Madagascar - Second Environment Program Project

Document of The International Development Association acting as Administrator of the Interim Trust Fund FOR OFFICIAL USE ONLY Report No. P-6985 MAG MEMORANDUM AND RECOMMENDATION OF THE MANAGING DIRECTOR TO THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION ON A PROPOSED INTERIM FUND CREDIT IN THE AMOUNT OF SDR 20.6 MILLION TO THE REPUBLIC OF MADAGASCAR FOR A SECOND ENVIRONMENT PROGRAM October 28, 1996 Environment Group Africa Region This document has restricted distribution and may be used by recipients only in the performance of their duties. Its contents may not otherwise be disclosed without World Bank authorization. - 11 - CURRENCY EQUIVALENTS Currency Unit Malagasy Franc (FMG) US$ 1.00 FMG 4,200 SDR I US$ 1.45851 WEIGHTS AND MEASURES Metric system MALAGASY FISCAL YEAR January 1 - December 31 LIST OF ACRONYMS AGIR: Appui A la Gestion de 1'environnement A travers des Instruments R6gionalis6s et I'approche locale (Regional and Local Environment Management Support Component) ANAE: Association Nationale d'Actions Environnementales (National Association for Environmental Actions) ANGAP: Association Nationale pour la Gestion des Aires Prot6g6es (National Association for the Management of Protected Areas) APPP: Annual Participatory Programming Process CAPE: Composante Aires Prot6g6es et Ecotourisme COS: Comite d'Orientation et de Suivi (Steering Committee of the Environment Program) DD: Direction des Domaines (Land Titling Directorate) DEF: Direction des Eaux et Forets (Water and Forests Directorate) EPI, EP2, EP3: Environment Program Phase 1, Phase 2, Phase 3 ESFUM: Eco-Syst6mes Forestiers A Usage Multiple (Multiple-Use Forest Ecosystems) FORAGE: Fonds R6gional d'Appui A la Gestion de l'Environnement (Regional Fund for Environment Management) FTM: National Geographic Institute GEF: Global Environment Facility ICDP: Integrated Conservation and Development Project IFAD: international Fund for Agriculture Development ITF Interim Trust Fund NTFP: Non-Timber Forestry Products ONE: Office National de I'Environnement (National Environment Office) PPDOP: Participatory Process for the Definition of Options and Priorities PRIF: Pre-investment Financing RPC: Regional Programming Committee UNDP: United Nations Development Program USAID: United States Agency for International Development WWF: World Wildlife Fund Vice President: Mr. Callisto Madavo Country Director: Mr. Michael Sarris Technical Manager: Ms. Cynthia Cook Task Team Leader: Mr. Michel Simon FOR OFFICIAL USE ONLY - 111 - MADAGASCAR SECOND ENVIRONMENT PROGRAM Program Summary Borrower: Republic of Madagascar Executing Agency: Ministry of Environment - National Environment Office Beneficiary: Not applicable Poverty: A large number of low income rural and urban families will benefit from the Program Credit Amount: ITF Credit of SDR 20.6 million (US$30 million equivalent) Terms: Standard IDA terms with a maturity of 40 years and a 10-year grace period Proposed GEF grant: SDR 8.9 million (US$ 12.8 million equivalent) (part of a total grant of US$ 20.8 million equivalent) GEF Focal Area Biodiversity GEF Country Eligibility Convention ratified as of March 4, 1996 GEF Implementing Agencies UNDP (US$ 8.0 million), World Bank (US$ 12.8 million) GEF Preparation Costs: PRIF US$ 0.5 million Financing Plan: See Schedule A Economic rate of return: Not applicable Staff Appraisal Report: Report number 15952 MAG This document has restricted distribution and may be used by recipients only in the performance of their duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE MANAGING DIRECTOR TO THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION ON A PROPOSED ITF CREDIT TO THE REPUBLIC OF MADAGASCAR FOR A SECOND ENVIRONMENT PROGRAM 1. I submit for your approval the following memorandum and recommendation on a proposed Interim Trust Fund development credit to the Republic of Madagascar for SDR 20.6 million, the equivalent of US$ 30.0 million, on standard IDA terms with a maturity of 40 years and a 10-year grace period. to finance the country's Second Environment Program. The Borrower will contribute US$ 31 million, GEF US$ 20.8 million (US$ 12.8 million to be managed by the Bank, the other part by UNDP), IFAD US$ 8.1 million (with IDA acting as Cooperating Institution), and other donors US$ 65.1 million. 2. Madagascar is well known for its unique natural environment. The international conservation community has identified the country's ecology and biological diversity as one of the planet's richest. Nearly seventy-five percent of its estimated 200,000 living species are endemic, i.e. found only in Madagascar. Unfortunately, Madagascar is also known for extensive environmental degradation. Mainly because of slash and burn agriculture, almost eighty- percent of the country's original forest cover has disappeared or is severely degraded. This also results in the loss of topsoil (up to 150-200 tons per hectare per year on bare land). Deforestation, bush fires, and extensive cropping of marginal lands are removing the ground cover necessary to keep in place the highly erodible soils of this unusual land. At the current deforestation rate, Madagascar's forests would disappear in about two-three decades. This threatens not only biological diversity, but watershed and soil stability vital to the agrarian economy. 3. At the root of Madagascar's environmental problems is the economy's failure to grow. Since independence in 1960, misguided development policies have led per-capita GDP to decline by about half, the incidence of poverty to double, and most socio-economic indicators to decline. Madagascar is one of the few countries in the world where children will be less well educated than their parents. This situation is all the more tragic given that Madagascar shares many of the characteristics of neighboring Mauritius or more distant Indonesia where effective development policies have been so successful at dramatically reducing poverty in less than a generation. 4. Following the country's peaceful transition to a democratic regime in the early 1990s, there were great expectations that the country would adopt more growth-oriented economic policies and start reversing several decades of economic decline. This breakthrough has not yet materialized and the conditions necessary to stop poverty from spreading have yet to be established. Therefore, the vast majority (seventy-percent) of Madagascar's population (growing at over 3 percent per year) will continue to depend for its livelihood on low-productivity extensive subsistence agriculture--the main and most severe source of environmental degradation. The environmental program proposed in this document has thus to be understood as one that will endow the country with the capacity to manage its environmental resources more effectively and reduce the rate at which its natural resources are being depleted. It will not be -2- able to stop environmental degradation altogether or to reverse it. This can only be achieved through an improvement in Madagascar's development performance. Agreement has been reached recently with the IMF and the Association on a policy framework that opens the way to structural adjustement, thus giving hope again that such improvement will materialize. As in many other developing countries, the ultimate outcome for Madagascar's environment will depend upon the economy's ability to intensify the use of land and develop non-agricultural sources of incomes. Previous responses to the problem. 5. Aware of these problems, the Government prepared in 1988 a National Environmental Action Plan (NEAP) with the support of bilateral and multilateral development agencies, including NGOs. The NEAP envisages establishing over fifteen years a policy, regulatory and institutional framework for the management of the environment and the resolution of its most severe problems: deforestation, soil degradation, and brown agenda issues. In 1990, the NEAP was given legal power by the adoption of the National Environment Charter and the National Environmental Policy (Law 90-033, December 21, 1990). Since 1990, much has been achieved under EPI in terms of building institutions, developing human resources, and establishing sound environmental policies, methods, tolls and procedures. Main strengths include the effective development of institutions and partnerships, high visibility and a substantial demonstration effect, both domestically and internationally, and effective field results (see above). Weaknesses were a slow and uneven take-off, insufficient program integration, consolidated monitoring not yet operational, and an as yet insufficient role given to environment concerns when formulating policies that require hard choices, whether at national or local level. Of note are four initiatives: 1) Disseminating the use of environmentally friendly agriculture and forestry exploitation techniques, as well as to improve the management of protected areas, and the establishment of new institutions for that purpose: (a) Association Nationale D'Actions Environnementales, ANAE, which specializes in designing and disseminating community-based soil conservation and watershed management projects and will have completed 1,000 mini-projects covering 150,000 hectares directly benefiting 33,000 families (with at least an equal number benefiting from demonstration effects); and (b) Association Nationale pour la gestion des aires protegdes, ANGAP that contracted out the establishment and management of twenty one national parks with 1,000,000 hectares. 