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Public Disclosure Authorized

The World Bank FOR OFFICIAL USE ONLY


Report No: 31760-MG

Document o f

PROJECT APPRAISAL DOCUMENT


Public Disclosure Authorized

ON A PROPOSED CREDIT

IN THE AMOUNT OF SDR 85.9 MILLION (US$129.8 MILLION EQUIVALENT)


TO THE REPUBLIC OF MADAGASCAR

Public Disclosure Authorized

FOR AN INTEGRATED GROWTH POLES PROJECT

June 14.2005

Public Disclosure Authorized

Private Sector Unit Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

CURRENCY EQUIVALENTS (Exchange Rate Effective {April 30,2005)) Currency Unit = Ariary (MGA) SDR = US$1.51209 US$ = SDR0.661335 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AfDB AFD AGOA CAS CPFA EMP ESIA ESMF FPSI GOM CCOP CMOD EIB EMIP EPZ EU FMR GDP GOM ICT IDA IFC IG2P MIGA MSME NPS ODA PPF PPP RAP RPF RTZ QMM SIL African Development Bank Agence Frangaise de Developpement - French Cooperation Agency Africa Growth and Opportunity Act Country Assistance Strategy Country Profile o f Financial Accountability Environmental Manual Plan Environmental and Social Impact Analyses Environmental and Social Impact Management Framework Finance, Private Sector and Infrastructure Government o f Madagascar Service Contract (Contrat de Conduite doptration) Service Management Contract (Contrat de Maitrise d Ouvrage DtlCguCe) European Investment Bank Environmental Management Implementation Plan Export Processing Zone European Union Financial Management Report Growth Domestic Product Government o f Madagascar Information Communication Technologies Intemational Development Association Intemational Finance Corporation Integrated Growth Poles Project Multilateral Investment Guarantee Agency Micro Small and Medium Sized Enterprises National Secretariat Overseas Development Assistance Project Preparation Facility Public Private Partnership Resettlement Action Plan Resettlement Policy Framework R i o Tinto QIT Madagascar Minerals S.A. SDecific Investment Loan Vice President: Gobind Nankani Country Director: James Bond Sector Manager: Demba B a Task Team Leader: Ivan Rossignol

FOR OFFICIAL USE ONLY


MADAGASCAR INTEGRATED GROWTH POLES PROJECT APPRATSAL DOCUMENT AFRICA AFTPS Date: June 20,2005 Country Director: James P. Bond Sector ManagerDirector: Demba Ba Team Leader: Ivan Rossignol Sectors: Ports, waterways and shipping (30%); General industry and trade sector (30%); General transportation sector (20%); General water, sanitation and flood protection sector (iG%); Powei ( i & b j Themes: Small and medium enterprise support (P);Infrastructure services for private sector development (P) Environmental screening category: Full Assessment

Project ID: PO83351

Source BORROWERRECPIEST IYTEm-ATIONAL DEVELOPXLIENT

Local 0.00 129.80

Foreign 0.00 0.00

Total

0.00 129.80
129.80

Total:

129.80

0.00

Borrower: Ministry o f Finance, Economy and Budget - Madagascar Responsible Agency: National Secretary - Madagascar

FY Annual Cumulative

6 7.00 7.00

7 38.00 45.00

8 46.00 91.00

9 26.00 117.00

11 10 11.00 3.00 128.00 131.00*

12 0.00 0.00

0 0.00 0.00

0 0.00 0.00

US129.8 million Project implementation period: Start September 30,2005 End: June 28,201 1 Expected effectiveness date: September 30, 2005 Expected closing date: December 15,201 1
v

This document has a restricted distribution and may be used b y recipients only in the performance of their official duties. I t s contents may not b e otherwise disclosed
without World Bank authorization.

Does the project depart from the CAS in content or other significant respects? Does the project require any exceptions from Bank policies? Have these been approved by Bank management?
I s approval for any policy exception sought from the Board?

[ ]Yes [XINO
[ ]Yes [XINO

[ ]Yes [XINO [ ]Yes [XINO


[XIYes [ ] N o [XIYes [ ] N o

Does the project include any critical risks rated substantial or high? Does the project meet the Regional criteria for readiness for implementation? Project development objective

The overall purpose o f the proposed project i s to help provide the adequate business environment to stimulate and lead economic growth in three selected regional poles. The specific objectives are to assist the G O M to: (i) construct and rehabilitate critical infrastructure essential for sustained economic activity in the tourism, manufacturing, agribusiness and mining sectors; (ii) in place appropriate incentive put measures to achieve rapid growth; ( i ) i idevelop the instruments to ensure equitable, sustainable growth; and (iv) strengthen the capacity o f local authorities to formulate, prepare, implement, and manage medium- and long-term integrated o f fbture regional development projects. Project description The project comprises 5 components:

- A: Strengthening the business environment - B: Supporting export led growth in Antanarivo-Antsirabe - C: Supporting tourism led growth in Nosy B e - D: Mining and tourism led growth in Toalagnaro - E: Program and project implementation, evaluation and monitoring
Which safeguard policies are triggered, if any? The project i s classified in Category A for environmental assessment purposes. The approach to the safeguards triggered i s presented below, and the results are summarized in Annex 10 o f the PAD. The policies triggered are:

- Environmental Assessment (OP/BP/GP 4.01) - Natural Habitats (OP/BP 4.04) - Pest Management (OP 4.09) - Cultural Property (OPN 11.03, being revised as OP 4.1 1) - Involuntary Resettlement (OP/BP 4.12) - Forests (OP/BP 4.36)

Significant, non-standard conditions, if any: Board presentation: N/A Loadcredit effectiveness : 1


2

Issuance o f a project implementation decree establishing the institutional structure o f the project (NPS); The N P S has been established and the National Secretary, head o f the operational department and the head o f the fiduciary department have been hired

Covenants applicable to project implementation: Dated covenants:

Land access, six months after effectiveness: Declared RCserves foncibres touristiques in Nosy Be can be leased to, or acquired by, interested private sector investors in the hotel industry; Eighteen months after effectiveness, fiscal incentives to promote the tourism sector must be adopted; Six months after effectiveness, a Green Charter for the sustainable development o f hotel, restaurant areas in RCserves foncibres touristiques must be developed. The green charter will identify the norms in terms o f waste disposal, pollution, code o f ethics (including policies against HIV/AIDS), safeguards and other footprints, for private sector investment o n these reserves; Six months after effectiveness, local representatives o f the N P S in Nosy Be, Antsirabe Taolagnaro, must be appointed; Four months after effectiveness, the N S will have recruited a permanent Environmental specialist;

4 and 5

MADAGASCAR Integrated Growth Poles Project CONTENTS

2.

1.

STRATEGIC CONTEXT AND RATIONALE

3.
1.

Higher level objectives to which the project contributes .................................................... PROJECT DESCRIPTION Lending instrument .............................................................................................................

Rationale for World Bank involvement ..............................................................................

Country and sector issues....................................................................................................

.................................................................

Page

1 1
6 6 8 8

.................................................................................................

2. 4.

Program and project objectives and costing ....................................................................... Project components ........................................................................................................... Lessons learned and reflected in the project design.......................................................... Project development objective and key indicators..............................................................

8
9 10 12 13

3.
5.

6.
1.

Alternatives considered and reasons for rejection ............................................................

IMPLEMENTATION

Partnership arrangements. ................................................................................................. Institutional and implementation arrangements ................................................................ Monitoring and evaluation o f outcomes/results ................................................................ Critical risks and possible controversial aspects ...............................................................

........................................................................................................

14
14 14 17 18 18 20 23 23 24 25 25 27 29

2.

4. 5.

3.

. . . Sustainability.....................................................................................................................

J)

6.
1.

Loanlcredit conditions and covenants ............................................................................... APPRAISAL SUMMARY

2. 4. 3. 5.

Fiduciary ........................................................................................................................... Social.................................................................................................................................

Economic and financial analyses ......................................................................................

.................................................................................................

Environment...................................................................................................................... Safeguard policies .............................................................................................................

