultural planning and reinforce policy and economic analysis. The project policy analysis and institutional strengthening measures would support the Government's Agricultural Sector Adjustment Program; the two operations are closely linked. The project would also aim at improving the efficiency of agricultural research as well as communications among researchers, extension staff, and producers. (ii) Components The project includes strengthening programs for major institutions responsible for agricultural policy and services. These programs would consist of technical assistance, short term consultancies, joint Government-consultant policy reviews, training, study tours, equipment and supplies. It would support activities in the following areas: MPARA: sector policy analysis; public expenditure analysis; studies; parastatal monitoring and restructuring; personnel management; information systems; extension system. MPAEF: sector policy analysis; public expenditure analysis; personnel management; parastatal monitoring; facilities management; information systems. MRSTD/F(FIFA: research planning and programming. MRSTD: natural resources inventory; land use analysis and monitoring. This document has a restricted distibution and may be used by recipients only in the performance of their offcia duties. Its contents maY not otherwise be disclosed without World Bank authorization.  Ministry of Finance: operation of an interministerial Resource Management Task Force and a Counterpart Funds Working Group. (iii) Benefits: The project would support a broad and far reaching Government agricultural policy reform program. Institutional development programs would strengthen the performance of agricultural agencies, and notably the management of public resources (human and financial). Focus on areas with highest production response potential would generate benefits from increased returns on the agricultural investment portfolio. An important benefit from improved financtal resource management would also be a higher level of confidence by investors and financing agencies, and higher absorptive capacity. Benefits to farmers would arise from the joint development and increased relevance of agricultural research and extension services in the form of more effective support services leading to higher production and revenues. Substantial benefits are expected from the natural resources inventory in terms of an increased capacity to respond to Madagascar's challenging environmental characteristics. (iv) Risks: A short term risk is that consultants might be inefficiently used due to poor timing and insufficient support from Government officials. Offsetting these risks are specific definitions of program objectives and terms of reference for assistance and provision for annual joint reviews. The longer term risks relate to institutional stability and the sustainability of reforms; past efforts have been complicated by frequent reorganizations and staff changes, as well as broader problems stemming from poor civil service incentives and training. These issues are to be addressed through continuous dialogue at the project, sectoral and country levels. The Government has recognized the importance of an adequate organizational environment for project implementation and sustainability and will maintain a constant review of those issues with Bank staff.  - iii - Estimated Project Costs - US$ Million Components Local Foreign Total MPARA 1.3 3.1 4.4 MPAEF .8 1.7 2.5 MRSTD/FGFIFA .6 1.1 1.7 MRSTD: natural resources inventory .7 1.9 2.6 Ministry of Finance . .15 .05 .2 Baseline Project Costs 3.6 7.8 11.4 Physical Contingencies .1 .1 .2 Price Contingencies .4 .8 1.2 Total Project Costs 4.1 8.7 12.8 Financing Plan Percentage IDA 2.1 7.9 10.0 78 USAID .1 .4 .5 4 Government 1.9 .4 2.3 18 TOTAL 4.1 8.7 12.8 100 Estimated Disbursements -US$ Million (IDA FY) 1987 1988 1989 1990 1991 Annual 1.0 2.8 3.2 2.4 0.6 Cumulative 1.0 3.8 7.0 9.4 10.0 Economic Rate of Return: Not applicable Maps: IBRD 16924 IBRD 16925  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RFCC tEN ION CF THE PESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC g NADAGASCAR FOR A SECOND * 1IULTURAL INSTITUTIONS DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed IDA credit of SDR 8.7 million (US$10.0 million equivalent) to the Dceocratic Republic of Madagascar on standard IDk terms to help finance a Second Agricultural Institutions Development Project. Cofinancing for the project will be provided by USAID (US$ 0.5 million). PART I - TEM ECONOMI1/ 2. A report entitled Current Economic Situation and Prospects- dated March 18, 1986, was distributed on March 24, 1986, to the Executive Directors and to participants in the Madagascar Consultative Group. It is available as document 5996-NAG and its main conclusions are reflected below. Country data sheets are provided in Annex I. 3. Madagascar, with a population of 9.7 million and a per capita nrcome of about US$265 in 1984, is among the poorest countries in the world. It is a sparsely settled country, with a population density of about 17 persons per square kilometer. Although Madagascar is generally weil endowed with natural resources and a variety of soils, there are considerable regional variations in ecology and climate. The central plateau, the most econo ically advanced region, has a subtropical to temperate climate. The south is the poorest region with an arid climate and infertile soils. The eastern region bas a tropical climate and, although the region is rich agriculturally, crops are frequently devastated by cyclones. The western part of the country comprises extensive pastureland with some tropical agricultural production along the coast. Agriculture continues to be the mainstay of Madagascar's economy, providing Wnloyment for 88X of the population, creating two fifths of GDP and generating over 801 of export earnings. 4. In the decade following indiperdence in 1960, Madagascar's economy grew at an average annual rate of about three percent. Agriculture was responsible for much of this growth, while manufacturing, benefitting from increased protection, gained in relative importance. The years following 1972 marked a watershed in Madagascar's economic and political development. After the 1972 and 1975 revolutions, an inward-looking economic policy was geared to self-sufficiency and consolidation of the new regime's socialist aims through decentralization to new local government institutions (the fokonolona system), nationalization of industrial, trading, and agricultural enterprises, and moves towards collectivization of agriculture. Towards the end of the 1970s this movement was overlaid by a policy of rapid industrialization with emphasis on capital intensity, accompanied by pricing and marketing policies heavily biased towards urban consumers. 1/ This section is essentially the same as Part I of the President's Report on the Agricultural Sector Adjustment Operation.  -2- 5. During the decade 1973-82 real per capita GDP fell by an estimated 28 percent. The major contributing factors to this decline were: (i) The widespread nationalization of economic activity and suppression of private initiative, accomplished by taking over numerous enterprises and creating new parastatals, gave rise to a large and unmanageable public sector. (ii) Regulatory intervention in the economy increased substantially; price controls were generalized and enforced with greater vigor than before, local authorities assumed broad new powers, government marketing monopolies were established, and import restrictions and exchange controls tightened. (iii) Many policy actions led to neglect of agriculture and fostered the growth of manufacturing for domestic markets, including the establishment of numerous enterprises of doubtful economic value. 6. The Government's attempts in the late 1970s to stimulate expansion of Madagascar's stagnating economy through a large public investment program contributed to an economic crisis beginning in 1980-81. The share of investment in GDP, which had averaged around 13 percent from 1970 to 1978, increased sharply to 25 percent in 1979-81. The financing of this massive investment program contributed to a large public sector deficit (about 18 percent of GDP by 1980), inflation in excess of 30 percent both in 1981 and 1982, and a sharply increased debt service burden (the debt service ratio,before rescheduling, rose sharply from about four percent of export earnings in 1978 to 46 percent in 1981, nearly 75 percent in 1984, and 90 percent in 1985). The debt service burden has been largely responsible for the severe shortage of foreign exchange which has been a critical constraint to economic activity. Contributing to this shortage was a drop in export earnings as the terms of trade for agricultural exports weakened and as domestic consumption expanded. This drop was accentuated by declining agricultural production due to an overvalued exchange rate, low controlled producer prices, and state interference with the marketing of agricultural products. Industrial exports, which had never been encouraged, suffered a further blow through the impact of the foreign exchange shortage on the availability of raw materials and spare parts. 