2) Building the knowledge base required for a better management of the country's environmental resources through: (a) testing concepts to protect and manage biodiversity (such as integrated conservation and development projects for protected areas); and (b) developing tools for improving land management such as mapping and remote sensing and reinforcing the environmental data base. 3) Establishing the institutional base for effective environmental management such as: (a) the creation of ANAE, ANGAP, and the National Environment Office (ONE); (b) the reinforcement of existing institutions such as the Department des Eaux et Forets (DEF) and the National Geographic Institute (FTM) that has already significantly improved its mapping capacity and produced aerials photographs over 80,000 km2 of protected areas; (c) the enactment of legislation allowing the creation of foundations and trust funds for environmental protection (Tany Meva); (d) the formulation of a new forestry policy (now being translated into legislation) promoting the decentralization of forest -3- management to local governments as well as to local communities, under negotiated contractual arrangements that will spell out the management system and distribution of revenues; a more rational system for granting logging permits; and reactivating a National Forestry Fund to manage cost recovery from stumpage fees; (e) introducing cadastral operations when this can improve the security of land tenure; and (f) introducing policies, norms and regulations in a number of sectors (e.g. tourism, road construction, industry) in order to limit or mitigate negative environmental impacts. 4) Promoting environmental sensitization, education and training, ONE developed activities in promotion, video, and training. Lessons learned. 6. The environmental management strategy presented in paragraph 7 incorporates all important lessons which can be drawn from the first phase of the Environment Program, including use of the results of beneficiary assessment and other participatory processes that were carried out as part of EP2 formulation. These concern the importance of impact evaluation, institutions, program scope and sustainability, and the importance of community involvement, as outlined below: 1) Impact evaluation. There has been no effort thus far at evaluating the impact of the policy framework on the environment--such as taxation of agricultural exports, the composition of public spending, or the investment regime. At the level of the operations, inadequate attention has been given to evaluating costs and benefits associated with environmental protection activities. For example, it is only very recently that ANAE started collecting the biophysical data necessary for evaluating on-site benefits associated with the introduction of more environmentally-friendly agricultural practices. However, systems to collect and evaluate data for estimating off-site benefits are yet to be developed. Similarly, not enough analysis has been carried out to evaluate benefits from proper exploitation of non-timber forestry products (e.g. medicinal plants, screening of plants for genetic engineering purposes), as well as the potential impact of eco-tourism development. Developing this knowledge is critical not only to orient and prioritize environmental initiatives, but also to help in the formulation of policies and to determine the extent to which farmers should be subsidized to shift towards more environmentally-friendly agricultural practices. 2) Institutions. The first phase of the environment program involved the establishment of several new institutions. Building capacity within these new institutions has taken time -- even more time than initially anticipated -- and has absorbed much of the efforts of this program. Although the impact of this work is difficult to measure, it is clear that key results have been achieved: ONE is well established in their role as both a coordinating and policy formulation agency; ANGAP and ANAE have developed a clear vision of their mission and their mandate is growing. Now that the various agencies have reached their cruising speed, clarifying their roles and mandates vis-h-vis other Central Government agencies is essential; this has been spelled out in detail in a recently produced Manual of Inter-institutional Relationships. 3) Program scope. One central idea behind the design of the first Environment Program was to integrate all activities which support the environment into a single -4- program -- particularly those activities concerning biodiversity conservation, soil conservation and policy development. This integration helped foster priority-setting on a national scale and coordination of donor funding, as well as creating synergy between closely linked programs (e.g. improved land security as a means of improving soil, water and biodiversity conservation). However, the result of integrating all of these issues into the EP 1 was the creation of an operation that was relatively complex for new institutions to manage. In the second phase, the rationale for maintaining such an integration is still the same. In addition, there are further environmental concerns which the Malagasy would like to address (e.g. improvement of marine and coastal environment, and improvement of environmental policies and standards in urban areas), as a follow-up to research and policy formulation under EP1. It will be essential to keep improving the existing agency management mechanisms in order to maintain the Environment Program within the limits of the Government's ability to implement it. As sectoral programs increasingly take the environment into account, another challenge will be to determine which are the environment-related activities which could be better carried out within the context of sector programs and thus be left out of the Second Phase Program (EP2). 4) Sustainability. Inadequate attention has been paid to the financial sustainability of the country's environmental efforts. At present, about 90 percent of the costs of environmental management are financed by foreign development agencies. More specifically, the long term financial sustainability of some of the activities initiated under the EPI is not clear. This is particularly the case for the Integrated Conservation and Development Projects which have been started in some of the Protected Areas. Under its current economic situation, Madagascar cannot afford to protect its biodiversity patrimony alone. The expected global benefits lead naturally to cost-sharing with the international community, hence the opportunity to use GEF resources. 5) Community involvement. Another very clear lesson learned in the course of the first phase, is the importance of working with the communities affected in the preparation and implementation of any activity. There has been insufficient recognition that environmental outcomes are the result of farmers' land use management and production decisions and that they are the key to the future of Madagascar's environment. Working with communities is crucial, as the ownership created when communities are involved increases the pace of implementation, the positive impact on the environment and the sustainability of this impact. This is now widely recognized in the country, and it is anticipated that all future programs will rely heavily on local participation, including beneficiary assessment. The current proposal. 