Annex 1-A: Country and Sector o r Program Background

..................................................... Annex 1-B: Country and Sector o r Program Background..................................................... Annex 1-C: Country and Sector o r Program Background.....................................................
Annex 2: M a j o r Related Projects Financed by the Bank and/or other Agencies

45
50

.................53

........................................................................ Annex 4: Detailed Project Description...................................................................................... Annex 5: Project Costs ............................................................................................................... Annex 6: Implementation Arrangements ................................................................................. Annex 7: Financial Management and Disbursement Arrangements ..................................... Annex 8: Procurement................................................................................................................ Annex 9: Economic and Financial Analysis ............................................................................. Annex 10: Safeguard Policy Issues .......................................................................................... Annex 1 : Project Preparation and Supervision ................................................................... 1 Annex 12: Documents in the Project File ............................................................................... Annex 13: Statement o f Loans and Credits ............................................................................ Annex 14: Country at a Glance ...............................................................................................
Annex 3: Results Framework and Monitoring MAP IBRD 33439

54 58 67 72 75

85
95 122 133 135 136 138

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues


Madagascar i s recovering strongly from an historical decline in per capita income. During the past three decades, Madagascars per capita GDP declined by 40 percent to US$220 in 2002. Structural reforms in the late 1990s played an important role in supporting growth performance up to 6 percent in 2001, the second highest rate in Africa at the time, mostly in the manufacturing sector (approximately 12 percent o f total GDP), vanilla and shellfish exports.
Despite these positive developments, the impact on poverty reduction on the 16 million Malagasy was modest, and poverty in the rural areas increased. Corruption and rent seeking were also widespread. This contributed to the 2002 political crisis, stigmatized by a stand-off between the two presidential candidates. The crisis led to the destruction o f key infrastructure and economic activity ground to a standstill, with Export Processing firms stopping all production.

The post-crisis period was marked by renewed strong economic growth, reaching 9.8 percent in 2003, bringing per-capita GDP to just below i t s 2001 level. This growth, however, relies o n continued investor confidence in Madagascar and o n some external factors influencing the tourism, fisheries and garment industries. In particular the tourism sector, exports o f coffee, shellfish and litchis depend on strong growth in Europe, while the health o f the garment industry depends o n how competitive the industry i s in a post multifiber agreement, quota-free U S market, and anticipated changes in the European Union (EU) garments trade regime.
Private capitalflows are still extremely limited and unsustainable

The current growth o f the Malagasy economy i s unlikely to be sustained. While Madagascar evidences good labor productivity rates in terms o f factory floor and labor costs, and while preferential trade agreements are currently favorable to Madagascar, private capital flows into the country are s t i l l extremely limited (amounting to approximately 10 percent o f the total foreign aid since 1997, at US$270 million2). This shows that the market response to current Malagasy reforms i s timid, at best, and that negative changes in external factors could trigger further losses in competitiveness, divestiture from productive assets and reduced growth3.
Poor geographic redistribution o wealth f

Madagascars recent growth had a comparatively l o w overall impact on poverty reduction; much lower than successful countries in South-East Asia Evidences suggest that growth between 1999 and 2001 was beneficial mainly to the people at the top o f the civil society or individuals

Source: Cadot and Nasir (2001), the number o f mens casual s h r t s per machine operator per day in Madagascar equals that in South Africa; labor cost per shirt i s at $0.16 while China evidences a labor cost o f $0.29. Source: Global Development Finance 2004 - The W o r l d Bank Source: W o r l d Economic F o r u m rankings o n competitiveness, where Madagascar i s at the 8 5 place; ~ DoingBusiness 2005 data. Source : Madagascar Country Assistance Strategy - 2003.

above the poverty threshold. Except for the province o f Antananarivo, all the five provinces became poorer over that time span. Other provinces5 have consistently displayed high poverty rates. The trends o f poverty within region follow that o f national headcount index with regional poverty gap improving only for the provinces o f Antananarivo and Toliary between 1993 and 2001. Similarly, at an 85 percent head count index, the regional poverty gap i s becoming deeper in rural areas for all provinces, except in Antananarivo. This demonstrates growth in Madagascar has not been shared.
Cost structure for Malagasy firms

Initial data o n the Investment Climate Assessment in Madagascar (2005), indicate that indirect costs on firms exceed a third o f their total operating costs, when compared to approximately 20 percent in China6. These indirect costs are immediately attributable to the poor physical infrastructure available, including road networks, deficient power supply, high telecommunication costs and tax and policy inefficiencies.
Undeveloped EPZ cluster and value chain

In spite o f numerous reforms launched since 2002, investor confidence in the Export Processing Zone (EPZ) sector has not totally recovered. The garment industry in particular i s heavily dependant on imported inputs with few domestic linkages such as sub-contracting and supplier relationships. The overall growth and competitiveness o f the industry is affected by weaknesses in the value chain in areas such as infrastructure and logistics, trade facilitation and domestic inputs. The industry also faces considerable uncertainty as the global textile and garments production networks adjust and realign to cope with the changes in the trade regime.
Sources o growth are untapped f

Tourism i s a growing sector contributing largely to the 6 percent annual growth rate. I spite o f n the countrys extraordinary flora and fauna, it i s better known to the scientific community than to tourists and the tourism sector remains under-developed. Madagascar receives approximately 100,000 visitors per annum while Mauritius receives approximately 700,000 visitors. Similarly, litchi, sisal and shellfish production, which are Taolagnaros main wealth, and which are in demand, cannot be exported. The large ilmenite deposits in Taolagnaro are the worlds highest grade, but have never been mined to this day.
This context creates thejustijkation for regional growth poles providing appropriate business environments

Current growth in Madagascar i s not spurred by the private sector, because o f a deficient investment climate showing poor and unreliable infrastructure and high risks associated with the policy environment. In addition, wide ranging reforms addressing the structural issues described above will yield results only in the medium to long-term. To jump-start this process, the GOM
In 2003, o n average, 85 percent o f the population in Fianarantsoa and Mahajanga and 78 percent o f the population in Toamasina and Toliary were poor. Source: Investment Climate Assessment Madagascar 2005 - Preliminary conclusions.

has therefore identified three regions where appro riate market conditions could be created to generate high private sector growth in the tourism , mining and manufacturing sectors. These regions were selected for their growth potential, the regional balance they represented, as well as for the sectors potential. Transversal activities targeting the business environment and supporting the development o f these regions were also identified to help realize the growth potential:
0

The Nosy B e region: with a population o f 61,000, the economic activity o f the island o f Nosy Be has been concentrated around sugar production and tourism. The sugar company, SIRAMA, which employs approximately 2,000 people, i s in a de-facto bankrupt situation, while the unemployment rate o n the island exceeds 90 percent. Tourism sector is underdeveloped with only some 25,000 tourists, visiting the island annually. Less than 20 percent o f the population has access to potable water, and 43 percent i s officially connected to the electrical grid. The port, which i s used for tourism, container traffic and fisheries i s clogged and does not meet basic safety requirements. The road network does not ensure access to the most spectacular sites o f the island.

The Antananarivo-AntsirabC region: Export processing zone (garment) f i r m s are scattered in and around Antananarivo with a few in Antsirabe. Firms cite the proximity to readily trainable and productive labor, urban and government services and the cooler climate as factors that attract them to locate in this area. There are a couple o f privately developed and managed industrial zones but none o f them has adequate infrastructure, proper customs and other facilities and services associated with a modem EPZ. The Government o f Madagascar (GOM) is currently supporting the development o f a modem industrial zone in Toamasina (Tamatave) through a public-private partnership arrangement. There i s potential for similar public-private partnerships in developing modern industrial facilities in this pole to overcome the current constraints such as poor infrastructure and logistics. In the Information Communication Technologies (ICT) sector the Association o f Private I C T service providers, GOTICOM, i s actively pursuing discussions to establish an I C T training center and I C T business park in Antanetibe on a public private partnership basis with strong possibilities to mobilize private financing. The Taolagnaro (Fort Dauphin) region: due to the poor conditions o f the road network connecting Taolagnaro to Toliary or to Anatanarivo, the Anosy region i s landlocked. This situation has created endemic famine situations over the past years, making the 60,000 population o f Taolagnaro one o f the poorest in Madagascar. The regions main wealth has been, in the past, sisal production, shellfish and litchis exports. The existing port condition, however, severely constrains most economic activity. Solid waste collection covers only 15 percent o f the populations needs while the sewerage and sanitation system i s not functioning. Only 31 percent o f the population has access to electricity; power shortages are often registered. The promise o f a large investment in an ilmenite mining operation has stalled most infrastructure investments during the last ten years. Tourism, which represents a promising economic potential, i s underdeveloped.

See World Banks Economic Sector Work o f the Tourism sector publishedin 2003.
3

See World Banks Economic Sector Work o f the Export sector in Madagascar completed in 2003.