7. Faced with an unsustainable resource gap (equivalent to 17% of GDP in 1980), Government began implementing stabilization measures in 1981. In the years which followed, aggregate expenditure was steadily reduced and gross savings increased, especially from 1983. Among specific measures taken to reduce aggregate demand, the most notable actions were on the exchange rate and on consumer subsidies. In nominal terms, the average rate of the FMG vis-A-vis the SDR depreciated by about 75% during 1982-85, and after adjustment for domestic and trading-partner inflation the real depreciation of the FMG approximated 25Z. The Government more than doubled the nominal price of rice distributed through official channels; consumer subsidies on imported rice were eliminated. Madagascar's stabilization also included tax measures, expenditure cuts, increases in price of public enterprise goods and services and sharply curtailed imports. In addition to fiscal restraint, tight bank credit ceilings were employed to reduce inflation.  -3- 8. Between 1980 and 1985, agricultural output tended to fluctuate. Production of paddy, a staple item, remained at around 2 million metric tons per year. Madagascar had to continue importing rice throughout the period, although the volume imported declined steadily from a peak 356,000 metric tons in 1982 to about 105,000 metric tons in 1985. The decline in rice imports, however, was due to foreign exchange scarcity rather than any marked increase in domestic self-sufficiency. Production of other food crops (maize, potatoes, cassava, sweet potatoes) grew steadily and significantly, possibly owing to higher demand - and hence production stimulus - for these crops as a result of increased rice prices. With the exception of cotton and sugar cane, the production of industrial and export crops generally stagnated (e.g., tobacco, coffee, pepper) or declined (e.g., groundnuts, butter beans). The output of two other principal export crops, vanilla and cloves, was restrained by the administration of low producer prices in the face of limited world market demand for these products. 9. The output of the industrial sector declined sharply between 1980 and 1982, and again in 1984; modest growth obtained in 1983 and 1985 did not make up for the decline in the other years. Industrial manufacturing capacity has been heavily underutilized in recent years owing to shortages of domestically supplied agricultural raw materials, and of imported inputs and spare parts. The construction industry also remained slack, judging from data on gross fixed capital formation. Between 1980 and 1982, all types of construction - residential, non-residential and other - declined heavily. In the following years, residential and other construction grew a little, but the volume of activity was constrained by continuing restraint in investment expenditures and shortages of construction materials. 10. On the policy front, Government initiated positive changes in industry, easing pricing controls, improving the administration of foreign exchange allocation, and, as recently as June 1985, legislating a new Investment Code. The new Code provides clearer and more automatic incentives and aims to attract foreign private investment. Here again, the recent initiatives need to be strengthened by extending the export earnings scheme (the EPI account) to a greater number of bona fide exporters, rationalizing the tariff system, and quickly completing the practical rules and regulations of the new Investment Code. 11. Owing to the slow growth of agriculture and industry, the transport sector bad less merchandise and fewer passengers to carry throughout 1980-85 although, within the period, there was some upturn in road and rail traffic in 1983 and 1984. The little traffic that was required had to be carried at high cost given the dilapidated state of the transport system. Until recently, however, costs could not be covered as the administered tariffs were set too low, thus further discouraging the provision of services. To improve the transport system and policy environment Government selected an -economic network' of about 10,000 kms of primary and secondary roads for priority rehabilitation; established a road fund for maintenance; and permitted tariff increases for the roads, railways, and the national airline.  -4- 12. Public Finance. During the 1978-80 period, the country experienced an unprecedented growth in public capital expenditures financed by external loans, leading to substantial budget deficits and accumulation of indebtedness and arrears. Successive adjustment measures adopted between 1981 and 1985 progressively reduced the magnitude of the deficit and domestic arrears. The bulk of the fiscal adjustment has been accomplished by cutting expenditures, with a lower investment level, contained payroll expansion, and a reduction in materials and supplies used for government activity. The current budget balance turned positive in 1983 and remained so during 1984 and 1985. The size of the current surplus, however, remained small relative to the need to increase public savings. The overall deficit declined from 18.41 of GDP in 1980 to 8.7Z in 1982 and 4.8Z in 1984. It was estimated at approximately 4.7Z of GDP in 1985. 13. Revenue. Total revenue declined from 17.91 of GDP in 1980 to 15.7Z in 1985. The tax structure was altered frequently with yearly changes in the tax rate system. The tendency was to increase tax rates on income and imports, without visible results on effective tax revenue, this being partly due to unsatisfactory tax administration, partly to increased tax avoidance, and partly to reduced imports. Extrabudgetary revenues represented a growing share of total government revenue, with surplus from export stabilization funds yielding the main contribution in this category. 14. Expenditure. Improvement in fiscal performance was mostly the result of tight control of expenditures. Between 1980 and 1985, central government expenditures increased by only 26%, representing a substantial decline in real terms. The ratio of expenditures to GDP over the period declined steadily from 36.3% in 1980 to 20.4Z in 1985. The main factor in this decline was cutbacks in capital expenditures from the unsustainable level of 1980. In real terms, capital expenditures declined by 15Z per year during 1980-85. 15. Monetary developments during 1980-85 were generally in line with fiscal developments, reflecting implementation of stabilization measures. Throughout the period, the growth of credit to Government was reduced, and, beginning in 1982, credit to the non-government (i.e., parastatal and private) sectors generally expanded faster than credit to the Government. 16. Domestic inflation in Madagascar was reduced considerably after 1982, from about 301 in 1981 and 1982 to approximately 10 percent in 1985. This performance was due mainly to demand management measures during the period, and to some decline in foreign prices of Madagascar's imports. The reduction of inflation during the period was all the more remarkable in that it occurred at a time when the Malagasy Franc was depreciating. Madagascar's balance of payments remained weak throughout 1980 despite substantial annual reductions in the volume of imports to the point of adversely affecting economic activities. To a large extent, the position remained weak owing to poor export performance and heavy debt service payments, the latter a legacy of large borrowings on hard terms during 1978-80.  -5- 17. Stabilization efforts throughout the period led to steady and marked improvements in the resource and current balances. In dollar terms, the resource gap in 1985 ($102 million) was less than 20Z of what it was in 1980 (US$557 million); and the current account deficit in 1985 (US$237 million) less than 40Z of what it was in 1980 (US$599 million). 18. Based on the existing debt portfolio at end 1985 and after taking into account pipeline disbursements, Madagascar will need new net capital inflows of about US$380 million per year during the 1986-90 period to cover current account deficits, meet scheduled debt repayments, and maintain a modest amount of gross reserves. The conditions at which Madagascar is able to obtain new finance and reschedule the debt are of crucial importance and will determine if the country is able to emerge from its low-level trap, even with a high quality policy program. 