7. Environmental management strategy. Depletion of Madagascar's natural resource base can be reduced by changing the enabling policies, institutions, incentives, and other conditions so that resource users have the authority to manage their own resources, and the responsibility and incentives to do so in a sustainable manner. Environmental outcomes are the by-product of land use management and production decisions. In the absence of a land management and agricultural production policy, there is no viable resource conservation policy, because the method by which people manage land and production options determines their use of the forest. In particular, the realization that biodiversity cannot be isolated from other environmental concerns has led to the development of a regional/local approach to biodiversity -5- conservation under EP2 that would be complemented by agricultural and other income generating activities that also aim at improving the management of natural resources at the local level. Therefore, the environmental strategy needs to increase the emphasis on rural development and smallholder land management of farmland and open access lands, especially in the areas where population pressure is the greatest, which are often far from the protected forests and parks. This approach would be implemented within a context which fosters better integration and sectoral links with the ongoing decentralization process, rural development efforts and regional growth pole activities with a spatial definition beyond the narrowly defined peripheral zones of the protected areas. The design of the program takes into account the outcome of all this work. The EP2 would complement the activities undertaken under several agricultural programs (extension, research, irrigation, livestock) that are also aimed at improving the management of natural resources at the farm level; more generally, it would be a key part of a global development strategy that combines macro-economic stabilization, structural reform and the promotion of private sector investment and export-led growth. 8. Program Objectives and Main Features. The program would be the second phase of implementation of the NEAP. It would continue and strengthen activities already launched under the first phase and initiate work in new areas where environment problems are critical. It emphasizes decentralization and local management of natural resources, particularly forests, as well as mechanisms to promote synergy - both between EP2 activities and more generally with other development programs. The objectives of the program are: i) to reduce the rate of current environmental degradation; ii) to promote sustainable use of natural resources, including soil, water, forest cover and biodiversity; and iii) to enable environmental considerations to become an integral part of macroeconomic and sectoral management of the country. The proposed Second Environment Program is part of a new generation of operations that have the following main characteristics: a) It covers all or most priority activities related to the environment; b) it is prepared by local stakeholders; c) it is supported by all donors active in the environment in the country; d) it minimizes reliance on international long-term consultants; and e) it involves common implementation arrangements (e.g. budgeting, monitoring and evaluation). 9. Program description. The program is defined as two sets of components, corresponding respectively to field operations and environmental management tools. Field Operations fall under two categories: Specialized Sub-sector Activities, corresponding to about eighty per cent of program cost, to improve the management of natural resources, including soil, water, forest, coastal zones and biodiversity, and urban problems; and Regional Programming and Local Management (AGIR), to implement generic mechanisms at the regional and local level to support regionalization of programming and local management of natural resources. Environmental management tools are required in terms of drawing an inventory of natural resources, creating effective monitoring systems to track their evolution, formulating environmental strategies and policies, and undertaking necessary environmental analysis and management. -6- A) Specialized Sub-sector Activities include five components: 1) Sustainable Soil and Water Management; US$ 43.5 million: Building on its accumulated experience, ANAE would expand the regional scope of its activities to reach 4,000 micro-projects mostly for improved watershed management and sustainable agriculture demanded by local communities, directly affecting 200,000 ha and benefiting 100,000 families. Previous experience suggests that for each family directly benefiting from ANAE activities, another 0.5 to I benefits indirectly by adopting new agricultural practices, and 5 benefit from externalities. The modus-operandi of the program is that communities need to request ANAE services and be willing to pay for a portion of the costs. ANAE would then conduct a quick evaluation of the scheme, including cost- benefit analysis, and agree to sponsor the mini-scheme only when the expected rate of return is above a certain threshold. This component also includes six watershed management schemes aiming at the protection of large scale infrastructure. 2) Multiple-use Forest Ecosystem Management; US$ 29.9 million: In the case of forestry management, the main focus of the program is to begin putting into effect the forestry policies developed under EPI by giving to local communities responsibility for forest management (whereby local communities utilize the forest on an environmentally sustainable basis by extracting timber, wood for charcoal and other forest products). A number of gazetted forests and community forests would be put under sustainable management, for a total of 580,000 ha at full development (out of a total of about four million hectares of gazetted forests and a total forest cover of about 8 million hectares). The modus operandi of this scheme will be similar to that which is managed by ANAE-- that is, there will be a screening process and ex-ante evaluation of economic benefits, and financing will only be forthcoming for projects with rates of return above a certain threshold. 3) National Parks and Ecotourism; US$ 43.1 million: This consists of establishing a network of protected areas, 38 areas covering 1.4 million hectares, 21 of which are already well advanced under EPI, through: (a) conducting survey work, proper delineation and associated legal action; (b) provision of infrastructure, equipment and staff to ensure effective conservation; (c) carrying out applied conservation research programs to provide the basis for effective monitoring of environmental indicators; and (d) promoting environmental awareness and strengthening environmental education. There has been no attempt to quantify the economic benefits of this component because any analysis would be extremely speculative. What will be important in this component of the program is to ensure its financial sustainability without significant government support. The promotion of ecotourism will be an important part of this component but at this stage it is unclear whether it will be able to generate as many resources as has been the case in other African countries. Therefore, this component will rely to a large extent on GEF financing. 4) Marine and Coastal Environment; US$ 6.6 million: Given the absence of coastal and marine management in the first phase, the main focus would be on establishing national and multi-local coastal resource management plans, and on the formulation of recommendations for a new generation of marine parks in Madagascar. The main benefits of this component will come from the improved productivity of the country's -7- coastal areas through the establishment of sound management practices for mangroves, fisheries, tourism development, and aquaculture among others. 5) Urban Environment; (cost included in other components) This component includes: (i) updating of the Urban Code; (ii) urban management activities by communities and local Governments, under the FORAGE mechanism presented below. Main benefits would come from improved living conditions and reduction of health hazards. B) Regional Programming and Local Management (AGIR), US$ 14.1 million: includes three components: 1) Support to Local Natural Resource (NR) Management and Land Tenure Security; the two objectives are (i) to enable transfer of management rights on public land, on a voluntary basis, from the state to village communities and to clarify the various land tenure rights in these villages; and (ii) redefine land management policies for the longer term. The first objective would be met by: (i) setting-up the appropriate legal and regulatory framework; (ii) creating a body of environmental mediators to facilitate the dialogue between state representatives and villages; (iii) training environmental mediators; (iv) building the capacity of the land-tenure administration (Direction des Domaines); and (v) implementing the scheme at the level of 150-200 villages, by mobilizing operational teams which include a mediator, technical specialists and surveyors. During the initial phase (two or three years), ONE will directly manage the entire process. Beyond this initial phase, the operational teams will be contracted directly by sub-sector components in answer to villages request. To meet the second objective, the country would carry out a comprehensive participatory process (at national and decentralized levels) aiming at reassessing land use right policies and developing consensus on the necessary evolution of public land management (particularly in relation with decentralization). The expected outcome of this last process would be a revised Land Law (Code foncier). 