Madagascar - Economic Management and Social Action Project

Document of The World Bank FOR OMFICIAL USE ONLY C4a /qb7-M464-7 Report No. P-4795-MAG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 17.1 MILLION TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR AN ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT October 27, 1988 Country Operations Division South Central and Indian Ocean Department Africa Region This document has a restricted distributon and may be used by recipients only in the performance of their offici dutes. Its contents may not otherwise be disclosed without World Bank authorization.  DEMOCRATIC REPUBLIC OF MADAGASCAR ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT CURRENCY EQUIVALENTS Currency Unit Malagasy Franc (1MG) US$ 1.00 - FMG 1,450 (August 3, 1988) FMG 1,000 = US$ 0.69 WEIGHT AND MEASURES Metric System ABBREVIATIONS ADB African Development Bank ADF African Development Fund BDE Banque des Donnies de l'Etat (National Statistical Institute) cG Consultative Group DGP DirectSon Generale du Plan (Directorate General of Planning) EMSAP Economic Management and Social Action Project PISA Fianakaviana Sambatra (Family Planning NGO) ENS Food and Nutrition Surveillance Program HIMO Haute Intensite de Main-d'Oeuvre (High Labor Intensity) ILO International Labor Organization LDP Letter of Development Policy MOn Ministare de la Sante (Ministry of Health) MPARA Minist4re de la Production Agricole et de la R;forme Agraire (Ministry of Agricultural Production and Agrarian Reform) NGO Non-Governmental Organization PE Public Enterprise PEP Public Expenditure Program PIP Public Investment Program PPF Project Preparation Facility PSAC Public Sector Adjustment Credit SDA Social Dimension of Adjustment UNDP United Nations Development Programme UNICEF United Nations Children's Fund USAID United States Agency for International Development WFP World Food Programme WHO World Health Organization FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY DEMOCRATIC REPUBLIC OF MADAGASCAR ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT CREDIT AND PROJECT SUMMARY Borrower: Democratic Republic of Madagascar Beneficiaries: Ministry of Agricultural Production and Agrarian Reform, Directorate General of Planning, Ministry of Finance and Economy, Ministry of Health, Ministry of Civil Service and Labor, National Statistical Institute, Ministry of Population, Social Conditions, Youth and Sports, Prime Ministry, and Ministry of Public Works Amount: SDR 17.1 million (US$22 million) Terms: Standard IDA Financing Plan: USS million IDA 22.0 ADB (ADF) 2.0 ADB TA Fund (Grant) 2.0 Swiss Aid (Grant) 4.7 Others (Grants) 1.8 UNDP (Grant) 3.8 Government and I it Recovery 4.6 Total 40.9 Economic Rate of Return: Not Applicable Staff Appraisal Report: No. 7410-MAG map: IBRD No. 20035 This document has a restricted distribution and may be used by recipients only in the performan. e7 of their official duties. Its contents may not otherwise be disclosed without World Bank authorizaton. 1  -1 - MEtMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC REPUBLIC OF MADAGASCAR FOR AN ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT 1. The following memorandum and recommendation on a proposed IDA credit to the Democratic Republic of Madagascar for SDR 17.1 million (US$22.0 million equivalent) are submitted for approval. The proposed credit would be on standard IDA terms and would help finance an Economic Management and Social Action Project (EMSAP) to address the social dimensions of development and support ongoing structural adjustment operations. Additional funds would be provided, primarily on a grant basis, by the African Development Fund (US$4.0 million equivalent), Switzerland (US$4.7 million equivalent), United Nations Development Programe (US$3.8 million equivalent), and various UN agencies, France, Japan and Italy (US$1.8 million equivalent). 