Transversal issues to the three regions: Across the country, access to finance i s difficult (less than 5 percent o f the population has access to credit) while no specific facilities or services have been set up for medium and small enterprises. Leasing activities are not developed, credit bureaus do not exist and repossession o f moveable assets i s virtually impossible, given the lack o f registry and cumbersome and time-consuming judicial procedures. Business linkages, training on business or sector specific matters generally does not exist, which creates difficult entry conditions for new entrepreneurs. Despite huge potential, tourism development has been very slow and Small and Medium Enterprises (SMEs) in tourism have little support. This situation should also be seen as a hurdle to the development o f larger firms, which often depend on the provision o f products and services from smaller companies. Finally trade and investment promotion activities do not take place in a concerted way. The mobility o f f i r m s fixed assets during the 2001 crisis showed that the business environment is not conducive enough to attract sustainable and long t e r m investments in Madagascar.

2. Rationale for World Bank involvement

The GOM has requested World Bank assistance to prepare and finance the proposed project to stimulate and sustain private sector led growth in the identified three poles. The World Bank Group plays a unique role among the donor community in Madagascar: with the largest disbursing portfolio and i t i s seen as the GOMs main partner for alleviating poverty. I t i s the only donor with sufficient capacity and resources to take an integrated and multi-sectoral approach to stimulating economic growth. The European Union, the Agence Francaise de Developpement (AFD), the European Investment Bank (EIB), the African Development Bank (AfDB) and the Millennium Challenge Account have also shown some interest in the program, but with a more sectoral focus and with different timelines. While a partnership with other donors interested in the project is likely, no commercial bank would have the ability to provide the width o f technical and financial assistance required under the project. The proposed project is a central element o f the World Banks strategy in Madagascar. I t provides a platform for hard and soft infrastructure delivery in a coordinated and integrated manner (as defined in the Africa Region Financial Private Sector and Infrastructure {FPSI} Strategy); and supports the GOMs decentralization initiative. I t further draws on the joint Intemational Development Association (IDA) - International Finance Corporation (IFC) Micro, Small and Medium Enterprises (MSME) Program for Africa, intended to achieve greater impact for the client through leveraging o f the comparative advantages o f each institution. Finally, this project heavily draws on the conclusions o f the World Development Report 2005 (A Better Investment Climate for Everyone), and the 2005 Madagascar Investment Climate Assessment, which both demonstrate that the investment climate i s central to growth and poverty reduction. A better investment climate can be achieved by alleviating constraints and addressing policyrelated risks.
3. Higher level objectives to which the project contributes

The GOM recently completed its Poverty Reduction Strategy Paper (PRSP) with the objective o f reducing poverty by h a l f in ten years. The three key priorities set out by the PRSP are: (i) improving governance; (ii) promoting broad based growth; and ( i ) i iproviding security. The Banks Country Assistance Strategy (CAS), which was approved by the Board in November 2003, focused on two projects for FY05 delivery, namely the first Poverty Reduction Strategy Credit (PRSC), which was approved by the Board on July 22, 2004, and the proposed project: the Integrated Growth Poles Project (IG2P). Given the complexity and innovativeness o f the project, the country Team decided to scale-up the IDA allocation for the IG2P, from US$85 million to US$129.8 million. The larger allocation also allows providing for the Eahola port financing. The IG2P will contribute to GOMs and World Banks overarching CAS goal to foster broad based economic growth by focusing o n export processing zones (Antananarivo-Antsirabe), the tourism and agribusiness sectors (Nosy Be and Toalagnaro), and the mining sector (Taolagnaro). The IG2P will complement ongoing sector reforms, for example, in the telecommunications,

power, and transport sectors. It will address constraints in human capital formation, governance, the business environment, institutional capacity and enterprise development identified as impediments to economic and social development. As a project catalyzing an integrated approach, the IG2P will not, however, be a proxy for the definition and implementation o f sectoral policies, but will help remove impediments through concrete actions on the ground. Private sector will use the public investments made under the project to leverage i t s own investments and reduce its risk for doing business in Madagascar. The IG2P will be a catalyst o f private sector investment.

B. PROJECT DESCRIPTION

1. Lending instrument
Specific Investment Loan (SIL). The proposed lending instrument i s a US$129.8 million credit equivalent (SIL). The SIL would be supplemented by Intemational Finance Corporation (IFC), other donor resources and private sector investments on a public private partnership basis.

This SIL includes a Partial Credit Guarantee (PCG) component, which represents less than 5 percent o f the total project amount. The PCG, put together in cooperation with the IFC, will be used for M S M E lending, and will grow financial intermediation in each o f the three regional poles. A full description o f this subcomponent i s provided in Annex 1-B. 2. Program and project objectives and costing
The objective o f the program and the project is to assist GOM provide an adequate business environment adequate to stimulate and lead economic growth in three regional poles in the areas o f Antananarivo-Antsirabe, Nosy Be and Taolagnaro, The overall cost o f program is estimated at some US$304 million equivalent, inclusive o f taxes and contingencies with, at this stage, the cost o f construction o f the new port at the Ehoala peninsula being at some Euro70 million equivalentg. IDAS contribution to the five components o f the program constitutes the proposed IDA project.
At this stage, the proposed IDA financing i s estimated at some US$129.8 million equivalent (about 43 percent o f the program financing needs). Parallel financing i s under discussions from the private sector and a number o f donors (IFC, AfDB, AFD, EU, GOM (taxes and duties)) in the amount totaling US$154 million equivalent (about 49 percent o f the program financing needs). Additional financing will be sought from other multilateral donors, bilateral donors, and possibly from other World Bank projects for the remainder (about US$21 million equivalent). A donor conference i s planned to be organized by the G O M before credit effectiveness.

The project will be implemented during fiscal years 2006-201 1, closing on December 31,2010

The project design, structure and implementation plan allow it to reach the main development objectives and performance indicators o f the program.

Final amount to be c o n f i i e d before Board.

L
Components

Integrated Growth Poles Program Summary costs with taxes and contingencies

YO Total

US$ million) 55 39

A. Strengthening the business environment

costs

Base

IDA Project

18% 13% 1Y o 1% 3%
2 Yo

21

1. Access to fmance 2. MSME capacity building 3. Cotintry-wide tourism development initiatives 4. Improvingthe busmess environment
B. Export led growth in Antananarivo & Antsirabe

7
4

4
3

8
I

3 7
6 2

I. Enhance EPZ competitivenes 2. ICT Busmess Park Development 3. Support to Antananarivo and Antsirabe municipalities
C. Tourism led growth in Nosy Be

2
3 2 55 52

1% 1% 1Y o
18%

3
2 32

1. Infrastructureupgrading
2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening

1 2
166

17% 0% 1%
55% 53%

30 1 2
55

D. Mining and Tourism led growth in Tolagniaro (Fort Dauphin) 1. Infrastructtre upgrading 2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening E. Program and Project Implementation, Evaluation and Monitoring 1. Support to program& project mnitoring and evaluation 2. Support to project management and training 3. Technical assistance for project management & mnitoring 4. Operating expenses for project management
Total Program Costs

162 2 3
21 13 2 4 2 304

1% 1% I ?4n
4%

52 1 2
15 8 2 3

100'

1% 1Y o 1%

2
130

3. Project development objective and key indicators

The overall purpose of the proposed project is to help provide the adequate business environment to stimulate and lead economic growth in three selected regional poles.
The specific objectives are to assist the GOM to: (i) construct and rehabilitate critical infrastructure essential for sustained economic activity in the tourism, manufacturing, agribusiness and mining sectors; (ii) in place appropriate incentive measures to achieve rapid put develop the instruments to ensure equitable, sustainable growth; and (iv) strengthen growth; (iii) the capacity o f local authorities to formulate, prepare, implement, and manage medium- and long-term integrated o f future regional development projects.

The k e y indicators to monitor and measure the impact o f the objectives are:
0

The increase in the number o f tourists arriving at Nosy B e and Taolagnaro airports and ports, as a proxy for growth measurement in the tourism sector via stimulus o f small- and medium-sized Malagasy firms;

The volume o f merchandise and minerals shipped through the Taolagnaro and Tamatave ports and Ivato airport (proxy for growth measurement in agriculture, mining and manufacturing in Taolagnaro and in the Antsirabe -Antananarivo components; The number o f new jobs created in the three poles (proxy for shared content o f growth).

