Madagascar - Agricultural Development Projects

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12646 PERFORMANCE AUDIT REPORT MADACASCAR MANGOKY AGRICULTURAL DEVELOPMENT PROJECT (CR. 881-MAG) STDY OF THE PLAIN OF ANTANANARIVO TA PROJECT (CR. 1086-MAG) SECOND MANGORO FORESTRY PROJECT (CR. 1161-MAG) LAC ALAOTRA RICE INTENSIFICATION PROJECT (CR. 1337-MAG) COTTON DEVELOPMENT PROJECT (CR. 1433-MAG) DECEMBER 30, 1993 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit: Manat (Manat = 10 Rubles) 1992 Average Value: US$1 = Ruble 187 February 1993 Value: US$1 = Ruble 595 June 1993 Value: US$1 = Ruble 1,260 ENERGY MEASURES AND EQUIVALENTS 1 Ton Crude Oil = Approx. 7 barrels (bbl) 1 Barrel = 42 US Gallons 1 mcm natural gas = 35.3 mcf ABBREVIATIONS AND ACRONYMS bbl - Barrel Bcm - Billion Cubic Meters bn - Billion (109) fob - Free on Board FSU - Former Soviet Union GDP - Gross Domestic Product GWh - Gigawatt Hour (10' Watt Hours) IRR - Internal Rate of Return km - Kilometer kV - Kilovolt kw - Kilowatt m - Meters mcf - Thousand Cubic Feet mt - Million Tons mtpy - Million Tons Per Year mtoe - Million Tons Oil Equivalent MW - Megawatt (106 Watt) m3/day - Cubic meters per day n.a. - Not Available/Not Applicable NGDU - Producing Operating Unit (petroleum) OECD - Organization for Economic Cooperation and Development PA - Production Association (petroleum) PSC - Production Sharing Contract SOCAR - State Oil Company of Azerbaijan Republic TWh - Terawatt Hour (10" Watt Hours) FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of DIrector-General Operations Evaluation December 30, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Madagascar Mangoky Agricultural Development Project (Cr. 881-MAG) Study of the Plain of Antananarivo TA Project (Cr. 1086-MAG) Second Mangoro Forestry Project (Cr. 1161-MAG) Lac Alaotra Rice Intensification Project (Cr. 1337-MAG) Cotton Development Project (Cr. 1433-MAG) Attached is the Performance Audit Report on the above five projects prepared by the Operations Evaluation Department. The audit concurs with the conclusion in the Project Completion Report (PCR) that the overall assessment of the Technical Assistance project can be considered satisfactory; it was used for designing an important follow-on infrastructure project now under implementation with Bank support. In contrast, at project completion, the outcomes of two of the four investment projects were considered unsatisfactory, one uncertain, and one satisfactory. With the advantage of the one to six years of additional perspective since completion, the audit concludes that the outcomes of all four are unsatisfactory. This is due to political unrest in 1991-92 and to the unintended impact of Bank- supported policy reforms on the institutional arrangements for operations and maintenance of irrigation projects. The main lesson arising out of the audit is that in order to enhance sustainability of project investments the consequences of macro-economic adjustment on specific projects ought to be ascertained and remedial actions taken in a timely fashion. Attachment This document has a restricted distribution and may be used by recipients onLy in the performance of their officiaL duties. Its contents may not otherwise be discLosed without WorLd Bank authorization.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT MADAGASCAR Mangoky Agricultural Development Project (Cr. 881-MAG) Study of the Plain of Antananarivo TA Project (Cr. 1086-MAG) Second Mangoro Forestry Project (Cr. 1161-MAG) Lac Alaotra Rice Intensification Project (Cr. 1337-MAG) Cotton Development Project (Cr. 1433-MAG) TABLE OF CONTENTS Page No. PREFACE .......................................................... i BASIC DATA SHEETS .................................................. m EVALUATION SUMMARY .............................................. xxi 1 BACKGROUND ..................................................... 1 2. THE PROJECTS ..................................................... 2 A. Mangoky Agricultural Development Project (Credit 881-MAG) .............. 3 B. Study of the Plain of Antananarivo Technical Assistance Project (Credit 1086) ... 4 C. Second Mangoro Forestry Project (Credit 1161-MAG) ..................... 5 D. Lac Alaotra Rice Intensification Project (Credit 1337-MAG) ................ 7 E. Cotton Development Project (Credit 1433-MAG; SF 008-MAG) ............. 9 3. MAIN ISSUES ..................................................... 11 A. Project Selection Criteria ......................................... 11 B. Institution Building Efforts ........................................ 13 C. Impact of Bank-supported Structural and Sectoral Adjustments .............. 14 Trade Liberalization .......................................... 15 Liquidation of Project Agencies .................................. 15 4. FUTURE PROSPECTS ............................................... 17 A. Irrigation Projects .. ............................................ 17 B. Privatization of FANALAMANGA and HASYMA ....................... 18 C. Bank Lending Policy .. .......................................... 19 ANNEX 1........................................................... 21 ANNEX2 ........................................................... 23 ATTACHMENT ...................................................... 25 This document has a restricted distribution and may be used by recipients,only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PERFORMANCE AUDIT REPORT MADAGASCAR Mangoky Agricultural Development Project (Cr. 881-MAG) Study of the Plain of Antananarivo TA Project (Cr. 1086-MAG) Second Mangoro Forestry Project (Cr. 1161-MAG) Lac Alaotra Rice Intensification Project (Cr. 1337-MAG) Cotton Development Project (Cr. 1433-MAG) PREFACE This is the Performance Audit Report (PAR) of five operations in support of the agricultural sector in Madagascar, for which Credits 881-MAG, 1086-MAG, 1161-MAG, 1337-MAG, 1433-MAG and SF 008-MAG were approved between March 1979 and December 1983 for a total amount of USD 70.1 million equivalent. The Credits were closed on average 29 months behind schedule, between August 1986 and June 1990. Four of the Credits were not fully disbursed and a total amount of USD 6.0 million equivalent, or about 8.5% of the original lending, was cancelled. Two operations, the Lac Alaotra Rice Intensification and Cotton Development projects, were co-financed with the Caisse Franqaise de Developpement, while the Fonds d'Aide et de Cooperation (FAC), the International Fund for Agricultural Development (IFAD) and the Arab Bank for Economic Development in Africa (ABEDA) cofinanced respectively the Lac Alaotra Rice Intensification, Mangoky Agricultural Development and Second Mangoro Forestry projects. The PAR, prepared by the Operations Evaluation Department (OED), is based on the Staff Appraisal Reports, President Reports, Credit Agreements, project files, discussion with Bank staff and the five Completion Reports prepared by the Africa Regional Office in cooperation with the Borrower between 1990 and 1992. An OED mission visited Madagascar in February-March 1993 and discussed project implementation, outcome and issues with officials of the Ministry of Agricultural Production and Agrarian Reform, the Ministry of Animal Production, Fisheries and Forests, the Ministry of Finance and Planning, and the various government agencies involved in project implementation. The mission also met with officials of some cofinancing institutions, as well as with representatives of the private sector and project farmers. Their kind cooperation and valuable assistance in the preparation of this report are gratefully acknowledged. This PAR focusses particularly on the selection criteria and development model of the four investment projects, the institution building components of the five operations under review and the effects of Bank-supported structural and sectoral adjustments on project outcome. The draft PAR was sent to the Borrower and the cofinancing agencies for comments. Those received from the Ministry of Finances are included as an Attachment.  - 111 - PERFORMANCE AUDIT REPORT MADAGASCAR MANGOKY AGRICULTURAL DEVELOPMENT PROJECT (CREDIT 881-MAG) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % of Estimate Estimated Actual Appraisal Est. Total Project Costs (USD million) 29.5 * IDA Credit (USD million) 12.0 10.9 90 IAD Loan (SDR million) 5.0 4.9 99 Ecnomic Rate of Return 18% negative umber of beneficiaries 3,200 3,900 122 families) (families) * Actual project costs not available due to missing records. CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (USD Million) IDA Credit 1980 1981 1982 1983 1984 1985 1986 1987 Appraisal estimate 0.40 3.00 7.00 10.50 12.00 12.00 12.00 12.00 Actual 3.04 7.31 8.37 8.50 9.41 9.81 10.24 10.83 Percentage of Estimate Actual 760 240 120 81 78 82 85 90 PROJECT DATES Appraisal Actual Board Approval 03179 Credit Signing 05/79 Effectiveness 06/79 0380 Completion Date 03/84 06/87 Credit Closing Date 08/84 0886 - iv - STAFF INPUTS (Staff Weeks) Activity 73 74 75 77 78 79 80 81 82 83 84 85 86 87 89 90 Total Prcappraisal -- 28.4 14.8 2.4 7.5 -- -- -- -- - -- -- -- -- - -- 3.1 Appraisal 0.1 -- -- - 28.9 16.1 -- -- -- - -- -- -- -- - -- 45.1 Negotiation -- -- -- -- -- 6.3 -- -- -- -- -- -- 6.3 upervision 13 -- -- -- -- 2.4 16.9 14.9 12.5 12.5 6.7 8.5 22.0 8.7 13.9 1.3 121.7 Other 0.1 0.1 0.1 0.7 9.7 -- -- -- -- - -- 10.7 Total 1.4 28.5 14.9 2.5 37.1 34.5 16.9 14.9 12.5 12.5 6.7 8.5 22.0 8.7 13.9 1.3 236.9 MISSION DATA Month/ Year Number Days in Specializ. Perform Rating Type of persons field represented status trend problems Pos-Appraisal 02779 1 11* n.a n.a n.a n.a Supervision 1 09179 3 13* E+A+F 1 2 II 01/80 1 2 E 1 2 III 02/80 2 23* A+[ 1 2 IV 08/80 2 12* E+I 2 2 F,T V 01/81 3 22* 2A+I 2 3 F,M,T VI 07/81 2 29* E+A 2 2 F,M,T VII 01/82 2 18* E+A 2 2 F,T VIII 06/82 3 21* A+F+M 2 1 F,M.T IX 01/83 4 23* A+E+F+MA 3 2 F,M,T,P X 03/83 1 7 A - - - XI 07/84 3 2 A+2E 3 1 F,T,P XII 02/85 2 26* A+E 3 1 F,T XIII 10/85 4 7 A+I+E+F 3 - F,M,T XIV 04/86 4 19 A+E+I+F 3 - F,M,T XV 09/86 1 2 1 3 - F,M,T XVI 01/87 2 9 I+F 3 - F,M,T Multi-project mission Specialization: A= Agriculturalist; E=Economist; F=Financi Analyst; I=Irrigation Engineer- M=Management Specialist. Performance Status: 1=Problem-free or minor problems; 2=Moderate problems; 3=Major problems. Rating Trend: 1= Improving; 2=Stationary 3=Deteriorating Type of Problems: F=Financial; T=Technical; M=Managerial; P=Political. Other Project Data Borrower Government of Madagascar Executing Agency SAMANGOKY Name of Currency Malagasy Franc (FMG) Appraisal Year Average: USD 1.00 = FMG 225 Intervening Years Average: USD 1.00 = FMG 455 Completion Year Average: USD 1.00 = FMG 1,069 Follow-on Project: None PERFORMANCE AUDIT REPORT MADAGASCAR STUDY OF THE PLAIN OF ANTANANARIVO TECHNICAL ASSISTANCE PROJECT (CREDIT 1086-MAG) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % Estimate Est. Actual of Appr. EsL Total Project Costs (USD Million) 2.9 2.6 90 Credit Amount (USD Million) 2.3 2.0 87 Economic Rate of Return (%) I __I ____ CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENT'l (USD Thousand) Year FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 Appraisal Estimate 300 1,700 2,300 Actual 0 0 80 400 830 1,000 1,540 2040 Actual as % of Estimate 0 0 3.5 17.4 36.1 43.5 67.0 88.7 Date of Final Disbursement: August 25, 1987. PROJECT DATES Appraisal Actual Board Approval 12/80 Credit Signing 01/81 Credit Effectiveness 03/81 10/81 Credit Closing Date 12/83 12/86 Discrepancies in USD amounts are the results of etchange rate fluctuations. - VI - STAFF INPIIT (Staff Weeks) 1979 1980 1981 1982 1983 1984 1985 1986 1987 1992 Total Preappraisal 1.9 9.6 11.5 Appraisal 10.6 10.6 Negotiations 0.9 2.7 3.6 Supervision 0.6 5.9 43 5.9 12.7 0.6 30.0 Others 74 69 14 0.3 0.9 16.9 Total 1.9 285 96 2.0 59 4.3 6.2 12.7 0.6 0.9 726 MISSION DATA Month/Year No. of Days in Specializations Performance Rating Type of Persons Field Represented Status Trends Problems Preparation 1 11178 2 10 E, W Preparation 2 06f79 1 4 E Preparation 3 0979 1 8 W Appraisal 1 02/80 4 11 E, W, R Supervision I 04/82 2 21 A, F I 1I- Supervision 2 11/82 3 14 F, W, S 2 2 T Supervision 3 02/83 3 10 F, A, D 2 1 T Supervision 4M 11/83 2 10 A, I Supervision 5 11/84 2 26 A, E 1 1 T Supervision 6 02/85 3 14 A, E, I 1 1 - Supervision 7 11/85 4 5 A, I, I 1 1 - Supervision 8 03/86 4 10 A, I, F 1 1 - Supervision 9 07/86 1 2 I 1 1 Key Specializations: A=Agriculturist; D=Drainage/Food Cont. Spec.; E=Economist; F=Financial Analyst; I=Irrigation Engineer R=Forester S=Sociologist; W=Water Resources Specialist. Status: 1= No problems; 2=Moderate problesm; 3= Serious problems. Trend: I= Improving- 2=Satisfactoty 3-Worsening. Type of problems: T=Technical. If Back-tc-Offnce Report only. Note Most of the supervision missions had multiple tasks. - vi - OTHER PROJECT DATA Borrower: Government of Madagascar Executing Agency: General Directorate of Planning of the Ministry of Finance and Planning Name