2. Background. Per capita income in Madagascar fts been declining virtually without interruption for the last 16 years. During the 19709, the Governmext's economic policies emphasized increased public sector involvement, industrialization, nationalization of foreign-owned enterprises, urban consumer subsidies, and a high level of government control over private economic activity. Between 1978 and 1980 the Government financed a massive public investment program with foreign borrowing, which led to a quadr"pling of external debt. Together with a substantial deterioration of the terms of trade, those policies led to a serious financial and economic crisis in the early eighties. Between 1971 and 1982, real per capita GDP fell by about one-fourth. 3. Since 1983, the Government has implemented courageous actions to redress the severe internal and external imbalances and to lay the basis for resumed economic growth. The decline in teal GDP has been arrested, but a high population growth rate of 3 percent has prevented resumption of per capita income growths Madagascar is today one of the poorest nations in Africa (US$225 per capita GDP in 1987). These long-term trends are apparent in the deterioration of social indicators (mortality and morbidity rates, food insecurity, homelessness, etc) for most social categories. In addition, the same policies that stopped the decline in GDP have affected different segments of the population differently. For intance, rapid shifts in the urban/rural terms of trade, together with a sharp decline in the real wages of civil servants, while beneficial for the bulk of the Malagasy population, have adversely affected urban dwellers, and especially the poorest among them, worsening already dismal living conditions. Other groups, such as public enterprise employees, while not in absolute poverty, will also be affected by some of the policy measures. Although trade and tariff policy reforms have led to the creation of new jobs, the reform of public enterprises will create redundancies. Finally, the resurgence of malaria to epidemic proportions is not directly linked to adjustment policies, but constitutes a threat to long-term recovery prospects. 4. The Government is conscious that the restoration of per capita growth is a necessary condition for improving living standards, and has adopted policies to promote sustainable economic growth. However, the Government is also convinced that, in the short term, per capita income growth will not be sufficient to alleviate poverty and increase the access of the most disadvantaged groups t.o productive resources and employment opportunities. Hence, the Government has  -2 adopted a social policy whose primary objective is economic growth with equity. The principal elements of the new social policy are outlined in the Government's Letter of Development Policy (LDP), in stpport of which the Executive Directors approved the Public Sector Adjustment Credit (PSAC) in June 1988. The LDP also spells out the priorities, principles and criteria for selecting and targeting social projects and a Government commitment to cost-effectiveness and budgetary transparency in implementing social programs. 5. The Government has identified in broad terms the most disadvantaged target groups that have not yet benefited from existing programs or projects. These include: (i) the estimated 2.5 million people (mainly mothers and children) who are most at risk in the current malaria epidemic becattee of insufficient drugs and poor distribution; (ii) a significant number of households, that, for a variety of reasons, including unemployment, chronic underemployment and rapid shifts in the internal terms of trade, are considered the most severely food-insecure; (iII) the estimated 11,000 social welfare cases (abandoned children, handicapped, etc.); and (iv) the estimated 7,000 public enterprise employees who are likely to be laid off by the public enterprise reforms under the next phase of the adjustment program. This initial targeting does not address the full spectrum of the social dimensions of development. It constitutes, however, a significant step in the right direction that will need to be complemented by further analysis of the most disadvantaged and vulnerable groups, of what can be done about their situation, and of the most appropriate delivery vehicles. In this context, the Government intends to make fuller use of the potential contribution of the non-governmental organizations (NGOs) in Madagascar, which could be considerable. 