19. Since the emergence of the debt crisis at the beginning of the 1980s, Madagascar has managed the balance of payments by cutting imports and rescheduling debt service payments. These are very costly options, involving disruption of economic activities and refinancing of some originally concessional loans at less concessional terms. Madagascar now has probably reached a limit to further cuts in imports as these are down to bare essentials. As to debt rescheduling, the country's creditors may continue to accord such arrangements to Madagascar. But, to generate significant amounts of annual debt relief, the rescheduling arrangements would need to provide more and more liberal coverage. Even then, however, debt rescheduling involves significant direct costs, depending on the terms of repayment agreed upon. In the future, therefore, Madagascar must attempt to boost export earnings as a means of strengthening the balance of payments and reducing the debt burden. 20. Relationship with I1F. As of September 1985, the Government had complied with all performance criteria set in the fifth standby agreement signed in April 1985. Most of the important program targets have been achieved and all scheduled purchases have been effected. In the second review of the current standby, the Government decided to accelerate the depreciation of the exchange rate and agreed to continue this process under the sixth standby agreement. An DV mission visited Madagascar in March 1986 to negotiate a program supported by a sixth standby arrangement, but unfortunately negotiations could not be completed since a major cyclone affected Madagascar and the impact of the damage could not be assessed immediately. A new mission is scheduled for June 1986. 21. The third meeting of the Consultative Group for Madagascar took place on April 25 and 26, 1986. The meeting agreed that the Government's program of policy reforms was on the right path and it was urgent that it be pursued and developed further. It was recognized that if Government's efforts are to succeed, Madagascar needs substantial external support. This would be provided by a combination of higher official development assistance, paiticularly in the form of quick disbursing aid, and debt rescheduling. A meeting of the Paris Club is scheduled for September 1986.  -6- PART II - BANK GROUP OPERATIONS IN NADAGASCAR The Existing Portfolio 22. Overall Lending Levels and Sectoral Composition. IDA credits to Madagascar amount to US$522.9 million (including US$29.9 million from the Special Fund) and Bank loans total US$32.6 million. Bank Group assistance to Nadagascar has been conctntrated on infrastructure (including urban and social infrastructure), agriculture and energy. Since the start of Bank Group involvement in Madagascar, about 32Z of Bank Group lending has been for transport, 27% for agriculture, 12% for industry, 12% for power and petroleum, 7% for education, 6% for urban development and water, 3Z for cyclone rehabilitation, and 1X for technical assistance. IFC has four investments in .4adagascar in textiles, footwear, and fisheries. Annex II contains a summary statement of past loans and IDA credits as of March 31, 1986. 23. Agricultural Lending. The Bank has supported 14 agricultural projects, of which five have been completed and nine are under execution. This has included three livestock development, four irrigation and two forestry projects, and one for each of agriculture credit, rice intensification and cotton development. Between 1972-79, several projects faced severe problems as a. consequence of Government policy during that nationalist revolutionary period. As a result, no new agricultural projects were approved between 1975 and 1979 and virtually no formal sector work proved feasible. 24. Recent credits for the Lac Alaotra (Cr. 1337-MAG) and Cotton (Cr. 1433-MAG) Projects (both cofinanced by the Caisse Centrale de Cooperation Economique) focus upon restoring rice and cotton production. A Second Village Livestock Project (Cr. 1211-MAG) supports development of livestock services for traditional producers and provides for sector-wide policy reviews. A credit for Irrigation Rehabilitation (Cr. 1249-MAG), cofinanced by the Caisse Centrale and the ELF, is assisting with rehabilitation of smaller irrigation networks, subsequent maintenance, and strengthening of government services in this sector. The Agricultural Institutions Technical Assistance Project (Cr. 1249-MAG) addresses sector policy and institutional issues. 25. Infrastructure Lending. Four credits have provided for the construction of all-weather highway links between the island's different regions and three credits have been made for road maintenance and rehabilitation. There have been credits to improve Madagascar's main port of Toamasina and to support the railways modernization efforts. Urban infrastructure development has benefitted from a water supply and sanitation credit for the capital city of Antananarivo. In addition, studies for urban development financed by the UNDP with the Bank as Executing Agency led to approval of an urban development credit (US$12.8 million in FY84). A US$15 million credit for cyclone damage rehabilitation was made in 1984. Energy projects have received growing Bank Group attention. IDA participated with several co-lenders in the financing of the large Andekaleka hydroelectric project, which was successfully  -7- completed in June 1982. Two credits (for US$12.5 million and SDR 10.7 million) for petroleum exploration support the Government's efforts to develop a domestic supply of hydrocarbons and to improve planning in the energy sector. In both projects the technical components have proceeded well but energy planning remains weak. Over US$250 million in exploration development by foreign oil companies has been generated by promotion under one of the projects. 26. Other lending. A first US$ 5 million DFC credit was made to the Industrial Development Bank of Madagascar (BNI) in 1980. A follow-up US$ 40 million, became effective in August 1985. In addition, a credit for an accounting and audit project was signed in June 1981 and a new credit for training auditors, accountants and managers was signed in April 1986. 27. Implementation Problems. Problems have arisen in the execution of a number of projects, mainly delays, cost overruns, deficiencies in management and inadequate financial performance of project agencies. Current problems center on difficulties linked to the country's economic crisis, notably the acute shortage of foreign exchange and budget funds and institutional problems related principally to the parastatal system. The Bank approach has been to maintain supervision and to address the generic problems through every instrument available, from the Consultative Group through the Country Implementation Review (the most recent was June 1985) including the macroeconomic, sectoral and project-level dialogue, technical assistance and staff secondment. The Government has been responsive and there have been significant improvements in Government portfolio management and a reduction in implementation problems. 28. Project Evaluation. Since the start of the Bank program in Madagascar, eight projects have been completed and audited by the Operations Evaluation Department. The Audit Report No. 1622 of December 1976 on the first Lac Alaotra project concluded that the project was generally successful. However, the Impact Evaluation Report No. 3600 of August 1981 concluded that earlier assessments of project performance had been over-optimistic, and that the actual rate of return was probably negative. The Audit Report No. 1143 of April 1976 of the first education project concluded that the education and manpower training objectives were satisfactorily achieved. The Audit Report No. 5434 of January 29, 1984 of the first Railway Project concluded that due to overruns and delays in implementation, the project had to be downscaled and that the estimated rate of return was less than 10%. The Audit Report No. 1559 of April 1977 on the Beef Cattle Development Project concluded that the project had contributed little to Madagascar. The Audit Report No. 2143 of July 1978 concluded that the Third Highway project was well justified and had a satisfactory rate of return despite substantial cost overruns. Report No. 2299 of December 1978 concluded that the physical objectives of the Taaatave Port project were satisfactorily achieved but pointed out that the institutional objective was not accomplished during project implementation because of inadequacies in the staffing of the port authority. Audit Report No. 5403 of December 28, 1984 covered two agricultural projects: the Morondava Irrigation and Rural Development Project was a profoundly disappointing operation, but tbh Village Livestock and Rural Development  -8- Project contributed to laying the groundwork for more effective services for traditional livestock owners, with good prospects for sustainability. 