Madagascar - Financial Institutions Development Technical Assistance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 20251 IMPLEMENTATION COMPLETION REPORT (CREDIT 24970) ON A TECHNICAL ASSISTANCE PROJECT IN THE AMOUNT OF US$6.3 MILLION TO THE REPUBLIC OF MADAGASCAR FOR A FINANCIAL INSTITUTIONS DEVELOPMENT TECHNICAL ASSISTANCE PROJECT (Credit 2497-MAG) March 30, 2000 Private Sector and Finance Unit Afnica Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective December 1, 1999) Currency Unit = MALAGASY FRANC FMG 1 = US$ 0.000162 US$ 1 = FMG 6143.75 FISCAL YEAR JANUARY 1 DECEMBER 31 ABBREVIATIONS AND ACRONYMS BCM Banque Centrale de Madagascar (Central Bank of Madagascar) BFV Banky Fampandrosoana ny Varotra BITS Swedish Agency for International and Economic Cooperation BTM Bankin 'ny Tantsana Mpamokatra CAS Country Assistance Strategy CNFPB Centre National de Formation de la Profession Bancaire (School of Banking Training) CSBF Commission de Supervision Bancaire et Financiere (Financial Supervisory Commission) IDA International Development Association ICB International Competitive Bidding IFAC International Federation of Accountants IT Information Technology INSCAE Institut National des Sciences Comptables et de l'Administration des Entreprises (School of Accounting and Business Management) FINDEP Finaicial Institutions Development Project HIPC Highly Indebted Poor Countries MIS Management Information System OECCAM Ordre des Experts Comptables et Comptables Agrees Malgaches PAIGEP Projet d'Appui Institutionel 6i la Gestion Publique PPF Project Preparation Facility SAL Structural Adjustment Loan UNCTAD United Nations Council on Trade and Agriculture Development USAID United States Agency for International Development Y2K Year 2000 Vice President: Callisto Madavo Country Manager/Director: Michael Sarris Sector Manager/Director: Gerard Byam Task Team Leader/Task Manager: Herminia Martinez/Jean-Bemard Maucor  FOR OFFICIAL USE ONLY CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 7 6. Sustainability 8 7. Bank and Borrower Performance 9 8. Lessons Learned 11 9. Partner Comments 11 10. Additional Information 13 Annex 1. Key Performance Indicators/Log Frame Matrix 14 Annex 2. Project Costs and Financing 17 Annex 3. Economic Costs and Benefits 19 Annex 4. Bank Inputs 20 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 21 Annex 6. Ratings of Bank and Borrower Performance 22 Annex 7. List of Supporting Documents 23 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.   Project ID: P00 1550 Project Name: Financial Institutions Development Technical Assistance Project Team Leader. Herminia Martinez TL Unit.: AFTPS ICR Type: Core ICR Report Date: March 30, 2000 1. Project Data Name: Financial Institutions Development Technical L/C Number: 24970 Assistance Project Country/Department: MADAGASCAR Region: Africa Regional Office Sector/subsector: FS - Financial Sector Development KEY DATES Original Revised/Actual PCD: 06/15/90 Effective: 12/20/93 06/23/94 Appraisal: 02/20/93 MTR: 09/30/94 02/09/96 Approval: 05/20/93 Closing.' 09/30/98 09/30/99 Borrower/Implementing Agency: GOVT OF MADAGASCAR/CENTRAL BANK Other Partners: USAID, Government of Switzerland, Swedish Agency for International and Economic Cooperation (BITS). STAFF Current At Appraisal Vice President: Callisto E. Madavo E. Jaycox Country Manager: Michael N. Sarris Francisco Aguirre-Sacasa Sector Manager: Gerard A. Byam Michael N. Sarris Team Leader at ICR: Herminia Martinez Govindan Nair, Financial Economist (AF3IE) ICR Primary Author: Korotoumou Ouattara 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U-=Unsatisfactory, HL-Highly Likely, L=Likely, UN=Unlikely, HUN=-Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact. SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S S Project at Risk at Any Time: Yes  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: As stated in the Staff Appraisal Report (SAR), the objective of the Financial Institutions Development Project (FINDEP) was to facilitate investment and growth in the productive sectors in Madagascar by improving the functioning of the financial system. This was in line with the Country Assistance Strategy (CAS), which emphasized increased private sector savings and investment as engines of future growth. The project aimed at strengthening key financial institutions and markets in Madagascar, thereby enhancing public trust in them and enabling them to mobilize savings to meet the investment financing needs of the private sector. The project was to be implemented in the context of the Government's Statement of Financial Reform and Development Policy adopted in March 1993. 3.2 Revised Objective: The project objectives were not changed during implementation. 3.3 Original Components: The project had four original components, each with a specific objective: (i) Central Bank Component: enhance the Central Bank's (BCM) ability to formulate and conduct monetary policy based on indirect instruments; (ii) Banking Supervision Component: improve the prudential supervision environment through the strengthening of the Banking Supervision Commission (CSBF); (iii) Auditing and Accounting Component: formulate and enforce audit and financial disclosure standards based on international norms; and (iv) Bank Privatization Component: support the privatization of state banks. Total cost of the project was estimated at US$10.4 million of which the World Bank total cost was US$6.3 million i.e. 60.5% of total project cost (see table 1). That amount included the funds to finance the four principal components and US$784,000 for PPF refinancing and unallocated funds. Co-financiers were USAID (US$3.0 million), Switzerland (US$0.6 million), and the Swedish Agency for International and Economic Cooperation - BITS (US$0.5 million). Table 1. Total Cost and IDA Initial Cost Estimates of the Project Component Total Cost IDA Initial Cost Rating (in million $US) (in million $US) CENTRAL BANK $8.9 $4.2 S BANKING $0.6 $0.6 S SUPERVISION AUDITING & $0.7 $0.7 U ACCOUNTING BANK PRIVATIZATION $0.2 $0.2 HS 3.4 Revised Components: The project components were revised during implementation. First, the task of privatization turned out to be more complex and costly than anticipated at appraisal. The early stages of project implementation were marked by the financial deterioration of the two state banks (BFV and BTM), due in large part to bad lending decisions during the period of political transition. Given the critical importance of the divestiture process to the structural adjustment program, it was -2-  decided to restructure another credit (APEX, Cr. 2104-MAG) to make sufficient funds available to provide technical assistance in support of state bank privatization. Second, the Auditing and Accounting Component was not implemented when the Government failed to comply with the disbursement condition. 