6. Obtaining the full beneficial impact of the adjustment process supported by the PSAC will depend on the effectiveness of its Implementation. This will require a reform of the administration's core macroeconomic management instruments, including in-depth changes of the public expenditure programming and budgeting systems, the management of investments in state-owned enterprises, and the structure of the financial sector. The Government has requested IDA assistance to strengthen its institutional capacity to Implement these reforms effectively, to collect and analyze key economic and social data, and to address the most urgent social problems. 7. Rationale for IDA Involvement. The Consultative Group (CG) meeting of January 1988 fully endorsed the Government's priorities. Both the Government and the donors represented at the CG requested that IDA assist in the development and implementation of a social program. Up to now, Government actions to address the social dimensions of development have been limited by the severe financial constraints, while non-governmental efforts have tended to be fragmented, underfunded and largely uncoordinated. Moreover, deepening the adjustment process will require the development and implementation of sometimes complex policy and institutional reforms. IDA's involvement is considered essential, given the linkages between the adjustment program and the facilitating measures supported under the proposed project. Preparation and appraisal of the project components have been carried out jointly with the Swiss Cooperation and the African Development Bank, and in close coordination with the donors represented at the Consultative Group meeting. It was initially envisaged that the proposed project would be presented to the Executive Directors simultaneously with the PSAC in June 1988. However, because of the complex institutional arrangements necessary for its implementation, it was decided to pursue the discussions with Government until the activities under the first year were better defined and the arrangements for their implementation fully satisfactory. Preparation and start-up activities have been financed through PPFs totalling US$1.5 million, and through retroactive financing (para. 11).  -3- 8. It is anticipated that, following project completion, the actions initiated will continue to receive donor support. In this context, continued support for the malaria control and family planning programs is envisaged under the Association's proposed population and health project and for targeted food distribution and nutrition under the proposed food security project. 9. Proiect Obiectives. The proposed EMSAP would support the Government's efforts to improve public sector management, to address the plight of the more disadvantaged groups and to strengthen its capacity to monitor and address social issues, policies and programs systematically within its overall economic policy framework and within the priorities established in the framework of the public expenditure program. The EMSAP aims to: (i) initiate a program of emergency actions for disadvantaged and vulnerable groups; (ii) reinforce the capacity of the Government to monitor social conditions and design social policies and programs; and (iii) facilitate implementation of the adjustment program by strengthening key institutions. 