29. Bank Strategy and Future Program. The Bank strategy is to support the Government's efforts to rehabilitate and restructure the economy by: (a) promoting policies and programs aimed at reforming incentive structures, increasing market-responsiveness, setting a more favorable climate for private sector initiative and investments, and providing financial and other support for appropriaLe policy programs; (b) supporting adoption of viable sectoral strategies aimed at rehabilitating productive and economic infrastructure and establishing conditions for long-term growth, and providing financial and technical assistance to implement these programs; (c) strengthening the institutions responsible for macro and sectoral economic and financial policy formulation and management; and Cd) helping Madagascar mobilize donor aid and to make effective use of donor financial, technical, and debt relief support. 30. Lending Program Development. On the assumption of continued Government responsiveness, the Bank is supporting Government adjustment efforts by emphasizing policy-based lending as the main vehicle of Bank financial assistance. Additional sector policy-based operations in agriculture and industry would be prepared. These would support continued market deregulation, export promotion, cost recovery, private investments, case-by-case parastatal rehabilitation of productive and economic assets, and would address longer-term issues in human resource development, health, agricultural research, and environmental degradation. Overall, future lending would concentrate on agriculture, industry, and transport. 31. Aside from sector and project-level efforts, the main vehicle for aid coordination has been the Consultative Group. Making the Consultative Group a more effective means of addressing Madagascar's economic problems is an important part of Bank country assistance strategy. This would contribute to resolution of the country's external financial problems. Donor and creditor support of a comprehensive financing strategy, combined with a sound Government program to stimulate real growth, offers the best prospects for future development. This implies active participation by the Government and the IMF in the preparation of Consultative Group meetings, and Bank focus on longer-term structural adjustment issues. 32. Other Support. In addition to a substantial economic and sector work program, the Bank is supporting the Government in policy analysis and selected institution-building through technical assistance. Further, two secondment positions have been approved, and the Bank's Resident mission has been augmented by a resident economist. SPFF resources have and will continue to be used to provide technical support for future policy studies, as well as to help strengthen investment planning, programming and budgeting.  -9- PART III. THE AGRICULTURAL SECTOR 33. Sector Profile. Madagascar's dominant economic sector, agriculture employs 88 percent of the population and accounts for over 40 percent of GDP and 80 percent of export earnings. The share of agriculture in GDP increased during the 1960s and 1970s, up from 33 percent in 1960 to almost 38 percent in 1980. Over half of agricultural production by value is for subsistence, predominantly paddy (30 percent) and beef (16 percent). Coffee, cloves and vanilla represent about 15 percent of production and about three-quarters-of merchandise exports. Industrial crops, notably sugar and cotton, account for about 7 percent of agricultural production. About 80 percent of total production comes from smallholder activity (in the 1 to 2 ha. range). 34. Recent Performance. In spite of very favorable factor endowment, including irrigation of about one third of cultivated land, the agricultural sector's performance over the past six years has been highly deficient, impinging upon growth of the economy. Between 1979 and 1983, overall agricultural production was static, in contrast to the strong growth trend of the 1960s and early 1970s. Notwithstanding ste-ady growth of the labor force, production of the two basic foodstuffs (rice and beef) and the major export crops stagnated. The balance of payments impact of these developments has been particularly serious. A net exporter of rice until the mid-1970s, Madagascar's subsequent imports of rice and edible oils consumed an increasing share of foreign exchange earnings, peaking at 21 percent of total export receipts in 1982. The supply of raw materials to a predominantly agriculture-based industrial sector has also dropped. 35. Sector Issues. The causes of this disappointing performance include both structural and short term factors. Principal structural factors are expanded public sector control over key services and economic functions, weak public sector institutions, inadequate resource allocation and financial management systems, and poorly defined strategies for public sector interventions in agriculture. The Government's far reaching control of the agricultural economy included setting prices and margins and a marketing monopoly which covered virtually all agricultural and livestock products by 1977. The contribution to economic activity of larger farmers and private sector marketing and processing networks has been discouraged for over a decade. Yet the Government's capacity to substitute state or parastatal operations for the private sector has been weak and the effort costly. Even in the classic services commonly provided by government, performance has been poor. In addition to institutional and policy factors, the economic crisis which hit the country In 1979-80 and the subsequent world recession have resulted in severe shortages of local budgetary funds and foreign currency for agricultural operations. The  -10- consequences of these converging trends have included the breakdown of essential services to farmers in many rural areas, limited availability of production inputs, and inadequate incentives for increasing output. 36. Government Objectives and Strategy. In response to these problems, at the 1983 Consultative Group Meeting for Madagascar, the Government set out the broad outlines of a restructuring program aimed at increasing food production and reducing imports. A second objective was to increase the production of export crops while at the same time improving their quality. Consistent with these goals, the following policy priorities were set forth: (a) promotion of private, smallholder production, and de-emphasis of parastatals and collective production; (b) concentration of investment in rehabilitation; (c) reliance on market prices; (d) withdrawal of the agricultural ministries and parastatals from direct-production and commercial activities; and (e) improvement of essential public sector services. 37. The First Phase of the Adjustment Process. Over the past four years, the Government has made some progress in implementing this strategy. Agricultural pricing and marketing controls have been eased on rice, meat, pulses, and groundnuts; prices for cotton and selected export crops have been significantly increased. On resource management, the Gover-nment has undertaken a public investment program for the sector which led to some redirection of scarce resources but still retained a dominant share of direct production-oriented investments. The Government has begun to redress the bias against the private sector by easing administrative controls, adopting a more favorable investment code and allowing them more access to credit and foreign exchange. Selected parastatals are being subjected to profitability tests and restructured to attain self-financing. The Government is reactivating key farmer services (notably extension and research) while starting to withdraw from direct production and commercial activities which are best performed by the commercial sector. The two major agricultural ministries, the Ministry of Agricultural Production and Agrarian Reform (MPARA) and the Ministry of Livestock, Fisheries and Forestry (MPAEF) have been reorganized, and large personnel reductions effected. Important policy measures remain to be taken in the rice subsector, resource allocation, farmer and market incentives, and farmer services. These are being addressed under the Agricultural Sector Adjustment Credit. Agricultural Sector Institutions 38. Numerous institutions have a significant impact on agricultural development. The institutional complexity and fragmentation of responsibility constitute a basic constraint to effective policy  -11- formulation and implementation. The major institutions with important responsibilities in the agricultural sector include: the Ministry of Agricultural Production and Agrarian Reform (MPARA), the Ministry of Livestock, Fisheries and Forestry (MPAEF), the Ministry of Commerce (MC), the Ministry of Scientific and Technological Research (MRSTD), the National Agricultural Research Institute (FOFIFA), and the Rural Development Bank (BTM). Numerous agricultural parastatals have been created by the Government and perform a wide variety of functions ranging from producer services to agro-industrial processing. 