3.5 Quality at Entry: Quality at entry is rated satisfactory. The project conformed to the Bank's country assistance strategy (CAS) as presented to the Board in 1992 in that it supported Madagascar's key objectives to: i) improve macroeconomic management through increased Central Bank independence and strengthened formulation and execution of monetary policy to promote the productive use of credit and contain inflation; ii) reduce the role and scope of the public sector, notably in the financial sector; and iii) promote private sector development by enhancing the quality of financial intermediation. The project was a critical aspect of a wider program of financial reforms needed to help revive private savings and investment. Quality of the project design: The project was undertaken while Madagascar was in a period of political transition. Although this transition provided the opportunity to strengthen key financial institutions in preparation of broad economic reforms, recovery, and growth, critical risks nonetheless remained. In particular, the risk that macroeconomic reform would not resume and thus jeopardize any successful implementation of the project was rated high during project appraisal. It was noted in the appraisal report that if the political transition were to last longer than expected, any institutional capacity building undertaken with project support would have limited application in the immediate future and consequently limited sustainability. In fact, the period of political turbulence lasted until the mid-nineties; nonetheless, the macroeconomic reform program did resume and its success was closely linked to improvements in financial institutions, including the Central Bank, the Banking Commission and the two state banks, BFV and BTM. The project chose to focus on a few key issues among several that were identified in a 1992 financial sector report. For example, the legal framework for financial transactions, and the domestic and international payment systems were areas included in the financial report and that the project did not address. Project design called for project management support to be provided by a cofinancier (Sweden), which provided support initially, but the activity was subsequently financed by IDA. In retrospect, project management activities should have been part of the activities to be financed by IDA. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The FINDEP project was approved by the Board in May 1993, a few months before a transitional Government stepped down in Madagascar. The credit became effective a year later, in June 1994. The project suffered significant initial delays because political-uncertainties slowed down the adoption of the Central Bank's new statutes which was a condition of credit effectiveness. Project management was also undermined at the outset by problems associated with the transition such as the appointment of a very weak governor nominated on political, rather than technical, grounds and the departure of the initial project coordinator, who became Minister of Finance. The project -3 -  was at risk for several years, but by the mid-term review in February 1996, the project was back on track principally because issues of leadership and management at the Central Bank were resolved. At the closing date of September 30, 1999, the project was rated satisfactory with respect to achieving its main objective of improving the functioning of the financial system by strengthening key institutions and markets. As discussed below, the expected outputs of the project components have been largely realized. 4.2 Outputs by components: A. CENTRAL BANK COMPONENT: The Central Bank component was the most important of the FINDEP project, accounting for 86% of project costs and comprising nine subcomponents to be implemented with support from the World Bank and three cofinanciers: USAID, Switzerland, and BITS (Sweden). Activities under the Central Bank component aimed at strengthening the operations of the Central Bank of Madagascar (BCM) have largely been completed. BCM has been reorganized and a new information system is in place, resulting in BCM having one of the most modern Management Information System (MIS) in African central banks. All applications for the transfer to the new accounting system have been developed. There was a transition period from the old "manual" system to the new which ensured a smooth transition. As can be expected with a new system, its capacities are still not fully utilized. The situation will improve as the newly-trained staff masters the system. The new system is expected to improve the accuracy and delivery of accounts as well as the management and efficiency of the Central Bank. Other accomplishments under the project relate to the improvement in open market operations with money market and refinancing operations of the Central Bank reformed significantly. Also, the Monetary Committee proposed under the Project has been created and its members trained, and a monetary policy reference manual is being finalized. (See Annex I for other Outcome/Impact Indicators). Some difficulties were encountered in the implementation of some activities of the Central Bank Component. Some of these difficulties were related to the choice of the accounting package to be used because no "off the shelf' system is perfect and most commercially available software has to be customized. In the case of BCM, the difficulties were magnified as very few staff were trained on