of Currency: Malagasy Franc (MGF) Appraisal Year Average: USD 1.00 = MGF 226 Intervention Years Average: USD 1.00 = MGF 424 Completion Year Average: USD 1.00 = MGF 1,069 Follow-on Project: Name: Antananarivo Plain Development Project Credit Number: Credit 2117-MAG Amount (USD Million): 30.5 Approval Date: 03/29/90  - ix - PERFORMANCE AUDIT REPORT MADAGASCAR SECOND MANGORO FORESTRY PROJECT (CREDIT 1161-MAG) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % Estimate Est. Actual of Appr. Est. Total Project Costs (USD Million) 30.2 22.7 75 IDA Credit Amount (USD Million) 20.0 15.1 76 ABEDA Loan Amount (USD Million) 4.2 4.2 100 Economic Rate of Return (%) 12.3 7.0 Financial Rate of Return (%) 11.5 2.6 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS USD Million 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 Appraisal Estimatek1 2,280 8,800 13,690 16,300 - - Actual 1,947 5,512 7,404 10,428 12,304 13,637 Actual as % of Appraisal - 22.1 403 45.4 64.0 75.5 83.7 Cancellation 2,663 Comments Cancellation of SDR 2,663,229.17 on February 12, 1988. Last disbursement made on February 12, 1988. The main reason for the cancellation was the necessity for re-identifyiung the purpose of the plantation, which was done during the appraisal of the Forest Management and Protection Project (Cr. 1878-MAG), of which the Mangoro plantation is now a part of. PROJECT DATES Appraisal Actual Board Approval 06/81 Credit Signing 10/81 Credit Effectiveness 02/82 07/82 Completion Date 06/4 06v87 Credit Closing Date 12/4 12/867 j/ SDR I = USD 1,227. STAFF INPUlTS (Staff Weeks) 1974 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1990 1991 Total Preappraisal 0.1 0.9 1.9 4.1 7.1 Appraisal 1.4 0.4 14.0 18.6 0.3 34.8 Negotiations 2.5 1.3 3.8 Supervision 0.1 10.2 18.0 14.3 3.6 5.9 2.3 0.8 3.8 59.0 Others 0.1 0.4 1.8 0.6 10.5 13.4 otal 1.7 0.4 2.7 2.3 18.7 31.7 11.8 18.0 143 3.6 5.9 2.3 0.8 3.8 118.1 MISSION DATA Month/Year No. of Persons Days in Field Specializations Performance Types of Represented Y Status Problems Appraisal 4 05-06/81 4 7 E,F --- upervision 1 03-04/82 2 10 FE 2/3 T upervision 2 12/82 2 4 F,E 2 T,M upervision 3 07/83 1 7 E 2 T upervision 4 06/84 1 i 7 F1 2 T upervision 5 12/84 1 3 PO 2 T upervision 6 04/85 2 4 PO,F 2 T upervision 7 10-11/85 1 13 PO 2 F y E = Economist; F - Forestry Specialist; PO - Project Officer. 1 = Problems-free or minor problems; 2 - Medium problems; 3 = Serious problems. 3 T = Technical; M - Management; F = Financial. f No identification; preparation done by Borrower. & Plus 4 days of a forestry industries consultant. OTHER PROJECT DATA Borrower: Government of Madagascar Executing Agency: FANALAMANGA Name of Currency: Malagasy Franc (FMG) Appraisal Year Average: USD 1.00 = FMG 367 Intervening Year Average: USD 1.00 = FMG 711 Completion Year Average: USD 1.00 = FMG 1,526 Follow-on Project: None  - XI - PERFORMANCE AUDIT REPORT MADAGASCAR IAC ALAOTRA RICE INTENSIFICATION PROJECT (CREDIT 1337-MAG) BASIC DATA SHEET KEY PROJECT DATA Appraisal Actual or Actual as % Estimate Est. Actual of Appr. Est. Total Project Costs (USD Million) 38.0 42.8 113 IDA Credit Amount (USD Million) 1&0 15.8 87 FAC Loan Amount (USD Million) 4.5 8.1 180 CCCE Loan Amount (USD Million) 10.0 8.7 87 Economic Rate of Return (%) 24.0 7.0 Number of Beneficiaries 35,000 35,000 100 (families) CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS USD Million Fiscal Year 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Appraisal Estimate 0.9 3.3 6.5 10.4 13.8 16.0 16.7 - - - Actual - 0.8 1.6 4.8 6.8 10.9 13.2 14.2 15.2 15.8 Actual as % of Appraisal Estimate 0 24 25 46 49 68 79 85 91 95 Date of last disbursement: February 20, 1992- Amount cancelled: SDR 895,013.28. PROJECT DATES Appraisal Actual Approval 03/83 redit Signing 05/83 redit Effectiveness 09/83 03/84 mpletion Date 01/89 09/91 redit Closing Date 06/89 09/91 - X1v - STAFF INPUTS (Staff weeks) FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 Toal Preparation and 2.7 5.8 9.4 5.2 23.1 Identification Appraisal 46.7 7.5 54.2 Negotiations 11.5 113 Supervision 1.3 29.9 12.6 30 19.5 15 13.1 9.4 8.5 4.9 144.2 CR 8.0 8.0 otal 2.7 5.8 9.4 51.9 203 29.9 12.6 30 195 15 13.1 9.4 8.5 12.9 241.0 MISSION DATA Supervision Month/Year Days in Number of Specialization Performance Rating Type of Mission Field Persons Represented Status Trend Problems 1 12/83 15 4 Financial Analyst 2 2 F,T,M Sr. Agriculturalist Irrigation Engineer Training Specialist 2 0284 21 1 Financial Analyst 2 2 F,T,M 3 07/84 20 2 Sr. Agriculturalist F,T,M inancial Analyst 4 11/84 26 1 Sr. Agriculturalist 2 2 F,T,M 5 NA NA NA NA 2 2 F,M 6 1215 9 4 Sr. Agriculturalist 2 F,M, Irrigation Engineer Training Specialist 7 04/86 26 4 Economist 2 F Irrigation Engineer Training Specialist 8 07/86 NA 1 Irrigation Engineer 2 F 9 03/87 9 4 Sr. Agriculturalist 2 F,M [rrgation Engineer Financial Analyst 10 10/87 15 1 irigation Engineer 2 M 11 06188 8 2 frrgation Engineer 2 M ainancial Analyst 12 02/90 8 1 Financial Analyst 2 F,M,T 13 07/90 14 1 Fitnancial Analyst 2 F,M,T 14 04,91 20 1 inancial Analyst 2 F,M,T Note: NA means data not avadable. Key to types of problems- F-Financial, M=Managerial; T-Techical. - xv - OTHER PROJECT DATA Borrower: Government of Madagascar Executing Agency: SOMALAC Name of Currency: Malagasy Franc (FMG) Appraisal Year Average: SDR 1.00 = FMG 406 Intervening Year Average: SDR 1.00 = FMG 1,226 Completion Year Average: SDR 1.00 = FMG 2,012 Follow-on Project: None  - - 1 ~i r I 5 - e . w 0 ~ - ~ c n ~ 0 a s a 1 4 --- - - XViii - STAFF INPUTS (Staff Weeks) FY81 FY82 FY83 FY84 FY85 FY86 87 FY88 FY89 FY90 FY91 FY92 Total Preparation 23 2.1 3.6 13.0 Appraisal 12.1 12.8 54.9 Negotiations 11.5 11.5 Supervisions 1.6 18.3 15.9 9.6 1.3 53 4.0 56.0 PCR .6 .8 19.4 total 2.3 2.1 50.7 25.9 183 15.9 .6 13 5.3 4.0 .6 .8 152.9 MISSION DATA Supervision Organization Month/Year No. of Persons Days in Country Performance Rating Type of (Specialization) of Project Problems Status Trend Appraisal IDA 12/83 5 Nov. 1983 Post Appraisal IDA 03/83 1 (Ag) NA. 1 2 1 IDA 09/84 1 (Mk) 2 1 2 P 2 IDA 12/84 3 (Ec. Mk. Eg) 18 1 2 M 3 IDA 07/85 1 (Ec) 11 1 2 M 4 IDA 04/86 1 (Ec) 2 2 - F 5 IDA 09-10/86 3 (Ec, FA, Ag) 21 2 - F 6 IDA 10-11/88 1(FA) 10 3 - F,M 7 IDA 08/89 1 (Ec) N.A. 2 - F,M 8 IDA/FAO 04-0590 2 (FA, Ag) 14 2 - F,M I (CP) I_I__ Key. Specialization: Ag-Agricultural Eg-Engineer Ec-Economist; Mk-Marketing; FA-Financial Analyst. Status: 1-Problem-free or minor problems; 2-Moderate problems; 3-Major problems. Trend: l=Improving; 2-Stationary; 3- Deteriorating. Type of Problems: F-FFmancial; M- Management; P-Procurement. OTHER PROJECT DATA Borrower: Government of Madagascar Executing Agency: HASYMA Name of Currency: Malagasy Franc (FMG) Appraisal Year Average: USD 1.00 = FMG 475 Intervening Years Average: USD 1.00 = FMG 1,037 Completion Year Average: USD 1.00 = FMG 1,466 Follow-on Project: None  - xxi - PERFORMANCE AUDIT REPORT MADAGASCAR Mangoky Agricultural Development Project (Cr. 881-MAG) Study of the Plain of Antananarivo TA Project (Cr. 1086-MAG) Second Mangoro Forestry Project (Cr. 1161-MAG) Lac Alaotra Rice Intensification Project (Cr. 1337-MAG) Cotton Development Project (Cr. 1433-MAG) EVALUATION SUMMARY Introduction of rice in the sixties, increased its imports up to 350,000 tons in 1982. 1. With an annual per capita income of about USD 220, Madagascar is one of the 3. In 1983, the Bank proposed, and the poorest countries in the world. About 85 per Government adopted, an agricultural strategy cent of the population lives in rural areas and aimed at increasing production of key crops, agriculture contributes approximately 40 per and including inter alia adequate production cent of GDP and 80 per cent of total foreign incentives, support for private enterprises and exchange earnings. For the past two decades efforts to divest government of unprofitable the economic growth rate of the country was parastatals. During the 1984-1990 period, the lower than the population increase due to agricultural sector grew at an average rate of inappropriate policies, excessive government 2.6 per cent annually, still below the popula- control on economic activities, and poorly tion growth rate but faster than the minimal coordinated investments in non-viable projects. growth of the seventies and early eighties. Only in the late eighties did an improved policy environment contribute to an accelera- The projects tion of economic growth, but progress in the adjustment process was stalled in 1991 with the 4. The five projects under review are onset of political turmoil. part of a series of twenty IDA credits for the agricultural sector in Madagascar. Four of the 2. The five projects under review were five were investment projects, which were the prepared and appraised during the 1979-83 continuation of previous projects financed by period, characterized by a poor performance of either the Bank or bilateral assistance. Project the agricultural sector. A large number of executing agencies were parastatals, which parastatal agencies played a major role in were expected to be financially autonomous processing and marketing agricultural inputs through a combination of commercial activi- and products as well as providing services to ties, cost recovery, and government subsidies. farmers. These agencies were generally poorly The fifth one was a technical assistance project managed and severely affected by institutional under the responsibility of the Ministry of and financial problems. Most producer prices Finance. were kept below border prices, resulting in farmers reducing their production for the 5. The Mangoky Agricultural Develop- market. Madagascar, which was a net exporter ment and Lac Alaotra Rice Intensification - xx1i - projects supported the development of modern 8. All projects included important sector irrigation on 3,700 ha and 25,000 ha respec- policy reforms and institution building compo- tively. Project components included the ex- nents, such as partial government disengage- pansion and rehabilitation of existing irriga- ment, reinforcing the autonomy and efficiency tion, drainage and road networks, land level- of the executing agencies, creating farmer ling, provision of agricultural services to farm- organizations, and introducing producer price ers, applied research and training. The pro- setting and cost recovery mechanisms. jects were to be implemented over five years at a respective cost of USD 29.4 and 35.2 Implementation Experience million. At appraisal, the project executing agencies, SAMANGOKY and SOMALAC, 9. Project implementation was delayed were found to be efficient and well managed. on average by 29 months due to late credit effectiveness, procurement difficulties, late 6. The Second Mangoro Forestry and imports of equipment, shortages of construc- Cotton Development projects supported tion materials, and a variety of reasons specific specific subsectors. The objective of the to each project. former was to maintain an existing pine planta- tion of about 70,000 ha, increase its area by 10. In two of the five projects, compo- 18,000 ha, and construct service roads and nents and scope were changed significantly houses at a total cost of USD 30.2 million, to during execution. In Mangoky, soil salinity, be disbursed over three years. The project drainage and levelling problems, combined also included a study to assess the economic with lower yields than anticipated and financial viability of a pulpmill and explore other alter- difficulties of SAMANGOKY, led to the native uses of the wood produced by the decision to reduce the new irrigation construc- Mangoro forest. FANALAMANGA, with a tion program by about one third and to reha- long experience in reafforestation, was the bilitate most of the existing irrigation system. project executing agency. The Cotton Devel- In the Second Mangoro project, the planting opment project aimed at increasing by 75 per program had a good start until it was found cent the seed cotton production of about that the annual growth of existing plantations 20,000 producers in four provinces through the was significantly lower than originally estimat- provision of farm inputs and equipment, adap- ed, requiring a major fertilization program to tive research and training. The project was to achieve commercial rates of growth in existing be implemented over four years at a cost of plantations. The marketing study concluded USD 34.4 million. HASYMA, the project that the production of sawn wood rather than authority, had an excellent record of profes- pulpwood would be the best economic solution sionalism and efficiency. for the Mangoro forest, requiring an increase in the thinning and pruning program. The 7. The Study of the Plain of Antanana- project components and scope were changed rivo Technical Assistance project financed accordingly, with the ensuing reduction of the consulting services, vehicles and equipment to new planting program. prepare a multisectoral flood control and development program for the Antananarivo 