Madagascar - Energy Sector Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6742-MAG MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 31.8 MILLION TO THE REPUBLIC OF MADAGASCAR FOR AN ENERGY SECTOR DEVELOPMENT PROJECT MARCH 14, 1996 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 EOUIVALENT Currency Unit Malagasy Franc (FMG) US$1 FMG 4,602 (August 1995) MEASURES Metric System, except: I barrel (bbl) 0.159 cubic meter 1 metric ton of oil (AP134) = 7.35 barrels GWh Gigawatt-hours kgoe Kilograms of oil equivalent kV Kilovolt MW Megawatt Toe Tons of oil equivalent ABBREVIATIONS AND ACRONYMS ABEDA Arab Bank for Economic Development of Africa CFD French Development Agency EIB European Investment Bank ESMAP Energy Sector Management Assistance Programme FMG Malagasy Franc JIRAMA Madagascar's Utility for Electricity and Water LPG Liquified Petroleum Gas LRMC Long Run Marginal Cost MEM Ministry of Energy and Mines UNDP United Nations Development Program FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY REPUBLIC OF MADAGASCAR ENERGY SECTOR DEVELOPMENT PROJECT Credit and Project Summarv Borrower: Republic of Madagascar. Implementing Agencies: Madagascar's Utility for Electricity and Water (JIRAMA) and Ministry of Energy and Mines (MEM). Beneficiary: Not applicable. Poverty: Not applicable. Amount: SDR 31.8 million (US$46 million equivalent). Terms: Standard IDA terms, with 40 years maturity including 10 years of grace. Commitment Fee: 0.50 percent on undisbursed credit balances, beginning 60 days after signing, less any waiver. On-lending Terms: SDR 22.0 million (US$31.8 million) will be on-lent to JIRAMA at an adjustable interest rate equal to the London Interbank Rate (LIBOR) plus 0.9 percent per annum, with 25 years maturity, including a 5 year grace period. JIRAMA will bear the foreign exchange risk on these funds. Financing Plan: See Schedule A. Economic Rate of Return: 22 percent on JIRAMA's investment program as a whole, 57 percent on the rehabilitation of hydropower stations, 28.7 percent on the interconnection Namorona-Manakara and Mananjary, 23 percent on the rehabilitation and extension of thermal power plants and 12 percent on the rehabilitation and extension of the distribution networks. (These rates of return were calculated using existing tariffs as a proxy for benefits. The economic benefits are much higher when calculated using the willingness of consumers to pay for electricity.) Improved stove program: 22 percent; and Mahajanga pilot woodfuel program: 42 percent. Staff Appraisal Report: No. 15086-MAG. Map: IBRD 25661. MIS Task Code: 1533. 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.  i  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MADAGASCAR FOR AN ENERGY SECTOR DEVELOPMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Madagascar for SDR 31.8 million, the equivalent of US$46.0 million, to help finance an Energy Sector Development Project. The Credit would be on standard IDA terms with a maturity of 40 years, including 10 years of grace. The Government of Madagascar will on-lend to the national utility for electricity and water, JIRAMA, SDR 22.0 million, the equivalent of US$31.8 million, from the proceeds of the Credit at an adjustable interest rate equal to the London Interbank Rate (LIBOR) plus 0.9 percent per annum with 25 years maturity, including a 5-year grace period. Country and Sector Background 2. Economic Reforrn. In the last twenty-five years, Madagascar experienced an unprecedented economic decline, attributable mostly to poor government policies that reserved the leading role in the economy for the state. Between 1971 and 1994, per capita GDP fell by about 45 percent. In 1994 the population of approximately 13 million growing at about 2.8 percent per annum had a per capita income of US$230. It is estimated that 74 percent of the population currently lives below the poverty line. Chronic malnutrition rates are about 40 percent, child mortality claims 20 percent of live births before the age of five, education standards are low and enrollment rates are on the decline. Also, the country has suffered extensive environmental degradation in the form of deforestation (partly due to wood offtake for use as fuel) and soil erosion. During the mid-1980s, the Government initiated a reform program that began to move Madagascar away from its old model of development, and which resulted in a brief resumption of growth. This process was interrupted by a period of political turmoil and transition to democracy in 1991-1993. 3. In the face of the above dire economic and social outcomes, as well as the experience of the brief revival in the late 1980s, the government has indicated its commitment to deep-seated reforms, with the central objective to reduce poverty. But poverty in Madagascar is so pervasive that it cannot be overcome without strong economic growth, leading to increasing employment. The government's reform program aims to boost the country to its 1971 living standards in ten years and double its per capita GDP in 25 years. This requires that annual GDP growth reaches six percent by the end of the decade. To achieve that level of sustained growth the country needs, among other things, adequate infrastructure for transport, telecommunications and energy. The government's strategy includes refocussing public expenditures aiming to improve resource allocation to priority sectors. This will require sectoral reforms opening up for private participation sectors that in the past have been reserved for the state, with the government focussing on its essential objectives, namely, establishing a coherent macroeconomic policy geared to financial stability, liberalizing the economy, and waging a comprehensive battle against poverty, environmental degradation, and the deterioration of social services 1'. The government has started to take steps in these directions which, if sustained, would help restore the country's credibility and prepare the ground for a SAC by the Bank and an ESAF by the IMF and possible debt relief from the Paris Club. It is not clear, however, if the political force- field will allow the government to complete the full range of reform measures. I' Madagascar: A Strategy for High Growth and Poverty Alleviation - An Economic Strategy Note (World Bank, June 1994).  4. In the energy sector, the government has launched a program of reforms aiming at the introduction of rational pricing policies, the elimination of monopolies, and state divestiture and competition through the opening of the sector to private participation. Reforms in the petroleum sector are being supported by the Petroleum Sector Reform Project (Cr. 2538-MAG). The proposed project would extend these reforms to the electricity sub-sector and support a program for rehabilitation and extension of power infrastructure as well as a program for the efficient production and use of firewood and charcoal to lessen the burden of energy expenditures on poor households' budgets and the damage to the environment. 