39. MPARA covers the cultivated crop subsectors (food, industrial, and export crops). Its role and organizational structure have been modified frequently over the past 25 years. The ministry was seriously weakened during the 1970's, notably following a far-reaching 1979 decentralization that worked so poorly it had to be reversed. Since 1983, MPARA has been responsible for: (i) formulating and executing policies related to agricultural production and rural infrastructure; (ii) carrying out agrarian reform policy; and (iii) monitoring the performance of certain agricultural parastatals and providing assistance to them. Institutional priorities for MPARA have focused on developing the basic information and management tools necessary for sound management and planning. Issues increasingly coming to the fore are more far-reaching: How should the ministry operate to stimulate agricultural production? What should be its role and general priorities? What are the internal linkages between departments and the division of labor in carrying out broad tasks? How can the ministry assure internal coordination and integrated action? On the financial side, ministry staff are grappling with the imbalance between operating expenses and personnel costs and the need to bring these into line so that the ministry can play an effective role within available resources. The need to target investment funds on productive activities is also of primary concern as millions have gone into the investment program with little evident impact on production levels. Proposed project activities would assist EPARA in addressing these issues by improving the data base for decision making and increasing the managerial and technical competencies of key staff. 40. MPAE' is a new ministry, created in July 1983 to give greater attention to the livestock, fishery, and forestry subsectors. Its mandate is to formulate and execute Government policies in these subsectors. It is also to monitor the performance of the relevant parastatals operating in these subsectors and to provide them with technical assistance. MPAEF's institutional development priorities have been quite similar to MPARA's, with the ministry experiencing the same need to master its information base, to clarify its role, to balance recurrent expenditures, and to develop a productive investment portfolio. However, its recent creation has magnified the importance of issues concerning role, strategy, internal organization, and operating procedures. Proposed project activities will support the ministry in pursuing this process of institutional strengthening and reform. 41. The Ministry of Scientific and Technological Research (MRSTD) was created in October 1983, as the Government sought to ensure that research was integrated into a coherent program geared to national priorities, emphasizing in particular agriculture and rural development. MRSTD  -12- supervises six autonomous research units including FCFIFA, the agricultural research institute. The operational effectiveness of these units has deteriorated sharply over the past five years, with funding levels inadequate to cover expenditures, and salary and pay scales too low to attract and retain qualified staff. Further, linkages among research programs and disciplines are poor. Past research results are frequently unknown due to the disappearance of documentation. MRSTD is addressing these issues, giving particular attention to setting priorities, developing a planning framework, identifying recurrent funding mechanisms, and analyzing manpower planning and training needs. The ministry is also working, with donor assistance, on pulling together past Malagasy research documentation and relevant international research results to provide the local research institutes with a comprehensive information base. FOL IFA was created in 1974 by consolidating seven French-sponsored research institutes into a single agricultural research center. FoFIFA's internal structure has changed frequently over the past ten years, with a progressive decline in management capability. In late 1983, the Government took steps to strengthen F(FIFA's management and to reverse this decline. These steps were supported under the Agricultural Institutions Technical Assistance Project. The critical issues facing agricultural research in Madagascar include: (a) excess lower level staff and insufficient research staff with adequate education; (b) insufficient and uncertain funding of research operation costs; (c) too many research programs in comparison to the number of staff and available funds; (d) too many research stations; and (e) inadequate research prioritization. FOFIFA and MRSTD have been addressing these issues, with particular emphasis on sound financial management and research programming. Proposed project activities would provide continued support for these efforts. The Agricultural Institutions Technical Assistance Project (Cr. 1249-MAG) 42. The Agricultural Institutions Technical Assistance Project (Cr. 1249-MAG) was a product of the policy reassessment which began in 1981/82. Project objectives were to assist Government in addressing critical institutional constraints, such as weak sector planning, poor parastatal management, and ineffective ministry and agricultural research services. Particular emphasis was given to rice subsector issues. The project was conceived as a first step (two and a half year implementation period) in a longer term program of institutional development. Project activities were grouped in three major areas: (a) Strengthening sectoral planning: preparation of a three-year investment plan, project preparation studies, preparation of a short-term action plan for the rice subsector, support to a rice coordination unit; (b) Improving parastatal management: financial and management audits for three critical rice irrigation authorities, pre- paration and implementation of management reform programs for these com- panies, studies of rice marketing and distribution systems, audits and training activities for other agricultural parastatals; and (c) Reorganizing and strengthening critical producer services: organizational analysis and implementation of reform programs for MPARA and the national agricultural research institute (FCFIFA). Project activities were designed to identify options for reform and to help build consensus for future action through local staff participation in the anAlytical process. The project was appraised in July 1981, approved in May 1982, and the credit became effective in December 1982.  -13- 43. Project implementation started in August 1981, with Project Preparation Facility (PPF) financing. Most project activities were completed by the end of 1985; two management assistance contracts for FCFIFA and SODEHO (an irrigation parastatal) will continue through early 1987, and the Credit closing date was extended to permit completion of these components. Slippage in the implementation schedule was essentially the result of administrative delays, particularly in approving major technical assistance contracts. Actual project costs are estimated at about US$6.5 million (97 percent of appraisal estimates). Some changes in emphasis have occurred during implementation. The complexity of evaluating the agricultural public investment program (PIP) was underestimated at appraisal. The Government concluded (largely as a result of the PIP exercise) that the key need was to streamline the portfolio and emphasize rehabilitation. The split of the Ministry of Agriculture into two, MPARA for food production ard MPAEF for animal, fish and forestry production, mid-way through implermentation changed project plans, entailing a significant increase in demands for organization and management assistance and disruptions in programs along the way. Lastly, programmed expenditures for assistance to the irrigation parastatals and to FGFIFA were only partially used, as several planned activities were undertaken under on-going projects (for example Cr. 1337-MAG, Cr. 881-MAG) or financed by other organizations. 44. The impact of the project varied among activities. The rice sector analysis has had a widely felt impact, as it led to the Government's decision to liberalize the rice trade and to relax pricing regulations. Perhaps the most complex undertaking attempted, and the area where the most remains to be accomplished, has been the support to MPARA and MPAEF for reorganization and management strengthening activities. Sectoral planning and programming are already substantially stronger than they were in 1981, and significant restructuring of programs is underway at MPARA and MPAEF. The comprehensive assessment of FCFIFA, carried out by the International Service for National Agricultural Research (ISNAR), led to decisions to change the management structure, to reorient research programs, and to strengthen financial management. Assistance on agricultural extension issues and a training program for parastatal managers are paving the way for future reform. Considerable information has been collected, management information systems have been designed, and staff training has begun; these activities constitute the building blocks for future institutional deve'lopment programs. PART IV: THE PROJECT 45. Background. The proposed project follows directly from the Agricultural Institutions Technlcal Assistance Project (paras 42-44), and is designed to consolidate progress achieved and expand into new areas meriting action and assistance. The project was prepared in late 1984 and early 1985. It was appraised in May-June 1985, with appraisal work completed in September 1985. Negotiations were held in Washington D.C. in March 1986; the Malagasy delegation was led by Mr. Rabesa-Zafera, Minister of Scientific and Technological Research.  -14- 46. Project Objectives and Results. The proposed project represents the second phase of a long-term institutional reform and development effort in the agricultural sector. It would support the implementation of the agricultural reform program which is underway within the framework of the Agricultural Sector Adjustment Credit (ASAC). It would specifically support the ASAC by improving resource allocation processes, financing an export study and providing a more effective extension service which would allow farmers to respond efficiently to marketing incentives. The proposed project would assist the Government to sharpen and implement its agricultural strategy. Project objectives can be classified in four broad categories: (a): management improvement of agricultural institutions - implementation of a new personnel management system and internal training program within MPAEF and MPARA; - definition and implementation of a commmnication network between central and provincial units of MPARA and MPAEF to improve coordination and data transmission; - staff development within Economic Analysis units of MPAEF and MPARA. (b): financial resource management - implementation of program budgeting within MPARA, MPAEF and FOFIFA; - completion of the financial monitoring systems started under the first project and expansion to cover all financial flows within MPARA and MPAEF; - definition and implementation of a parastatal monitoring system for MPARA and MPAEF extending beyond the case-by-case studies executed under the first project; - creation of coordinating mechanisms for financial resource management between agricultural sector ministries and the Ministry of Finance. (c): agricultural sector planning - preparation of subsector studies supporting strategy definition for export crops, food crops and fertilizer; - preparation of an agricultural extension master plan and initial implementation program to increase effectiveness of the extension system; - preparation of an agricultural research master plan and first five-year implementation plan; - completion of a natural resources inventory including soil and water resources maps and a land use map; - creation of an interministerial structure to execute permanent natural resources inventory activities to support agricultural planning. (d): policy and economic analysis - completion of sub-sector database and studies supporting reinforcement of rice policy analysis. 47. The proposed project comprises independent programs to be implemented by major institutions which have a critical impact on agricultural sector development: (i) the Ministry of Agriculture and  -15- Agrarian Reform (MPARA); (ii) the Ministry of Livestock, Fisheries and Forestry (MPAEF); (iii) the National Agricultural Research Center (FCFIFA); and (iv) the Ministry of Scientific and Technological Research (MRSTD). A small component would assist the Ministry of Finance. Project support would consist of technical assistance personnel, short-term consultancies, training programs/study tours, and equipment/supplies. This assistance would be integrated into annual work programs with agreed upon objectives, personnel requirements, budgets, and measurable outputs. 48. The proposed project is a major component of a broader Government program. The Global Assistance Program to Institutions managing the Agricultural Sector (Programme Global d'Assistance aux Institutions gerant le Secteur Agricole) presented during negotiations currently includes support to the newly created Department of Fisheries and Aquaculture in MPAEF and to the Ministry of Commerce. These activities are to be financed by UNDP. Support to the Department of Fisheries and Aquaculture would consist of training headquarters and Faritany level staff in their new job responsibilities and helping to develop an information system on fishery subsector trends. The Ministry of Commerce component is designed to improve the efficiency and productivity of export services and activities within the Ministry. It includes the establishment of a computerized market and price information system and the rehabilitation of export product quality laboratories and related technical services. Detailed Features 49. For HPARA, project activities would support implementation of a three-and-a-half-year operational plan for institutional development whose objectives are to improve operational effectiveness by clarifying ministry priorities, bringing personnel and financial resources into balance, strengthening monitoring and analytical capabilities, and resolving some basic operational issues (notably organization of agricultural extension services on a national basis). The project would: (a) support monitoring and evaluation, public investment programning and parastatal restructuring; (b) assist in monitoring financial resource flows; (c) support management of regular and contractual staff; (d) assist ministry staff in computer planning and information management; and (e) sponsor a training program for managers. The project would also support sector studies, including a fertilizer study, and help design a national extension system which is effective and sustainable. To bolster MPARA's economic and policy analysis capability, the project would support monitoring of price and economic trends, updating of farm budgets, and a training program for economic staff. Project support would take the form of consultants, training, office equipment, supplies, and vehicles. Training activities would include on-the-job training, in-country seminars, and limited overseas courses. 50. For MPAEF, priorities are to streamline services provided by Ministry staff and to provide these essential services efficiently, to bring financial resources into line with operational needs by restructuring personnel, and to strengthen programming and analytical capabilities. The project would: (a) strengthen project preparation; (b) support project monitoring and evaluation; (c) restructure and reform parastatals; (d) support finance and accounting systems; (e) strengthen personnel  -16- management; (f) develop a medium-term computer and information system; (g) plan and execute training programs for ministry managers and staff; and (h) develop an improved system for maintaining and managing its vehicle fleet. The project would also support economic and sector studies in order to improve M]&EFf's policy and economic analysis. 51. Proposed activities in support of agricultural research follow from on-going activities under the first project, which addressed the rehabilitation of FOFIFA and focussed on improving its management and programming process. They would assist Government efforts to reorient and to increase the efficiency of agricultural research operations. Central to the reorientation underway is the decision to make research more problem-oriented and to improve communications between research workers, extension staff, and rural producers. Objectives are to define long-term agricultural research priorities, to design an efficient and sustainable agricultural research system, and to prepare and strengthen the national agricultural research institute (FCFIFA) for carrying out the agreed national research strategy. Improved priority setting and programming should help FOFIFA to live within its means, both financially and in terms of available human resources. The project would support FCFIFA and MRSTD by: (a) reinforcing financial management and research management; (b) training FOFIFA staff in research and station (administrative and financial) management, and in specific skills like test design, sampling methods and statistical analysis (biometrics); (c) preparing a complete inventory of past research results; (d) preparing an international symposium on agricultural research in Madagascar; (e) preparing a long-term master plan for agricultural research; and (f) preparing a research project to execute the first five year tranche of the master plan. 52. The Project would support the Government's efforts to develop and consolidate its information base on natural resources (land, water, population, forest, fish, etc.). Information to be collected and analyzed would cover both qualitative and quantitative aspects of the resource base, actual level of utilization, development potential, and constraints. This information would aid the Government over the medium and long term in regulating resource use (to avoid over-exploitation) and in planning development efforts in various spheres. Project assistance would support the first p.:ase of a longer-term national effort. Activities during this first phase would include: (a) collecting and analyzing existing information (e.g., documentary, satellite); (b) preparing inventories (maps and supporting documentation) for land and water resources and for current land-use patterns; and (c) training national staff. There will be immediate benefits from this work for a wide range of agricultural planning and management activities give'n the paucity of reliable information at present. 