4. Project components
The proposed project comprises five components: one corresponds to transversal activities in support to business environment activities, and three correspond to the regional growth poles. The fifth component addresses and includes all activities related to project implementation, evaluation and monitoring. Annex 4 gives a detailed description o f the components and activities under the project.
In each o f the three growth pole components, a combination o f investments and technical advisory services i s proposed:

(US$55 million equivalent o which IDA w i l l contribute US$21 million equivaleno. Based on f demand, the project will aim to provide proactive support to the Micro, Small and Medium Scale enterprises (MSME) sector and to strengthen the business environment in the three geographic poles to allow Malagasy f i r m s play a greater role in the economy. The component will also provide support for capacity building in tourism and will monitor specific policy changes. The main activities under this component to be developed and implemented in cooperation with the I F C and Multilateral Investment Guarantee Agency (MIGA) include: (i) improving MSMEs' access to finance including through an IFC-managed risk sharing arrangement to provide guarantees to commercial banks; ( iM S M E capacity building to develop value chains (including i) in view o f a possible development o f the Antisrabe agribusiness zone); ( i ) i itourism capacity building; (iv) supporting the JIRAMA operation restructuring; and (v) improving the business environment including monitoring o f policy and regulatory changes to be taken by the GOM, strengthening o f the investment promotion agency and creation o f registries.
Component B: Supporting export led growth in Antananarivo-Antsirabe (US$7 million equivalent o which IDA w i l l contribute US$6 million equivalent). Based on f demonstrated private sector demand, the project will help develop off-site investments allowing

Component A : Strengthening the business environment

the creation o f an I C T business park in Antananarivo (Antanetibe site) and provide technical assistance for an industrial and agribusiness zones in Antananarivo and Antsirabe. The main activities o f this component include: (i) provision o f technical assistance to relevant ministries and EPZ authorities to enhance the sector's competitiveness, including to develop a new regulatory framework, to develop o f one or more industrial parks (EPZ) in Antananarivo and Antsirabe, to develop skills development program(s) and on the issue o f trade negotiations; (ii) supporting the development o f an I C T Business park in Antanetibe. Finally, the project will provide support to the municipalities o f Antananarivo and Antsirabk through: technical assistance, training, rehabilitation o f existing facilities.

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Component C: Supporting tourism led growth in Nosy Be (US$55 million equivalent o which IDA will contributeUS$32 million equivalent). The project f will create an infrastructure platform and regulatory environment to expand the tourism industry significantly. The infrastructure will be designed to accommodate a demand o f 2,000 intemational-level hotel rooms by 20 10. Core activities under this component include: (i) adoption by the municipality o f a tourism development master plan and urban development plan for Nosy B e to regulate and manage development in existing protected areas; (ii) technical ii assistance to develop and implement business incentives measures to attract investments; ( i ) upgrading o f the road network to provide access to the isolated eastern part o f the island and improve travel conditions between the airport, the main city (Hellville) and tourism sites; (iv) upgrading o f the Hellville and Ankify ports (the latter under another ongoing IDA project); (v) upgrading the public utilities system by supporting power generation and distribution, upgrading the water and sewerage system, upgrading urban solid and liquid waste management, and telecommunications; and (vi) upgrading the urban infrastructure o f Hellville and providing i t s hospital with a surgery block. Finally, the project will provide support to the municipality o f Hellville and the local tourism authorities through: technical assistance, training, rehabilitation o f existing facilities and creation o f ecotourism facilities. Component D: Mining and Tourism led growth in Taolagnaro (US$l66 million equivalent o which IDA will contribute US$55 million equivalent). The project f will create the infrastructure platform and regulatory environments to open up the landlocked region o f Taolagnaro to facilitate the growth o f tourism, agribusiness and to catalyze private sector growth in ilmenite mining. The infrastructure will be designed to accommodate a demand of 850 international-level hotel rooms by 2010. The principal activities under this component the include: (i) adoption by the municipality o f a tourism development master plan and urban the development plan for Toalagnaro, (ii) development (under a public private partnership) o f a new public port o n the Ehoala peninsula to support the ilmenite mining operations and to facilitate market access for local production and exports, ( i ) partial rehabilitation o f the ii a existing port o f Taolagnaro to provide continuity for traffic during construction o f the new port; (iv) upgrading the access road network, and the main rural roads, which could also become a support to tourism activities; (v) upgrading the key public utilities services (power, water, sanitation, urban infrastructure and services and solid waste management) and telecommunications to support the growth o f tourism and other economic activities in the region, and (vi) upgrading o f selected urban infrastructures including the Tsiranana hospital. The project will provide support to the municipality o f Taolagnaro, the local tourism authorities through technical assistance, training, rehabilitation o f existing facilities, construction o f basic sanitary facilities. Component E: Program and project implementation, evaluation and monitoring (US$21 million equivalent o which IDA w i l l contribute US$15 million equivalent). At the f central and regional levels, the project will provide support for: (i) project implementation, project coordination, procurement and financial management and ( isupporting the preparation i) and implementation o f the provisions o f the Environmental Management Plan, as well as the carrying out o f all environmental and social activities under the project.

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5. Lessons learned and reflected in the project design


Overseas Development Assistance (ODA) to create economic growth: With private investments representing only 10 percent o f official development aid, the Malagasy economy seems to be over-dependant o n public funding. W h i l e proposing an additional public investment, this project i s designed to b e leveraged by private sector investments and to create a context for public private partnerships. Investments in public infrastructure in Taolagnaro should foster the Rio Tinto mining investment. Investments in infrastructure and business environment in Nosy B e and Taolagnaro should allow the development o f a larger tourism industry. Investments in Antananarivo/Antsirabe should enhance the development o f textiles and garments, I C T activities and agro businesses. Technical assistance and financing to MSMEs will help widen the financial markets and will be done in partnership with the local banks, mainly. Focusing on delivering the basics: Broad-ranging improvements in the investment climate and in infrastructure provisions through regulatory, institutional reforms and sector investment are

typically done with national coverage. However, experience shows that such a strategy does not bring results in the short-term, and, more important, does not necessarily allow the emergence o f a better business environment to foster private sector investment. Given the importance o f a reliable business environment for the success o f this project, a combination o f targeted investments and regulatory reforms focusing on: (i) security; (ii) regulation and taxation; ( i ) ii finance and infrastructure; and; (iv) labor markets, will be financed through the project. These should allow generating pockets o f growth in the shorter term.

An integrated approach: Delivering sector investments sequentially will not yield the expected results and the project will not reach i t s objectives until the platform for growth is completed.

Each sector investment implementation schedule will be carefully timed to coincide with other sector investments in order to allow the delivery o f the integrated services essential to the platform, which will then support economic growth. The integrated approach is a results-based approach combining all segments o f the project to attain one single objective.

A regionally focused approach: An emerging lesson i s that a more regionally focused approach

to development in response to private sector demand might better enhance impacts on growth and poverty reduction. Focusing on selected areas allows optimal allocation o f scarce public resources and strategic deployment o f limited institutional capacity. I t also builds best practices for future integrated poles in Madagascar.

To achieve better ownership, accountability and monitoring over the l i f e o f the project and to ensure quick delivery of the planned investments, the project will be executed with one central implementation unit reporting to the Steering Committee with three regional representations, each based in the regional pole concerned. Following discussions with the GOM, it i s expected that this unit will be independent and filly empowered to implement the project. Close collaboration will be sought with the new regional Chefs de regions and the mayors to promote ownership for economic development. The project will promote the active and significant participation of the private sector (under the M S M E component). Over the life o f the project, as capacities develop, these regional representations will take on more and more responsibility for

Decentralized and independent implementation arrangements: The IG2P is a regional project.