5. The Energy Sector. Madagascar's energy balance reflects the country's early stage of economic development. It shows that most of the energy consumed comes from woodfuels and is used by households. Firewood accounts for 74 percent and charcoal for 9 percent of a net energy supply that was 2.6 million tons of oil equivalent (toe) in 1993. Conversion losses in the production of charcoal are very high, about 1.2 million toe annually. The Government is concerned about the sustainability and the environmental impact of the use of woodfuels, since their large-scale consumption is one of the factors contributing to the destruction of Madagascar's rich, biodiverse environment. Because of this, with support from IDA, the Government has been promoting more efficient methods to produce and burn charcoal, the urban households' fuel of choice. The proposed project will continue supporting these actions, which will now be extended to include a pilot program for better management of forest resources being exploited for fuel. 6. The second largest source of energy is imported petroleum (12 percent of net supply), which in 1993 absorbed 26 percent of export earnings. The transport sector is the largest consumer of petroleum products. Electricity's share of net energy supply is only two percent, but this source of energy is crucial to running a modern productive sector. Although hydroelectric resources are substantial (about 60,000 GWh/yr) the country has developed less than one percent of this total for electricity generation, and only eight percent of the Malagasy population has access to electricity. For this reason, the Government also wants to promote increased access to electricity, particularly for lower-income groups, in a manner that is economically rational. The Government is also keen on improving energy efficiency in general. Therefore, in addition to actions concerning woodfuels, the proposed project will support initiatives to explore the potential for greater fuel efficiency in the transport sector and for efficiency gains in industry, as well as an electricity loss-reduction program by the national utility, JIRAMA. The Power Subsector 7. Institutional set-up. At the institutional level, Madagascar's power subsector is presently characterized by state domination. The subsector's current legal framework is defined in a 1974 decree, covering both the electricity and water sub-sectors. The decree declares electric power and water services to be economic activities reserved for the state and spells out Government policies for the subsectors. To implement those policies, the Government created the electricity and water utility JIRAMA in 1975. Because of Government intervention, in its early years JIRAMA operated in a non-commercial environment, but the Government is now committed to open the power subsector to private capital, and to corporatize and commercialize the utility. The proposed project will support this reform program. The Government is also preparing a restructuring program for the water sub- sector, which IDA intends to support.  8. Physical characteristics. In its physical structure, Madagascar's power supply system is characterized by its great fragmentation. Because of the low levels of demand and the vast distances separating load centers, local networks still represent the least-cost solution for supply in the majority of cases. As a result, the electricity supply system consists of 63 separate public networks. JIRAMA's name-plate generation capacity is 216 MW, of which 105 MW is in hydroelectric plants. Aggregate peak demand is currently 110 MW, with the eight largest cities accounting for 95 percent of the total. Although it appears as if there is more than enough capacity, in fact, most of Madagascar's installations are very old. As a consequence, a large number of the existing thermal units has to be retired before the year 2000, while most of the hydro units need urgent rehabilitation to extend their lives. Some transmission lines, and many of the distribution networks, also require urgent rehabilitation. 9. Evolution of demand and supply. Electricity sales were 437 GWh in 1994, supplied from a gross generation of 546 GWh of which 71 percent came from hydro plants. Demand growth has been uneven, reflecting the vicissitudes of GDP growth. Demand grew at an average annual rate of 4.8 percent between 1986 and 1990, decreased 2 percent in 1991, the year when civil disorders swept the country, grew again at 5.6 percent from 1991 to 1993, and stagnated in 1994. The number of consumers increased from 140,000 in 1986 to 190,000 in 1994, at an average annual growth rate of 3.7 percent. JIRAMA projects its electricity sales to grow at an average rate of 4.8 percent per year between 1995 and 2000. Because of the expected effect of the loss reduction program included in the project, the corresponding growth rate of gross generation is only 4.1 percent. 10. System expansion. In 1989-90, JIRAMA developed a least-cost expansion plan with the assistance of consultants financed by the Energy I project (Credit 1787-MAG). The plan, which was recently updated by JIRAMA, constitutes the basis for its investment program. The proposed credit will finance the rehabilitation and extension of the electricity supply system, through support of JIRAMA's least-cost expansion plan, and also of a program to extend electrification at low cost, focussing on peri-urban and dynamic rural areas, and targeting lower-income groups which up to now have been excluded from access due to the financial barrier of up-front costs. 11. Electricity pricing and cost recovery. In 1990, JIRAMA and its consultants also carried out a tariff study which introduced a system of tariffs based on the long run marginal cost of supply (LRMC). In 1991, JIRAMA adopted the tariff structure defined by the study, and the level required for financial equilibrium, as a target which the company was to reach through successive adjustments. The Government approved substantial tariff increases and the process was completed by mid-1994. The present tariff structure is based on the LRMC, and its average level of about US10 cents/kWh is sufficient to ensure JIRAMA's financial equilibrium. Furthermore, since the beginning of 1993, the tariff level is automatically adjusted for changes in fuel price, the exchange rate, and inflation. The Government has maintained this tariff policy through difficult economic times, demonstrating its commitment to pricing based on sound economic criteria. With the exception of a large industrial client in Mahajanga, with whom JIRAMA is negotiating a solution, collection delays from private clients are within 60 days. Public sector clients, on the other hand, have in the past tended to accumulate large arrears which were periodically settled through cross-debt compensations. The Government and JIRAMA are taking measures to ensure timely payment in the future (para. 26).  -4 - 12. Proposed power sub-sector reform. The reform program will create a new legal and regulatory framework for the electricity sub-sector, and restructure JIRAMA. In June 1996, the Government will propose to the National Assembly the adoption of an Electricity Law that will, inter alia: (a) open the power sub-sector to private economic agents, establishing the rules for entry and exit, as well as the standard obligations and rights of operators; (b) create a Regulatory Commission having as main functions the calculation and setting of tariffs, and quality of service monitoring; (c) establish the rules for sector structure and economic operation of power systems; and (d) define the principles and procedures to be applied in tariff calculation and setting. The Regulatory Commission will consist of a governing board and a technical secretariat. The board will consist of five members and will be chaired by a representative of the Ministry of Energy and Mines (MEM). The technical secretariat, staffed with a small number of specialists, will provide the technical foundation for the decisions of the board by means of studies that it will conduct itself or that it will request from qualified international consultants. The electric utilities will finance the agency's budget. IDA will finance an initial tariff study to define regulated prices and adjustment formulas. 