2) Support to Regional Programming and Spatial Analysis; The participatory design of the program established the need for a new mode of addressing the root causes of biodiversity loss and other natural resources degradation in Madagascar, requiring technical analytical work (e. g. watershed management, ecological corridors, urban environment problems), the formulation of local environmental strategies, and creation of proper stakeholders' commitment through decentralization. Small regional technical units would be established to provide support to EP2 Regional Programming Committees (RPCs) for program management, and formulation of sub-projects for financing by the Regional Fund presented below. 3) Regional Fund for Environmental Management (FORAGE); In many cases some critical piece of infrastructure can have a decisive effect on returns and benefits of environmental protection, therefore a special fund will be established to finance on a demand-driven basis environment management sub-projects (e.g. watershed management, urban environment, development activities around Protected Areas) sponsored by local governments or private organizations and meeting pre-defined eligibility criteria. Adequate economic returns would be one of the criteria. Given the novel nature of the proposal, only limited financing has been allocated, further allocation would be contingent on the outcome of the mid-term review of the program. -8- C) Environmental management tools; US$ 17.2 million: 1) Strategic activities would include two components: (i) formulating and transferring environmental policies, strategies and instruments (sector policies, urban environment policy, analytical and planning tools, economic instruments) and (ii) making environmental impact assessment operational by setting up environment units at the level of all sector ministries. 2) Support activities; such activities would take the form of free-standing components only to the extent that they cannot be incorporated into the main components listed above; this would include five components: research, communication-education-training, geographic instruments, an environmental information system, and program coordination and management, including monitoring and evaluation. 10. Program implementation. Implementation will be carried out by the various line agencies that were set-up during the first phase, namely ONE (policy formulation, monitoring, information systems, marine and urban environment, program management), ANGAP (protected areas management), ANAE (village level mini-projects and FORAGE), DEF (forest management, watershed management), DD (land use security) and FTM (geographic instruments). High level policy guidance will be entrusted to an independent National Environment Council. Policy level coordination will be the responsibility of an Interministerial Environment Committee, also under creation; the State Secretary for the Environment (SEE), under the Prime Minister's office, will chair the Committee on behalf of the Prime Minister. Operational level coordination will be carried out by ONE. The need to better define the border line between the EP2 and other programs as well as to seek synergy between such programs would be addressed through the regionalization of the Annual Participatory Programming Process (APPP) and the proposed Regional Fund. Under decentralization, annual work plans will be defined at the regional level, and regions will coordinate EP2 components with other programs, as well as focus on various social and economic aspects of environmental problems. It is clearly understood that decentralization will take some time. Therefore, temporary Regional Programming Committees (RPCs) will be established until the regional governments are fully prepared to assume their new roles. RPCs, comprised of all key stakeholders, will be established to set priorities for the activities that are to be funded under EP2. 11. Program cost and financing. The cost of the program, including taxes and contingencies, is estimated at US$ 155 million. It is similar to the actual cost of the First Phase Program (about US$ 150 million, most of it tax exempt). IDA would finance US$ 30 million out of the Interim Trust Fund (ITF), IFAD US$ 8.1 million (IDA being the Cooperating Institution) and GEF US$ 20.8 million (GEF financing would be managed parttly by UNDP and partly by the Bank). Government would finance about US$ 31.0 million (4.0 million taxes, 7.7 million tax- exempt financing, and 19.3 million through tax exemption against external grants). In addition, the following donors are expected to participate to the financing of the program: Sustainable soil and water management: France, Germany, Japan, Norway, Switzerland Multiple-use Forest Ecosystem Management: France, Germany, Switzerland, USAID, WWF National Parks and Ecotourism EU, France, Holland, USAID, WWF -9- Marine and coastal environment UNDP, WWF Regional and Local Management, FORAGE: France, UNDP, USAID Strategic activities France, UNDP, USAID Support activities France, USAID, WWF 12. Rationale for IDAJITF Involvement. The Country Assistance Strategy for Madagascar was discussed by the Executive Directors on July 12, 1994 and a progress report was discussed on April 18, 1996. The Bank Group's overarching objectives in Madagascar are to help the government promote private sector-export-led growth, attack poverty, improve natural resource management, build local capacity and improve project implementation. The proposed project is consistent with the country strategy and contributes to meeting most of the foregoing objectives. The Bank has played a leading role since 1987 in the formulation and implementation of the NEAP. Continued involvement is essential to sustain the Government's commitment to difficult and critical changes in its public investment program, which includes promoting the transition from projects to programs, and mobilizing the support of other donors. The Bank also has a key role to play in helping the country to mobilize GEF funding in relation to the global nature of the benefits that are expected from improved biodiversity protection. Proposals for IDA and GEF financing were specified at the time of joint program appraisal. GEF funding would be focused on some specific components, namely National Parks, Multi-purpose Forest Eco-systems Management, and Capacity Building for Support to regional programming and spatial analysis. IDA would act as the lender of last resort, with the appraisal and supervision process focusing on the program as a whole and the use of ITF resources defined through the annual programming process on the basis of the coverage and availability of other donor financing. 13. Issues and actions. The following are the key issues that were raised during appraisal and negotiations: = Program size and complexity. All the components that could not be subjected to cost-benefit or cost effectiveness analysis have been significantly scaled down during appraisal. The results have been to reduce the complexity of the design, bring total cost in line with financing pledges, and to strengthen the link to be established during implementation between achievements and resource allocation. - Economic analysis. Ex-ante economic analysis of sub-projects will be introduced in soil conservation and forest management components, as well as for the Regional Fund (FORAGE), and practical steps to be taken to implement it have been agreed upon. - Cost recovery. Although it has been agreed that cost recovery mechanisms would be introduced for ANAE and FORAGE (see paragraph 18), a prerequisite would be for Government to review subsidy and/or cost recovery policies of other operations (e.g. the Bank-financed Social Fund) in order to ensure consistency. Cost recovery for the Forest Management activities would be through the standard mechanisms of stumpage fees and other levies, using the existing National Forestry Fund. The level of fees and recovery was reviewed, and prospects are satisfactory. => Gender aspects. Men and women play a different role in the management of the natural resource base. Although all the components of the EPI include activities that specifically benefit women, the analysis carried out as part of appraisal indicates that a more pro-active approach was warranted. A working group has been set up, that has identified four areas of focus, and corresponding objectives and monitoring indicators are under development. => Implementation arrangements. Within the new Government structure, the responsibility for the Environment Program is now under the authority of a Minister. This is a welcome - 10- development, in line with the inter-ministerial nature of many of the program's activities. The capacity of the various agencies to implement the program was discussed during appraisal. It has been confirmed that the role and responsibilities of the various implementing agencies will be spelled out in an Implementation Manual, and a draft Manual was reviewed during negotiations. The Manual includes draft Implementation Agreements between Government and all implementing agencies, as well as an inter-agency agreement spelling out the way they will work together. Key monitoring indicators will also be part of the Manual and Agreements. Achievement of objectives will be taken into account for resource allocation during the annual budgetary process. Donor coordination. Multi-donor supervision missions will be organized twice a year, once to review past year achievements and once to agree upon the annual program of work and budget for the following year. The first mission has been scheduled for mid-November 1996, to coincide with the annual meeting of the COS (Comit6 d'Orientation et de Suivi), the formal Steering Committee of the Program. To help maintain close coordination among donors during implementation, USAID, France and the Bank have agreed to cofinance one resident supervision staff. 