11. The Cotton project was implemented plain. The project was to be implemented as planned; agricultural inputs and equipment over two and a half years, by the Planning were timely provided to farmers, and research Directorate of the Ministry of Finance at cost and training activities were successfully com- of USD 2.9 million. pleted. The project institutional reforms - XXiii - resulted in HASYMA loosing its processing 15. The Mangoky and the Cotton projects and marketing monopoly. The rural roads were considered unsatisfactory operations at program suffered a delay of two years and was completion. In the former, no incremental not fully completed due to insufficient studies production has been obtained. This was due and inadequate supervision of works. to the technical and institutional problems encountered during project execution, com- 12. The two remaining projects, Lac pounded by the de facto dissolution of SAMA- Alaotra and Antananarivo Plain, exceeded NGOKY in 1991, resulting in poor mainte- their physical objectives. In Lac Alaotra the nance and deterioration of irrigation facilities rehabilitated area exceeded appraisal estimate and rural roads. Both the PCR and the audit by 10 per cent . Institutional changes contrib- agree that the project reestimated ERR is uted to improving SOMALAC's efficiency and negative. The Cotton project succeeded in financial autonomy until 1986, when the com- increasing seed cotton production close to the pany lost its rice marketing monopoly and appraisal target. A recession in the domestic incurred significant losses in its commercial market, however, combined with the fall in the operations. Water user's associations and world cotton price, forced HASYMA to other forms of farmer organizations were reduce cotton production at the end of the successfully established. The Antananarivo project implementation period, through a Technical Assistance project successfully and partial elimination of the less efficient cotton timely produced a master plan for the protec- growers. The audit concurs with the 5 per tion of the plain, at a cost lower than antici- cent EER reestimated by the PCR (30 per pated. Remaining project funds were used for cent at appraisal) due to production and prices the preparation of additional documents in- lower than anticipated. cluding final design and tender documents. Of the five projects, this was the only one to 16. The Second Mangoro project results spawn a follow-on project. were considered uncertain by the PCR be- cause the potential wood production was 13. In USD terms, project costs were on higher than the absorptive capacity of the local average 10 per cent lower than estimated at market, and prospects for export were poor. appraisal due to reductions in scope and Project ERR was reestimated at between 7 per devaluation of the FMG during project imple- cent and 14 per cent , according to various mentation. The exception was the Lac Alaotra marketing assumptions. The audit found that Rice Intensification project with a slightly the project had been adversely affected by higher cost than anticipated. criminal fires, which destroyed about 20 per cent of the Mangoro forest in 1992. In addi- Project Results tion, despite some progress and favorable perspectives for export, the project's potential 14. At project completion, two projects production still exceeds identified potential were considered unsatisfactory, one uncertain outlets. Although project results are still and two satisfactory. With the benefit of the uncertain, the audit endorses the lowest ERR one to six years of additional perspective since reestimate (7 per cent ) of the PCR. credit closing, the audit concludes that all investment projects are unsatisfactory. This 17. The Lac Alaotra project was consid- change is due both to political unrest in 1991- ered satisfactory by the PCR, with a reestima- 92 and a series of Bank-supported policy ted ERR of 25 per cent, about the same as at reforms since 1986 with adverse impact on appraisal. The audit found, however, that investment projects. most of the project economic and institutional - Xxiv - benefits have been lost since SOMALAC was there is a risk that a hasty decision could lead officially abolished in January 1991 and no to another SOMALAC-type disaster. Estab- public or private organization was assigned lishing joint ventures with private wood and responsibility over project activities. Mainte- textile companies rather than straight dissolu- nance of the irrigation system has been discon- tion of the two parastatals is highly desirable tinued, resulting in rapid siltation on the and the Bank Group could be helpful in this canals, destruction by farmers of water control respect. structures, and shortages of water. The audit reestimates the project incremental production Findings and lessons of paddy at 55 per cent of PCR projections and the project ERR at 7 per cent . 21. At appraisal, the investment projects looked promising because they were all repeat- 18. In contrast, the Study of the Antana- er operations with a relatively simple design, narivo Plain Technical Assistance project can and placed under the control of well-estab- be considered satisfactory. It was used for lished and efficient agencies. In spite of being designing an important follow-on infrastructure repeater projects, they were innovative and project now under implementation with Bank complex in their institution building and policy support. The audit found, however, that the dialogue efforts and components. absence of a resettlement plan for about 1,400 families has delayed execution of the follow-on 22. But being a repeater project is not project by about two years. enough to justify investment and ensure easy implementation. Experience since has shown Sustainability that some of the projects were not part of the government's priorities, illustrating the impor- 19. Stopping the decline of the Mangoky tance of government and Bank joint sector and Lac Alaotra irrigation projects is an abso- work for sound project selection. In addition, lute priority, which can be achieved only by re- all projects were hampered by persistent organizing adequate operation and mainte- constraints underestimated at appraisal, like nance of the irrigation systems and re-estab- poor condition of roads, procurement difficul- lishing cost recovery mechanisms. While ties, and shortages of construction materials. farmers should be able to ensure Operation The design of the irrigation projects proved and Maintenance (O&M) of the tertiary and unsuited to farmers' traditional skills when quaternary canals, O&M of the head and technical assistance was phased out. major infrastructure needs heavy machinery and specific expertise. Contracting the work, 23. Some notable successes were achieved or granting concession, to private companies during project execution in the area of policy operating under the supervision of Irrigation dialogue, institution building and establishment Districts would be a more flexible solution of efficient farmer organizations in the irriga- than direct execution by a government institu- tion and cotton subsectors. In this respect, tion. however, the Bank-supported structural and sectoral adjustment operations which took 20. The future of the Second Mangoro place in the second half of the eighties, had Forestry and Cotton projects is highly depen- adverse effects on project outcome. Although dent on developments in both external and the liberalization of rice processing and mar- domestic markets for their respective products. keting was favorable for, and well received by Liquidation of both FANALAMANGA and farmers, it ruined the agencies' financial auton- HASYMA is currently under consideration; omy which was based on rice monopoly rents. -xxv - Similarly, the free marketing of agricultural abandoned, and cost recovery has been discon- inputs, which resulted in an abundance of tinued. Project experience demonstrates the products at the village level, led to widespread danger of the hasty, unconsulted and untimely falsification of input quality by retailers. The dismantling of a government agency when the fact that cotton producers still prefer using the possible effects of such decision have not been services of HASYMA rather than relying on properly assessed and measures to ensure a the private sector also illustrates that trade smooth transition to a new institutional system liberalization must be conducted within a have not been taken. proper regulatory framework and seriously monitored to avoid abuses. 25. While project supervision was ade- quate and cooperation with cofinancers was 24. Government divestiture has been an excellent during the early project years, Bank important element of the Bank-supported policy-based lending in the last years, conflict- adjustment operations. In this regard, effects ing with the institutional objectives of the of parastatal liquidation has been disastrous on projects, resulted in the government, the Bank project outcome. Canals in Lac Alaotra and and other donors having divergent views and Mangoky have suffered from lack of mainte- priorities and finally loosing interest in the nance and heavy siltation. Farmer organiza- projects. Project experience has also illustrat- tions have been unable to survive on their ed the need for better coordination within the own, cooperation between members has been Bank.  PROJECT PERFORMANCE AUDIT REPORT MADAGASCAR Mangoky Agricultural Development Project (Cr.881-MAG) Study of the Plain of Antananarivo TA. Project (Cr.1086-MAG) Second Mangoro Forestry Project (Cr.1161-MAG) Lac Alsotra Rice Intensification Project (Cr.1337-MAG) Cotton Development Project (Cr.1433-MAG) 1. BACKGROUND 1.1 With a population of about 12.0 million growing at 3 per cent a year and a per capita income of USD 220, Madagascar is one of the poorest countries in the world. The country's economic record was one of modest growth, about 3 per cent per annum, from the recovery of independence in 1960 to the 1972 revolution; stagnation from 1973 to 1980; sharp deterioration between 1980 and 1982, followed by financial stabilization and limited growth from 1983 to date. The poor economic performance of the 1970s and early 1980s stemmed largely from inappropriate economic policies, including government control on most economic activities, nationalization of foreign-owned enterprises, poorly coordinated investments in economically non-viable projects, government interventions in pricing and marketing and extensive consumer subsidies. 1.2 About 85 per cent of Madagascar's population lives in rural areas and agriculture dominates the economy, contributing about 40 per cent of GDP and more than 80 per cent of total foreign exchange earnings. Madagascar is relatively well endowed both in rainfall and surface water resources. Because of a variety of climatic conditions, the country is suited to growing a wide range of crops. There are variations among regions, however, in terms of potential and the island lies on the path of cyclones. Pasture and forests cover about 50 per cent and 30 per cent of the total land area, respectively. Rice, the staple food of most of the population, is grown on about half of the cultivated area, followed by perennial crops, mostly coffee, and root crops. Production systems vary from mechanized and sophisticated techniques to simple subsistence practices. Abcut 80 per cent of total agricultural production comes from smallholders. 1.3 When the projects under review were prepared and appraised, the performance of the agricultural sector was poor, and not commensurate with the population growth rate. Main reasons were government policies which caused serious disruptions in institutions responsible for rural development and agricultural supporting services. Marketing of major food crops anJ export crops (coffee, cloves, vanilla and pepper) was nationalized. As Government expanded public control over key sectors of the economy, the number of parastatal institutions operating in the agricultural sector increased rapidly during the late 1970s and early 1980s. In 1983, about 90 parastatals were playing a major role in marketing and processing of agricultural products, management of irrigation systems, and provision of services to farmers. These companies were generally over-expanded, poorly managed and adversely affected by institutional, policy and financial problems. 1.4 In the early 80s, agriculture's priority relative to other sectors was low (only about 4 per cent of the national operating budget), resulting in a degradation of services to farmers, particularly research and extension, provision of agricultural inputs, and maintenance of rural roads. In addition, -2- most producer prices were controlled and kept below import parity prices, and were not increased in real terms for about ten years. Consumer prices of rice were also kept below border parity prices, resulting in heavy subsidies, mostly to urban consumers. Farmers' response to the government pricing policy, marketing problems, shortages of agricultural inputs and deteriorating infrastructure was to reduce production for the market. Agricultural growth turned negative in the early 1980s and Madagascar, which was a net exporter of rice in the 60s, increased rice imports to 180,000 tons in 1980 and 350,000 tons in 1982. 