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implementation o f specific activities. Catalyzed by the project, regional tourism offices will also be developed.
6. Alternatives considered and reasons for rejection
This project is not designed as a traditional multi-sector project. The focus o f the IG2P design i s o n the integration o f all the necessary infrastructure investments (soft and hard) that will allow the GOM to support growth in certain sectors. As such, the team opted for a design demonstrating that the same infrastructure can service a broad range o f sectors, rather than just one. This design is new to World Bank operations in the Africa region, and i s expected to bring more tangible results on the ground. Focusing on the least cost options with economic returns: infrastructure elements that did not contribute to a better economic rate o f return o f the component were excluded from the design o f the project. The scale o f the infrastructure investments was also dimensioned to fit the expected benefits o f the development o f the tourism, manufacturing and mining sectors. In doing so, several proposals to finance roads were dropped from the project design. Major changes to the utility sectors were carefully weighted in. Adding more than three regions: the scope o f the project would have been too wide, leading to a real implementation challenge, and unlikely to yield the expected results. The GOM decided to limit the number o f poles to three and based on the success o f the project, would eventually add poles in new regions upon success in the first three. Subsidizing a private port with GOM-IDA funding? The large port o f Ehoala finds its justification first through the export o f ilmenite, second through its use for the export o f agricultural products and third to serve as a transshipment port as the most obvious mooring for boats coming from the African continent. The economic analysis shows that the financing o f the new Ehoala port in Taolagnaro could only be justified if it does not exceed US$35 million. Any public investment exceeding this amount would lead to a subsidized investment in an uneconomical public infrastructure. Based on this decision framework, i t i s expected that the remaining financing gap will need to be financed by the private sector (Rio Tinto), once the institutional arrangements, the environmental review and public disclosure and other fiduciary obligations, have been completed. I t i s also expected that Rio Tinto will invest in the implementation o f a comprehensive community development plan o f Taolagnaro to accommodate the urban growth that will derive from the mining and port operations.

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C. IMPLEMENTATION

1. Partnership arrangements
Role o f the Private sector: Several business associations as well as regional groupings o f entrepreneurs were consulted during the design phase o f the project. More consultations will take place during implementation. I t i s expected that regular consultations will help consolidate private sector interest and lead to public private partnerships. At Appraisal, some partnerships have already materialized with RIO TINTO for Component D; for component Bydiscussions were underway with GOTICOM and MIKIRY on the I C T business park in Antanetibe and with investors to develop the agro-techno pole project; for component A, discussions were underway with several commercial banks to implement the guarantee mechanism. The ACCOR Group and the World Tourism and Travel Organization have also been advising the team on project design issues. Coordination o f donors: At Appraisal stage, the Agence Franqaise de Dkveloppement, the A f i c a n Development Bank, the European Investment Bank confirmed their interest in financing the program. The partners supporting IG2P recognize the importance o f establishing appropriate coordinating mechanisms. Partners will be asked to agree to undertake joint missions, including preparation, appraisal, supervision, annual and midterm reviews. They will also be asked to agree to harmonize procedures for procurement, accounting, financial management, and reporting, as much as i s feasible. Regular consultations among donors will also be held.

2. Institutionaland implementationarrangements
Project implementationperiod. The project will be implemented over a period o f five calendar years and six fiscal years, completed by June 30,2010, and closed by December 31,2010.

Given the complexity and scope o f the project, a lean and efficient implementation structure will be put in place:
Project oversight. During the project implementation, a Steering Committee (Comitk national de pilotage), chaired by the Minister o f Finance, composed o f representatives o f the sector ministries, public utilities entities, region and town administrations, Ofice National de l 'Environnement, the Office National du Tourisme, and relevant ministries, will be established. The private sector will be given the same number o f seats on this Committee as the public sector. The Steering Committee will be responsible for policy guidance and overall project oversight, and will ensure communication and cooperation among stakeholders (including the private sector). Only when performance objectives given to the SecrCtariat National (NPS) are not met (see below), will the Steering Committee be in a position to influence or delay the project implementation process. The Steering Committee's Secretariat will be assumed by the SecrCtariat National (NPS). Project coordination and implementation (NPS). The overall coordination and implementation o f the project will be carried out by the (NPS) established at the national level,

14

with three regional representations. Headed by a SecrCtaire national recruited on a competitive basis, the N P S will be responsible for project execution, including procurement, financial management, and monitoring and evaluation, o f the various activities supported under the project. The W S s performance will be benchmarked against timely implementation o f the project implementation plan. The NPS will report to the Minister o f Finance.

The main activities o f the N P S will be: (i) consolidation o f the work programs and budgets; ( i i) implementation o f all activities; (iii) maintenance o f records and accounts for all transactions related to the N P S ; (iv) preparation and production o f consolidated annual financial statements and quarterly Financial Management Reports (FMRs); (v) contracting and supervision; (vi) management o f disbursements for components under i t s responsibility and replenishment applications for the special account; and (vi) monitoring and evaluation o f the various activities supported under the project.
The three regional representations will be based in htsirabe, Taolagnaro and Nosy Be. These regional representations will have a monitoring and coordinating role at the regional level, mostly. In order to enhance responsibility o f the regional centers and implement the decentralization strategy o f the GOM, it i s expected that some transfer o f financial management and procurement responsibilities from the N P S to regional representations may take place during the second h a l f o f the implementation period (after the Mid Term Review) when capacities are deemed adequate following the assessment carried out by the World Banks specialists. To allow rapid implementation, execution o f most activities under components A, ByC and D will be entrusted to different agencies under several service contracts Contrats de conduite d operations (referred as CCOP) or Contrut h la Maitrise d Ouvrage Deleguke (referred as CMOD). The service agencies will be selected o n a competitive basis, and will meet IDA procurement capacity requirements.
M o r e information on the project implementationi s provided in Annex 6

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Steering Committee headed by Presidency (Govemment and stakeholders)

National Project Management Unit (Secrktariat national)


Delegation of procurement dnd supervision only

Procurement: Procurement o f works, goods and services under the project will follow World Bank Guidelines. To ensure that the project i s executed in a timely, transparent, efficient and integrated approach, i t i s expected that all procurement under components A, ByC and D (except for the construction of the new part at Ehoala) will be carried out under service contracts Contrat de Conduite doptrations (CCOP) and will follow a Procedures Manual, satisfactory to IDA. All other procurement activities will be carried out by the N P S . For components A, ByC and D, contractual relationships will be managed by the CCOP agencies, while signature o f contracts and disbursement will be done by the N P S with the assistance o f an accounting and financial management firm (fiduciary agency to be selected competitively). The N P S will be strengthened to ensure that staff has adequate skills and competence to implement and monitor the project. Audits of procurement and disbursement o f IDA funds and o f other donors will be undertaken at regular intervals by internal and external auditors.

I
of goods and services

A manual o f procurement procedures (covering all components o f the project) for the activities financed by IDA as part o f the project, i s being drafted by the Borrower and should be finalized to the satisfaction o f IDA before the proposed IDA-financed project i s effective. The manual, which could also be adopted by other participating partners under the project, incorporates a range o f procurement methods successfully implemented in Madagascar which will be used for the procurement o f works, goods and equipment, consulting services and operating costs.
lo Works and Goods wholly or partly financed by IDA will be procured in accordance with the Banks guidelines for Procurement under IBRD Loans and IDA Credits of May 2004. Consultancy services wholly or partly financed by IDA will be procured in accordance with the Banks Guidelines for Selection and Employment of Consultants by World Bank Borrowers dated May 2004.

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Institutional arrangements for the port of Ehoala. It i s expected that the Ehoala port would be constructed on a public private partnership basis with Quit Madagascar Minerals S.A. (QMM),Rio Tintos subsidiary in Madagascar. Discussions on the institutional arrangements for the construction and operation o f the Ehoala port were ongoing at time o f Appraisal, As a result, while IDA will contribute to the financing o f the port at a level estimated to some US$35 million equivalent, disbursements will only occur no later than March 31, 2006 when the G O M and Rio Tinto will have agreed, in form and substance satisfactory to IDA, on: (i) final the design o f the proposed port; ( i a final Environmental Manual Plan (EMP) for the port, i) approved by ONE, that i s based on the EMP annexed to the environmental permit already issued to QMMby the Ministry of Environment but conforms to the final design and incorporates the additional management and monitoring activities for the port presented in Chapter 8 (the EMP) o f the Environmental and Social Impact Analyses (ESIA) for the Toalagnaro Growth Pole and meets the World Bank safeguards requirements (including public disclosure); (iii) the institutional framework o f the PPP between Madagascar and R i o Tinto which would allow the negotiations o f the appropriate arrangements for the construction and operation periods, safeguarding the World Bank requirements for transparency, efficiency and competitive bidding procedures; (iv) the detailed costing o f the investment and finally; and (v) the firming up o f the port financing plan. IDA i s supporting this process, through the Project Preparation Facility (PPF) advance, and international experts are already involved in advising the GOM. Further advisory services will be provided under the project. Rio Tinto has informed the GOM and the World Bank that a final mining investment decision would be requested from their Board in August 2005.

3. Monitoring and evaluation o f outcomeshesults


Implementation support. The World Bank will devote an estimated 70 staff weeks per year for

implementation support o f credit progress through fiscal year 2011. The implementation support team will include both World Bank and IFC staff. During the first two years, implementation support will focus on performance o f the implementation entities in managing contracts, procurement, and financial matters, as well as in completing the agreed implementation plans. During subsequent years implementation support will focus on progress in executing works, developing sector strategies, and strengthening the capacity o f regional units to implement hture proj ects.