10. Project Description. Following the Government's and IDA's review of a larger portfolio of social interventions, agreement has been reached on three major components, which are: (i) A social action program consisting of: (a) an emrgency malaria control program; (b) an expansion of family planning services by Fianakaviana Sambatra (FISA), a local NGO; (c) assistance for the preparation and Implementation of a food security policy; (d) income-generating sub-projects in targeted areas; (e) support to the Ministry of Population for coordinating the NGOs; and (f) a redeployment program for workers who are likely to be laid off as a result of the public enterprise reform. (ii) A component supported by the Bank's Africa Region-wide Social Dimensions of Adiustment (SDA) proiect, which would strengthen the administrative capacity for identifying, preparing, imp-ementing and monitoring medium- and long-term targeted social programs, in particular by setting up permanent household surveys and establishing appraisal capabilities for food security and poverty alleviation projects. (iii) An economic manasement assistance component that would support lmplem ntation of the adjustment program by financing short-term technical assistance, studies, training and logistical support for: (a) reform of the budget process and preparation of a broader public expenditure reform program; (b) public enterprise reform; and (c) establishment of a study fund to facilitate preparetion of the next phase of the adjustment process. The total cost of the project is estimated at US$40.9 million equivalent, with a foreign exchange component of US$22.3 million (54 percent). A breakdown of the costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations In Madagascar are given in Schedules C and D, respectively. The staff appraisal report No. 7410-MAG, dated October 27, 1988 is also attached. 11. Project Manazement. In keeping with the complexity of the situation, the current lack of reliable data for targeting purposes and the urgency of taking action, the project design stresses flexibility, includes pilot actions and emphasizes agreed decision-making processes and selection criteria. This approach should make it possible to integrate the information gathered during project implementation to refine, inter alia, the targeting mechanisms as well as the design of specific social programs. The project's overall coordination would be handled by the Direction Generale du Plan (DGP). Implementation of the agreed social action program and of the economic management component would be managed directly by the concerned ministries or agencies based on a strengthening of existing institutions. Terms of reference for technical assistance personnel have been agreed to. Training of their local counterparts would be emphasized to reduce the need for technical assistance in the long term. To speed project implementation, retroactive financing for expenditures under the project incurred prior to effectiveness but no earlier than July 1, 1988 would be provided for an amount not to exceed US$2.0 million (9.1 percent of the proposed credit amount).  - 4 - 12. Aareed Actions. The Government has defined selection criteria for social action programs and the moialities for monitoring their impact in the LDP. In addition, the following actions have been agreeds (i) Overall Project. (a) Annual work programs for overall execution of the project to be prepared and submitted for IDA approval by the end of August of each year; (b) the appointment of an overall project coordinator at the DGP and of a component manager for each component; (c) annual audits, project monitoring procedures and special accounts to be established. (ii) Social Action Program. The Government has submitted and the Association has approved: (a) annual work programs for the first year for each component; (b) a list of eligible institutes, training programs, criteria of eligibility and maximum cost per participant, as well as operating procedures for the redeployment fund. (iii) Economic Management Assistance. Under the PSAC, the Government comnitted itself to: (a) a three-year reform program for the public enterprise sector; (b) the creation of an ad hoc committee to manage the divestiture and liquidation programs; and (c) action plans to reform the budgetary process and implement a three-year rolling public investment program. Under ENSAP, agreement was reached on technical assistance support to Implement these reforms. 