14. Environmental aspects. The whole program is geared towards the improvement of natural resource management and other environmental concerns. 15. Program objective categories. The program will contribute to the following Bank Group objectives: (i) natural resources management; (ii) poverty alleviation; and (iii) institutional development and capacity building. 16. Participatory approach and coordination with donors. Stakeholder participation and governmental commitment were central elements of the project design. The process of formulating the second phase program is being carried out entirely by Malagasy agencies. The initial participatory process, during the period June-December 1994, resulted in the preparation of an identification report that was discussed at the December 94 meeting of the program's Steering Committee (COS: Comit6 d'Orientation et de Suivi). Detailed preparation work was completed in November 1995. It included a GEF-funded Participatory Process for the Definition of Options and Priorities (PPDOP) in which Government, local communities and other stakeholders worked together to define problems, establish priorities, and discuss future actions. The formulation of new forest policies and legislation on local community management of natural resources were also the result of participatory processes. In addition, three participatory priority-setting workshops have been carried out at regional level, as well as a beneficiary assessment to evaluate the first-phase activities involving local populations (i.e. land titling, micro-projects for erosion control, integrated conservation and development operations), and the conclusions were used as an input into program design and appraisal. Finally, through successive multi-donor missions, all donors and international NGOs involved in the environment in Madagascar have worked jointly with the Malagasy agencies - an infrequent occurrence in Madagascar - in order to seek full consensus on strategies and priorities. Proposals for Bank and GEF participation in the Program were defined during the missions. The preparation documents have been updated by the Malagasy. 17. Program benefits. Long term sustainable growth of the country cannot be achieved in the absence of proper management of its natural resources, and the cost of inaction would be higher than the cost of the program. The program would combine concrete actions which have short term measurable benefits with long term undertakings (e.g. policies, education) to ensure - 11 - sustainability. Direct beneficiaries would include communities affected by the soil conservation schemes and the development activities of the conservation projects (protected areas, forest management, coastal management). Most beneficiaries would be within the poorest segments of the population. Induced benefits would come from the introduction of improved environmental impact analysis and mitigation measures for public investment, as well as from private investments in ecotourism facilities and services that would be induced by the program. Models have been developed that demonstrate that key activities can be economically justified under a fairly wide range of initial conditions: (i) Sustainable soil and water management: This component would benefit directly 100,000 families, and indirectly benefit, through externalities some 500,000 families. Models show economic rates of return ranging from II to over 75 per cent. Indirect benefits on reduced downstream siltation have not been quantified, but are considered substantial, so that total return would be in fact higher. (ii) National Parks and Ecotourism: Protected areas in Madagascar are primarily justified by the global biodiversity benefits. Given Madagascar's exceptional biodiversity, it is safe to state that global benefits much exceed the cost of the program, and that the issue is only one of cost-effectiveness and financial sustainability. (iii) Multiple-use Forest Ecosystem Management: The benefits of management stem from ensuring the continuing flow of values from biodiversity, non-timber forest products, protection of off-site benefits, sawnwood, and charcoal. The analysis shows that direct costs of forest management are largely compensated by direct timber and charcoal benefits (net present value of US$ 16 million and internal rate of return of 22% for the management of 580,000 ha over the EP2 and EP3 period). 18. Anticipated Global Environmental Benefits. EP2, and particularly the GEF supported components, will help conserve Madagascar's unique biological diversity. Madagascar has higher numbers of endemic species, more higher-order endemism and more genetic information per unit area than perhaps anywhere on earth. This fact more than any other pushes Madagascar to the top of the global conservation priority list. A hectare of forest lost in Madagascar has a greater negative impact on global biodiversity than a hectare of forest lost virtually anywhere else on the planet. 19. Sustainability. The financial sustainability of protected areas is a major issue. In the long run, the combination of income from eco-tourism (entrance fees to parks, royalties on private activities that benefit from the existence of a park, etc.) with the revenue from capital investment (e.g. through a trust fund or foundation such as the one recently established in the country) should be sufficient to ensure such a viability. In the short to medium term, external financing will be required. Given the nature of ANGAP's activity, there is a clear case for applying some GEF funds to this part of the EP2. Financial sustainability of forestry operations would come from a decrease in the need for Government intervention together with an improvement in recovery of stumpage fees and other levies. Another issue is the replicability of the use of subsidy (ANAE mini-projects and FORAGE). Subsidies are considered justified in the short term to offset the risks of change to promote sustainable natural resource management. In order to ensure long-term sustainability of the schemes, cost recovery would be progressively introduced. The level of cost recovery would depend on the importance of direct benefits versus externalities. Fifty per cent of recovered funds would remain with ANAE, and thus contribute to the financial viability of the institution. The other fifty per cent would be managed at village community level to finance expansion and/or maintenance of mini-project investments. 20. Risks. Policy risks. There are strong interactions between environmental degradation. population increase and economic stagnation, including the decline of agriculture, so that the - 12 - IMpact of the environment program would be limited in the absence of significant progress on the other fronts. Policies that discriminate against agriculture have a direct impact on incentives tor deforestation and shifting cultivation; more generally speaking, the incentive framework for agricultural development (e.g. rural infrastructure and access to markets, availability of social and financial services) determines land use intensification and thus has a direct influence on natural resources management practices. Policies that discriminate against tourism development (e.g. visa regime, air transport monopoly) would also affect the program negatively, because ecotourism is a major potential source of income in protected areas. Such issues are being addressed under the on-going structural adjustment dialogue. 