computers or office automation software. Therefore, the project team had to follow a two-pronged approach consisting of first training users on the basics while supervising the project consultant (who was focused on the customization of the accounting software and development of division-specific applications), then training again the same users on the accounting package and on the new accounting procedures. When compared to the experience of similar projects, BCM did a good job in re-engineering its own accounting procedures and in absorbing as an institution the office automation and new accounting system that was built to model the institutional re-engineering. There were also difficulties in establishing cooperation between the Central Bank and the concerned departments of the Ministry of Finance to build a program to improve the management of the public debt, a function which under other World Bank programs was to be transferred to Treasury. The idea of purchasing the software developed by UNCTAD and implementing a training program was not implemented. This action will be undertaken under the World Bank supported PAIGEP project. -4 -  B. BANKING SUPERVISION COMPONENT Most activities in support of the Banking Supervision Commission (CSBF) have been completed (training, technical assistance in the drafting of regulations, modernization of physical facilities and provision of information systems). The IMF provided valuable support by assigning a Technical Advisor to the Commission. The CSBF is now a relatively independent organization. The technical secretariat of the commission is adequately staffed with well-trained staff. Its reporting system and off-site inspection are adequate. It has some capabilities for on-site inspection. This nascent capability will be, however, stretched with the increase in the number of international banks from three to six, following the sale of two large state banks, BFV and BTM, to Societe Generale and Bank of Africa respectively, and the licensing of a second Mauritius bank. In the early period of project implementation, the Banking Commission introduced regulations which were generally in line with international standards, although the Commission's powers were limited under the 1988 Banking law. There is, to a large extent, compliance with the Basel principles of bank supervision. The jurisdictional problems with the 1988 law were resolved with the passage of the 1996 Banking law which gave the commission the authority to issue all prudential rules. Most of the regulations have been prepared by the Technical Secretariat of the Commission (e.g. capital adequacy; risk concentration; lending to shareholders and directors; provisioning) and several have been approved such as liquidity measurement, the accounting plan for banks and other financial institutions, and publication of accounts. Despite its new powers, CSBF is still linked to the Central Bank which is responsible for appointing and remunerating the staff of its technical secretariat. CSBF's independence vis-a-vis the Government and politicians has not been tested yet, and only time will tell whether the Commission will remain impartial when confronted with political requests and pressure to license unsuited applicants. C. AUDITING AND ACCOUNTING COMPONENT The component which aimed at improving the auditing and accounting profession was not implemented because Malagasy professionals in these fields did not want to carry out the fundamental reforms agreed to under the Credit (specifically the need to open the profession to new entrants in the local market, including foreign firms, in order to improve competition and industry standards). The component was rated unsatisfactory. In 1998, the Bank decided not to extend the closing date for this component. Although the component was not implemented, the project team played a catalytic role in starting the dialogue that was then pursued by members of the professional association on their own and eventually resulted in some fundamental reforms in the accounting profession. In their written contribution to the ICR, the Professional Association of Accountants reports that positive actions resulted from the World Bank inputs. There was, in the end, an improvement in accounting and audit practices and in particular, the adoption of international accounting and auditing standards. These reforms ultimately resulted in the entry of the Malagasy accounting profession into the International Federation of Accountants (IFAC) in May 1999. The accounting and auditing profession has also opened up to the rest of the world by allowing partnerships between local and international firms such as PricewaterhouseCoopers, and Mazzars and Guerard. D. BANK PRIVATIZATION COMPONENT The two state banks (BFV and BTM) that held 56% of all financial assets in 1990 were - 5-  successfully privatized with technical assistance financed under the APEX project. Starting in the late eighties, the portfolios of the two state banks were restructured in preparation for their eventual privatization. By the mid-nineties, the state banks had a very weak financial position largely due to some politically-motivated lending. The appointment of two expatriate technical advisors funded by the projects as provisional administrators of the state-owned banks and advisors in the sale of the banks produced visible results in the banking sector very quickly, and contributed to the control of monetary expansion after 1996. Provisions and non-accrued interest as well as non-provisioned non-performing loans fell sharply in 1998 as the result of the recovery efforts of the state-owned banks and the restructuring of BFV portfolio before its sale to SociJti Generale. The new bank (BFV-SG) started operations in October 1998. A restructuring of the BTM portfolio was also done in conjunction with its sale to Bank of Africa, which began operations in November 1999. The share of BTM and BFV in the net portfolio of the banking system declined from 48.7% at the end of 1995 to 24.7% in April 1999. The banking system in Madagascar is healthy today, largely because of the privatization of the two remaining state banks and other activities financed under the APEX project. The achievements under bank privatization were rated highly satisfactory and will be discussed in the ICR for the APEX project which closes on June 30, 2000. 