13. Benefits. The proposed ENSAP would facilitate implementation of the Government's adjustment program by addressing the most pressing social problems and strengthening the administration's capacity to ranage the economy. The expected short-term benefits include increased sustainability of the Government's adjustment policies until growth achieves momentum by: (i) better meeting the basic needs of the targeted population in terms of health and nutrition status and employment opportunities; and (ii) facilitating the redeployment of workers made redundant in public enterprises, while speeding labor market adjustment. Over the medium term, the proposed project would lay the basis fors (i) developing targeting mechanisms that could be used in the design and implementation of policies that properly consider both economic and social factors; (ii) redefining the respective roles of the Government and other agents (such as NGOs) in the delivery of social services; (III) improving the delivery;pf family planning services; and (iv) strengthening the Government's capacity for macroeconomic management. 14. Risks. The complexity of the program is the main risk, given the limited institutional capacity of the Malagasy administ-ation. Another risk relates to the accuracy of the targeting mechanisms used in designing the program. A third risk is whether the Government will be able to ensure that program assistance is limited to the intended beneficiaries. The first risk is reduced by the project's design, which, besides flexibility, entails independent components that will be implemented by the agencies that actively participated in their design and preparation. Necessary technical assistance has been agreed to and will be financed under the project. The second risk is minimized by the diversification of the intervention port folio and by built-in provisions to Improve targeting mechanisms. The third risk is addressed by periodic reviews of the project's activities and reporting and auditing arrangements. 15. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. October 27, 1988  SCHEDULE A Page 1 of 1 DEMOCRATIC REPUBLIC OF MADAGASCAR ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT ESTIMATED COSTS AND FINANCING PLAN Estimated Costs*/ USt ml lions Coftnancng Coordinated Financing Local forox Total Gov. IDA ADO ADB/TA Swiss l WP ghrsb/ Total SOCIAL ACTION PROGRAM 14.41 12.64 27.065 4.46 14.22 0.00 9.a9 4.76 1.82 1.90 2*.06 Malaria Component 2.18 7.82 9.60 1.49 1.38 - - 4.78 0.26 1.80 9.50 Faelly Plannlng 0.47 9.86 .0.8 - - - - - O.88 - S.8 Food Security 1.90 1.50 2.60 0.15 2.85 - - - - - 2.50 Targeted Employment 4.05 2.48 6.53 0.02 6.21 - - - 0.80 - 6.68 Support to NGOs 9.06 0.15 0.20 0.91 0.19 - - - - - 0.20 Redeploy. Fund/Roomploy. 6.66 9.64 7.49 2.88 4.17 - - - 0.U - 7.49 SOCIAL DIMENSIONS OF ADJUSTMENT 1.48 1.60 2.98 0.00 0.94 0.00 9.60 9.eo 1.98 0.09 2.98 Social Projects Eval. 9.47 0.49 9.87 - - - - - 907. - 0.8? Household Surveys 1.01 1.10 2.11 0.08 0.94 - - - 1.11 - 2.11 ECONOMIC MANAGEMENT 2.890 8.18 10.92 0.098 6.84 2.90 2.00 O.OS 0.00 0.00 10.92 Public Finance 1.94 8.78 4.76 0904 8.19 1.62 - - - - 4.76 Public Enterprises 9.86 1.60 2.4U 0908 2.48 - - - - 2.46 Economic Studies 0.9W 2.890 8.70 0.01 1.81 0.88 2.00 - - - 8.70 TOTAL PROJECT COST l .W S.2H7 iWW T54. 2 2 .00 2.00 7if 1 121975 Financing Plan US$ millions I IDA 22.00 53.7 ADB 4.00 9.8 Swiss Coop. 4.75 11.6 UNDP 3.80 9.3 GOM 4.60 11.2 Othersb/ 1.80 4.4 TOTAL 40.95 100.0 a/ Net of taxes, which are estimated at US$6.1 million equivalent. bk Includes WHO (US$0.1 million), UNICEF (US$0.3 million), Italy (US$0.5 million), Japan (US$0.2 million) and France (US$0.7 million).  -6 SCHEDULE B Page 1 of 1 DEMOCRATIC REPUBLIC OF MADAGASCAR ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT PROCUREMENT METHOD AND DISBURSEMENTS Procurement Method (USS millions) Total Project Components ICB LCB Other N.A. Cost Civil Works 4.6 0.4 5.0 (4.6) (0.0) (4.6) Equipment and V-hicles 2.9 1.9 2.8 7.6 (2.9) (1.9) (0.5) (5.3) TA and Studies 13.6 13.6 (5.3) (5.3) Operating Costs 3.7 3.7 (2.6) (2.6) Training & Severance Pay 7.3 7.3 (4.2) (4.2) Medicines 3.7 3.7 (0.0) (0.0) Total 2.9 6.5 27.8 3.7 40.9 (2.9) (6.5) (10.0) (2.6) (22.0) IDA DISBURSEMENTS Catezory Amount (US$ millions) Civil Works 4.6 1002 of foreign expend- iture and 85% of local expenditure; Equipment and Vehicles 5.3 100% of foreign expend- iture and 852 of local expenditure; TA & Studies 5.3 1002 of foreign expend- iture and 85X of local expenditure; Operating Costs 2.6 852 of expenditure; Training 4.2 1002 of foreign expend- iture and 852 of local expenditure. Estimated IDA Disbursements IDA Fiscal Year 1989 1990 1991 1992 1993 --------------- (US$ millions) ------------ Annual 5.5 6.5 6.5 2.5 1.0 Cumulative 5.5 12.0 18.5 21.0 22.0  -7 SCHEDULE C Psge 1 of 1 DEMOCRATIC REPUBLIC OF MADAGASCAR ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT SUPPLEMENTARY PROJECT DATA SHEET Section Is Timetable of Kev Events (a) Time taken to prepares Eight months (b) Prepared byt Government, with IDA and ADB assistance (c) First IDA mission: February 1988 (8) Appraisal mission departures April 1988 (e) Negotiations: October 1988 (f) Planned date of effectiveness: February 1989 Section II: Disbursement Conditions (i) Malaria Control Programs the preparation of an epidemiological survey; (ii) Food Security: agreement on action plans for pilot program implementation; (iii) Redeployments effectiveness of the Public Sector Adjustment Credit; establishment of the Redeployment Fund with an lnitial deposit of 1MG 1.0 billion; creation of the information center; (iv) Public Enter2risest effectiveness of the Public Sector Adjustment Credit for both the divestiture and monitoring components; establishment of the unit responsible for performance review, rehabilitation and restructuring for the monitoring component; (v) Public Finance: effectiveness of the Public Sector Adjustment Credit.  -8- SCHEDULE D Page 1 of 2 DEMOCRATIC REPUBLIC OF MADAGASCAR ECONOMIC MANAGEMENT AND SOCIAL ACTION PROJECT STATUS OF BANK GROUP OPERATIONS A. Statement of Bank Loans and IDA Credits (as of June 30. 1988) (Amount USO millone Loan or less cancellation) Credit Number Year Borrower Purpose Bank 10AD/ Undlibursodb/ Twenty credits and five loans hove been fully disbursed. 82.67 281.568 - CP 1156-MAO 1981 Madagascar Accounting A Audit 11.50 0.40 CR 1211-MAO 1982 Madagascar Village Livesteck II 8.14 1.5S CR 1298-MAO 1992 Mldagasecr Teimiroro He"vy Oil Exploration 11.60 2.60 CR 1837-MAO 1902 MUdadgeere Lac Aloetra 19.00 7.66 CR 1891-MAO 1908 Madagascar Sixth Highway 25.00 2.81 CR.PF04-MAO 1908 Madagascar 5 20.00 1.69 CR 148U-MAO 1988 Madagascar Cotton Development 7.90 0.84 CR.PF08-MAQ 1098 Madagascar a a 9.90 0.90 CR.F1497-MAO 1988 Madaoscar Urban 12.980 10.82 CR 1526-AQ 1984 Madagascar Cyclone Rehablitation 15.90 0.24 CR 1541-MAQ 1985 Madagascar Industrial Assistance 40.90 12.10 CR.A907-MAO 1988 Madagascar a (SFA) 20.90 8.14 CR 1509-9AO 1965 Madagascar Irrigation Rehabilitatloh 106.7 18.32 CR 1661-MAO 1986 Madagascar Accounting A Mgt. Training 19.O9 12.15 CR 1626-1-MAO 1986 Madagaescr Cyclono Supplemental 19.00 6.16 CR lOii-MAO 1986 Madagascar Ag. Sector Adjust. Credit 20.00 12.69 CR A16-MAO 19806 Madagascar 9 9 83.0 28 .61 CR 1694-MAO 1986 Madagascar Third Rallway 12.00 7.74 CR 1709-MAQ 1986 Madagascar Second Ag. Institutions 10.90 0.50 CR 1752-MAO 1907 Madagascar Port Rehabilitation 10.90 15.55 CR 1707-MAO 1987 Madagascar Energy 25.P 26.96 CR 1804-MAG 1987 Madbagocar Second Agricultural Credit if .1 10.02 CR 1834-MAO 1987 Madaeacar Industry and Trade Pollcy Adjust. 16.00 7.68 CR A082-MAG 1987 Madagascar a e a 67.900 42.86 CR 1878-MAOc/ 198 MadagLscar Forest. Mgt. A Protection 7.90 86.8 CR 1905-MAOc/ 190 Madbaescar Seventh Highway 40.00 37.B9 CR 1928-MAOC/ 1986 Madagascar slmenite Mining Eng. 8.655 6.1 CR 1941-iAOc/ 1988 Madagascar Public Sector Adjustment 125.00 118.61 TOTAL 82.57 901.72 898.20 of which has been repaid 9.67 7.20 TOTAL now outstanding 22.90 804.52 Amount sold 6.86 of which has been repaid. -- 6.86 TOTAL now held by Bank and IDA 22.90 894.52 TOTAL undisburaed 3"9.2 p/ The status of projects listed In Part "A" Is described In a separate report on all Bank/IDA- financed projeets in oxecution, which ts updated twice yearly and circulated to the Executive Directors on April 80 and October 31.