1.5 Sector policy dialogue between the Bank and the government was intense in the first half of the eighties. In its Agriculture and Rural Development Sector Memorandum, dated June 1983 and presented to the Consultative Group for Madagascar, the Bank proposed an agricultural strategy, aimed at restoring production of key crops at least to levels achieved in past years. The strategy was based, inter alia, on the following elements: ensure adequate producer incentives; improve rural infrastructure, particularly access and feeder roads; support private enterprises and efforts to divest government of unprofitable parastatals; reduce state marketing ventures, and improve agricultural services to farmers. 1.6 The government responded positively to the Bank's recommendations by reducing price and marketing controls, increasing rice producer and retail prices, adopting an investment code more favorable to private investors, reinforcing support services to farmers, reorganizing the Ministries of Agricultural Production (MPARA) and Livestock (MPAEF), and restructuring or liquidating some parastatals. During the 1984-1990 period, the agricultural sector grew at an average rate of 2.6 per cent annually. Although modest in absolute terms, and still below the population growth rate, this performance was significantly better than the minimal growth and subsequent decline of the 1976- 1983 period. 1.7 Starting in the mid-eighties IDA extended to Madagascar a series of adjustment and sectoral Credits to help the government reorienting the economy towards a free market system. The ensuing improved policy environment contributed to an acceleration of economic growth between 1988 and 1990. By mid-1991, however, Madagascar went through a period of political instability, civil unrest, and extensive strikes which resulted in a change in government in 1992 and national elections in February 1993. Although on a longer term these political changes are expected to have a positive effect on the economy, the eighteen-month period of political turmoil, combined with severe drought in 1991 and 1992, had a negative impact on both the overall economic growth and the outcome of the investment projects. 2. THE PROJECTS 2.1 Since 1970, the Bank Group has supported Madagascar's agricultural sector through twenty IDA Credits (Annex 1), totalling USD 278.6 million, (equivalent to USD 396.6 million in constant 1990 dollars) for fifteen investment projects, three technical assistance projects and two sector adjustment operations. The five operations under review were the fifth, seventh, eighth, tenth, and eleventh in the series. Four of the Credits supported investment projects; and the fifth was a technical assistance operation. The five Credits were approved by the Board during the 1979-83 period, characterized by the above-mentioned severe degradation of the agricultural sector, and four of them were under the responsibility of parastatal institutions. Project description, implementation -3- experience and results, as described by SARs and PCRs and reviewed by the Audit, are summarized below. A. Mangoky Agricultural Development Project (Credit 881-MAG) 2.2 The Mangoky (pronounced Mengook) is Madagascar's second largest river, and its delta, located in the southwest of the island, has a good agricultural potential. The region, however, is relatively isolated, undeveloped, inhospitable, and sparsely populated. The Mangoky Development Master Plan, prepared in the early 60s, concluded that about 100,000 ha could be developed under irrigation in the valley and delta. A parastatal, SAMANGOKY, was established to initiate the development of a first phase of 10,000 ha, partly financed by FAC and FED, with cotton as the main crop. By the end of the 70s, about 6,600 ha had been successfully developed but at a cost higher than anticipated, mostly due to severe flood damages and the need for more flood protection works than expected. 2.3 The Bank-supported Mangoky Agricultural Development Project, approved in March 1979, was to complete the development of the first phase through the construction of a gravity irrigation system on about 3,700 ha, to be cultivated in cotton and rice by about 3,200 families. Main project components included the construction of the irrigation, drainage, and road networks; land clearing and levelling; construction of schools to serve the needs of 3,200 new migrant families; detailed design and supervision of civil works; provision of inputs to farmers; applied agricultural research; and training. The project was to be implemented over five years at a total cost of USD 29.4 million to be financed by IDA (41 per cent), IFAD (22 per cent) and the government (37 per cent). The Agricultural Engineering Department of the Ministry of Rural Development was to supervise the construction of civil works, while SAMANGOKY was responsible for all other activities including land development, operation and maintenance of the irrigation system, and provision of agricultural inputs and other services to project farmers. 2.4 As the government was to retain ownership rights to all lands developed under the project, a special partnership contract was to be signed between SAMANGOKY and project farmers, stipulating the duties and responsibilities of both sides and the sharing of costs and benefits. Project beneficiaries were to be selected among traditional farmers of the Toliary Province and migrants from other regions. They would receive a plot, ranging in size from 0.8 to 1.2 ha, to be cropped in rice and cotton. Under the provision of the partnership contract, SAMANGOKY would provide land preparation, seeds and fertilizers, irrigation water, pest control operations, and marketing services while farmers would carry out sowing, transplanting, weeding, irrigation, and harvesting under SAMANGOKY's supervision. To repay for SAMANGOKY services, project farmers would pay one ton of paddy for each hectare planted to rice; for cotton, SAMANGOKY would retain all costs incurred from the price paid to the producer. 2.5 Implementation experience was satisfactory during the first project year, but deteriorated thereafter. Construction of the main irrigation and drainage system was contracted to an efficient private contractor and completed four months ahead of schedule. On the other hand, works executed on force account by SAMANGOKY (such as land levelling and construction of the quaternaries) suffered considerably delays by shortages of spare parts and materials, late government counterpart funding, and extended strikes of SAMANGOKY personnel followed by resignation of the general manager. Moreover, as a result of the government decentralization policy of 1980, authority for land allocation shifted from SAMANGOKY to provincial authorities, thus depriving the company from -4- its most important instrument to impose discipline to farmers. The land tenure system did not prove conducive to farmers'productivity and autonomy: yields remained well below expectations and farmers failed to pay their service charges, resulting in SAMANGOKY's financial situation becoming precanous. 2.6 An attempt to improve project execution was made in 1983, through the reduction of the project scope from 3,700 to 1,500 ha, rehabilitation of the existing irrigation infrastructure, modification of the cost recovery system, enhanced flexibility in the cropping pattern, and renting of plots to large farmers. In addition, SAMANGOKY would undergo reorganization, abandoning its construction activities, and concentrating on the O&M of the existing irrigation system and the provision of agricultural extension and inputs to all farmers in the Mangoky delta. These measures, however, came too late to restore SAMANGOKY's efficiency and financial position. 2.7 The PCR, issued in 1990, concluded that the project had failed to achieve its objectives. Out of the 3,700 ha originally planned for development, only about 2,500 ha were fully equipped. Part of the project area proved useless due to soil salinity, drainage, or levelling problems. At project completion, in 1986, cropping intensity was less than 80 per cent, compared to 180 per cent expected at appraisal. Crop yields decreased during project implementation from pre-project averages of 2.5 t/ha and 3.8 t/ha for cotton and paddy, respectively, to 1.2 t/ha and 3.5 t/ha. Among the reasons for declining yields were SAMANGOKY's incapacity to provide timely land preparation, inadequate land levelling, deterioration of irrigation conditions, inadequate input distribution, and lack of farmers's incentive to improve productivity. Large companies and medium-scale farmers, which were allowed to rent land after 1984, did not perform better than small farmers. 2.8 Project ERR, which was estimated at 18 per cent at appraisal, was reestimated as negative by the PCR since no incremental benefits were obtained. Future prospects were considered poor due to the deterioration of rural roads and irrigation facilities, soil salinity in part of the project area and declining international prices of cotton and rice. 2.9 Early in 1993, the audit mission found that SAMANGOKY has been de facto abolished as the company, legally established in 1961 for a period of 30 years, has not been extended. Nonetheless, the Director General and his staff of 237 had not been laid off and were still living and working on the project site. In addition, about 4,000 farming families were permanently established in the project area. Following an agreement between SAMANGOKY's personnel and the Ministry of Agriculture, funds received from farmers for land use and rents, and from the sale of the Company's agricultural equipment, have been used to keep the Company operating and to pay salaries of its personnel. The irrigation system, however, is no longer maintained and the desilter system of the main canal has not operated for more than one year. As a result, water availability has been considerably reduced, irrigable land has been restricted to about 2,800 ha, and agricultural production is below that of the pre-project situation, thus confirming the negative ERR of the project. B. Study of the Plain of Antananarivo Technical Assistance Project (Credit 1086) 2.10 The Plain of Antananarivo, which used to be predominantly agricultural but became partly residential due to the expansion of the capital city, is subject to periodic flooding. In 1959, 20 per cent of the houses in the area were flooded. In 1977, floods affected about 16,000 persons, inundated large areas of the city, and destroyed a large part of the area's paddy crop. Project -5- objective was to support the government effort to prepare an integrated flood control and development program for the Plain. 2.11 The project, approved in December 1980, was to be implemented over two and a half years, at a total cost of USD 2.9 million of which about 80 per cent would be financed by the IDA Credit. Project components included: (i) preparation of pre-investment studies to be conducted to a pre-feasibility stage, including various technical options to protect the plain and intensify agriculture, for which the project would provide 196 man-months of consultant services (of which 80 would be local consultants), aerial surveys, vehicles and equipment; (ii) improvement of research stations and hydrological measurements for erosion and soil protection; and (iii) strengthening of the Directorate of Planning (Ministry of Finance) capability to supervise the studies. 2.12 Project implementation was delayed by late credit effectiveness due to bureaucratic reasons, lengthy consultant selection process, late availability of aerial photos, severe cyclone in 1982, and problems with the mathematical model. Nonetheless, by December 1984 (the original closing date), the master plan for the protection of the Plain had been completed at a cost lower than anticipated. It was then decided to use the remaining project funds for the preparation of detailed design and tender documents for irrigation rehabilitation and flood protection. When the Credit was closed, three years behind schedule, total project costs were about 91 per cent of initial estimates. 