4.3 Net Present Value/Economic rate of return: N.A. 4.4 Financial rate of return: N.A. 4.5 Institutional development impact: Institutional development impact is rated substantial. The project's most important objective was to improve the functioning of the financial system with a heavy emphasis on restructuring the Central Bank (86% of project cost) to enable the institution to formulate and conduct monetary policy based on indirect instruments. Thus, during the life of the project, the Central Bank was reorganized, its systems modernized and BCM shifted from direct to indirect methods of monetary control. Directed credit was eliminated. Credit ceilings for commercial banks were abolished, and reserve requirements became the key instrument of credit control in 1995. The reserve requirement system was also modified to be based on deposits rather than credit. The system of reserve requirements has been successful in controlling inflationary pressures and reducing bank liquidity. However, despite very significant gains in the conduct of monetary policy, there remains areas of improvement. Reserve requirements impose a penalty on banks and discourage deposits. The remuneration of reserves beyond a certain level should, thus, be considered by the Central Bank. BCM should also monitor the evolution of the effective reserve requirement rate to determine the effect of reserve rate differentials. Poor communication between the Ministry of Finance and the Central Bank remains a constraint on monetary policy and should be improved. The management of domestic debt, which was not a main focus of the project, has been a source of concern, and some support was started by the IMF, USAID and the World Bank under PAIGEP project. Improvements in domestic debt management, including in the Treasury bill system will need to be addressed in future operations of the Bank and is in the agenda of the IMF. -6 -  The project had an important impact on the legal framework starting with the adoption of the Central Bank's new statutes as a condition of credit effectiveness. The legislation gave the Central Bank a large measure of independence with regard to the implementation of monetary and credit policies. To protect that independence, direct advances to the Government by the Central Bank are limited to 15% of the Government ordinary revenues, while the holding of treasury bills by the Central Bank is subject to a separate ceiling of 10% of the same revenues. Also, the enactment of the new Banking Law in 1996 during project implementation reinforced the powers of Banking and Supervision Commission and allowed the institution to improve its supervision of financial institutions. Today, CSBF has administrative, licensing, regulatory and supervisory authority on all financial institutions which mobilize deposits and/or grant loans. Another credit effectiveness condition was the external audit of the Central Bank. The Central Bank has been externally audited every year since that time and the project achieved its goal of creating an independent audit unit within the Central Bank. Today the Central Bank is a much more independent institution, freer from govermnent pressure to formulate monetary policy than it was at the start of the project. Over the past year, it has had to increase its lending to Government over the statutory limit but auditors note that this was done with IMF approval under exceptional circumstances. 5. Major Factors Affecting Implementation and Outcome 5. 1 Factors outside the control of government or implementing agency: N.A. 5.2 Factors generally subject to government control: The Accounting and Audit Profession component of the project was not implemented because the condition for disbursement was never met. That condition included the modification of the existing ordinance governing the profession of Accountants and Auditors to ensure that international standards are adhered to, as well as the opening of the profession to newcomers including foreign firms. The Government found it difficult to overcome the resistance to change of the established accounting and auditing profession. 5.3 Factors generally subject to implementing agency control: The Central Bank could have avoided some delays in implementation of the new MIS system by taking appropriate actions on time. It is likely that some of the delays in decision-making, including staffing, resulted from natural concerns by the Management of the Central Bank about the complexity of the system re-engineering tasks which accompanied the reorganization of the Central Bank and the introduction of a new accounting system. Also, the Central Bank's view that the international consultant in charge of system's change underestimated the task could be correct. As a result of the delays, the closing date of the credit had to be extended one year until September 30, 1999. 5.4 Costs andfinancing: During project implementation, several changes in the components affected final project cost and financing: (see Annex 2: Project Costs and Financing). Funds originally allocated to the Accounting and Audit component were reallocated to the Central Bank Component. Activities -7-  under the Bank Privatization component were financed under APEX, Cr. 2104-MAG and the funds originally allocated under FINDEP remained undisbursed. At closing, US$712 ,000 of the US$6.3 million credit amount was not committed. All undisbursed amounts will be canceled. 