21. Institutional risks are related to potential political instability resulting, in particular, in policies that would affect the institutional set-up and promote inter-institutional competition. Such a situation would compromise program implementation, as happened in 1994 with the creation of a separate ministry for the environment, which sought to control the resources of existing agencies and programs. The proposed institutional arrangements (paragraph 11) would address these issues by formalizing the distribution of responsibilities and thus providing for more stability. Other risks are related to weak implementation capacity. Formal implementation capacity analysis has already been carried out for ONE, and is on-going or planned for other agencies. Such reviews are helping the institutions clarify their mandate, streamline their organizational structure and working procedures, assess their human resources and program their training requirements. Finally, integrating Madagascar's present governmental agencies into the regional approach to natural resource management will be a challenge. Fortunately, the ongoing decentralization process is fully compatible with this objective. 22. Recommendation. I am satisfied that the proposed Interim Fund Credit would comply with Resolution No. 184, adopted by the Board of Governors of the Association on June 26, 1996, establishing the Interim Trust Fund and I recommend that the President approve it. Gautam S. Kaji Managing Director Attachments Washington, D.C. October 28, 1996 Schedule A Page 1 of 2 PROGRAM COST AND FINANCING PLAN Components Project Cost Summary % % Total '(000 US$) Foreign Local Foreign Total Exchange Base Costs A. Field Operations 1. Specialized Sub-sector activities a. Sustainable Soil and Water Management Soil Conservation and Improvement of Rural Life 24,834.0 2,380.4 27,214.4 9 19 Ankarafantsika Watershed 3,707.1 3,563.9 7,271.0 49 5 Other Watershed Management 3,172.4 2,057.7 5,230.1 39 4 Subtotal Sustainable Soil and Water Management 31,713.5 8,002.0 39,715.5 20 28 b. Multiple Use Forest Ecosystem Management 13,539.8 13,551.7 27,091.6 50 19 c. PCDI and CAPE Integrated Conservation and Development Projects 10,210.1 0.0 10,210.1 0 7 (PCDI) National Parks and Ecotourism 20,209.9 9,334.1 29,544.0 32 21 Subtotal PCDI and CAPE 30,420.0 9,334.1 39,754.1 23 28 d. Marine and Coastal Environment 3,188.0 2,872.3 6,060.2 47 4 2. Regional Programming and Local Management Support to Local NR Management 3,093.2 3,206.9 6,300.0 51 4 Support to Regional Programming 2,428.0 1,349.3 3,777.2 36 3 Regional Fund for Environmental Management 2,956.8 0.0 2,956.8 0 2 Subtotal Regional Programming and Local 8,477.9 4,556.1 13,034.0 35 9 Management Subtotal Field Operations 87,339.2 38,316.2 125,655.5 30 89 B. Strategic Activities 1. Policies, Strategies, Instruments 759.0 1,631.0 2,390.0 68 2 2. Making EIA Operational 801.3 636.7 1,438.0 44 1 Subtotal Strategic Activities 1,560.3 2,267.7 3,828.0 59 3 C. Support Activities 1. Environmental Research 1,219.3 1,031.0 2,250.3 46 2 2. Education, Training 766.8 1,033.3 1,800.0 57 1 3. Geographic Instruments 440.0 660.0 1,100.0 60 1 4. Environmental Information System 639.5 885.5 1,525.0 58 1 5. Program Coordination and Management 3,345.0 1,834.1 5,179.1 35 4 Subtotal Support Activities 6,410.6 5,443.8 11,854.4 46 8 Total BASELINE COSTS 95,310.1 46,027.7 141,337.8 33 100 Physical Contingencies 4,143.2 2,190.7 6,333.9 35 4 Price Contingencies 5,080.1 2,254.8 7,334.9 31 5 Total PROJECT COSTS 104,533.4 50,473.2 155,006.6 33 110 Estimated financing plan (million of US dollars) Source of financing Local Foreign Total ITF 20.0 10.0 30.0 GEF 12.5 08.3 20.8 IFAD 3.0 5.1 8.1 Other donors 35.0 14.6 49.6 On-going donor-supported projects 3.0 12.5 15.5 Government 1/ 31.0 - 31.0 Total 104.5 50.5 155.0 1/ including US$ 19.3 million of tax exemptions, 4.0 million of budgeted taxes and 7.7 million of net-of-tax financing Schedule A Page 2 of 2 Summary of Proposed Procurement Arrangements Procurement Method Procurement International National Arrangements Competitive Competitive ('000 US$) Bidding Bidding Other N.B.F. Total A. Operating Costs - - 24,108 20,473 44,581 (9,183) (9,183) (6,487) (6,487) B. Grants for Sub-Projects - - 25,067 1,945 27,013 (12,294) (12,294) (0) (0) (7,100) (7,100) C. Consultant Services, - - 12,950 22,094 35,044 Studies, Training (4,215) (4,215) (3,202) (3,202) (1,000) (1,000) D. Goods and Vehicles 2,844 769 615 13,952 18,180 (1,848) (500) (400) (2,748) (1,060) (400) (200) (1,660) E. Civil Works - 4,689 - 7,856 12,545 (1,596) (1,596) (1,452) (1,452) F. Unspecified - 17,643 17,643 Total 2,844 5,458 62,741 83,964 155,007 (1,848) (2,096) (26,093) - (30,037) (1,060) (1,852) (9,889) (12,801) (8,100) (8,100) Note: Figures in parenthesis are the respective amounts financed by the Interim Trust Fund (1st line), WB- managed GEF (2nd line), and IFAD (3rd line, where applicable) Estimated ITF, IFAD and GEF disbursement (US$ million) 1997 1998 1999 2000 2001 2002 ITF Annual 3.3 6.2 6.0 6.3 5.7 2.5 Cumulative 3.3 9.5 15.5 21.8 27.5 30.0 IFAD Annual 0.8 1.8 1.6 1.8 1.5 0.6 Cumulative 0.8 2.6 4.2 6.0 7.5 8.1 GEF Annual 1.4 2.7 2.5 2.7 2.4 0.9 Cumulative 1.4 4.1 6.6 9.3 11.7 12.8 Percentage 11 32 52 73 92 100 Schedule B Page 1 of 5 Performance indicators Following is a tentative list of quantified Monitoring and Evaluation indicators, as well as the standard description sheet which should accompany each of these indicators to verify its quality when it is defined and follow its evolution over time. Some indicators need to be further refined and their total number still needs to be reduced. Most indicators have been assigned a target value to be reached by the end of EP 1. Values to be reached at the end of every Program year have also been defined or are being defined but are not presented here. The final list of indicators would constitute a contract between the Program implementing agencies and the Government and donors. Schedule B Page 2 of 5 List of Impact and performance indicators Component Objectives indicators unit PY5 target Code IIP (1) Source of measurement Sustainable Soil and Water Management * Promote techniques of soil management * Top soil loss in miniproject sites it/halyear <1 MPIO1 I M&E ANAE coherence with environment * Area under direct conservation from miniprojects Ha 8,300 MPPO2 P M&E ANAEl Operators * Promote rationale land use * Area of large watershed protected Ha 4150 MPIO3 I Surveys/Ex post evaluation * Programs coherent with recommendations Number MPPO4 P Accounting System (AS) DEF/ANAE implemented * Strengthen technical capacities 0 Families outside projects adopting techniques Number 50,000 MPIO5 I Survey/farmers self-evaluation * Families participating in miniprojects Number 26,400 MPPO6 P M&EANAE/ Operators * Peasant associations operating their own Number 80 MPPO7 P M&E ANAE miniprojects * Reduction of ANAE budget participation % 20 MPPO8 P * Participate to yield and financial increase * Internal Return Rate % 10 MPl09 I ANAE * Agricultural income increases in miniproject sites % 30 MPII10 I M&E/Ex post evaluation * Yield increases in miniproject sites % 50 MPIl1 I Multiple-Use Forest Ecosystem Management (ESFUM) * Knowledge of the status of forest and its 0 Area mapped Ha SFP01 P DEF evolution * New protected areas created Number 4 SFPO2 P DEF * Control stations set up Number 10 SFPO3 P DEF * New forest management practices * Area under Natural Resources contracts Sq Km 1500 SFPO4 P DEF * Increase in populations income from forest products % 10 SFIO5 I DEF/Operators * Texts ratified Number 7 SFPO P DEF *Forest operators trained in new techniques Number 150 SFPO7 P DEF/ Training center * Increase of revenues in forest research stations % 50 SFP08 P DEF * Increase forest surface and potential * Area reforested Ha 3,0 SFO I DEMonthly control stationsreot * Increase performance of forest service staff a Annual Work Plan realization % 80 SFP10 P DEF National Parks and Ecotourism * Protected area network set up * Protected areas with operational structure and Number 12 APP01 P ANGAP/DEF funding * Network conservation 0 Operational managing structures Number APPO2 P ANGAP * Degradation of primary forests in level-A protected % AP103 I ANGAP/FTM areas * Network Sustainable management 0 Protected areas under direct management by ANGAP Number 11 APPO4 P ANGAP * Self-financing of ANGAP % 14 APPO5 P AS ANGAP * PA used as training sites * Annual increase in of tourists visiting level-A % 20 APPO6 P ANGAP protected areas * PA used for entertainment * Students and pupils having visited the protected Number 11000 APIO7 I ANGAP areas * Participate to local population development * Amount of entrance fees available for mini-projects US$ 89000 APIO8 I ANGAP Schedule B Page 3 of 5 Marine and Coastal Environment * Ensure sustainable management and a Local management plans under implementation Number MCP01 P Survey exploitation of marina natural resources * Zone under existing regional action plans Sq. Km MCPO2 P ONE/EMC * Participate to local population development * Fishing yields in managed areas Tons MCIO3 I PRECOl/EMC * Increase in fishing families income % MCi04 I PRECOlEMC * Increase of foreign currency by activities % MCIO5 I PRECOl/EMC diversification * Prevent marine pollution * Diminution of marine pollution Quality ratio MCIO6 I PRECOWEMC * Marine biodiversity conservation * Surface of new protected areas created Sq. Km MCPO7 P ONE/EMC Local Natural Resource Management and Land Tenure Security (GELOSE) * Locally sustainable management of NR * Management Transfer completion rate % GEPO1 P ONE * Land tenure security (LTS) completion rate % GEPO2 P DD * Agreed environmental mediators Number GEPO3 P ONE 0 Status of renewable resources within local Quality ratio GEPO4 P Survey management areas * Increasing Biodiversity and NR benefits for * Total area under relative land tenure security Sq Km GEP05 P DD local community * Economical management systems implemented Number GEPO6 P ONE * Management cost per hectare US$ Eq. GEPO7 P ASONE * cost per hectare of LTS US$ Eq 7 GEPO8 P AS DD * Increase in populations' income where management % GEPO9 P Survey transfer is implemented * Land tenure security * Total of tax collection within land tenure security FMG/Hab GEP10 P areas * LTS cost recovery FMG million GEP11 P Support to Regional and Spatial Approach (AGERAS) * Biodiversity conservation * Threats on biodiversity within AGERAS managed Quality ratio AGIO1 P Operators PAIRegional structure (RS) areas * Local capacities development Quality ratio AGIO2 I AGERASIRS * Multilocal problems resolved % AGPO3 P AGERAS/RS * Operational participative multilocal structures Number AGPO4 P AGERAS * Operational regional planning units Number AGPO5 P AGERAS * Pronects completion rate % AGPO6 P AGERAS Regional Fund for Environmental Management (FORAGE) * Promoting regional environmentally * Financing requests sent to FORAGE Number FOIO1 I FORAGE sustainable financing mechanism on a demand driven basis * Projects financed by FORAGE/ project request % FOPO2 P * Average waiting peniod between request and month FOPO3 P implementation Strategies and EIA * Environment policy formulation * Formulated policies Number 11 PSP01 P ONE e regulations texts agreed and diffused Number 11 PSPO2 P ONE * Policy implementation * International conventions ratified Number PSPO3 P ONE/Miniteries * Evolution of Environment status Quality ratio PSIO4 I ONEIMiniteries * operational environmental units created Number PSPO5 P ONE/Miniteries * Environmental NGOs and associations Number PSPO6 P ONE/Minitenes Schedule B Page 4 of 5 0 Making EA procedures operational * Total investment subject to environmental impact US$ Eq PSIO7 I ONE assessments * Actions implemented by local population Number PSP08 P ONE * Private companies in accordance with environmental Number PSI09 I ONE standards * Public surveys Number PSP10 P ONE * Operations reviewed by ONE % PSPi 1 P ONE * EIA realized Number PSP12 P ONE Environmental Research * Promote instruments for sustainable NRM e Research fields finalized Number REP01 P research agencies * Strengthen local researcher capacities 0 Trained researchers according to the research field Number REPO2 P AGEX * Contracts and terms of references issued Number REPO3 P ONE/CAREE * Quality of results Quality ratio REPO4 P survey * Consultation of reports Number REIO5 I ONE/CAREE Communication, Education and Training * Enhance communication activities and impact * TV/radio shows and magazines on the Environment Number CEP01 P ONE * Audience of broadcast programs Number CEPO2 P ONE/survey * Messages assimilated by populations % CE103 I Survey * Enhance environmental training * Educational staff trained Number CEIO4 I CFSIGE * % satisfied training requests % CEPO5 P Survey * Schools with green classes Number CEP06 P CFSIGE * Students attending green classes Number CE107 I SFSIGE/AGEX * Special courses implemented Number CEIO8 I CFSIGE/Ministry of education e Optional courses taught in colleges Number CEPO9 P ONEICFSIGE * Students attending such courses Number CEP10 P ON/CFSIGE Cartographic basic instruments * Satisfy users needs 0 Satisfaction of geographic information users % 80 IGIO1 I ONE/FTM/AGEX * Execution of orders % 100 IGPO2 P FTM * Ensure FTM profitability 0 Turnover % 100 IGPO3 P FTM * Self-financing capacity of FTM FMG billion 17 IGPO4 P FTM * Gross operating profit: FMG FMG billion 4 IGPO5 P FTM * EP2 "geographic contracts obtained by FTM % 70 IGPO6 P FTM * Economical value of FTM FMG billion 70 IG07 I FTM EIS * Make EIS network operational and useful 0 Informed decisions made Number $1101 I * Consultations of databases by users Number 81102 1 * Network focal points Number 81103 I * Knowledge status on protected areas Quality ratio S1104 I * Knowledge of environmental status Quality ratio S1105 I * Satellite accounts Number SIO6 I Schedule B Page 5 of 5 Coordination * Coordination 0 M&E system quality Quality ratio COtO1 I * PT, PTA and PS adopted Quality ratio COPO2 P * % of PTA realization % COP03 P * Disbursement rate % COPO4 P * procedures time Days COP05 P * % PIP allocation upon request % COPO6 P * % problems resolved % COPO7 P * Amount of reallocated funds US$ COP08 P * % AGEX satisfaction Quality ratio COP09 P Global Indicators * Satisfied Malagasy people vis-6-vis the program % TRIO1 I Each indicator measures * Biodiversity and renewable resources status Quality ratio TRIO2 I one of the obiective of the program 0 Increase in income % TRIO3 I * Total private investment generated by the program FMG billion TRIO4 I * Land tenure security Quality ratio TRIO5 I * Erosion rate Quality ratio TRIO6 I * Women participation % TRIO7 I * % financial realization % TRIO8 I * Malagasy growing awareness Number TRIll I (1) I=Impact, P=performance Schedule C Page 1 of 1 TIMETABLE OF KEY PROCESSING DATES Time taken to prepare Two years Prepared by Government Agencies with donor's assistance Initial IEPS August 18, 1995 First multi-donor pre-appraisal mission November 24 - December 19, 1995 Second multi-donor pre-appraisal mission March 22 - April 16, 1996 Appraisal mission departure June 18, 1996 Negotiations September-October 1996 Board presentation December 12, 1996 Planned date of effectiveness February 1st, 1997 Mid-term review November 1999 This report is ba;ed on [ie findings of anl appraual mission undertaken in June 1997 by a team comprising of Messrs. Michel Sinion (Agricultural Economist. Task Team Leader). Frangois Rantrua (En% ironmental Information Specialist), Yes Wong (Agriculturist). and Raj Soopramanien (Senior Counsel). The mission was based on the work of two multi-donor pre-appraisal missions involving about se%enty persons mobilized bN fourteen donors and international NGOs. Franqois Falloux % as the Lead Ad% iser. Roberto Zagha advised on economic analysis. Peer re% ie" w%as carried out by Ivar Ted Serejski. Jean-Roger Mercier. Henri Rouille d'Orfeuil. Maureen Cropper and Marea Hatziolos. The Technical Manager is CNnthia Cook and the CountrN Director is Michael N. Sarris. MOP Schedule D Run Date: 11/11/96 Dataasof: 11/11/96 Status of Bank Group Operations in Madagascar IBRD Loans and IDA Credits in the Operations Portfolio Difference Original amount in US$ millions between expected Project Lan or Fiscal and actual ID Credit No. Year Borrower Purpose IBRD IDA Cancellations Undisbursed disbursements' Number of Closed Loans/Credits: 65 Active Loans MG-PA-1512 C21170 1990 GOV.OF MADAGASCAR TANA PLAIN DEV 30.50 23.02 20.06 MG-PA-1515 C20940 1990 GOVT. EDUC SECT REINF 39.00 12.50 7.44 MG-PA-1520 C22510 1991 GOVERNMENT NAT HEALTH SECTOR 31.00 16.26 10.48 MG-PA-1522 C26440 1995 GOVT. OF MADAGASCAR IRRIGATION II 21.20 18.98 1.15 MG-PA-1533 C28440 1996 GOVT OF MADAGASCAR SCAR ENERGY SECTOR DEV PR 46.00 44.58 0.17 MG-PA-1540 C21040 1990 GOVT. FIN SECTOR/APEX 48.00 23.38 15.47 MG-PA-1546 C20420 1989 AGRIC RES 24.00 12.31 5.97 15.07 MG-PA-1549 C22430 1991 GOVERNMENT LIVESTOCK 19.80 11.53 5.58 MG-PA-1550 C24970 1993 GOVT OF MADAGASCAR FINANCIAL INSTITUTIO 6.30 5.32 3.59 MG-PA-1552 C23820 1992 GOVERNMENT VOC. EDUCATION 22.80 12.89 5.63 MG-PA-1553 C24740 1993 GOVERNMENT FOOD SECURITY & NUTR 21.30 6.90 -0.79 MG-PA-1556 C21250 1990 GOVERNMENT ENVIRONMENT 26.00 8.51 5.72 MG-PA-1558 C25380 1994 GOVERNMENT PET SEC REFORM 51.90 51.41 26.82 MG-PA-1563 C27290 1995 GOVERNMENT AG.EXTENSION PROJECT 25.20 22.18 0.77 MG-PA-1571 C24590 1993 GOVERNMEN RURAL FIN 3.70 1.16 -0.47 MG-PA-1583 C25910 1994 MTP/MUT URBAN WORKS PILOT 18.30 5.29 -172 MG-PA-35669 C27780 1996 GOVT MADAGAS/FOND D'INTER SOCIAL FUND 2 40.00 35.50 MG-PA-35914 C26250 1994 GOVT OF MADAGASCAR CYCLONE REHABILITATI 13.10 3.90 3.04 MG-PA-40019 C291 10 1997 GOVERNMENT CAPACITY BUILDING 13.83 13.85 TOTAL 0.00 501.93 12.31 323.16 118.00 MOP Schedule D Run date: 11/11/96 Madagascar - Statement of IFC Investments Committed and Disbursed Portfolio As of 9/30/96 (In US Dollar Millions) Committed Disbursed I I I 1FC 1FC FYAppmval Company Loar Equity 2usi Paic Loan Equity Quas1 Panic 1977/87 SOTEMA 1.88 0.00 0.00 0.00 1.88 0.00 0.00 0.00 1983/89 Nossi-Be 2.59 0.24 0.00 0.00 2.59 0.24 0.00 0.00 1985/89 COTONA 1.06 0.00- 0.00 0.00 0.68 0.00 