2.13 The project was successful in preparing a multisectoral and integrated flood control and development program for the Antananarivo Plain. The quality of the studies was satisfactory and the master plan was ultimately used as one of the basis for the preparation of the Bank-supported Antananarivo Plain Development Project (Cr.2117-MAG), currently under implementation. Project studies were also used to obtain donor assistance for other projects in the Plain. The project provides an example of adequate coordination within the Bank, as demonstrated by a smooth and rapid transfer of responsibility from the Agriculture Division to the Infrastructure Division within AF3 when it became apparent that urban development should be given priority over agriculture in the master plan. 2.14 At the time of audit, it was found that the time needed to evict some 1,400 families occupying (legally as well as illegally) the project area has delayed project execution by about two years. In addition, further delays can be expected as the compensation program proposed by BPPA, the project authority, did not fit the Bank guidelines on resettlement of displaced people. A new resettlement plan is currently under preparation with the assistance of Bank staff. C. Second Mangoro Forestry Project (Credit 1161-MAG) 2.15 About 17.0 million ha, or 30 per cent of the total land area, is classified as forest land, of which about 4.0 million has been demarcated as State forests. Man-made forests in Madagascar are mainly pine (100,000 ha) and eucalyptus (200,000 ha), established mostly for poles and fuelwood. Since the early fifties, plans for manufacturing wood pulp in Madagascar have been prepared and the planting of 96,000 ha of pine in the Mangoro Valley was envisaged to supply raw material for a possible pulpmill with an anticipated output of 200,000 tons or more per annum. In 1974, the Bank supported the First Mangoro Forestry Project to plant 35,000 ha of pine to supplement the 25,000 ha previously planted in the region. The project was successfully implemented. By 1980, over 41,000 ha had been planted, exceeding the appraisal target by 20 per cent, without cost overrun. -6- 2.16 FANALAMANGA, the project authority, was established in 1975 as a mixed-capital company to implement the plantation program in the Mangoro Valley and carry out processing and marketing activities. At completion of the first project, FANALAMANGA had a remarkable record of competence and efficiency. However, as a result of changes in wood production costs and declining pulp prices in the world market, there was some doubt about the economic viability of the large sylvo-industrial complex for woodpulp production envisaged at appraisal.' 2.17 The Second Mangoro Project, approved in June 1981, would support the continuation of the planting program in the Mangoro Valley, but at a reduced rate to allow time for new industrial development studies and to consolidate the institution building achievements of the first project. The project was to be implemented over three years at a total cost of USD 30.2 million, of which 66 per cent would be financed by IDA, 14 per cent by BADEA, 3 per cent by UNDP and the remaining 17 per cent by the government. Main components included: (i) the maintenance (pruning, controlled burning, sanitary control, and fertilizing) of existing plantations (about 70,000 ha); (ii) the plantation and maintenance of 18,000 ha of pine and 500 ha of eucalyptus; (iii) the construction of roads and of three villages for about 300 families; (iv) the improvement of pasture, and (v) research and studies to assess the economic viability of a pulpmill and review alternative uses of the wood produced by the Bank-supported projects. 2.18 Credit effectiveness was delayed by five months for administrative reasons. However, the planting program had a good start until a study, carried out under the project, found that annual incremental growth of existing plantations was much lower (4.9 m/ha/year) than originally estimated (12 m/ha/year). As a result, it was decided to change the project objectives, components, and scope. First, with such low yields the production of pulpwood would no longer be economically viable; therefore, sawn wood was to become the main product line of the project. This would require a pruning and thinning program quite different from that planned at appraisal. Second, a different and much larger fertilization program than originally anticipated was included in the project to increase the low yields of existing plantations. Third, the plantation program was reduced from 18,000 ha to about 10,000 ha. 2.19 At the Credit's Closing Date (June 1987), three years behind schedule, the revised planting program was completed. More service roads and trails, but less secondary roads, were constructed. More buildings and houses than planned were completed. The revised pruning and thinning program was properly implemented, but the fertilization program was delayed by shortages of labor and transportation difficulties. Pasture improvement was only 40 per cent complete, because getting users to respect exploitation rules proved more difficult than anticipated. The research and training programs were changed to accommodate the new project needs. The studies were completed, but their results were disappointing, as they did not sufficiently review alternative uses of wood, both for export and domestic market, once the planned pulpwood industry was found not to be economically viable. 2.20 At completion, the project economic performance was uncertain because the production of sawn wood at full maturity was expected to be larger than the needs of the domestic market, and the prevailing export conditions for wood were not favorable. The PCR, issued in 1991, reestimated project ERR on two different marketing assumptions: under an optimistic scenario, wherein outlets I MADAGASCAR Mangoro Forestry Project (Credit 525-MAG) OED Report No. 4198, November 1982. -7- would be found for the produced wood, project ERR would be around 14 per cent. Under the pessimistic scenario, ERR would only be 7 per cent. The institution building impact of the project was considered positive by the PCR: FANALAMANGA remained an efficient agency during project implementation and reorganized itself successfully to deal with changes introduced in the project description. 2.21 At the time of audit, project outcome was found to have been adversely affected by a series of criminal fires, during the political disturbances of 1991-1992, which destroyed about 15,000 ha of forest, or about 20 per cent of the total planted area. Most of the burnt forests consisted of adult pine trees, planted before or during the first Bank-supported project but maintained under the project under review, thus reducing significantly its expected benefits. On the other hand, incremental growth of plantations has been around 7 to 8 m'/ha/year, lower than estimated at appraisal (12 m') but better than envisaged prior to the revised fertilization program (4.9 M). 2.22 Mangoro's wood production already exceeds available outlets. A new private factory was recently constructed with Spanish partnership to produce pallet elements for export. Discussions are under way for the construction of another pallet factory with French partnership. Prospects also exist for the sale and export of mine poles. Limited quantities of sawn wood, charcoal and resin are sold on the local market. Secure outlets, however, do not currently absorb more than 25 or 30 per cent of the potential wood production and future prospects are uncertain. On this basis, plus forest destruction by fires, the project ERR is not expected to exceed 7 per cent, the pessimistic assumption of the PCR. D. Lac Alaotra Rice Intensification Project (Credit 1337-MAG) 2.23 The flat region surrounding the Alaotra lake covers about 7,000 km' and contributes about 10 per cent of the total national rice production and about a third of the country's marketed production. The lake's catchment area is drained by numerous rivers which, through diversion weirs, dams or small retention structures, provide water to a large number of irrigation systems covering about 68,000 ha. About 33,000 ha are traditional schemes, while the remaining 35,000 ha are modem irrigation systems constructed between 1950 and 1980 under various external financing operations. 2.24 A first Bank-supported Lac Alaotra project, partly financed by IDA Credit 214-MAG of USD 5.0 million, was approved in 1970 and closed in 1975. The credit supported the rehabilitation of existing irrigation systems covering about 4,000 ha, the construction of a new irrigation network on 6,000 ha of peat marshlands and drainage works on 8,000 ha. The project was successfully implemented by SOMALAC, the parastatal agency established in 1962 to develop the project area. The Bank's PCR, (1977), reported satisfactory and timely completion of the civil works, but lower paddy yields and production than anticipated. However, because of higher world price of rice than initially estimated, project ERR was reestimated higher (22 per cent) than anticipated at appraisal (11 per cent). In contrast, the Impact Evaluation Report, issued by OED in 1981', described a situation which had considerably deteriorated in four years because of technical problems with peat MADAGASCAR Lake Alaotra Irrigation Project - Malagasy Republic (Credit 0214-MAG) Performance Audit Report No. 1622. June 1977. MADAGASCAR Lake Alaotra Irrigation Project (Credit 0214-MAG) Impact Evaluation Report No. 3600. August 1981. -8- soils, labor shortages, resistance of farmers to undertake second cropping of paddy, and declining performance of SOMALAC. 2.25 The Lac Alaotra Rice Intensification Project, approved in March 1983, aimed at increasing the country's rice production by about 34,000 tons/year through the rehabilitation of infrastructure on 25,000 ha of modern irrigation systems and improvement of water supply on 3,000 ha of traditional schemes. The former, to be carried out by private contractors under SOMALAC's supervision, included the rehabilitation of small dams, the construction of pumping stations, clearance of silt, repairs of breaches in canal banks, raising beds of quaternary canals, replacement of gates, and upgrading of service roads. Works in the traditional systems included the construction of small dams, irrigation and drain canals, and land levelling. Estimated average rehabilitation cost per hectare was relatively low: USD 380 for modem infrastructure, and USD 300 for the traditional systems. Other components included the supply of farm inputs, production and distribution of paddy seeds, research and training, and the establishment of gauging stations. 2.26 In line with the current policy to improve the performance of parastatals and government agencies, the project had an important institution building component in the form of (i) reorganization and strengthening of SOMALAC and (ii) support to the regional extension service (CVA) of the Ministry of Agriculture. SOMALAC was to be reorganized into three distinct branches, namely Production, Maintenance and Marketing Departments, which would be financially autonomous through a combination of cost recovery, subsidy, and profits. Performance indicators were to be set and monitored for each Department. A major training program would be undertaken for SOMALAC and CVA staff. To this effect, technical assistance comprising twelve experts, as well as equipment, vehicles and buildings, would be provided by the project. 2.27 Total project costs were estimated at USD 38.0 million, to be financed by IDA (47 per cent), CCCE (26 per cent), FAC (12 per cent) and the government (15 per cent). The project would benefit about 35,000 families and be implemented over five years. As the project was considered difficult, risky and an important instrument of policy dialogue between the government and the Bank, a Mid-term Review was envisaged at the end of the second project year to assess progress against appraisal targets and propose adequate recommendations. 2.28 As in all projects reviewed by this audit, Credit effectiveness was delayed by six months for bureaucratic reasons and government's failure to recapitalize SOMALAC, a condition of effectiveness. Additional delays resulted from the need to change the design of some civil works because of growing problems of erosion in the watershed and siltation in the dams and canals. As a result, project completion was delayed by two-and-a-half years, but the project achieved more than its original physical objectives (31,000 ha rehabilitated versus 28,000 ha planned at appraisal) without cost overrun in USD terms but significant ones (210 per cent) in terms of local currency. 