Monitoring. Overall project monitoring will be based on indicators confirmed at appraisal and the project implementation plan to be finalized by the N P S and to be agreed during negotiations.

Monitoring will be carried out by the Steering Committee and assisted by consultants as necessary, including the Safeguards Independent Expert Panel. Progress under each project component will be monitored and coordinated by the NPS under the guidance o f the Steering Committee. Progress reports will be prepared by the N P S every six months, commencing in September 2005, and submitted to the World Bank within one month thereafter. N o later than three months after the closing date o f the project, the N P S will prepare and furnish to the World Bank a report on the execution o f the project, its costs and the benefits derived and to be derived from it.

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Reviews. In addition to intensive implementation support by the World Bank staff, together with GOM and the other involved parties to assess progress in implementing the agreed activities, reviews will be carried out every six months. The Steering Committee in consultation with the Chef de Rkgion and through the NPS, will be responsible for: (i) preparation o f the necessary documentation for the reviews; and (ii) planning o f review meetings. During the first reviews, special attention will be paid to assess the private sector participation and their implication in the program and project activities throughout the selected growth poles to eventually reorient some activities if the situation requires it. Mid-term review. A mid-term review will be carried out no later than December 2008 by the World Bank, together with the Steering Committee, the NPS, the donors involved in the program and the other involved parties. I addition to covering all areas included in annual reviews, the n mid-term review will assess the implementation status o f the national and regional components, institutional and financial arrangements, the Public Private Partnership (PPP) mechanisms put in place and the capacities o f the regional units for their increased role in the second phase o f the project implementation. Prior to the mid-term review, the Borrower will contract a consultant to review and assess the progress o f implementation and prepare the necessary documentation for the review. The review will evaluate progress in reaching project and program objectives and identify measures needed to reach objectives. Careful attention will be paid to: (i) effective PPP mechanisms put in place under the project; ( i the performance o f the N P S in, among others, i) addressing environmental and social issues in design and implementation o f the different components; and ( i ) performance o f the N P S in addressing fiduciary responsibilities. This i ithe will involve visits by specialists to selected sites for first-hand assessment o f executing entities performance. They will assess the environmental and social impacts o f investments, both individually and cumulatively, and the adequacy o f safeguard procedures agreed for the project.

4. Sustainability
Most o f the infrastructure investments planned to be made under the project (roads, urban roads, water, electricity) will be commissioned by ministries or agencies which already have sustainable institutional and cost recovery mechanisms in place through tariffs, users fees or levies to dedicated funds (e.g. Fonds dEntretien Routier for the roads) and local taxes. The Ehoala port sustainability will be addressed through the public private participation concession agreement currently under discussion.

5. Critical risks and possible controversial aspects The risks to the program and the project are high. The programs and projects size and complexity, coupled with the implementation capacity constraints o f Madagascar mean that the development, safeguard, financial, and fiduciary risks are high. Therefore the World Bank will work closely with the GOM and other partners to ensure the risks are identified and mitigated appropriately. The major risks are:
0

The Program o investments is not fully funded. The current IDA allocation for this f operation (US$129.8 million equivalent) does not allow financing the full identified

18

amount o f public investments needed for the IG2P. To mitigate this risk, the G O M has approached several donors, including the European Union, EIB, AfDB, AFD, the Millenium Challenge Account and other bilateral donors, to seek co-financing under the IG2P. Regular donor meetings will be organized to achieve 100 percent o f financing for the operation before effectiveness and after as needs require. On its side, the World Bank i s proposing to take a flexible approach, where investments not funded after consultations with other donors, could be financed either under other World Bank-financed operations in Madagascar (in consistency with the CAS), based on the satisfactory implementation o f this project.
Lack o capacity impedes timelyproject implementation. The second main risk i s that f lack o f capacity at the N P S level or political interference with the process results in implementation delays. To reduce this risk, several steps are being taken. First, the N P S will be given full independence for the implementation o f the project, provided that performance objectives are met. These performance objectives will be monitored by the Steering Committee. Second, staff from the NPS will be recruited on a competitive basis based on competency. Third, procurement and implementation o f works for activities to rehabilitate and construct infrastructure will be carried out by experienced implementing agencies recruited through service contracts (CCOP or Contrat de Maitrise dOuvrage DClCguCe {CMOD}). Some preparatory work has already been completed through a CCOP contract with AGETIPA to ensure that work contracts for urban infrastructure and roads are awarded as soon as possible after the project becomes effective. Fourth, the N P S will recruit a fiduciary agency to implement accounting and procurement activities. Fifth, the World Banks Country Office will provide day-to-day support for project implementation. Finally, the project includes resources for training, technical assistance, and institutional support, which will help build lasting capacity o f government and nongovernmental entities. Lack o an adequate business environment to make the infrastructure platforms f attractive. Several reforms need to be adopted in parallel to developing the infrastructure platforms for growth. For instance, the tourism sector will not be able to develop without liberalization o f air policy; private sector investments will not take place if land cannot be acquired in the identified Reserves fonciires touristiques; EPZ firms will not operate in a good environment if no EPZ law i s enacted. To address this risk, the GOM committed during the pre-appraisal and appraisal missions to enact legislation to address each o f these issues, to strengthen institutions such as the investment promotion agency or regulatory agencies in charge o f the policy dialogue, or set up task forces to assist in the implementation o f the agenda. The project proposes to finance all activities that will allow the putting in place o f the required business environment for the proposed regional poles. These activities will be monitored through component A. Finally, several o f these measures will be adopted as dated covenants in the credit agreement. Subsidizing a private investment through the construction o the Ehoala port. The f public investment in the port i s part o f a larger investment in an ilmenite mining project in Taolagnaro, sponsored by Rio Tinto, but will also serve other sectors, such

19

as agribusiness. The economic analysis shows that any public investment above US$35 million would be uneconomic for the GOM. In addition, delays in Rio Tintos preparation have led the Task Team to appraise the project without full information on the Ehoala port construction component. The main risk i s that IDA be asked to finance the port infrastructure without a final port design and an updated EMP, institutional arrangement (including agreement on port tariffs), financing plan, fiduciary arrangements and before Rio Tinto commits to the mining and port operations. To mitigate this risk, the project proposes to disburse under this subcomponent not later than March 3 1, 2006: (i) only after the institutional framework i s put in place and Rio Tinto has invested in it; ( iclear procurement arrangements for i) the design, construction and supervision o f the port, acceptable to IDA, have been agreed; ( i ) i ifinal design o f the port has been adopted by the GOM and the resulting EMP has been approved by the GOM cleared by IDA and disclosed; and (iv) the financial analysis o f the port operation is acceptable to IDA and GOM.
0

Weak capacity o the accounting profession in Madagascar. The C F A A for f Madagascar concluded that country public financial management poses a major fiduciary risk. The CPFA (Country Profile o f Financial Accountability) carried out in September 1998 confirmed also the weak capacity o f the accounting profession in Madagascar. To mitigate this risk the following measures have been proposed: i) local auditors who intend to audit the financial statements o f World Bank financed projects should enter into partnership with international auditing firm to strengthen their capacity; i )effective participation o f the international auditing firm in the i fieldwork; i i reinforcement o f the accounting profession after the completion o f the i) ROSC mission.

6.

Loadcredit conditions and covenants

Effectivenessconditions: 0 Issuance o f a project implementation decree establishing the institutional structure o f the project, acceptable to IDA; 0 The NPS has been established and the SecrCtaire national, head o f the operational department, head o f the fiduciary department have been hired; 0 Adoption o f a procedures manual and financial management manual acceptable to IDA; 0 Recruitment o f external auditors acceptable to IDA; Disbursements In the Ehoala port subcomponent will not take place prior to: The objective o f this disbursement condition i s to ensure that (i) clear procurement arrangements for the disbursement o f the IDA financing for the Ehoala port subcomponent are acceptable to IDA, (ii) Borrower and QMMhave agreed o n a financing plan for the port, satisfactory to the IDA, (iii) financial analysis for the port investment i s satisfactory to IDA, (iv) the Borrower the has completed a final EMP for the port, conforming to the final design, publicly disclosed, approved by ONE, and satisfactory to IDA. This disbursement condition will have to be met by March 3 1,2006.