13. The Govermnent has also invited proposals for consulting services to define a restructuring program for JIRAMA, including its conversion into a commercially-oriented joint-stock company, with the possibility of private participation in its capital. The study will include: (a) an assessment of JIRAMA's present situation; (b) definition of a new corporate strategy for the utility, taking into account the proposed new regulatory framework, including an analysis of the feasibility of separating water and electricity operations and identification of the options for private participation; (c) definition of a financial restructuring package, including a revision of the asset base, a revaluation of assets, and a recapitalization if needed; and (d) fornulation of new statutes for the utility as a joint-stock company, a new organizational structure, and adequate management systems. Furthermore, the consultants will define a plan for implementing the restructuring package, which will then be executed under the project. Woodfuels 14. Traditional methods for both the production and consumption of charcoal are inefficient and could be improved. Under the Energy I project, the MEM did research and initiated actions that led to the introduction of an improved kiln for charcoal manufacturing, and proper control of the carbonization process - with an efficiency gain of 40 to 50 percent - and also to the development of improved charcoal stoves -- which permit an efficiency gain of about 30 percent. MEM trained charcoal makers and stove manufacturers, and mounted a successful promotional campaign for the improved stoves in the area of the capital. A recent IDA Environmental Impact of Woodfuels study evaluated the environmental problems of seven regions in Madagascar and found two, Mahajanga and Toliary, where the exploitation of forest resources for fuel was the main cause of forest degradation. The study pointed to the need for integrated long-term plans for the use of wood resources at the regional level. The proposed project will test, on a pilot basis in the Mahajanga region, an integrated set of measures to improve forest resource management, and will also continue disseminating nation- wide the techniques for more efficient production and use of charcoal developed under Energy I. 15. Project Rationale. The project will contribute to implementing Madagascar's strategy for economic growth and poverty reduction by: (a) providing electricity infrastructure to support strong economic growth, leading to greater employment; (b) transforming the power sub-sector's legal and regulatory framework, in line with the Government's policy of liberalization and sound pricing, to increase efficiency and attract private investment; (c) improving the efficiency of energy processes, particularly the production and use of charcoal; and (d) introducing better management of forest  - 5 - resources being exploited for fuel. The project continues the reforms and investment initiated under the recently-completed Energy I project (Cr. 1787 MAG) and complements the ongoing Petroleum Sector Reforn Project (Cr. 2538 MAG). 16. The initial thrust of the power sub-sector reforn will be on creating a transparent legal and regulatory framework conducive to greater efficiency and capable of attracting private investment, and on preparing JIRAMA for operation in the new environment through corporatization and commercialization. Before substantial private investment can realistically be expected, a transition period of three to five years is needed to establish the credibility of the new legal and regulatory environment. For that reason, the proposed project will support the state-owned utility's investment in power infrastructure up to the year 2000 to ensure that there are no bottlenecks that could constrain economic growth. 17. JIRAMA's investment program covers generation, transmission and distribution. For generation, the program emphasizes rehabilitating existing hydroelectric plants, and is the result of a least-cost expansion planning study carried out with the assistance of consultants financed by IDA under Energy 1. The alternative of increasing diesel-based generation was more costly. For the majority of the small isolated centers, however, the only alternative available is the addition of small diesel generating sets (40 to 300 kW). In transmission, an extension will incorporate several centers now served from diesel plants to systems that have surplus hydroelectric capacity. Higher fuel costs make the alternative of letting the systems develop separately more expensive. In distribution, the project will finance rehabilitation, expansion and renovation of networks in the country's eight largest urban centers. Expansion will follow a master plan prepared by consultants that IDA financed, which considered different alternative voltage levels and timing of network additions. In Antananarivo, where the capacity of the existing 5-kilovolt distribution system has become insufficient for the city, the network will be renovated using a 20-kV voltage level, following a master plan prepared within the framework of the Energy I project by consultants with French financing. The study considered several alternative voltage levels and network structures which the technico-economic analysis found less adequate. 18. As mentioned before, the infrastructure components also include an electrification program focusing on peri-urban and dynamic rural areas that will target lower-income groups, helping them to overcome the financial barrier through mechanisms for financing up-front costs, such as house wiring and connection fees. This will help improve quality of life among those groups. In order to benefit a maximum number of people, the average cost per connection will be minimized by more intensive utilization of existing infrastructure, and by applying low-cost design standards. For remote, poorer areas, solutions based on photo-voltaics or wind will be explored. This program, for which the strategy has been agreed with MEM, will follow a master plan to be developed with consultant support under the project. The idea is to complement investment based on pure commercial criteria with a program that will help gain access to electricity areas and groups able to elicit, after a start-up phase, a sufficient level of consumption at economic prices. 19. The project will also contribute to sustainable growth and preservation of the environment through its components for greater energy efficiency, including the reduction of electricity losses, improved techniques for the production and use of charcoal, and support of a pilot program to ensure a sustainable supply of woodfuels to the Mahajanga region that will test new arrangements for managing natural forest resources that are being exploited for fuel.  - 6 - 20. Project Obiectives. The proposed project aims at: (a) enhancing Madagascar's prospects for economic recovery and growth by ensuring an adequate supply of electricity, including an increased access of peri-urban and rural populations to the service; (b) increasing economic and management efficiency in the power subsector, and attracting private capital for investment, through institutional reform; and (c) promoting greater energy efficiency, which, in the case of woodfuels, will at the same time help mitigate adverse environmental impacts. 