6. Sustainability 6.1 Rationale for sustainability rating: Sustainability of the project is likely. Institutional and legal reforms initiated under this project have helped create the environment for a modern and competitive banking system. The revision of the Central Bank statutes has given the institution new powers and independence in the formulation and implementation of monetary and credit policy. Government commitment to pursue reforms in the financial sector has resulted in its disengagement from bank ownership with the effective privatization of both state banks. Although the full impact of bank privatization will only be known in the medium to long run, the improved management of public banks during the divestiture process and their subsequent sale has contributed to increased efficiency in the financial system. It may be too early to detect a clear trend, partly because fiscal imperatives continue to dominate interest rate trends, but increased efficiency is already reflected in reduced intermediation margins and a downward pressure on interest rates. Also, the tight supervision of the state banks during the three-year divestiture process reduced significantly the potential losses of the banks. Today, the banking system remains healthy with non-performing loans estimated at less than 5% of the gross loan portfolio and almost fully provisioned. Until the end of 1999, when the sector was last reviewed, the interbank foreign exchange market established in 1994 has worked fairly well and government interventions have been minimal. Treasury bill holdings outside of the financial system increased rapidly since 1998 because of the broadening of the access to the primary market and pressure on some state-owned companies to shift from time deposits to treasury bills. The project helped CSBF build its capacity for bank supervision. This was achieved with parallel support from the IMF who provided a technical assistant in supervision. In November 1999, the IMF conducted an assessment of the Central Bank with an expert from Bank of France. On the basis of this review, the IMF plans to provide additional technical assistance to build the internal audit capacity of the Central Bank and of CSBF to carry out on off-site and on-site supervisions. The justice system was not an area pursued by the project but remains a key obstacle for the financial sector. Court decisions regarding financial matters and especially in loan recovery procedures are too often arbitrary. Procedures to seize and dispose of mortgage goods and to execute judgments are too slow and too expensive. The World Bank's support for business law reforms, including those relating to the operations of financial institutions were initiated under the PAIGEP and Private Sector Support (PATESP) projects. Some issues relating to guarantees are being studied under the Microfinance Project. The legal/judicial reform program will continue to be a priority and should be considered under private and/or financial sector operations. Further support of the World Bank in the financial sector, such as insurance and the institutionalization of the savings bank will be discussed over the coming months. The IMF plans to continue its support for Banking supervision and the internal audit function of the Central Bank. Assistance is also required in debt management, where much work remains to be done. 6.2 Transition arrangement to regular operations. - 8 -  Steps have been taken to ensure that project outcomes are sustainable, including training for management and key staff at the Central Bank and CSBF. Thus, members of a newly-created Monetary Committee have all been trained as well as staff at CSBF responsible for bank supervision. Users of the new accounting system at the Central Bank have been trained and new staff has been appointed in the completely restructured accounting and IT departments. Smooth transition to regular and more efficient operations has also been made possible by providing the Central Bank with the proper computer equipment for its future operations. Most of the divisions of the Central Bank are now equipped with modern and efficient hardware and software as the result of the project. The Central Bank also took the necessary steps to ensure Y2K compliance of the system, and no difficulties were reported for the passage to the year 2000. 7. Bank and Borrower Performance Bank 7. 1 Lending: Bank performance in the identification, preparation, and appraisal of the project was satisfactory. The Bank identified a project that was consistent with the government development priorities reflected in the Government Statement of Financial Sector Reform and Development. It was also consistent with the Bank's CAS for Madagascar which emphasized increased private sector savings and investments as engines of growth. In fact, identification of a potential project started as early as 1991, with a World Bank mission to Madagascar to undertake the first phase of the Financial Sector Development Study. The study identifies several areas of intervention at the time. A World Bank project preparation mission in November 1992 was made up of a large delegation of Bank Staff and consultants (nine members in total) working alongside the Central Bank authorities organized with the help of a small supervisory group formed just a few months before. There was a high degree of involvement of managers and senior staff of all Central Bank departments at all stages of project preparation, ensuring early borrower ownership of the project. The project appraisal mission took place in March 1993 at which time the Government of Madagascar demonstrated its commitment to the project with the adoption of a policy statement of comprehensive program of financial reforms. The actions of the policy statement closely matched what would be adopted as components of the project. Then, the Central Bank, which would serve as the implementing agency of the project, signaled its readiness and commitment by appointing a project coordinator. Bank cooperation with other partners was confirmed with commitment from USAID, the Swiss and Swedish Governments to support the project through parallel financing. Also the collaboration and link of the project with the IMF actions was made clear with discussions with the Central Bank on the revision of its statutes based on comments given by the IMF a few months before. The revision of the Central Bank statutes became a condition of effectiveness. 