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Disbursementsin the PCG sub-component will not take place prior to:
0 0

Selection o f the Participating Banks Opening o f the account, the form o f which i s to be determined, where IDA funds will be deposited for the purpose o f the PCG. The framework agreement has been entered into by the Borrower to the satisfaction o f IDA.

Disbursement condition in the Grant sub-component will not take place prior to: 0 Identification and implementation o f procedures to commit and disburse the grants. Financial covenants: 0 The IG2P shall maintain records and accounts in accordance with sound accounting practices; 0 Records, accounts, special accounts, SOEs shall be audited by independent auditors acceptable to IDA; 0 Production o f quarterly FMRs. Dated Covenants: A number o f institutional reforms must take place to ensure success o f the project. These reforms will be benchmarked as dated covenants: Land access, six months after effectiveness: Declared R&sewes fonciires touristiques in Nosy B e can be leased to, or acquired by, interested private sector investors in the hotel industry; Eighteen months after effectiveness, fiscal incentives to promote the tourism sector must be adopted; Six months after effectiveness, a Green Charter for the sustainable development o f hotel, restaurants areas in R&servesfonciBres touristiques must be developed. The green charter will identify the norms in terms o f waste disposal, pollution, code o f ethics (including policies against HIV/AIDS), safeguards and other footprints, for private sector investment on these reserves; Six months after effectiveness, local representatives o f the N in Nosy Be, Antsirabe and S Taolagnaro, must be appointed; Four months after effectiveness, the N S will have recruited a permanent Environmental specialist; Remedies: A number o f institutional reforms that must take place to ensure the success o f the project, but that are not entirely within the control o f the Government, are identified as remedies: 0 Free/Open sky policy six months after effectiveness: access to the island o f Nosy B e and to Taolagnaro must be opened to competition to allow better service in terms o f timeliness and quality and competitive ticket pricing;

21

EPZ strategy by Mid Term Review: The implementation o f EPZ sectoral policies and legislative acts when needed, providing for the development o f the EPZ sector; The adoption of a revised investment policy by Mid Term Review.

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D. APPRAISAL SUMMARY 1. Economic and financial analyses The present value of total gross benefits from IG2P i s US$203.8 million. From it, it can be seen that tourism benefit are by far the more important o f IG2P's benefits, amounting at 57 percent o f them, followed by mining benefit that represent 2 1 percent o f them.
From the economic analysis point of view, the IG2P has been divided in three growth poles that were assessed separately: Nosy Be, Tana-AntsirabC and Tolagnaro. For each pole, cost categories have been regrouped to form the investment and recurrent cost as well as the mitigation o f the negative social and environmental externalities. For the Tolagnaro port, the residual value o f the investment has been deducted from the investment cost before calculation o f i t s present value. Results are presented in the table 1 below.
Table 1: Economic cost of the three poles
Type of investment ( US$million, PV)

NOSY BE 33.2 1.3 2.3 0.5 12.4 49.7

Antananarivo/Antsirabk

'

Tolagnaro

Total 100.4 4.8 8.5 2.9 28.4 145.1

Physical, social and Sanitary Infrastructures Business Environment Project Management Mitigating Social and Environment Impact Recurrent Cost Total

9.2 1.6 1.8 0.6 3.1 16.3

58.0 1.9 4.4 1.8 12.9 79.1

For each pole, benefits have been identified and quantified: i t is the tourism rent for Nosy-Be, the wage premium associated with textile jobs for Antananarivo-AntsirabC, and the mining, tourism and agricultural rents for Tolagnaro. In all cases, benefits quantification was associated with hypotheses on additional tourists, agricultural, textile and ilmenite production with the project situation compared with the without project one, as well as with hypotheses o n incremental rents associated with additional tourists and productions. Results are presented in the table 2 below.
Table 2 : Economic benefits o the three poles f
Type of Benefits (US$ million, PV)

NOSY BE 85.4

AntananarivolAntsirabe

Tolagnaro

Total

Tourism Rent Agricultural Rent Mining Rent Textile Rent Total

31.4 20.0 42.1 17.2

116.5 20.0 42.1

17.6
93.5 203.8

85.4

17.2

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Benefit and cost for each pole have been compared and sensitivity analysis has been done. N e t Present values (NPV) and Economic Rate o f Returns (ERR) are presented in the table 3 below. Nosy B e i s by far the most valuable pole for the country with a NPV that represents 70 percent o f IG2Ps NPV and ERR at 18.5 percent. The variables that influence the most the IG2P outcome are the number o f years separating the investment in the mining operation with and without the project and GOMs ability to tap into tourist willingness to pay for nature. If the number o f years is less than three years, investment in Tolagnaros pole i s o f no worth. If the G O M does not charge US$8 per tourist when they visit natural area, the cumulative loss for the IG2P is US$27 million, more than 50 percent o f total NPV.
Table 3: CostBenefit analysis o the three poles f
NPV ( I O percent, 25 years) and ERR NOSY BE

Antananarivo/AntsirabB

Tolagnaro

Total

Net Present Value (NPV)

35.7
18.5

0.9

14.5 12.9

51.5

Economic rate of Return

10.3

2. Fiduciary

The assessment carried out during the Appraisal by an IDA accredited specialist determined that the IG2P financial management system doeNPSt satisfy the World Banks financial management requirements. An agreed action plan with the Borrower has been developed to strengthen the financial management system in place and to build its capacity to produce quarterly Financial Monitoring Reports (FMRs) with the designed format provided in Annex A o f the FMRs Guidelines for World Bank-financed Projects. The main measures to be taken are the following: i)recruitment, under terms and conditions acceptable to IDA, o f a qualified accounting firm to handle all aspects o f the project financial management including budgeting, i accounting, financial reporting and disbursement functions; i )elaboration o f an accounting manual o f procedures describing the new organizational structure, project accounting and budgeting systems, chart o f accounts, models o f FMRs, and operating instructions for proper i) record keeping and safeguarding assets; i i design and implementation, by a consultant, o f an integrated accounting software to satisfy project requirements and ensure timely production o f financial statements and FMRs. All these recommendations should be implemented prior to credit effectiveness. The content and formats o f financial statements and FMRs were determined at the project appraisal stage and agreed at negotiations. The project financial statements will be audited annually by independent and qualified auditors acceptable to IDA, in accordance with International Standards o f Auditing. The auditors should be recruited prior to credit effectiveness. The audit report will be submitted to IDA not later than six months after the end o f each fiscal year. I t s important to mention that no significant problems have been encountered in terms o f audit covenants: all World Bank-financed projects in Madagascar have always submitted their audit reports in due time their audit reports.

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3. Social

First order social benefits of the project will come in the form o f employment and purchases o f materials and contractual services for the upgrading and new construction o f facilities and infrastructure, primarily in roads, ports, water and sanitation, power, and cultural preservation. Once the new facilities are in operation, they will also confer on the public the additional benefits o f improved municipal and social services and accessibility, together with a more modest number o f jobs in operation and maintenance. Second order benefits are those to be derived from the economic growth the new infrastructure and services are designed to promote. These include expanded employment opportunities (particularly in tourism-related service industries), new and expanded markets for small businesses and providers o f contractual services, continuing improvement o f access to social services, and overall improvement in quality o f life. There are also potential negative effects. The most immediate direct impacts stem from acquisition o f land and other property and relocation o f a small number o f families and businesses. A total o f 855 ha o f house lots will be affected, along with 293 ha o f agricultural and wooded land. Permanent relocation o f 109 homes and two businesses will occur, and 44 street vendors will have to relocate temporarily but will return to the sites they presently use after road rehabilitation i s completed. A total o f approximately 1,900 individuals will be affected. Other potential negative effects include: employment opportunities being taken by craftsmen or laborers from outside the affected communities or growth pole regions; conflict between immigrant and local workers; expansion o f undesirable industries such as sex tourism and prostitution; increased exposure to HIV/AIDS and other Sexually Transmitted Disease (STDs); and deterioration o f quality o f l i f e if growth (particularly in tourism) outstrips expansion o f municipal and social infrastructure and services. The project design already incorporates activities that will reduce the likelihood o f many o f these effects, such as support to regional planning for sustainable growth over the long term, improved land administration, and upgraded health facilities. Local governments are not ignorant o f the risks that attend in-migration o f workers and increases in tourist arrivals and will continue with their o w n public awareness and enforcement programs. In addition, the various safeguards studies and impact management instruments that have been prepared (see Subsection 5 below) have addressed all o f these impacts and produced action plans to mitigate or manage them. The safeguards work conducted by the Borrower also included a gap analysis o f the extensive environmental, and social assessment and the GOM-approved environmental management plan for QMMs planned ilmenite mine to ascertain the extent to which social impacts, generally similar to the l i s t above, have been addressed in the planning o f this associated, private-sector operation and the proposed new port at Eahoala.
4. Environment