21. Project Description. The project consists of four major components. First, the bulk of JIRAMA's investment program, including: infrastructure (rehabilitation and extension of generation, transmission and distribution facilities), tools and equipment for maintenance; a loss reduction program; improvements in management systems and personnel training; and feasibility studies for two small hydro projects (US$118.1 million). Second, an electrification program to selectively increase the population's access to electricity service, by applying low-cost design standards, with emphasis on better utilization of existing infrastructure and the extension of networks that have surplus generating capacity (US$7.8 million). Third, a program to support capacity building and actions to reform the power subsector, including the establishment of a new legal and regulatory framework that will allow private sector participation; and the restructuring of JIRAMA according to principles of commercial operations (US$3.2 million). Fourth, a country-wide program to promote energy efficiency, with emphasis on woodfuels, including an integrated pilot program to ensure a sustainable supply of woodfuels for the Mahajanga region, preserving the natural forest (US$3.4 million). The project will be co-financed by the European Investment Bank (EIB) (US$24.7 million), the French Development Agency (Caisse Francaise de Developpement, CFD) (US$28.3 million), and the Arab Bank for the Economic Development of Africa (ABEDA) (US$6.6 million). 22. Schedule A presents the detailed costs of the program, as well as the financing arrangements. Schedule B presents economic and financial-analysis tables, as well as key performance indicators. Schedule C summarizes procurement and disbursement arrangements. Schedules D and E respectively present a timetable of key project processing events, and the status of IDA operations in Madagascar. 23. Project Implementation. The project will be executed in five and a half years, with December 31, 2001, as the closing date. JIRAMA will be responsible for implementing its investment program. It acquired considerable capability in project implementation under the Energy I project. Furthermore, as part of the preparation activities, JIRAMA is receiving support from consultants in designing and setting up an organization and systems for project management. The Directorate of Energy at the Ministry of Energy and Mines will be the executing agency for the electrification program, the reform of the power subsector and the energy efficiency program. For the latter, there is already a structure in place which successfully executed a component under the Energy I project. A consultant will define the institutional arrangements for the electrification component within the framework of a master-plan study. 24. Lessons from Previous IDA Involvement. Since 1978, IDA has been active in supporting the development of the energy sector in the Republic of Madagascar, with one hydroelectric project, three projects in the petroleum sector, an energy assessment under the Joint UNDP/Bank Energy Sector Management Assistance Programme and one energy sector project. The most important lessons from previous power projects in Africa and elsewhere that have been incorporated in the design of this project are: (a) that greater efficiency and financial viability of power subsector operations requires structural reform: opening the subsector to private participation, maintaining economically efficient pricing, and conmnercializing state-owned utilities; and (b) that electrification of  - 7 - new areas has to be done selectively, focusing on areas that can make productive use of electricity, trying to make more intensive use of existing infrastructure, and applying low-cost design standards. Also, on a more specific level, and based on the experience of the Energy I project, JIRAMA has sought to structure procurement packages to minimize the burden of supervision and coordination. 25. Rationale for IDA Involvement. The project is an important instrument for implementing IDA's Country Assistance Strategy (CAS) for Madagascar, discussed by the Board on July 12. 1994 and updated by the progress report circulated together with this package. The CAS seeks to help the Government in promoting vigorous growth, which is crucial for long-term poverty alleviation, and improving natural resource management. The proposed project will support: (a) expanding the role of the private sector in the provision of services, as well as improvements in infrastructure to stimulate economic growth; and (b) better forest management in the Mahajanga region. IDA's involvement will help the Government in taking the necessary steps to address two main issues in the power sub- sector, namely: (i) the need for a change in the legal framework to allow private sector participation; and (ii) the restructuring and corporatization of JIRAMA, the national power company, to open its capital to private interests. Several European companies have already expressed interest in investing in the power subsector in Madagascar. The project's components for power system rehabilitation are consistent with the CAS emphasis on the maintenance and rehabilitation of existing infrastructure. The project also represents the next step in an on-going dialogue between the Government and IDA on an agreed program of energy sector development. In particular, it continues work which the Energy I project initiated on the economic pricing of electricity and programs to promote efficiency in the production and consumption of woodfuels. The restructuring of JIRAMA's electricity operations is consistent with on-going restructuring efforts to open public sector companies to private sector participation, both in the petroleum subsector, supported by IDA's Petroleum Sector Reform Project, and in JIRAMA's water operations, which IDA also plans to support. Madagascar's political situation is evolving, but there is a broad consensus that there is no alternative but to interest the private sector in the financing and management of new power infrastructure if the country is to meet its objective of sustained growth. 26. Agreed Actions. In its letter of sector policy submitted to IDA, the Government states that its key objectives for the energy sector are to: open the sector to private capital, with the Government assuming a regulatory role; maintain an efficient pricing policy; and promote efficiency in the production and use of energy. The Government will submit a draft Electricity Law to the National Assembly in June 1996, and will set up a regulatory agency before the end of September 1996. The Government has agreed to continue a pricing policy for electricity based on the LRMC and with tariffs automatically adjusted. The Government and JIRAMA agreed to a plan, involving a debt write-off and conversion of debt into equity, designed to enable JIRAMA to attain a debt-to-equity ratio not exceeding 70/30 by the end of 1996. JIRAMA agreed to generate from internal sources not less than 30 percent of its average annual capital expenditures, and to maintain an internal cash generation of at least 1.5 times the estimated debt-service requirement. The Government is also putting in place new procedures to ensure the timely payment of electricity bills by the Central Government, and its agencies. The conditions for credit effectiveness are: (a) the execution of a satisfactory subsidiary loan agreement between the Government and JIRAMA; (b) the appointment by the Directorate of Energy and JIRAMA of key implementation staff; (c) issuance of the request for proposals for the restructuring of JIRAMA by the Ministry of Energy and Mines (actual) and (d) the submission to IDA of the bidding documents for contracts scheduled for award during the first year. Finally, disbursements for the electrification program will be conditional on the establishment of a regulatory authority for the power sector.  - 8 - 27. Environlmental Aspects. The proposed project has been assigned environmental category B. The preparatory work included an environmental analysis for the transmission lines and substations which JIRAMA will build. The analysis confirmed that the transmission corridors and substation sites that JIRAMA has designated for the planned installations do not traverse any environmentally sensitive areas. The proposed systems do cross a variety of inhabited and agricultural areas, and the primary environmental issue is the potential socio-cultural and anthropological impact. Environmental planning to mitigate any adverse effects will focus on good route planning and construction practices. The Borrower and IDA have agreed on a review mechanism to ensure: (a) the incorporation of the detailed environmental recommendations in the final engineering design; and (b) project monitoring to ensure their actual implementation. IDA has approved the environmental analysis and mitigation plan. 28. Several of the project components will help enhance the quality of the environment. The rehabilitation of hydro plants, and the incorporation of several centers now served from diesel plants to systems that have surplus hydro generating capacity will help reduce CO2 emissions and environmental pollution. The substitution of hydro for thermal generation in Manakara and Mananjary, through the incorporation of those towns to the Fianarantsoa interconnected system, will reduce contamination of the surrounding lagoon systems with fuel and lubricant from the existing diesel plants. Improving energy efficiency will also lessen pollution. The woodfuels components will reduce deforestation. 29. Program Objective Categories. The proposed project is an investment operation which makes a contribution to basic infrastructure, public sector management, private sector development and environmental protection. 30. Particiatorv apDroach. The proposed project is the next step in a long-standing dialogue between the Government and IDA on energy sector issues, and has been prepared with full participation of the implementing agencies. JIRAMA's investment program is based on expansion plans defined by the utility itself with the assistance of consultants financed by IDA. The initiative for the electrification and energy efficiency programs comes from the MEM. On the issue of power sector reform, the Bank had the role of introducing the new ideas about sector management and structure, but the proposed reform program was defined by a local commission after discussions with Bank staff. 31. Benefits. Support of JIRAMA's investment program will help ensure enhanced and more reliable electricity supply, and relatedly avoid or reduce outage costs, fuel costs, and energy losses. Without the project, outage costs would increase as a result of shortfalls in generating capacity, as well as the increased incidence of faults in the existing systems. The project will help avoid fuel costs for thermal generation by extending the life of existing hydroelectric plants, and by connecting several centers, now served from diesel plants, to systems that have surplus hydro generating capacity. The reduction of technical losses will achieve savings in both, capacity investment and energy generated, and the reduction of commercial losses will increase utility revenue. The electrification program will result in savings from the substitution of electricity in end-uses which currently depend on kerosene, candles, and batteries, and will make possible increased economic activity.  -9- 32. The new regulatory framework for the power sub-sector will elicit efficiency gains, part of which will be transferred to consumers through tariff regulation. Over the long term, the institutional reforms are expected to attract private investment for system expansion. Improved energy efficiency will reduce waste, and, in the case of woodfuels, save trees. Benefits have been quantified for JIRAMA's investment program as a whole and for its individual components. Benefits have also been estimated for the improved stoves program and for the pilot woodfuels supply program for Mahajanga. The economic rate of return on JIRAMA's investment program is estimated at 22 percent. The economic rates of return on the rehabilitation work under the project range from 12 percent to 57 percent. These rates of return were calculated using existing tariffs as a proxy for benefits. The economic benefits are much higher when calculated using the willingness of consumers to pay for electricity. For the improved stove program and the Mahajanga pilot woodfuel program, the ERRs are 22 and 42 percent, respectively (see Schedule B). All economic rates of return equal or exceed the opportunity cost of capital in Madagascar estimated at 12 percent. 33. Project Sustainability. The reform of the power sector will begin a gradual disengagement of the State and involvement of the private sector which should lead to power companies operating on commercial principles. Rate regulation will be geared towards this end, making investment in the sector attractive, while at the same time introducing incentives for efficiency. The Government has agreed to maintain the present tariff policy until a revised tariff system is put into effect in October 1997, within the framework of power sector reform. The proposed project will also contribute to the sustainability of woodfuels supply by increasing efficiency in the production and use of charcoal. 34. Risks. The possible developments that may adversely affect the project may be divided into pre- and post-commissioning risks. The pre-commissioning risks relate to: (a) construction cost increases; and (b) delays in completion. The post-commissioning risks are related to: (i) the market risk; and (ii) government policies and actions on market structure and regulation, and pricing policy. 35. With respect to pre-commissioning risks, the risk of construction cost increases was minimized by taking into account cost data for similar works and setting aside contingencies in proportion to the perceived risks of occurrence (15 percent for hydro rehabilitation, and 10 percent for other components); the delays-in-completion risk has also been reduced through: (a) the advance preparation of bidding documents; (b) the provision of assistance, as part of project preparation, to supply the tools for project management and to set-up detailed implementation schedules for each component; and (c) the experience gained by both JIRAMA and MEM with the implementation of the Energy I Project (Cr. 2787 MAG) 21. The woodfuel components will be implemented by MEM through local consultants and NGOs which are closer to the communities most affected by the woodfuel crisis. it Implementation Completion Report (Report No. 14838), June 14, 1995.  - 10 - 36. Once the project is constructed, the market risk becomes predominant. A sensitivity analysis was carried out which evaluated the effect on the return of the project of a drop in sales, due for example to an economic downturn. Due the rehabilitative nature of the majority of the work, the economics of the project remain sound. However, other policies and actions the Government could take may have a negative effect on the project. Concerning electricity services, the risk would arise from the imposition of price controls, and the unwillingness to allow greater private sector participation through the creation of barriers to entry. The sensitivity analysis on the program as a whole as well as on components thereof, shows that a reduction in benefits either through lower prices, lower quantities or both would significantly affect their rate of return. Reneging on commitments to open up the electricity subsector to private participation would have some serious medium to long-term effects as the Government cannot afford to pay for power expansion and rehabilitation. The system would not be able to satisfy demand and would most certainly deteriorate. Although this risk is present, great care has been taken to develop and strengthen local ownership of the process. The local authorities have had the leading role in the formulation of the reform program for the power subsector, which ensured that social and political constraints were given particular consideration. 