2.29 SOMALAC was reorganized as planned. During the first project years, such changes improved SOMALAC's efficiency. Profits from input supply and rice marketing activities improved recovery rate of water charges, and significant progress in staff performance permitted SOMALAC departments to recover a significant part of their operating costs in 1985. Research and extension activities were considerably developed and resulted in more productive paddy varieties being introduced in the project area. Credit associations were created to allow groups of farmers to get loans from BTM, the agriculture credit bank. Water users' associations to organize water distribution, handle routine maintenance, and collect water charges were successfully established. -9- 2.30 SOMALAC's situation changed in 1986 when the government, as agreed under the Agricultural Sector Adjustment Credit, (ASAC), liberalized the rice trade and input supply. SOMALAC lost its monopolistic role and rents, and was forced to compete with private traders. In order to stay in business, SOMALAC had to pay higher prices for rice, incurring significant losses in its commercial operations. Concurrently, the collection rate of water charges declined from 90 per cent in 1987 to 46 per cent in 1990 due to political interference with the cost recovery system. When it became apparent, at the beginning of 1991, that the commercial functions had been successfully taken over by the private sector, it was decided to liquidate SOMALAC and to transfer the extension activities to the Ministry of Agriculture. However, no institutional arrangements were made for somebody else to take charge of the O&M of the irrigation system. 2.31 The PCR concluded that the project objective to increase rice production had been achieved with a slight increase in irrigated area and a 50 per cent increase in yields. Assuming that the irrigation system would be adequately operated and maintained, the PCR reestimated the project ERR at 25 per cent (24 per cent at appraisal). The PCR stated, however, that the sustainability of the project was in doubt, mainly because institutional questions regarding the O&M of the irrigation system remained unresolved. 2.32 In February 1993, the Audit mission found that SOMALAC had been liquidated in January 1991, its equipment sold, and its personnel laid off. The irrigation system has not been maintained since, resulting in water scarcity at the field level due to siltation of the main and secondary canals. Farmers attempted to operate the dam gates by themselves, resulting in about two thirds of the water stored in one of the project dams being lost, and a primary canal washed away. The audit mission also found the construction of some quaternary canals had proved of low quality, preventing irrigation of some 5,000 ha of peat soils. 2.33 In 1991 and 1992, the project's irrigated area decreased by about 20 per cent, yields were about 15 per cent to 20 per cent below appraisal estimates, and incremental paddy production was only about 55 per cent of PCR projections. Although the Bank-supported National Extension Project (Cr.2150) was expected to take over SOMALAC's support to farmer organizations and extension activities, little progress has been made due to late procurement of vehicles and illegal occupation of 80 houses and other buildings by the former personnel of SOMALAC. As a result, farmer organizations are no longer operational. The Audit concludes that the premature dismantling of the SOMALAC in the absence of an adequate institutional arrangement to take over the O&M of the irrigation system has significantly reduced the project economic viability and sustainability. Because no significant increase in production would be possible without new investments, the audit reestimates the project ERR at 7 per cent (Annex 2). E. Cotton Development Project (Credit 1433-MAG; SF 008-MAG) 2.34 Textile is one of Madagascar's largest industry, accounting for about a third of the value added of the manufacturing sector and employing about 10,000 persons. In addition, about 20,000 families are involved in cotton production, which is concentrated in the dry (and relatively poorer) areas of the northern, western and southern parts of the country. Seed cotton production reached a peak of 37,000 tons in 1977, slightly below the needs of national industry (40,000 tons), but declined thereafter because of low producer prices', lack of foreign exchange to import agricultural inputs, machinery and spare parts, and deteriorating condition of rural roads. Cotton seed is also an important raw material for the vegetable oil industry, contributing about 15-20 per cent of the - 10 - national demand for cooking oil. When the project was appraised in 1983, oil extraction was privately owned but 85 per cent of the textile industry was owned by the government. 2.35 The dominant institution for cotton production is the parastatal Hasy Malagasy (HASYMA), established in 1979 to take over the functions of CFDT, a French cotton producing company. HASYMA's activities include: provision of inputs and extension services to cotton producers, ginning, and marketing. In 1983, HASYMA had retained much of the professionalism of CFDT and was considered one of the most dynamic and well-managed of Madagascar's parastatals. About 60 per cent of seed cotton is produced by large and modern farms under the flood recession system in Northern Madagascar; the remaining 40 per cent is produced in the west and south by small farmers under irrigation (Mangoky area) or rainfed conditions. 2.36 The objective of the Cotton Development Project, approved in December 1983, was to increase seed cotton production from 26,000 tons to 45,000 tons in four provinces. Increases in production were to be achieved through expanding cotton cultivation by 8,000 ha, increasing yields in existing areas, and keeping producer prices sufficiently attractive at about 90 per cent of its border prices equivalent. Project components included: provision of farm equipment and vehicles; rehabilitation of rural roads; provision of farm inputs; adaptive cotton research; technical assistance to HASYMA; training; and studies. The project was to be implemented over four years, at a total cost of USD 34.4 million of which 51 per cent would be financed by IDA, 33 per cent by CCCE and the remaining 16 per cent by HASYMA and project farmers. Conditions of effectiveness were the provision of a substantial injection of capital to HASYMA and the establishment of a sector coordination committee. 2.37 Credit effectiveness was delayed by three months but most project activities, except rural roads, had a good start and progressed rapidly. Inputs and equipment were provided to project farmers as planned. Technical assistance provided adequate training to national staff. Research activities were delayed but resulted in new and more productive cotton varieties. Studies led to a major restructuring of HASYMA, which became a mixed company and got the freedom to market its cotton internationally. In addition, cotton producers in the north were allowed to set up their own ginning and marketing channels. The rehabilitation of cotton tracks suffered numerous and lengthy delays due to insufficient studies and inadequate monitoring of the works. The Credit Closing Date was extended by two years to use the remaining project funds for the track maintenance program. 2.38 Cotton production increased from 26,000 tons in 1983 to 43,000 tons in 1985, close to the appraisal target, due to a sharp increase in both the cropped area and the number of growers, attracted by higher and guaranteed prices. At the same time, however, seed cotton average yields declined because many farmers had no experience in cotton growing and did not use inputs. In 1985- 1986, a bumper crop combined with recession of the domestic market forced HASYMA to export just when the world price of cotton plummeted, resulting in heavy losses and severe financial problems for the company. New measures including better selection of cotton growers, discouraging production in some regions, and promoting crop diversification were introduced. 2.39 Cotton production fell back to 27,000 tons in 1987 and then stabilized around 31,000 tons. However, as many cotton companies in Africa, HASYMA remained trapped in a non-viable pricing system, with fixed producer prices higher than the prevailing world and local market prices. As a result, HASYMA was virtually bankrupt at the time of project completion. The PCR mentioned that a number of large farms in the north were willing to take over cotton processing and marketing - 11 - activities in this area, or to diversify to tobacco. In the south, expansion of cotton, without crop rotation, has resulted in erosion and decrease in soil fertility. Nevertheless, a selection process has eliminated many small and inefficient farmers. The PCR re-estimated Project ERR at 5 per cent (30 per cent at appraisal) due to production and yields lower than expected and declining international cotton prices. Sustainability of project results was considered doubtful as a number of technical and institutional problems were not resolved at completion. 2.40 At the beginning of 1993, the audit mission found that cotton production decreased in 1991 and 1992 to 26,600 tons and 20,200 tons, respectively, because of adverse climatic conditions. Prospects for 1993 were, however, relatively favorable due to adequate rainfall combined with the introduction of two new more productive cotton varieties. In line with the marketing liberalization policy of the government, HASYMA has lost its ginning and marketing monopoly but only a small part of these functions has actually been taken over by the private sector. Despite its precarious financial situation, HASYMA has remained an efficient and well managed company, praised both by large and small cotton growers. 2.41 Nevertheless, the cotton sub-sector in Madagascar has been, and still is, adversely affected by a number of factors: the poor condition of the main roads and rural tracks in the producing areas, hindering delivery of agricultural inputs and of seed cotton output; farmers limited access to credit; increasing pest and disease problems and difficulty to ensure cotton crop protection; vandalism and stealing of seed cotton crops in the north; and lack of alternative crops in the south. 3. MAIN ISSUES 3.1 The five projects under review share some common features: (i) they were appraised and approved by the Board during a rather short period (1979-83), characterized by poor performance of the agricultural sector; (ii) project selection criteria and institutional arrangements of the four investment projects were similar; (iii) institutional building was an important component of all projects; and (iv) project outcome was affected, mostly negatively, by the sectoral adjustment operations that the Bank supported in Madagascar during project execution.' A. Project Selection Criteria 3.2 When the projects were identified in the late 70s and early 80s, no Bank agricultural sector work had been carried out for Madagascar. In spite of that, the projects under review, (three supporting irrigation and drainage, one export-oriented operation and another one supporting cash crops), were in line with the national objectives at the time: self-sufficiency in food, increased production of cash crops for export, expansion of basic agro-industries to process local raw materials, and increased rural employment. Agricultural Sector Adjustment (ASAC, or CASA4 CV. 1691, of May 1986); Industrial and Trade Policy Adjustment (ITPAC, or CASPIC; Credit 1834, of June 1987); Public Sector Adjustment (PSAC, or CASEP; Credit 1941, of June 1988); and Economic Management and Social Project (PASAGE; Credit 1967, of December 1982). - 12 - 3.3 All four investment operations were repeater projects: the Mangoky and Cotton projects were the second phases of previous operations supported by bilateral and multilateral assistance; the Mangoro and Lac Alaotra Rice Intensification were follow-on projects of investments financed by the Bank in the early 70s. 3.4 A second similarity was that well established parastatals were to be responsible for project execution. The respective appraisal reports mention that SAMANGOKY was "an efficient and well managed institution"; FANAMALANGA has achieved "a remarkable record of competence and efficiency" during implementation of the first Mangoro project; and HASYMA was "a dynamic and well managed agency". SOMALAC was also considered a successful institution until the mid 1970s when its efficiency started being eroded by government policies and political interferences. 3.5 An advanced stage of preparation, the presence of sunk costs investments and the fact that the projects did not face substantial risks of a technical nature were also important elements for project selection. Issues of pricing policy, shortages of foreign exchange and possibility that parastatals be transformed into Socialist Enterprises ' were mentioned as potential risks, but beyond the project's control. In short, the project selection criteria were simplicity of objectives, easiness of execution and limited risks rather than innovation. 