7.2 Supervision: Bank performance in supervision of the project was satisfactory. The project benefited from frequent supervision missions (at least two per year) involving Bank Staff, cofinancier staff and -9-  diverse expert consultants in monetary policy and banking supervision to evaluate progress in project implementation. This was accomplished with a tight supervision budget. Performance ratings of the project were realistic. The project was judged unsatisfactory in the beginning due to political uncertainty and inadequate project management by the implementing agency. The Bank team upgraded project rating to satisfactory by the mid-term review after new management was appointed at the Central Bank and the project made significant progress. Overall, implementation problems and progress were well identified and follow up actions were taken, such as dropping the auditing and accounting component after several attempts were made to allow the Government to reach an understanding with the Audit and Accounting profession. Also funds were judiciously reallocated to components that appeared to be underfunded. 7.3 Overall Bank performance: The overall Bank performance is rated satisfactory. The project benefited from extensive preparation and with a close supervision, the Bank team was able to address problems when they arose and take corrective actions. The team also proved very creative by taking advantage of some situations such as restructuring an existing underutilized credit to provide complementary financing to a key component of the project. It is worth noting that the project team coordinated closely with the Monetary and Exchange Affairs Department of the IMF in the implementation of the Central Bank and Banking Supervision Commission components. The IM1F assigned a technical advisor to the Banking Commission, whose tenure has largely coincided with project implementation. The project team also worked closely with other donors. Borrower 7.4 Preparation: The Borrower showed early interest in the possibility of a World Bank project that would address institutional issues faced by the Central Bank and weaknesses in the financial sector. Preparation of the project by the borrower was satisfactory. The World Bank team had several preparation missions and discussions with the authorities. In fact, by the time of pre-appraisal of the project, the borrower had already adopted a policy statement on which the project was going to be based, showing commitment to the future project. 7.5 Government implementation performance: Government implementation performance was satisfactory overall except for the accounting and auditing component. 7.6 Implementing Agency: The project suffered some delays in the beginning due to weak day-to-day and senior management at the implementing agency, i.e., the Central Bank, during the political transition and the Bank considered cancellation of the credit. However, the Government appointed a Governor who showed commitment to Central Bank reforms and who in turn appointed a very capable project management team who implemented this complex project efficiently. 7.7 Overall Borrower performance: Overall, borrower performance was satisfactory once a new governor and new management of the project were in place. - 10-  8. Lessons Learned Several lessons learnt from the implementation of this project can be structured along the following lines: 1. Selectivity/Prioritization of Issues and Bank Team Strength The project team was wise to focus on some key issues in the myriad of activities to be undertaken in the financial sector in Madagascar. Thus, other complex issues such as payment systems via Gyro banks and legal framework for financial transactions were not included in the FINDEP project. Experience in this project demonstrates that a strong multi-disciplinary World Bank team, able to react with agility to problems as they arise and who has a close relationship with the implementing agency is critical to project's success. The strength of the World Bank team can be attributed to the varied activities and programs in the financial sector which were being introduced in the mid-nineties (measures in the SAL; two investment operations in the portfolio and one under preparation). For instance, the World Bank tearn was able to provide support in the complex area of procurement of information systems. In spite of efforts on both the government and World Bank sides, the selection of consultants and subsequently the procurement of software and hardware proved time-consuming. Experience under this project would argue for caution in the inclusion of small IT components in projects which cannot have adequate supervision. 2. Continued Project retooling The Bank team reacted well to developing situations and took appropriate actions when needed. The Bank Privatization Component was judiciously moved to another project which had more funds. Also, the Management of External Debt under the Central Bank Component has been passed on to another World Bank project, i.e. PAIGEP. That move would ensure that the activity gets done by a project suited to handle it. The accounting and auditing component was abandoned after long discussions showed that required changes could not be introduced in time to finance the selected activities under the credit. The World Bank team learned that it is difficult to introduce major policy changes through a technical assistance operation. A more appropriate instrument would have been a SAL which was not available at the time of the project. 3. Collaboration with Partners and Co-financiers The Central Bank and the World Bank team sustained a successful working relationship with several other co-financiers (USAID, BITS, Government of Switzerland) and the IMF. The World Bank team kept close ties with the other co-financiers, some of whom were unable to carry out all the activities they had originally planned. The World Bank, then, stepped in to continue the activities. Project supervision was thorough and close interaction with the Borrower proved vital to project's success. 