0.00 0.00 1990/91 AEF FIARO 0.00 0.47 0.00 0.00 0.00 0.47 0.00 0.00 1991 BNI 0.00 2.61 0.00 0.00 0.00 2.61 0.00 0.00 1992/93/95 AQUALMA 5.80 0.61 0.00 0.00 5.80 0.61 0.00 0.00 1995 AEF Karibotel 036 0.00 0.00 0.00 0.36 0.00 0.00 0.00 Total Portfolio: 11.69 3.93 0.00 0.00 11.31 3.93 0.00 0.00 Approvals Pending Commitment Loan Equity Quasi PariO 1994 MADAGASCARCDF 0.00 1.11 0.00 0.00 1994 SCOI 1.50 0.00 0.00 0.00 1996 AEF INDOSUMA 0.90 0.00 0.00 0.00 Total Pending Commitmen 2.40 1.11 0.00 0.00 Schedule D Page 4 of 6 Status of Bank Group Operations in Madagascar Note on Portfolio and Disbursement Performance 1. In August 1993, Madagascar completed a two-year process of political transition from a single party regime to a pluralistic democracy. Implementation and disbursement of the IDA-financed portfolio, which had been slow during the transition, have now improved. While the continued poor economic and financial situation in the country had the potential to hamper portfolio progress, efforts were made during annual public expenditure reviews (PERs) to ensure adequate counterpart resources for priority projects. The April 1994 country portfolio performance review (CPPR) addressed key generic problems which were affecting the portfolio, and set action plans to speed parliamentary ratification of projects, to guarantee timely availability of counterpart funds and eliminate roadblocks to requests for disbursements of IDA funds, to limit procurement delays, and to improve accounting and audit procedures. The government decided to systematically monitor portfolio performance, and empowered a monitoring committee in the Ministry of Finance and Budget to monitor implementation and report regularly, both to the government and the Bank. A May 1995 CPPR reviewed the progress achieved and remaining steps to be taken. It also focused, on a project-by-project basis, on the achievement of results on the ground and project objectives. This CPPR benefited from the participation of a number of beneficiaries who reported on their perceptions of how the projects are implemented, how they are useful, and how they might be improved. A June 1996 CPPR extended participation to NGO representatives, donors and mayors; in order to get more involvement from the regions, consideration is being given to hold the 1997 CPPR outside the capital city. 2. The efforts to improve project implementation are paying off. The percentage of unsatisfactory projects in the portfolio dropped from 27 percent in FY92 to 10 percent in FY95 as regards implementation progress, and from 27 percent to 5 percent as regards development objectives. Disbursements for investment projects increased substantially from US$23 million in FY92 to US$72 million in both FY95 and FY96. This represented an increase in the disbursement ratio from 7 percent to 21 percent. At the end of this schedule is a table which shows project-by-project disbursement for FY95 and FY96. 3. While significant progress has been made on portfolio performance, much remains to be done. The political and economic/financial situations in Madagascar still have the potential to derail project implementation, and continuing efforts will be made to monitor closely and follow up the actions identified during the CPPRs, both for generic issues and for individual projects. 4. Disbursement Lags. Even though disbursements have been reasonably robust, the undisbursed balance for some projects has diminished more slowly due to the strengthening value of the SDR versus the US$ between the time of approval and the present, a trend which has only started to reverse recently. There are also projects which are now performing well, but which because of initial delays, show lags when compared to original expectations. Three projects show significant disbursement lags. MOP Schedule D Run dae: 11/11/96 Madagascar - Statement of IFC Investments Committed and Disbursed Portfolio As of 9/30/96 (I. US Dollar Millions) Committed Disbused I I I EFC lFC FYApproval Company Loan Equity Qu=i Paritc Loan Equity Quaii Parric 1977/87 SOTEMA 1.88 0.00 0.00 0.00 1.88 0.00 0.00 0.00 1983/89 Nossi-Be 2.59 0.24 0.00 0.00 2.59 0.24 0.00 0.00 1985/89 COTONA 1.06 0.0&- 0.00 0.00 0.68 0.00 0.00 0.00 1990/91 AEF FIARO 0.00 0.47 0.00 0.00 0.00 0.47 0.00 0.00 1991 BNI 0.00 2.61 0.00 0.00 0.00 2.61 0.00 0.00 1992/93/95 AQUALMA 5.80 0.61 0.00 0.00 5.80 0.61 0.00 0.00 1995 AEF Karibotel 0.36 0.00 0.00 0.00 0.36 0.00 0.00 0.00 Total Portfolio: 11.69 3.93 0.00 0.00 11.31 3.93 0.00 0.00 Approvals Pending Commitment Loan Equrty Quari Papric 1994 MADAGASCAR CDF 0.00 1.11 0.00 0.00 1994 SCOI 1.50 0.00 0.00 0.00 1996 AEF INDOSt.UMA 0.90 0.00 0.00 0.00 Total Pending Commitment: 2.40 1.11 0.00 0.00 Schedule D Page 5 of 6 * The Antananarivo Plain Development Project (Cr. 2117-MAG) has achieved substantial progress toward its institutional objectives; in particular, the government has created the entities charged with the future operation and maintenance of the drainage and flood control and sewerage utilities. However, suspension of disbursements for downstream portions of the drainage system (pumping station) by the key co-financier, due to payment arrears, has delayed IDA's ability to proceed with the upstream works. A solution has now been found which will allow the pumping station to be completed and the IDA-financed works to resume. * Despite a difficult start, linked both to political and management uncertainties, the Financial Institutions Development Project (Cr. 2497-MAG) is now showing progress. Overall, management of the Central Bank (BCM) has improved considerably, and key policy and institutional decisions have been taken. BCM has played a more active role in the conduct of monetary policy -- establishment of a mechanism linking its reference rate for the price of money to inflation; raising reserve requirements; placing the two state-owned banks under holding management and selecting sale advisors; and removal of credit ceilings and reliance on instruments of indirect control. The adoption of new BCM statutes has given it real independence from the government. Finally, important progress has been made in banking supervision. The recent promulgation of a new banking law will reinforce this effort. Concerning project implementation itself, a coordination unit has been established to take day-to-day management decisions within parameters of general priorities defined by a supervision committee. The BCM has agreed to introduce a new accounting system for 1997 and has already launched the preselection process for new software. * Effectiveness of the Petroleum Sector Reform Project (Cr. 2538-MAG) was slow owing to a lengthy process of ratification by the National Assembly. After a slow start, project implementation is picking up momentum with the recruitment of the project management consultant. Also, in line with its decision to liberalize the import of refined petroleum products, the government opted for opening up immediately the capital of the refinery to the private sector and requested that the project be restructured so as to eliminate the rehabilitation of the refinery and related investments. The government request is now being processed and it is expected that about US$18 million will be canceled. Remaining investments under the project relate to: (i) the restructuring of SOLIMA, the creation of an open access system to certain key facilities by all operators and the establishment of a regulatory authority (the selection of consultants for these studies is being finalized); and (ii) physical investments in infrastructure to improve safety and protect the environment. * A fourth project which previously was highlighted in this category - the Health Sector Improvement Project (Cr. 2251-MAG) - is now performing well and disbursements have significantly improved. 5. Effectiveness. The Energy Sector Development Project (Cr. 2844-MAG), approved by the Executive Directors on April 16, 1996, was signed on May 29, 1996. The Credit became effective on August 28, 1996. Schedule D Page 6 of 6 Madagascar Portfolio Disbursement Trends (US$ millions) Credit Disb. Disb. Cr. No. Proect Amount FY95 FY96 1967 EMSAP 22.00 4.28 4.75 2042 Agr. Research 11.69 2.07 1.57 2094 Education Sector 39.00 8.01 9.34 2104 APEX 48.00 5.79 9.50 2117 Tana Plain 30.50 4.77 2.27 2125 Environment 26.00 5.15 5.53 2243 Livestock 19.80 2.49 1.67 2251 National Health 31.00 4.37 6.38 2382 Vocational Education. 22.80 3.45 4.10 2459 Rural Finance 3.70 0.91 0.85 2474 Food Security 21.30 3.51 7.50 2497 Financial Institutions 6.30 0.64 0.55 2538 Petroleum Sector 51.90 1.19 0.37 2591 Urban Works 18.30 3.67 8.23 2625 Cyclone Rehabilitation 13.10 2.78 5.50 2644 Irrigation II 21.20 0.62 1.99 2729 Agr.. Extension 25.20 0.00 0.78 2778 Social Fund II 40.00 0.00 0.00 2844 Energy Development 46.00 0.00 0.00 497.79 53.70 70.88 Closed Projects 18.66 0.76 TOTAL 72.36 71.64  Report No: F- 6985 MAG Type: MOMD