3.6 In fact, experience under project implementation has shown that a number of adverse factors were underestimated at appraisal. First, in the case of the two irrigation projects, the success of previous operations and efficiency of executing agencies were partly due to heavy technical assistance. When the latter was phased out, it became apparent that the capital-intensive design, water control technology, and rotational operation rules of the two projects were not suited to farmers' traditions and government operators' capability. Similarly, agricultural innovations like second cropping and systematic use of fertilizers could not be sustained after Credit closing. In both projects, yields and production remained well below their potential. In retrospect, the development of small or medium-size irrigation system, combined with a more traditional type of water distribution, would have probably been a better solution to develop both the Mangoky and Lac Alaotra areas than the modern and sophisticated irrigation technology actually chosen. 3.7 Second, project selection based on simple design and advanced stage of preparation proved not entirely successful. During project implementation, it became apparent that two (Mangoky and Mangoro) of the five projects were actually of low priority for the government. In the Mangoky project, the remoteness of the project area was a serious obstacle to the recruitment and continuity of qualified managers and technical staff; the land tenure system was not conducive to farmers' motivation; and the relatively high cost per hectare was not justified by the low level of productivity. As a result, government support for the project declined sharply during project implementation. Similarly, the government somewhat lost interest in the Second Mangoro Forestry project when it became clear that wood production would exceed available outlets. 3.8 Project experience has shown the danger of a piece-meal approach to project choice and illustrated the need for in depth sector work. One by one, the seemingly strong parastatals showed Socialist enterprises were defined as those of strategic importance in which the State owned or controlled 51% or more of the shares. Each enterprise was managed by a committee composed of representatives of the State, workers' representatives, and financial partners. The managing director was nominated by the Prime Minister on the advice of the Managing Committee. - 13 - their vulnerability to first, poor pricing and marketing policies, and then, their major dependency on monopolistic rents. The lack of supporting sector work was compounded, in the case of cotton, by drop in world prices. In the case of Mangoro, it led to over-investing in a sector without enough demand. In the audit's view, expediency in project generation through repeater projects and good performing parastatals is no substitute for in-depth sector work and ensuing project generation therefrom. B. Institution Building Efforts 3.9 All projects were expected to be used as instruments for institution building purposes. First, the project parastatals were to be restructured and strengthened through government's injection of funds or capital increases (SOMALAC and HASYMA); training of project staff and studies (all projects); elimination of commercial activities which did not directly contribute to development and subsequent reduction of redundant personnel (SAMANGOKY, SOMALAC and HASYMA). In the case of SOMALAC, the redistribution of responsibilities between three autonomous and financially self-sufficient departments was quite innovative in the context of the type of economic organization prevailing in Madagascar at the time. 3.10 Second, in order to reduce government intervention in the agricultural sector, the projects promoted the establishment of farmer organizations. Water user's associations were to operate and maintain the tertiary and quaternary canals in the irrigation projects; credit associations were to obtain and guarantee loans for their members; and farmer groups were to organize seed cotton collection, packing and loading at the village level. 3.11 Third, measures were taken to improve the policy environment of the projects: new mechanisms for cost recovery in irrigation, adequate producer prices for rice and cotton, and easing of the government's processing and marketing monopolies were to be progressively introduced, subjected to annual consultations between the Bank and the government. A mid-term review to discuss progress in implementation and economic changes was to be undertaken by the government, the Bank and other donors. Finally by providing adequate technical assistance, equipment and funds the project were to address the pervasive weaknesses of agricultural research and extension of the last decade. 3.12 Project experience has shown that the project institution building components brought some interesting and successful innovations. The restructuration of the project parastatals had a good start when their functions were trimmed and their redundant personnel curtailed. In particular, the subdivision of SOMALAC into three independent and financially autonomous companies, each with clear objectives and well defined performance indicators, was a relative success during the first project years. Their financial autonomy, however, did not last because they lost their marketing monopoly rents during project execution (para 3.20). In addition, farmers'contribution (the second source of financing) always remained below expectations due to yields and production lower than anticipated. 3.13 Establishing efficient farmer organizations has been the most successful achievement of both Lac Alaotra and Cotton projects. For two years, Water User's Associations were able to operate and maintain tertiary and quaternary canals and recover water charges from their members. Some progress in this direction was also achieved in the Mangoky project. Credit associations succeeded borrowing from BNT under a collective responsibility system and the recovery rate was excellent Groups of small cotton growers, modelled after the successful cotton groups in West Africa, were - 14 - successfully established by HASYMA and started developing seed cotton collection and primary marketing at the village level. 3.14 Another merit of the projects was to recognize the weaknesses of the agricultural research and extension systems in Madagascar since the early 70s, and to include adaptive research and improved extension methods among the project components. As a result, two high-yielding varieties of paddy were identified and successfully introduced in the Lac Alaotra region. Seed production was successfully developed. Two new, more productive cotton varieties were recently selected for replacing the obsolete Acala variety in both the northern and southern cotton producing areas. 3.15 The project institution building efforts undoubtedly contributed to improve the policy dialogue with sector authorities during project implementation. The sustainability of such efforts, however, was not achieved. First, the research and extension activities, carried out under multilateral and bilateral assistance and financing, were discontinued after credit closing. Second, the project institutional improvements became obsolete when a series of Bank-supported structural and sectoral adjustment operations resulted in major policy changes which resulted in government divestiture and liquidation of parastatals (para 3.26). Project experience has demonstrated that policy reforms are not sustainable in the framework of individual projects. An in-depth sector work, with government's full cooperation and support, would have provided a better channel for policy dialogue. 3.16 Finally, all projects were hampered by some persistent and unresolved institutional difficulties. The poor condition of roads was recognized as an important constraint at appraisal but no satisfactory solution was found to resolve it. Funds were provided in the projects for road rehabilitation, but this component suffered numerous delays and was not satisfactorily implemented. At the time of audit, the road condition was worse than before and during project implementation, demonstrating that these project agricultural parastatals were not equipped and staffed to ensure the adequacy of studies, efficiency of executing agencies, and quality control of civil works. 3.17 Delays in credit effectiveness due to bureaucratic reasons, misprocurement or procurement difficulties, shortages of construction materials, and delays in importation of equipment due to late payment of import taxes repeatedly hampered or delayed project execution. No lesson was apparently learnt from the previous project's experience on how to correct such deficiencies in the follow-on projects. C. Impact of Bank-supported Structural and Sectoral Adjustments 3.18 In parallel with the institutional building efforts of the projects under review, fundamental issues of the agricultural sector were also addressed by other Bank-supported operations. Starting in 1982, two Agricultural Institutions Technical Assistance Projects supported the preparation of specific action plans to strengthen the Ministry of Agriculture, liberalize pricing and marketing of rice, and improve parastatal management. 3.19 By the mid eighties, four adjustment Credits were extended to Madagascar to support major policy reforms, including liberalization of trade, price decontrol, privatization of public enterprises, and encouragement to private sector. Such a profusion of institutional changes and policy reforms, which took effect during implementation of the five projects under review, had mixed effects on project outcomes. - 15 - Trade Liberalization 3.20 Liberalization of rice marketing and privatization of rice processing facilities had a major negative impact on SOMALAC, and to some extent SAMANGOKY, as it ruined the financial autonomy principle based on the marketing monopoly rents collected by both project agencies. Deprived from their main resources, project agencies went bankrupt and became primary candidates for liquidation or privatization. 3.21 On the other hand, farmers benefitted substantially from the liberalization of rice marketing, which resulted in a significant increase in paddy producer prices. The audit mission found that, with the exception of one village,' fair competition between traders exists in the Lac Alaotra region and most farmers expressed their satisfaction about the liberalization process.' 3.22 In contrast, liberalization of cotton ginning and marketing had a limited effect on HASYMA and cotton growers. Contrary to expectations, the private sector has not significantly increased its ginning and marketing activities after the liberalization of the subsector. On the contrary, most growers appreciate HASYMA's services and prefer to remain its faithful customers rather than invest in commercial and processing facilities. Therefore, HASYMA is still able to adequately recover its costs, and its financial situation has not been adversely affected by the liberalization measures. 3.23 Free marketing of agricultural inputs was also promoted by the Bank, with mixed results. While private traders are on the increase and a variety of agricultural inputs are available in all project areas, severe problems of product falsification have arisen. At the time of audit, observers in the Lac Alaotra region estimated that about 50 per cent of pesticides and insecticides were falsified and stated that farmers were quite reluctant to use these products. In addition a number of dangerous chemicals, already prohibited in many countries, were freely imported in Madagascar. Remedies, including proper legislation and adequate control, are currently under preparation with Swiss and German technical assistance. On the other hand, most cotton growers continued to rely on Hasyma for the import and supply of agricultural inputs and no quality problem was mentioned. This experience illustrates the need for careful monitoring when importation and trade of agricultural inputs has been liberalized. Liquidation of Project Agencies 3.24 Government divestiture and liquidation or privatization of parastatals were important elements of the Bank-supported structural adjustment process, particularly in the agricultural sector where, in the mid-eighties, about 90 public agencies were involved in all kinds of development and commercial activities. In Madagascar, the decision to abolish a parastatal is made by an inter- ministerial council (Conseil de Surveillance) and applied by a specific agency (D616gation A la Privatisation). 6 By bringing pressure on his fellow villagers, the village's mayor managed to exert a complete rice marketing monopoly on his favor. 