37. Reconmiendation. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. James D. Wolfensohn President Attachments Washington, D.C. March 14, 1996  - 11 - Schedule A Page 1 of 1 REPUIBLIC OF RADAGASCAR ENERGY SECTOR DEVELOPMENT PROJECT Project Cost Summary (FMG biltion) (US$ miLLion) Local Foreign Total Local Foreign Total A. JIRAMA's Investment Progran 1. Generation 33.2 106.8 140.0 9.5 30.5 40.0 2. Transmission 5.3 12.5 17.9 1.5 3.6 5.1 3. Distribution 39.9 118.5 158.3 11.4 33.8 45.2 4. TooLs and Equipment for Maintenance 2.5 8.9 11.3 0.7 2.5 3.2 5. Other Programs a. Loss Reduction Program 0.5 1.3 1.9 0.2 0.4 0.5 b. Capacity Building for Management and Training 0.4 9.8 10.2 0.1 2.8 2.9 c. Information Technology Program 2.1 7.1 9.2 0.6 2.0 2.6 d. Feasibility Studies for Hydro 0.5 3.5 4.0 0.2 1.0 1.2 Subtotal Other Programs 3.6 21.7 25.3 1.0 6.2 7.2 Subtotal JIRAMA's Investment Progran 84.4 268.4 352.8 24.1 76.7 100.8 B. Electrification Program 3.8 19.9 23.7 1.1 5.7 6.8 C. Institutional Reform of the Power SLbsector 1. Legal and Regulatory Framework 0.0 5.4 5.4 0.0 1.5 1.5 2. Corporatization of JIRAMA 0.2 4.3 4.5 0.1 1.2 1.3 SubtotaL Institutional Reform of the Power Subsector 0.2 9.7 9.9 0.1 2.8 2.8 D. Energy Efficiency Program 1. Program for Energy Conservation 2.6 2.8 5.4 0.7 0.8 1.5 2. Mahajanga Woodfuels Pilot Program 2.2 3.8 6.0 0.6 1.1 1.7 SubtotaL Energy Efficiency Program 4.8 6.6 11.4 1.4 1.9 3.2 TOTAL BASELINE COSTS 93.2 304.6 397.8 26.6 87.0 113.7 Physical Contingencies 10.0 31.8 41.8 2.9 9.1 11.9 Price Contingencies 54.1 225.1 279.2 -0.7 7.6 6.9 TOTAL PROJECT COSTS 157.3 561.5 718.8 28.8 103.7 132.5 Project Financing Plan (US$ million) Local Foreign Total % of Total IDA 1.9 44.1 46.0 34.7 EIB - 24.7 24.7 18.7 CFD - 28.3 28.3 21.3 ABEDA 6.6 6.6 5.0 JIRAMA 26.7 - 26.7 20.1 GOVERNMENT 0.2 - 0.2 0.2 TOTAL 28.8 103.7 132.5 100.0  - 12 - Schedule B Page I of 3 REPUBLIC OF MADAGASCAR ENERGY SECTOR DEVELOPMENT PROJECT Project Economic Returns (percent) and Sensitivity Analysis I/ JIRAMA's Investment Program Transmission Line Namnorona-Manakara-Mananiary Base case 22 Base case 29 'a) 15% increase in investment costs 19 (a) 25% increase in investment costs 24 (h) 40% increase in fuel prices 21 (b) 25% drop in expected sales 21 (c) 20% drop in expected benefits 15 (c) 25% increase in operating (including fuel) costs 27 Hydroplant Rehabilitation Rehabilitation and Extension of the Distribution Network Base case 57 Base case 12 (a) 25% increase in investment costs 44 (a) 15% increase in investment costs 10 (b) 25% drop in expected benefits 40 (b) 15% increase in supply costs 6 (c) 25% increase in investment costs (c) 15% drop in expected demand 9.5 conmbined with (b) 31 Rehabilitation and Extension of Thermal Power Stations Improved Stove Programs 22 Base case 23 Mahajanga Woodfuel Program 42 (a) 15% increase in investment costs 19 (b) 20% increase in fuel costs 18 (c) 10% drop in expected demand 17 Main assumptions: Discount rate: 12% Tariffs maintained at least at LRMC Losses reduced from 18 to 12 percent of net generation Average annual growth of electricity sales of 4.8% Nature of Benefits Incremental sales, interconnection of about 45,000 new consumers. 30,000 of which in areas already served by JIRAMA, increased supply reliability and reduction of system losses from 18 to 12% of net generation, substitution of hydro for thermal generation, economic efficiency gains from institutional reform of the electricity subsector, improved efficiency of firewood and charcoal production and consumption, and reduction of the relative share of energy expenditures in household budgets by about 20%. Main Beneficiaries Rural and urban households, using woodfuels; all electricity consumers. 1/ With average tariffs taken as a proxy for economic benefits. The economic benefits are much higher when calculated usin1g the willingness of consumers to pay for electricity. Benefits from institutional reform and electrification program were not quantified. Details are given in the Staff Appraisal Report: Madagascar: Energv Sector Development Proiect, November 1995.  - 13 - Schedkle B Page 2 of 3 REPUBLIC OF MADAGASCAR ENERGY SECTOR DEVELOPHENT PROJECT FINANCIAL SLUHARY FOR JIRAMA'S ELECTRICITY SECTION (In FMG million) 1994 1995 1996 1997 1998 1999 2000 Actual Income Statement Items Operating Revenue 117,334 199,663 250,834 275,054 297,636 322,765 346,555 Operating Expenses 97,216 128,233 145,215 156,978 165,406 199,643 218,886 Operating Income 20,117 71,430 105,619 118,077 132,230 123,122 127,669 Net Income (19,838)1/ 8,677 28,128 43,563 66,042 78,353 85,795 Balance Sheet Items Current Assets 223,663 183,738 242,390 280,826 321,117 380,844 441,782 Less Current Liabilities 123,889 102,718 122,907 128,794 126,381 138,933 145,108 Plus Net Fixed Assets 479,804 562,452 600,611 634,710 750,655 888,473 985,909 Total Net Assets 579,579 643,473 720,094 786,743 945,391 1,130,384 1,282,583 Long-Term Debt 363,950 433,994 479,370 500,502 585,657 686,484 746,767 Other Liabilities 156,050 876 912 949 988 1,029 1,071 Equity 59,579 208,602 239,812 285,292 358,746 442,872 534,745 TotaL Liabilities and 579,579 643,473 720,094 786,743 945,391 1,130,384 1,282,583 Equity Funds Flow Statement Items Internal Sources 70,888 122,444 149,047 166,787 178,251 191,705 203,290 New borrowing 66,742 35,117 77,235 66,649 123,461 147,842 115,106 Debt write-off 2/ (46,297) TOTAL SOURCES 137,630 111,264 226,282 233,436 301,712 339,547 318,396 Investment 52,741 33,580 83,758 102,849 179,458 212,306 183,243 Working capital increase 30,372 (7,887) 44,136 28,598 25,552 49,751 58,612 (decrease) Debt Service 54,517 85,571 98,388 101,988 95,702 74,489 73,540 Dividends 1,000 3,000 3,000 Total Applications 137,630 111,264 226,282 233,436 301,712 339,547 318,396 Financial Ratios Debt Service Coverage 1.3 1.4 1.5 1.6 1.9 2.6 2.8 Contribution to 35 91 98 51 40 40 87 investment (percent) 3/ Current Ratio 1.8 1.8 2.0 2.2 2.5 2.7 3.0 Debt/Equity Ratio 4/ 86/14 68/32 67/33 64/36 62/38 61/39 58/42 1/ After net financial charges of FMG 39,955 mn, including extraordinary exchange losses of FMG 28,566 mn caused by 100 percent devaluation of the FMG in 1994. 2/ Government debt write-off as agreed at negotiations to compensate for liquid working capitaL contributed in the past by the electricity section to the water section. 3/ Internal sources minus: debt service + increase in working capital other than cash and bank + dividends; divided by: average investment for last, current and next year. Investment for 1994 and 2001 is FMG 38,931 mn and FMG 106,038 mn respectively. 4/ At negotiations, the Government and JIRAMA agreed to a plan, involving conversion of debt into equity and a debt write-off, to allow JIRAMA to attain a debt/equity ratio of no more than 70/30 by 1996.  - 14 - Schedule B Page 3 of 3 REPUBLIC OF MADAGASCAR ENERGY SECTOR DEVELOPMENT PROJECT Key Performance Indicators (JIRAMA) Performance Indicator 1995 1996 1997 1998 1999 2000 Staffing and Productivity 1/ Customers per Employee 48 48 50 55 60 65 Sales Per Employee (Mwh) 110 110 120 130 140 150 Efficiency Energy Losses (percent of net 18 18 17 15 13 12 energy generated) FinanciaL 1/ Operating Income as a percent 35.8 42.1 42.9 44.4 38.1 36.8 of Total Operating Revenue Debt Service Coverage 1.4 1.5 1.6 1.9 2.6 2.7 Contribution to investment 91 98 51 40 40 87 (percent) 2/ Debt/Equity Ratio 68/32 67/33 64/36 62/38 61/39 58/42 Average Collection Period (days) Public Sector 90 90 90 90 90 90 Private Sector 60 60 60 60 60 60 1/ Target values for these indicators will be reviewed by the consultants charged with JIRAMA's restructuring study. 