53. The project would also provide logistical support and short-term technical assistance to two activities within the Ministry of Finance which are related to the execution of the Agricultural Sector Adjustment Program. These activities are to be carried out by: (i) an interministerial Resource Management Task Force, which provides a focal point for review and resolution of financial resource management issues;  -17- and (ii) a Counterpart Funds Working Group, which has been set up to examine problems and options related to the management of these significant resources. Project Implementation 54. The programs for each component would be implemented by the four ministries (Agricultural Production, Livestock, Fisheries and Forestry, Research and Finance) and by a parastatal (the National Agricultural Research Institute). The program of activities for each institution is self-contained and does not depend on actions by another agency to attain its objectives. The 'independence" of programs is intended to simplify project implementation. Financial arrangements have been designed to support this approach, with separate Credit allocations and disbursement categories being established for each implementing agency. Project activities are planned to be implemented over a period of about four years. Project assistance would be integrated into annual work programs for each institution, with agreed upon objectives, personnel requirements, budgets, and measurable outputs. Start-up activities are underway, financed by a PPF advance of US$ 680,000 approved in October, 1985 and additional PPF financing of US$ 195,000 approved in January, 1986. Project Costs 55. Total project costs are estimated at FMG 8,929 million (US$12.8 million equivalent), with a foreign exchange component of 68 percent. Project costs include technical assistance (long and short term consultants), training, equipment, civil works and some incremental operating costs. Incremental operating costs will mostly be to support the execution of the natural resources inventory (vehicle operating costs, salaries, supplies, internal travel and per diem). Tecbnical assistance costs represent 51% of total base costs while training and equipment account each for 15% of total base costs. Civil works represent only 2% of total base costs. Incremental operating costs constitute 1OZ of total base costs. Import duties and local sales tax amount to about 12 percent of total costs. Base cost estimates reflect June 1985 prices updated to January 1986. Physical contingencies include 10 percent for rehabilitation works and purchases of supplies; no physical contingencies are included for staff, equipment, and operating costs, for which quantities have been clearly established. Financing Plan 56. Financing of project costs would be shared between the Government of Madagascar, IDA, and USAID. The proposed IDA Credit of SDR 8.7 million (US $10.0 million equivalent) would finarne 78 percent of project costs. This would pertain to the costs for technical assistance, training and equipment associated with MPARA, MPAEF, MRSTD/F(FI[FA and the Ministry of Finance. USAID financing of US$ 0.5 million would help finance the parastatal monitoring and restructuring components for MPAEF and MPARA. The Government contribution of US $2.3 million would finance 67 percent of incremental operating costs (net of taxes) and 100 percent of taxes and import duties.  -18- Disbursements 57. Disbursement would be on the basis of: 100 percent of foreigr expenditures and 80 percent of local expenditures for Consultant services, training, equipment, vehicles and incremental operating costs. All disbursements will be fully documented except that disbursements for all expenditures costing less than (or for contracts under) US$200,000 will be made against statements of expenditure (SOE), documentation for which would not be submitted for review but would be retained by the Borrower at the institutions involved and would be subject to annual audit by auditors acceptable to IDA. Disbursements are expected to be completed by December 31, 1990, that is a disbursement period of four and a half years. To facilitate project implementation by speeding up disbursements, a Special Account in US dollars, operated by the Treasury, would be established in a bank acceptable to IDA with a sub-account for each of the Ministries. The account would be replenished regularly on the basis of documentary evidence for payments made. Procurement 58. Goods and services procured with Credit funds would be purchased according to Bank/IDA guidelines. Cut off points for accepted procurement procedures comprise: (a) local or international shopping for purchases less than US$20,000; (b) local competitive bidding for purchases between $20,000 and $200,000; and (c) ICB for purchases over US$200,000. Procurement for civil works would follow local competitive bidding procedures since no international firm would be interested in works of such limited magnitude. Local competitive bidding procedures would comply with the Borrower's Decree 70-089 of January 28, 1970 with certain modifications agreed with by the Bank. IDA will review draft bid documents for contracts exceeding an estimated value of US$40,000 equivalent. Technical assistance provided under the project would be recruited according to Bank/IDA guidelines for the use of consultants. Accounts and Audits 59. Implementing agencies would maintain separate accounts for project activities which would cover all source3 of financing (IDA, USAID, Government funds'. Expenditures would be broken down by major expenditure category to permit meaningful monitoring and anAlysis. Quarterly expenditure statements would be prepared by each agency for IDA review. Project accour-s would be audited on an annual basis, including an inventory of physical acquisitions ;rnd their assignment within the agency. Project accounts for all institutions involved should be presented annually and the corresponding audited reports submitted to IDA within six months of the end of each fiscal year. Audits of FCFIFA accounts would be carried out as part of their regular annual audit by independent auditors acceptable to the Association. Audits of Project accounts for ministerial departments (MPARA, MPAEF, MRSTD, MPFE) would be carried out by independent auditors (also acceptable to the Association) hired by the Ministry of Finance in a single coordinated exercise.  -19- Annual Work Programs and Reporting 60. The project would be implemented on the basis of annual work programs prepared by each implementing agency and approved by its respective minister or managing director and IDA. The programs would serve as a planning, implementation and monitoring tool and would provide the necessary flexibility to ensure adjustment of project activities to current circumstances. Each annual work program would include: (i) an evaluation of the previous year's performance and a discussion of how the new program builds on that experience; (ii) a statement of specific objectivee (quantified) to be pursued during the year in question and a description by component of the activities to be undertaken in order to achieve those objectives; (iii) detailed investment and operating budgets by component, showing the manpower, financial, and physical resources required to carry out the proposed annual program; (iv) staffing and training plans; (v) a financing plan which indicates the source of funds for items iu the investment and operating budgets (IDA credit categories, FNDE - national investment fund-, counterpa:t funds, USAID); and (vi) procurement plans for purchases and works scheduled in the annual work program, including type of bidding and timetables. Preparation and approval of the annual work program would follow the Government's budget cycle. Draft work plans would be submitted to IDA for review by September of each year and the final version would be agreed upon by December. First year work programs have been reviewed and approved. 