9. Partner Comments (a) Borrower/implementing agency: The Central Bank of Madagascar (BCM): The Central Bank of Madagascar was the implementing agency for the BCM Component of the project for which they provided a summary report (see attachment). BCM credits FINDEP with - 11 -  attaining one of its most important goals among the many others accomplished by the project: the implementation of new methods of information technology. Thanks to the project, BCM possesses today one of the most modern MIS systems in Africa, comparable to even European Central Banks such as the Bank of France. The new system allows BCM to not only have a reliable accounting system but to generate management information as well. Although it is premature to measure the impact of FINDEP at this point, the report points out that the project yielded very positive results for the Central Bank and started an irreversible development process. The Banking and Supervision Commission (CSBF): CSBF was responsible for implementing the Strengthening of the Banking Supervision component. In its written contribution (see attachment), CSBF stated that project objectives were well defined, although some were not achieved. The project financed computer equipment, software and hardware as well as vehicles that CSBF says greatly increased its supervisory and inspection abilities. CSBF staff participated also in several training activities provided by the project. However, the agency thinks that it could have taken advantage of more training opportunities if it had been more proactive instead of relying on proposals from the Central Bank. In evaluating World Bank performance, CSBF noted a difficult relationship with the Bank at first. The relationship became satisfactory once better communications were established with project managers. (b) Cofinanciers: USAED: Through its Financial Market Development Project, USAID agreed to assist the Research Department of the Central Bank by financing short term technical assistance, an expatriate research advisor and in-country training courses. Equipment and training were also provided to enable Internet connection. In addition, this Project supported human resource development at the Central Bank through short technical assistance and training. According to USAID's report, their experience with the project was very satisfactory. The staff at the Central Bank proved exceptionally professional and exacting. Their appropriate quality requirements for the nature of external assistance has contributed significantly to the Central Bank's ability to apply sound monetary stabilization policies and reduce inflation. This also helped enable the successful introduction of a secondary T-bill market. This commitment to getting the best results from external offers of assistance was also reflected in their effective coordination of a successful MIS upgrading effort. The Swiss Government: The Swiss Government had committed US$0.6 million for Foreign Exchange and Internal Audit subcomponents of the Central Bank Component. In their written contribution to this ICR, the Swiss Cooperation indicates that the Foreign Exchange subcomponent objectives were mostly achieved except for the rododater which was not installed. Several Central Bank employees benefited from training in Madagascar and abroad in Switzerland and France. The Swiss Cooperation also financed a Foreign Exchange room at the Central Bank as well as a two-year subscription to "Reuters" services. The Swiss cooperation recognizes that some delays in implementation, especially with respect to training abroad, were due to a Swiss decision to - 12 -  suspend all its training activities after the murder of a manager of a Swiss road project in July 1996. All activities resumed, however, by the end of January 1997. Nonetheless, the Internal Audit Subcomponent was not fully implemented by the Swiss as originally planned. The subcomponent called for technical assistance for an internal audit unit but, according to the Swiss, the conditions required to start the activity were never met on time. The activity, including the creation of an audit unit and reinforcement of control procedures, was later completed with World Bank/IDA financing. BITS Project Management Capacity activity was to be financed by the Swedish Agency for International Technical and Economic Cooperation (BITS) who was expected to finance consulting services to help the Central Bank in project planning and execution and provide support for overseas training and study visits. A number of missions took place until December 1994 aimed at providing assistance to the Central Bank in business analysis, project planning and management, and advice on strategies and a master plan in information systems. BITS ended its assistance in 1995 citing a lack of funds and restructuring of Swedish cooperation agencies. The World Bank, then, provided the financing for the technical assistance in project planning and management as well as for the preparation of the master plan. BITS did not provide comments for this completion report. (c) Other partners (NGOs/private sector): The Auditing and Accounting Profession component of the project was not implemented because thie professionals in these fields failed to undertake the required reforms. Nevertheless, the Association of Auditors and Accountants (OECCAM) with whom several discussions with Bank Staff took place, provided a written contribution to the ICR. OECCAM points out that it included in its 1999 program several of the activities that failed to be realized under the project. These included: (i) Update of accounting principles and annotated 1987 Guide to be submitted to the Accounting Superior Council; (ii) Drafting and publication of Auditing norms; (iii) Formal adoption of the code of ethics and deontology; (iv) Unification of the Expert financial accountants and Certified accountants professions; (v) Set up of the first professional examination; (vi) Studies to determine the country's needs for professional accountants for the next five years; (vii) Clarification of the texts giving OECCAM the exclusive rights to intervene in some areas; (viii) Measures taken for the defense of the profession, internally (respect of technical norms, personal ethic et professional deontology) as well as externally (illegal practice of the profession); and (ix) Quality control, especially in the management of case files. 