7 See PAR of the agricultural Sector Adjustment Credit (Credit 1691-MAG), currently under preparation. - 16 - 3.25 At the time of audit, two of the project agencies had been liquidated: SOMALAC was officially abolished in January 1991, and SAMANGOKY's legal existence came to an end in March 1991. As already mentioned, assets of SOMALAC were auctioned and its personnel laid off, while SAMANGOKY equipment and staff are still in the project site. HASYMA and FANALAMANGA are candidates in the privatization list. 3.26 Effects of agency liquidation have been disastrous for both the Lac Alaotra and Mangoky projects. In addition to a complete lack of maintenance of the irrigation systems, and subsequent reduction of irrigated area and agricultural production, farmer organizations have been unable to survive without the support of project agencies. In Lac Alaotra, water users' associations and credit groups are virtually in abeyance. Water distribution at the tertiary and quaternary levels is chaotic, and collection of water charges has been discontinued. The case of SAMANGOKY, where personnel is still being paid with funds diverted from proceeds from land rent and sale of equipment at the expense of adequate O&M of the irrigation system, is also an illustration of poor planning of the privatization process. 3.27 While the dissolution of the two companies could have been justified sometime after credit closing, the timing of SOMALAC liquidation was particularly inadequate. The company was abolished before all the project civil works had been completed, resulting in some contracts being poorly supervised and the quality of work deficient. With the departure of most SOMALAC personnel ', training efforts have been lost and all research and extension activities have been discontinued, while the Bank-financed National Research and National Extension projects, which were supposed to take over these functions, were not yet effective. 3.28 The hasty decision to dissolve SOMALAC was, to some extent, the result of declining cooperation between the government, the Bank and bilateral assistance. By reviewing project files, the audit found that the quality of project supervision deteriorated in the late eighties. During the first implementation years, supervision frequency was correct (twice a year on average), except for the Cotton Project which was never sufficiently supervised. Missions were adequately staffed in terms of qualification and number of persons (2.0 to 2.8 per mission, depending on the project). Staff continuity was adequate, with the exception of the Study of Antananarivo Plain and Second Mangoro Forestry projects. Cooperation with French cofinancers was excellent: CCCE and FAC participated in most Bank supervision missions of the Lac Alaotra Rice Intensification and Cotton projects, and common aide-memoires were prepared at the end of each mission. In the late eighties, however, supervision mission frequency and staff continuity declined. The government, the Bank and other donors had divergent views on adjustment policies and priorities, and they all somewhat lost interest in the projects. 3.29 A lesson for the Bank is that structural adjustments operations are likely to have direct or indirect effects on implementation and outcome of investment projects. Therefore, there is a need, at the preparation stage of adjustment operations, to carefully identify and analyze the possible It is worth noting that part of the SOMALAC personnel benefitted from the provisions of the Bank Credit No. 1967 (PASAGE), aimed at facilitating reinstatement of government officials in the private sector. - 17 - impact of economic and institutional adjustments on on-going investment projects.! When negative effects are anticipated, corrective actions and related investments should be included in the adjustment operation. In this respect, hybrid loans might be a better instrument than SALs and SECALs to support such corrective measures. 3.30 Project experience has also shown the danger of hastily abolishing a government agency without proper planning, when the possible effects of such decisions have not been properly assessed, and when measures to ensure a smooth transition towards new institutional arrangements have not yet been taken. In the case of these two irrigation projects, the government and the Bank intention was to introduce a completely different Operation and Maintenance system based on contracts with private enterprises. This would have required a transition period, (including a test) before abolishing government institutions. Similarly, support to farmer organizations should not have been discontinued until another public or private system was able to take over this function. 3.31 The lesson is the need for much better correlation between policy and institutional changes to be introduced under SALs and SECALs and activities under on-going investment projects. Poor coordination within the Bank, when investment projects and structural adjustment are under the responsibility of different divisions, may result in policy reforms of SALs and SECALs severely affecting the results and sustainabilty of other Bank-supported operations. 4. FUTURE PROSPECTS A. Irrigation Projects 4.1 Organizing adequate operation and maintenance of the two irrigation projects to stop their decline is now an absolute priority. Project experience has shown that farmers should be able to operate and maintain tertiary and quaternary canals but not the major infrastructure (dams, headworks, primary and secondary irrigation and drainage systems). In each project, frequent silt clearing is needed, requiring heavy machinery and experimented operators. While rural irrigation districts could be able to carry out such Operation and Maintenance function, their efficiency is likely to be limited by insufficient equipment and staffing as well as by late budget allocations, a frequent feature in Madagascar. The government intention to contract the work out, or to grant concessions, to private companies operating under the supervision of irrigation districts, would undoubtedly be a preferable and more flexible solution. 4.2 After the unfortunate experience of the last two years, Lac Alaotra farmers will certainly be reluctant to contribute to finance Operation and Maintenance costs of the main irrigation and drainage system, leaving this charge (equivalent to about USD 125,000/year) to the government However, they will probably accept to renew their financial contribution if, after one year or two, the new Operations and Maintenance system proves satisfactory. In the Mangoky project, the amount 9 In this respect, see also the Morocco Vegetable Production and Marketing Project (OED Report No 8885, dated June 1990) where the changing role of OCE, the main project executing agency, was imposed by a Bank-supported SAL with adverse effects on research and extension activities and abandon of past promotion efforts. - 18 - of land occupation fees and renting (equivalent to about USD 150,000/year) would be more than enough to cover desilting and maintenance costs of the primary canal and secondary systems. 4.3 The fact that CFD (ex CCCE) is still financing an irrigation rehabilitation project in the Lac Alaotra region could be used to revive water users' groups and test new Operation and Maintenance formulas, which could be extended, if successful, to other areas in Madagascar. In Mangoky, where financial autonomy would be possible if services were limited to O&M of the main and secondary canals, concession to a private firm for operating the desilting system and maintaining the irrigation network could be envisaged when SAMANGOKY has been officially dissolved and its personnel properly compensated. B. Privatization of FANALAMANGA and HASYMA 4.4 The two companies suffered from the widespread anarchy which prevailed in Madagascar in 1991-92. The loss of about 20 per cent of its forest badly hit FANALAMANGA, while stealing of cotton and damages to crops by livestock in the north contributed to weakening HASYMA financial situation. 4.5 Finding additional outlets for its wood is currently a high priority for FANALAMANGA and the Bank could probably be helpful in this respect. By nature, FANALAMANGA is a commercial company whose best future may be to become a private enterprise. Because of its unfinished thinning and pruning program, however, the company is not expected to become profitable before 1995. It will also face a cutting capacity problem when one or more pallet factories are in operation, requiring the daily cutting of several hectares of pine, for which the company is currently not properly equipped. Therefore, new investments in wood cutting and loading equipment will be needed. Similarly, internal demand for sawn wood cannot be met because of the current low capacity of FANALAMANGA's sawing facilities, requiring new investment. All such investments should preferably come from the private sector. For all these reasons, full privatization or joint venture agreements with national or foreign firms able to provide both investment capital and markets, would probably be the best option for FANALAMANGA. 4.6 Unlike FANALAMANGA, HASYMA has multiple functions. Because of its support to thousands of smallholders, HASYMA has an important development role that a private and commercial company could not play. Therefore privatization of HASYMA should be approached with extreme caution as it could lead to another SOMALAC-type disaster. A premature or hasty liquidation of HASYMA could result in the dropping of about 8,500 small growers and in retrenching in the large farm cotton producing system of the north. Such solution would be socially and politically unacceptable as smallholders have low incomes and limited alternative resources. HASYMA has also played an important role in the rehabilitation of rural roads, adaptive cotton research and trials, and laboratory services that no other government or private institution has been able to carry out satisfactorily so far. 4.7 On the other hand, a number of HASYMA's activities, including provision of inputs to farmers, seed cotton ginning and lint cotton marketing are commercial by nature. Compared with similar companies in Africa, HASYMA's performance has been termed satisfactory by the Bank and external observers because of its efficient ginning capabilities, relatively low operation costs, and independence from external markets due to the importance of local textile industry. Therefore, the commercial aspects of HASYMA may attract private investors, particularly large farmers, and - 19 - smallholder groups who have a vested interest in the survival of HASYMA. The French company CFDT, which holds 30 per cent of HASYMA's share capital, might also be interested in increasing its participation if some of the constraints now affecting HASYMA (obsolete varieties and insufficient research) are removed. C. Bank Lending Policy 4.8 As noted before, project experience has shown that a vast policy-based lending, like the one which was extended by IDA to Madagascar in the late eighties, may have an adverse effect on investment projects. The question may also be raised as to what extent the policy-based lending of the past years has reduced Bank support for the programs needed to ensure sustainability of past investments. The poor condition of roads and deterioration of services in Madagascar, adversely affecting all sectors of the economy, is perhaps an indication that the Bank may not have done enough to help sustain infrastructure maintenance and development in parallel with the adjustment program.  - 21 - ANNEX 1 STATEMENT OF AGRICULTURAL DEVELOPMENT CREDITS IN MADAGASCAR (AS OF OCTOBER 31, 1992) Project Name Credit No. Approval Date Amount USS M. LAke Alaotra trrigation 214 07/28/70 5.16 Morondava trrigation and rural development 322 06/29/72 15.30 Village Ivestock and rural development 506 07/16774 9.60 Mangoro Forestry 525 12/17t74 6.75 Mangoky Agricultural Development 881 03/06179 12.00 Agricultural Credit 1064 09/)9/80 11.50 Technical Assistance 1086 12/18/80 2.30 Second Mangoro Forestry 1161 06/16/81 20.00 2nd. Livestock and rural development 1211 01/23/82 15.00 Agricultural Institutions T.,A. 1249 05/18/82 5.70 Lac Alaotra Rice Intensification 1337 02/22/83 1.00 Cotton Development 1433 12/22/83 17.80 Agricultural Sector Adjustment 1691 05108/86 53.00 Irrigation Rehabilitation 1589 04/30/85 12.00 2nd. Agricultural Institutions T.A. 1709 06/10/86 10.00 2nd. Agricultural Credit 1804 05/21/87 10.00 Forests Management and Protection 1878 02/16/88 7.00 National Agricultural Research 2042 06/15/89 24.00 Agricultural Extension Pilot 2150 05/31/90 3.68 Livestock Sector 2243 05/16/91 19.80  -23- ANNEX 2 LA C ALA OTRA RICE INTENSIFICATION PROJECT ECONOMIC RATE OF RETURN Project Incremental Paddy Incremental Costs Net Benefit Year Production (Capital % O&M) Tons Value 1 - - 2955 (2955) 2 6805 246 2944 (2698) 3 15527 839 3677 (2838) 4 23427 2374 7015 (4641) 5 15381 1943 2425 (482) 6 26650 4057 2778 1279 7 42658 5203 1630 3573 8 16030 1715 682 1033 9 16030 1741 744 997 10 16030 1631 744 887 11 16030 1681 744 937 12 16030 1774 744 1030 13-22 16-30 2338 744 1594 22-25 16030 2374 744 1630 ERR 7%  - 25 - ATTACHMENT MINFIN - ANTANANARIVO THE WORLD BANK ATT: MR. GRAHAM DONALDSON - CHIEF - AGRICULTURE AND HUMAN DEVELOPMENT DIVISION, OPERATIONS EVALUATION DEPARTMENT SUBJECT: PERFORMANCE AUDIT REPORT REFERENCE: YOUR LETTER DATED 20 AUGUST 1993 I AM PLEASED TO TELL YOU THAT WE DO NOT HAVE ANY PARTICULAR OBSERVATION FOR THIS PERFORMANCE AUDIT REPORT. MINISTER OF FINANCES AND BUDGET THE GENERAL SECRETARIAT HENRI RANAIVOSOLOFO