61. Each implementing agency would prepare semi-annual reports describing progress in achieving work program targets, comparing actual costs with budget estimates, and explaining variations between actual and planned results in these areas. These reports would also include expenditure statements for IDA review based on each implementing agency's project accounts. Each implementing agency would prepare a project completion report for the components under its implementation responsibility and would submit this report to IDA no later than six months after the Credit closing date. Project Justification, Benefits, and Risks 62. The project reflects IDA's long-term commitment to agricultural institution building in Madagascar as a means to remove policy, institutional, and managerial constraints to sector performance. It supports directly the broad reform program under the Agriculture Sector Adjustment Credit by increasing the ability of the ministries to implement policy reform in relevant areas and provide the data and analytical tools for the Government to consider future policy options for medium term adjustment. Benefits in the form of increased returns to the agricultural portfolio would be obtained by improving resource allocation processes and focusing on prioriry subsectors with high production potential. 63. Under the first Agricultural Technical Assistance Project, substantial progress was made in improving planning and programming processes, which must be sustained to derive higher benefits from these process improvements which require a long implementation period. Cumulative benefits beyond those obtained from the first Agricultural Institutions Technical Assistance project are expected to be significant.  -20- The current status of resource management in Madagascar acts as a disincentive to investment, as, for example, donors become frustrated with the low rate of utilization of resources in certain projects. Improved efficiency of financial resource management processes would increase confidence of foreign aid donors and investors. Improvements in MPARA's and MPAEF's management and financial administration will strengthen the capacity of the Government to implement its agricultural development plan, and increase the absorptive capacity of the sector. 64. Benefits would also arise from an updated and comprehensive knowledge of Madagascar's natural resource potential. This has particular importance since the current information base is practically non-existent and many areas of the country remain unkLown. The development and consolidation of a natural resources information base would allow ministries to plan development efforts by identifying areas of opportunity which have been neglected or under-exploited to date and by avoiding over exploitation through regulation of resource use. It would also serve to define priority intervention areas with highest agricultural production potential. In the medium and long-term, substantial benefits are expected from stronger conservation and land resource management, and an improved ability to monitor and respond to challenging environmental characteristics of Madagascar such as the high susceptibility to erosion. In this perspective, the project would support the national conservation strategy endorsed by the Government during the November 1985 Environmental Conference with the World Wildlife Fund and the International Union for the Conservation of Nature and Natural Resources. 65. Primary project beneficiaries are the major institutions which have a critical impact on agricultural sector development: MPARA, MPAEF, MRSTD, and FOFIFA. Benefits from the project in the form of technical assistance, equipment and training would be closely linked to a clarification and redefinition of the appropriate role of these institutions. The withdrawal of these institutions from activities which could be executed by the private sector (for example, fertilizer supply) and the more effective provision of producer services achieved through this redefinition expand the range of beneficiaries to segments of the private sector interested in the agriculture sector and to the users of services provided. Secondary benefits obtained from improvements in the quality of the project portfolio would be widely distributed among the population affected by those projects. The joint development and upgrading of agricultural research and extension within the project would stimulate agricultural production by, among other factors, introducing more efficient varieties and cultivation methods. Improvements in the extension system would provide direct benefits to a broad range of farmers in the form of more effective support services leading to increased production and revenues. By focusing research activities and rendering them more relevant to agricultural production needs, the project would be also reinforcing the impact of the extension systems. 66. A short term implementation risk is that consultants would be used inefficiently due to delays in their selection and cumbersome bureaucratic procedures hindering timely action on recommendations. The experience of the first Agricultural Institutions Technical Assistance Project demonstrated that these problems can be overcome with strong  -21- Government commitment. Another risk is that institutional or organizational changes could call for modifications in project design which could compromise institutional development objectives. Flexibility built in through annual work programs should offset this risk, with assessment of proposed organizational changes as an explicit criterion in assessing annual programs. Long-term implementation risks arise from deeper structural issues of the institutional environment. The fluidity of organizations and positions, the shortage of mid-level professionals, the closure of many technical educational centers, and low salary levels are all structural factors which constrain the project's impact. In addition, high staff turnover is a major cause of dissipation of impact over time, as specially trained staff transfer to positions which do not use their acquired skills. The longer term impact of the project depends to a large extent on the resolution of these structural issues. Some of them are directly addressed by the project. The training program for managers and support to the management of regular and contractual staff within the Financial and Programming Department in MPARA and the strengthening of MPAEF personnel management and training focus on the resolution of some of these .tructural issues. Issues which are not directly addressed by project activities must be included as part of the ongoing dialogue with Government at the project, sectoral and country levels. The improvement of recruitment and retention of mid-level professionals and the stabilization of positions and organizational structures require understandings, and measures by the Government, which cannot be reached through a single project. These issues will be kept under constant review during project implementation. An open dialogue with Bank missions is expected to lead to an annual institutional development program for each of the ministries involved. Linkages between training and personnel management issues (such as rotation of personnel) will also be addressed within these programs to increasa the impact of training activities. Activities are underway by the Ministry of Civil Service and Labor to deal wifth some of these issues, while attention is being given on a Government-wide basis to the revitalization of the agricultural education system. PART V - RECONMENDATION 67. I am satisfied that the proposed Credit would comply with Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed Credit. Attachments A. W. Clausen President May 13, 1986  - 22 - Annex 1 T A LE 36 Page 1 of 5 IABACCA -SOCIAL IDICATORtS IMTA SHEET LM SCnAS REFRECE QOuPl (NESCaVTD AVERAGES) Ia HOST (HOST RCT ESTIHATE) lb RECNT LW ICEN AFRICA mNICLE rN-cm LWt&.! 197eS gSTIA.T/b SIE OF SABA" AFRICA S. OF SAHARA a ( (OMM sq. U) TOTAL 587.0 517.0 587.0 ACRIaLTL 361.2 363.7 370.1 CW MR CAPI CUsl) 130.0 190.0 320.0 249.1 1112.9 (KILOCRANS OF OIL EQUIVALENT) 27.0 50.0 61.0 62.6 529.0 maTins a_ A iA AL TISTIS POPULATION.NID-IEAR (T {USNU) 5"4.0 4715.0 9199.0 URIA POPULATION CE OF TOTAL) 10.1 16.1 19.5 19.2 29.7 FOPUATtfI PRO1CriONS POPULATIO IN TlA 2000 (HILL) If.l STATTOHAST POPULATION (HILL) 54.1 POPULA%TION lomNlt 1.9 POPULATION UEESITT PER SQ. 1m. 9.3 11.6 15.3 32.5 11.8 PEA SQ. It. AGI. LAND 15.2 16.7 24.2 119.2 111.5 POPULATION AE STRUCT (Z) 0-14 13.5 41. 42.& 43.9 45.6 45.4 11-64 135 55.2 53.9 52.9 51.5 51.7 6S A ADMBOVE 3.2 3.3 3.3 2.9 2.9 POPULATION GlOs RItATE (C) TOTAL 1.6 2.1 2.5 2.6 2.8 URBAN 6.9 5.0 5.2 6.2 5.2 CRMDE SIXTH RATE (PER Tll0tl) 46.7 45.2 4.7 4*.6 47.0 CRUDE OEATH RATE (PtR TROUS) 26.6 21.9 L7.8 17.7 15.2 CROSS NEPRODUCTION RATE 3.0 3.0 3.2 3.2 3.2 FARt!. PFLANING Sn. AL (TNOUS). . USR %OF HARRED USCM) INDEX OF FOOD PMOO. PE CAPITA (1949-71-100) 69.0 102.0 94.0 65.6 91.6 PMM CAITA SPILT OF CALORIES (2 OF REIREMS) 100.0 107.0 109.0 36.4 98.2 PROTEINS (CRAMS PE DAY) 57.0 59.0 56.0 49.9 Sb.7 OF HIIIN ANIMAL AND PULSE 17.0 17.0 15.0 IC 16.3 17.0 CNILO (AS 1-4) DEATH RATE 45.0 32.0 23.0 23.6 18.7 LIFE EXECT. AT 31NTM (YTRS) 37.2 42.2 67.9 U6.4 51.7 IIFANT MORT. RATE (tP TNOUS) 177.0 149.0 116.0 117.5 102.7 ACMSS TO SAFE ATEtR (IPOP) TOTAL .. 11.0 25.0 Id 21.6 35.6 UR . 67.0 76.o Td 61.5 54.1 RURAL . . 1.0 T4.o7 14.2 27.3 ACCESS TO