10. Additional Information N.A. - 13 -  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Im act Indicators: A. CENTRAL BANK COMPONENT 1. Research Department 1. Research Department - Staff trained in monetary policy formulation. - Strengthen capacity to formulate monetary - Updated research center and provided policy internet connection - Improve published information - Regular monthly publication of statistical, - Improve data collection and classification policy and research infomiation 2. Open market operations 2. Open Market Operations - Improve money market auction operations - Money market and refinancing operations of - Improve-reserve requirements system to be the Central Bank were reformed significantly. based on deposits rather that credits. - Method for determining reference rate was - Improve information use to allow better improved in 1995 liquidity management - Guidelines on intervention by the Central Bank on interbank money market was not adopted due to inactivity in the market - Reserve requirements system has been in place since 1995. Reduction to 5% of the reserves to be maintained against time deposits and certificates of deposits. 3. Foreign Exchange Operations 3. Foreign Exchange Operations - Active management of forex and - Interbank foreign exchange market supervision of interbank markets established in 1994 is working well and - Improve forecasting and analysis of foreign govemment interventions are minimal. currencies - Training was provided to the foreign service department to enable the Central Bank to play a supervisory role and to improve procedures in forecasting and analysis of treasury in foreign currencies 4. Clearing operations and circulation of bank 4. Management of Bank Notes and Coins notes Equipment was purchased for the - Technical assistance, training, and Department and new procedures were put in equipment to Financial Operations place Department; - Strengthen security in distribution of notes and coins - : 5. Improved Accounting system 5. Accounting System - Extemal audit' - First external audit of BCM was credit - System review;: effectiveness condition - Introduce new improved system; - Annual audits are now performed regularly. - New uniform chart of accounts for banks; - A new accounting system was put in place - Establish a modern archiving system and a new accounting manual published - Archiving system activity was dropped 6. Intemal Audit 6. Internal Audit - Implementation of audit programs and - Training activities were financed by the procedures . Swiss. - Develop training programs for staff - Technical assistance by the Bank resulted - Create independent intemal audit unit in creation of an independent internal audit unit 7. Human Resource Development 7. Human Resource Development - Technical assistance to formulate human Assistance to develop and implement an resources development plan for BCM; improved personnel was achieved through - Assistance to project implementation. training at home and overseas - 14 -  8. Information Technology Systems for 8. Information Systems developing institutions capabilities and - Evaluation of computer system and master external debt Management plan in 1997 was followed by purchase and - Evaluation of Computer System installation of new hardware and software. - Development and implementation of - New accounting system was completed in information technology strategy; early 1999 and operated jointly as a test with - Purchase and installation of new hardware the old system until April 1999. At that date, and software; the old system was abandoned. - Implementation of new methods for - Staff was trained to handle new system information system (organizational structure, - The division was restructured and manual of procedures, training strengthened 9. Management of External Debt: 9. Management of External Debt - Improve forecasting and analysis of external The Central Bank and concerned debt with training and new software departments of the Ministry of Finance have been unable to cooperate to build a program- to improve the management of the public debt. The idea of purchasing the software developed by UNCTAD and implementing a training program has been abandoned. This action will be undertaken under the World Bank supported PAIGEP project B. BANKING SUPERVISION (CSBF) B. BANKING SUPERVISION (CSBF) COMPONENT COMPONENT 1. Technical assistance, training and - Equipment: Telephone, fax, and computer equipment for CSBF; equipment were acquired for CSBF. Several - Computer hardware and software books and publications in banking, finance, - Develop training program for staff economics, accounting, law, and financial markets were acquired for CSBF library as well a year subscription to economic and financial periodicals. - Technical Assistance activities under the project were finally undertaken by the IMF - Training was provided to 10 CSBF staff who attended four sessions in Paris, France jointly organized by the World Bank and the French Banking Commission. -Technical assistance and training have resulted in CSBF maintaining a database on banks, monetary market, and currency markets. Now CSBF is able to publish regular monthly information notes for the public at large as well as annual reports of the institution. New Banking law was put in effect as well as prudential supervision ratios and compliance with Cooke ratios were implemented. - On-site inspection of commercial banks is improving C. AUDIT AND ACCOUNTING C. AUDIT AND ACCOUNTING COMPONENT COMPONENT 1. Technical assistance to professional This component was abandoned after the body; govemment failed to meet the requirements 2. Development and implementation of bank for credit disbursement accounting and audit training program by INSCAE and CNFPB. D. BANK PRIVATIZATION COMPONENT D. BANK PRIVATIZATION COMPONENT 1. Specialized technical assistance to state - Two technical foreing advisors were placed banks. at the two state banks to clean up the - Ad hoc assistance on valuation, audits and portfolios and advise the goverment of the placing for the two state banks to be sale of BFV and BTM pnvatized - Both state banks were privatized by December 1999 with funding from another credit i.e. APEX project - 15 -  Output Indicators: End of project - 16 -  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) .~~rjc otB