2 Internal sources minus: debt service + increase in working capital other than cash and bank + dividends; divided by: average investment for last, current and next year. Investment for 1994 and 2001 is FMG 38,931 mn and FMG 106,038 mn respectively.  - 15 - Schedile C Page 1 of 2 REPUIBLIC OF MADAGASCAR ENERGY SECTOR DEVELOPMENT PROJECT Surmary of Proposed Procurement Arrangements (US$ million) Procurement Method International Local Competitive Competitive Consulting Bidding Bidding Services Other N.B.F. Total A. Works 1. JIRAMA works - - - - 8.7 8.7 2. MEM eLectrification works - 0.9 - - - 0.9 (0.8) (0.8) B. Equipment 1. Power system equipment Hydro plant equipment 0.8 28.8 29.7 (0.7)a/ (0.7) Diesel plant Equipment 8.5 - - 2.5 - 11.0 (7.1) (2.1)b/ (9.2) Transmission and Distribution Equipment 8.5 0.5 - - 39.2 48.2 (7.8) (0.5) (8.3) Service connection equipment 9.9 - - - - 9.9 (8.2) (8.2) 2. General plant Cars; office and D. P. Equipment 2.3 0.2 - 0.5 0.2 3.3 (2.0) (0.2) - (0.5)c/ - (2.6) Equipment for 0 & M, and for training center 4.0 - - 0.2 - 4.3 (3.3) (0.2)d/ (3.5) C. Services 1. Engineering and consultancies - - 9.4 0.3 3.8 13.5 (9.3) (0.3)_/ (9.6) 2. Training - - 1.1 0.4 - 1.5 (1.1) (0.4)f/ (1.5) D. Miscellaneous 1. Land and Rights of Way - - - - 0.1 0.1 2. PPF Refinancing - - 0.9 0.5 - 1.5 - - (0.9) (0.5) (1.5) Total 33.4 1.6 11.4 5.3 80.8 132.5 (28.5) (1.5) (11.3) (4.7) (46.0) Note: Figures in parentheses are the respective amounts financed by IDA. a/ Direct contracting for proprietary spares. b/ US$1.4 million direct contracting for proprietary spares, and USS0.7 million Limited international bidding for specialized equipment incLuding fuel processing equipment. c/ From U.N. agencies. d/ International shopping for measuring instruments and software to be used in the loss reduction program. e/ Direct contracting to finalize feasibility study for the Ambodiroka hydro project. f/ Travel expenses, subsistence and tuition equivalent for training abroad.  - 16 - Schedule C Page 2 of 2 REPUDBLIC OF MADAGASCAR ENERGY SECTOR DEVELOPMENT PROJECT Disbursement ScheduLe (US$ million) Description Percentage Financed by IDA Total A. JIRAMA (1) Goods: (a) ELectromechanical Equipment 100% of foreign expenditures 18.4 (b) General Plant 100% of foreign expenditures and 90% of local expenditures 5.5 (2) Consulting Services: 100% 3.2 B. MINISTRY OF ENERGY (3) Works: 100% of foreign expenditures and 90% of local expenditures 0.9 (4) Goods: (a) Electromechanical Equipment 100% of foreign expenditures and 90% of local expenditures 4.7 (b) General Plant 100% of foreign expenditures and 90% of local expenditures 0.4 (5) Consulting Services: 100% 7.7 (6) Training: 100% of foreign expenditures and 90% of local expenditures 0.4 C. OTHER (7) Refunding of the PPF: Amounts Due 1.5 (8) Unallocated: 3.3 TOTAL 46.0 Estimated IDA disbursements (US$ miLLion): FY97 FY98 FY99 FY00 FY01 FY02 Annual 1.7 8.5 16.7 12.7 4.4 2.0 CumuLative 1.7 10.2 26.9 39.6 44.0 46.0  - 17 - Schedule D Page 1 of 1 REPUBLIC OF MADAGASCAR ENERGY SECTOR DEVELOPMENT PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: 36 months (b) Prepared by: Government/Bank 1/ (c) First IDA Mission: September 1992 (d) Appraisal: June 1993 (e) Post Appraisal November 1993 (f) Negotiations: Sept. 1994 (g) Planned date of Effectiveness: July 1996 (h) List of relevant ICRs: Energy I Project, June 1995. The Bank's contribution to the preparation of the project was the responsibility of Messrs. Angel Baide (Task Manager), Power Engineer; Noureddine Bouzaher, Senior Economist; Richard Senou, Senior Financial Analyst; Robert Van der Plas, Domestic Energy Specialist; Ms. Rangaswamy Vedavalli, Principal Economist; Stephen Gaull and John Davis, Financial Analysts, Consultants. Mario Zenteno, Consultant, contributed to the institutional reform component; Georges Maestrini, Consultant, contributed to the component for human resources management and training in JIRAMA. Edward Gaither, Geoffrey Smith and Marc Methe, Consultants, contributed to planning for the electrification program.  - 18 - Schedule E Page 1 of 7 STATUS OF BANK GROUP OPERATIONS IN THE REPUBLIC OF MADAGASCAR A. Statement of Bank Loans and IDA Credits Status of Bank Group Operations in the Republic of Madagascar Summary Statement of Loans and IDA Credits (LOA data as of 2/28/96 - MIS data as of 3/13/96) Amount in USS million (Less cancellations) Loan or Fiscal Undis-1i CLosing Credit no. year Borrower Purpose Bank IDA bursed Date Credits 59 Credits(s) closed 841.35 C19670-MAG 1989 MADAGASCAR MACRO EMSAP/TA 22.00 3.96 06/30/96 (R) C20420-MAG 1989 MADAGASCAR AGRIC RESEARCH 11.69 6.83 12/31/96 C20940-MAG 1990 MADAGASCAR EDUC SECT REINF 39.00 15.90 06/30/96 C21040-MAG 1990 MADAGASCAR FIN SECTOR/APEX 48.00 30.77 06/30/97 C21170-MAG 1990 MADAGASCAR TANA PLAIN DEV 30.50 24.06 06/30/97 C21250-MAG 1990 MADAGASCAR ENVIRONMENT 26.00 13.24 06/30/96 C22430-MAG 1991 MADAGASCAR LIVESTOCK 19.80 13.36 06/30/99 C22510-MAG 1991 MADAGASCAR NAT HEALTH SECTOR 31.00 21.14 06/30/97 C23820-MAG 1992 MADAGASCAR VOC. EDUCATION 22.80 15.41 06/30/98 C24590-MAG 1993 MADAGASCAR RURAL FIN 3.70 1.90 12/31/97 C24740-MAG 1993 MADAGASCAR FOOD SECURITY & NUTR 21.30 12.22 07/31/98 C24970-MAG 1993 MADAGASCAR FINANCIAL INSTITUTIO 6.30 5.64 09/30/98 C25380-MAG 1994 MADAGASCAR PET SEC REFORM 51.90 52.60 12/31/98 C25910-MAG 1994 MADAGASCAR URBAN WORKS PILOT 18.30 9.99 12/31/98 C26250-MAG 1994 MADAGASCAR CYCLONE REHABILITATION 13.10 5.89 06/30/97 C26440-MAG 1995 MADAGASCAR IRRIGATION II 21.20 19.68 06/30/00 C27290-MAG 1995 MADAGASCAR AGRIC. EXTENSION PROJECT 25.20 23.71 12/31/00 * C27780-MAG 1996 MADAGASCAR SOCIAL FUND 2 40.00 37.64 12/31/00 TOTAL number Credits = 18 451.79 313.90 Loans 5 Loans(s) cLosed 32.57 All closed for MADAGASCAR TOTAL number loans = 0 1/ Undisbursed balance for many projects has diminished more slowly than disbursements would indicate 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 (e.g. US$ value of Social Fund 11 is less than the original amount).  - 19 - Schedule E Page 2 of 7 STATUS OF BANK GROUP OPERATIONS IN THE REPUBLIC OF MADAGASCAR Summary Statement of Loans and IDA Credits (LOA data as of 2/28/96 - MIS data as of 03/13/96) Amount in US$ million (Less cancellations) Loan or Fiscal Undis- Closing Credit no. year Borrower Purpose Bank IDA bursed Date TOTAL*** 32.57 1,293.14 of which repaid 25.51 46.19 TOTAL held by Bank & IDA 7.06 1,246.95 Amount sold of which repaid TOTAL undisbursed 313.90 Notes: * Not yet effective. ** Not yet signed. * Total Approved, Repayments, and Outstanding baLance represent both active and inactive Loans and Credits. (R) indicates formally revised Closing Date. (S) indicates SAL/SECAL Loans and Credits. The Net Approved and Bank Repayments are historical value, all others are market value. The Signing, Effective, and Closing dates are based upon the Loan Department officiaL data and are not taken from the Task Budget file.  - 20 - Schedule E Page 3 of 7 INTERNATIONAL FINANCE CORPORATION STATEMENT OF IFC INVESTM4ENTS As of January 31, 1996 (In million US dollars) Country: THE REPUBLIC OF MADAGASCAR GROSS COMMITMENTS US$ MILLION HELD Undisb. OBLIGOR TYPE OF BUSINESS FISCAL YEARS LOAN EQUITY TOTAL BY IFC incl. Ptpnt Soci6te Textile de Mahaju Textiles 1977/87 14.72 .31 15.03 1.92 Bata S.A. Malgache a/ General Manufacturing 1980 1.25 - 1.25 - Les Pecheries de Nosy-be Food and agribusiness 1984190 6.94 .25 7.19 3.17 La Cotonnire d'Antsirabe Textiles 1986/90 10.89 .18 11.07 2.06 0.40 Financiere d'lnvestissement Capital markets 1990/91 - .47 .47 .47 - BNI-Credit Lyonnais Madag. Capital markets 1992 - 2.61 2.61 2.61 Aquaculture de la Mahajamn Food and agribusiness 1992/93/95 5.80 .61 6.41 6.41 - Societd d'Exploitation Hoteliere Hotel and Tourism 1995 0.36 0.36 0.36 0.36 Total Gross Commitments b/ 39.96 4.43 44.39 Less Cancellations. Terminations, Repayments, and Sales 26.89 .50 27.39 Total Commitments Now Held c/ 13.07 3.93 17.00 17.00 0.76 Pending Commitments MADAGASCAR CDF - 1.11 1.11 SCOI 1.50 - 1.50 Total pending commitments 1.50 1.11 2.61 Total commitments held and pending commitments 14.57 5.04 19.61 Total undisbursed commitments .76 - .76 a/ Investments which have been fully cancelled, terminated, written off, sold, redeemed, or repaid. b/ Gross commitments consist of approved and signed projects. c/ Held commitments consist of disbursed and undisbursed investments.  - 21 - Schedule E Page 4 of 7 REPUBLIC OF 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, are now showing improvement. 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 the priority investment program. 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 department in the Ministry of Budget, Finance and Planning 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. 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 13 percent in FY95 as regards implementation progress, and from 27 percent to 17 percent as regards development objectives. In addition, 22 percent of the portfolio was rated highly satisfactory in terms of meeting development objectives. Disbursements for investment projects increased substantially from US$23 million in FY92 to US$72 million in FY95. This represented an increase in the disbursement ratio from 7 percent to 20 percent. Disbursements so far in FY96 (through end-February 1996) are US$51 million. At the end of this schedule is a table which shows project-by-project disbursement trends for FY95 and FY96. 3. While significant progress has been made on portfolio performance, much remains to be done. The political and economic/financial situations in Madagascar still have the potential to derail project implementation, and continuing efforts will be made to monitor closely and follow up the action plans identified during the May 1995 CPPR, both for remaining generic issues and for individual projects. 4. Disbursement Lags. Even though disbursements have been reasonably robust, the undisbursed balance for some projects has diminished more slowly due to the strengthening value of the SDR versus the US$ 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. Four projects show disbursement lags of more than 50%:  - 22 - Schedule E Page 5 of 7 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 by the key co-financier, due to payment arrears, has delayed IDA's ability to proceed with the upstream works. IDA is studying in coordination with the co-financier possible solutions to this problem. If resolution is not forthcoming, the IDA credit may have to be suspended. The Health Sector Improvement Project (Cr. 2251-MAG) was considered a problem project in FY94. Since the beginning of FY95, however, considerable progress has been made by the Ministry of Health (MOH) with support from IDA and other partners in implementing key reforms aimed at addressing sectoral issues: (i) a private non-profit drug procurement unit has been established; (ii) health districts have been established with medical officers appointed and budgetary allocations decentralized; (iii) a package of essential services and norms have been defined; and (iv) a policy on cost recovery and community management has been agreed. These reforns and the significant improvement of project management resulted in an upgrading of the project to a satisfactory rating. Disbursements have picked up. The project mid-term review held in June and October 1995 resulted in proposals for some project restructuring -- to help MOH upgrade district health services and introduce cost recovery and community management in the districts; to remove from the project family planning activities which will now be supported by USAID; to help finance the revolving drug fund of the newly-established drug procurement unit; and to refine institutional strengthening activities to address MOH's main weaknesses in human resources development, IEC (information, education, communications) and management information systems. The project changes will be submitted to the Board shortly on a non-objection basis. 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 the Acting Governor has taken key policy and institutional decisions. Since he replaced the previous Governor in December 1994, 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 based on the above, 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. With decisions made on key sector issues and improved management, procurement of key items and disbursements are now advancing. 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 recent recruitment of the project management consultant. Also, in line with its decision to liberalize the import of refined  - 23 - Schedule E Page 6 of 7 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$18 million will be canceled. Remaining investments under the project relate to: (i) the restructuring of SOLIMA, the creation of an open access system to certain key facilities by all operators and the establishment of a regulatory authority; and (ii ) physical investments in infrastructure to improve safety and protect the environment. 5. Effectiveness. The Social Fund II (FID) Project (Cr. 2778-MAG), approved by the Board in September 1995, was expected to become effective by early January 1996. The government's decision to remove the FID Director in November 1995, however, slowed project activities including follow-up on credit effectiveness conditions. The National Assembly has approved the project. The government is in the process of recruiting a new FID Director, whose first task will be to ensure that all credit effectiveness conditions are fulfilled. The government is also taking actions to meet the conditions meanwhile. Effectiveness is now expected by June 1, 1996.  - 24 - Schedule E Page 7 of 7 Madagascar Portfolio IDA Disbursement Trends (US$ millions) Credit Credit Disbursed Disbursed Total No. Project Amount FY95 FY96 1/ Disbursed 1967 EMSAP 22.00 4.28 3.96 20.54 2042 Agricultural Research 11.69 2.07 1.02 6.43 2094 Education Sector 39.00 8.01 7.94 28.50 2104 APEX 48.00 5.79 5.55 22.65 2117 Tana Plain 30.50 4.77 1.89 9.67 2125 Environment 26.00 5.15 3.76 15.83 2243 Livestock 19.80 2.49 0.73 7.15 2251 National Health 31.00 4.37 3.49 12.59 2382 Voc. Education 22.80 3.45 3.17 9.18 2459 Rural Finance 3.70 0.91 0.54 2.07 2474 Food Security 21.30 3.51 4.24 10.61 2497 Financial Institutions 6.30 0.64 0.49 1.16 2538 Petroleum Sector 51.90 1.19 0.37 1.56 2591 Urban Works 18.30 3.67 6.07 9.74 2625 Cyclone Rehabilitation 13.10 2.78 5.22 8.00 2644 Irrigation II 21.20 0.62 1.87 2.49 2729 Agricultural Extension 25.20 0.00 0.20 0.20 2778 Social Fund II 40.00 0.00 0.00 0.00 Closed projects 841.35 18.66 0.76 839.91 TOTAL 1293.14 72.36 51.27 1008.28 1/ As of February 29, 1996.  44' 45' 4d' 560 MADAGASCAR ELECTRIC POWER SYSTEMS AND FOREST COVER U nsinG TRANSMISSION LINES: 0 138 LV, DOUBLE CIRCUIT ----- 63 kV 35o20LV 0V * MAJOR ELECTRICITY CENTERS * OTHER ELECTRICITY CENTERS 0AMS * HYDRO POWER STATIONS ANTS I R A N A N A FORESTS , RIVERS ' AMY' \ - - FARITANY ROUNDARIES 2,A4OA O IbR. .) ANDAFA -. 5t'^AIOfl',Hy 0! ;N I.O_ ' ~ ~ ~ ~ ~ 0, 4{ ; -.AJR l.R * -A1 I'll -M A H A J NGA EnLIY ew;nf -OG C h II 11 {ie IOdimn m,lod>..