The project also offers potential environmental benefits. Sanitation and solid waste management facilities and services will reduce land and water pollution, if correctly designed, sited and operated. Electric power generating plants that are sources o f significant noise and air pollution may be replaced in more appropriate locations and with improved equipment. Public water

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supplies will be improved. The green charter will serve as a guide for tourism development in terms o f waste disposal, pollution, safeguards and other footprints on the environment. The proposed marine protected area at Nosy Tanikely offers the opportunity for natural resource conservation benefits coupled with increased attractiveness for tourism. Improved capacity for environment-based regional planning will contribute to development that respects the opportunities and constraints o f the natural and cultural resources o f the three growth poles, and thus to environmental sustainability. Many of the potential direct adverse impacts are relatively uncomplicated, having to do with municipal infrastructure. Most o f the work is rehabilitation, hence most o f the impacts are not significant and can be relatively easily managed. Worthy o f note, though are the need for dredging at and disposal o f dredged material from the existing ports o f Fort-Dauphin and H e l l Ville. Analysis o f the material from Fort-Dauphin indicates no particular problem for disposal, whereas the pollutant content o f the sediments at Hell-Ville presents more o f a challenge for safe disposal. There are really only two groups o f direct, potentially significant, negative impacts on the environment. These are the impacts o f the proposed new port at Eahoala, cofinanced by the World Bank and QMM, and those o f the ilmenite mine, not financed by the World Bank under this project but considered as an associated project and thus covered in the safeguards work for IG2P as well as in the ESIA required by the G O M and the EMP attached to the permit issued by the Minister o f Environment in 2001. The new port will involve construction o f a breakwater and quay, dredging (with dredged material to be used as landfill), and operation o f a quarry. The connecting road from the mine to the port must cross a major dune formation, with the attendant risk o f destabilizing the dunes. Impacts on groundwater, soils, and vegetation at the mine site and on a system o f periodically brackish lagoons system that will become permanently fresh water are the most significant. Avoidance o f indirect impacts such as those that could result from poorly-sited or implemented tourism or industrial development, depends on following sound planning principles and enforcing standards and guidelines, both o f which IG2P seeks to strengthen. Cumulative impacts were considered in detail in the ESIAs. Direct cumulative impacts would include those o f the QMMilmenite mine development and operation combined with the new port and other infrastructure activities at Taolagnaro. Secondary impacts, which pose a greater challenge to manage and which can be predicted at both Taolagnaro and Nosy Be, are the pressures on natural resources and ambient environmental quality that can result from a combination o f intended and unintended developments. Immigration o f employment seekers, increases in productive economic activity, growth in tourist arrivals and construction o f facilities for them together can, in the absence o f effective controls, lead to more rapid deforestation, depletion and deterioration o f water supplies, accumulation o f solid waste, decline in water and air quality, and destruction o f scenic and cultural amenities. Sound regional planning and functioning systems o f land development administration and control, coupled with timely provision o f necessary environmental management infrastructure, will be essential to support sustainable rather than self-destructive growth at the growth poles.

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5. Safeguard policies
Safeguard Policies Triggered by the Project Environmental Assessment (OP/BP/GP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) Safety o f Dams (OP/BP 4.37) Projects in Disputed Areas (OP/BP/GP 7.60)* Projects on International Waterways (OP/BP/GP 7.50)

Yes [XI [XI [XI [XI [XI

No

[XI [I

[I [I [I

[XI

[I [I [I 11 [I [I

[XI [XI [XI

The project i s classified in Category A for environmental assessment purposes. The approach to the safeguards triggered i s presented below, and the results are summarized in Annex 10.

OP 4.01 Environmental Assessment. The Borrowers consultants have prepared an Environmental and Social Impact Management Framework (ESMF) that will guide the screening, analysis, and safeguards approval o f future subprojects in IG2P, not as yet defined. The ESMF also presents the guidelines and terms o f reference for environment-based regional planning to be applied in the growth poles. In addition, an E S I A has been prepared for each growth pole, focusing o n the subprojects planned for implementation in the first year o f the project and including management and monitoring plans (EMPs). In preparing the ESIA and E M P for Taolognaro, the consultants carried out a gap analysis o f QMMs extensive ESIA for the proposed mine, port and supporting facilities, and o f the EMP that was attached to the environmental permit issued to QMMby the Minister o f Environment in 200 1. Because o f the particular needs o f the marine protected area at Nosy Tanikely, a separate EMP was prepared for that subproject. An independent panel o f experts engaged by the Borrower to advise on social and environmental issues conducted its first field mission in December 2004 and submitted its initial report in January 2005.
OP 4.04 Natural Habitat. N o critical natural habitat i s being converted. QMMis compensating for the conversion o f the brackish lagoon system to fresh water, primarily through provisions to sustain fish migration and to introduce native species adapted to the new conditions, including fish that can be managed for the artisanal fishery in the lagoons. QMMplans to protect the remnant o f relatively undisturbed natural forest o n the mine site, to re-vegetate mined areas, and to restore wetlands that are lost in the dredging operations. A significant portion o f the beach and dune system at Ehoala will be placed in protected status as an offset for the portion o f the beach that will be converted for the new port.

OP 4.09 Pest Management. The E S M F provides guidelines for application o f the pest management policy should it in fact be triggered by any subproject.
* By supporting theproposedproject, the Bank does not intend to prejudice thefinal determination o theparties claims on the f disputed areas.

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OPN 11.03 Cultural Property. A Cultural Property Policy Framework has been prepared, and i t s application i s explained in the ESMF. Known locations o f cultural property are mapped in the ESIAs. The ring road for Nosy B e has been realigned to avoid a sacred tree, in consultation with the local community as specified in the Framework for all such cases.
OP 4.12 Involuntary Resettlement. A Resettlement Policy Framework (RPF) has been prepared to guide resettlement and land acquisition planning and implementation in future subprojects. Resettlement Action Plans (RAPS)have been prepared for two subprojects in Taolognaro and one in Nosy Be, as described below. 0 RAP for Rehabilitation o f National Route 13 at Taolagnaro - 44 street vendors to be temporarily relocated to continue their business at nearby sites until the rehabilitation i s complete. 0 RAP for the access road from the mine to the new port, the quarry from which materials for the breakwater will be obtained, and the haul road from quarry to port -283 ha o f agricultural land, 841 ha o f house plots, 95 households to be relocated, total o f 1046 individuals affected. 0 RAP for Rehabilitation and Improvement o f Ring Road at Nosy B e - 10 ha o f farmland and woodland, 14.5 ha o f house plots affected, 14 households to be resettled, total o f 814 individuals affected.

A Process Framework has been prepared for the marine protected area to be established at Nosy Tanikely (near Nosy Be), since i t s establishment may restrict access to customary resources by present users.
OP 4.36 Forests. I t i s unlikely that this Operational Policy (OP) will be triggered, but procedures for applying it are defined in the ESMF in case a future subproject should involve community forest management. Consultation and Disclosure. Extensive consultation was carried out as the safeguards documents were prepared. All except the gap analysis o f the QMMESIA (which i s a working paper rather than a formal safeguards document) were publicly disclosed in Antananarivo and the relevant growth pole as well as in the World Banks Infoshop, with disclosures completed o n March 8, 2005. The gap analysis will be made available to any interested party on request. A formal public comment period began under GOM regulations with the disclosure, during which the GOM conducted a series o f consultations on the documents in each growth pole. The safeguards documents will be revised as necessary in response to the comments received, and summaries o f the comments and consultations will be annexed to them. They will be disclosed again in final form prior to Board approval.

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Annex 1-A: Country and Sector or Program Background MADAGASCAR: Integrated Growth Poles Project

The Business Environment in Madagascar

The investment climate in Madagascar has dramatically improved since 2001. Structural judiciary; (ii) customs sector ( i ) i i fiscal regime applicable to reforms were made in the: (i) private enterprises; (iv) investment promotion through participation o f the country to international forum; (iv) membership on regional organizations to reduce the perception o f political risks; and (v) growth o f a small- and medium-sized enterprises sector. The 2004 Doing Business indicators, however, still portray Madagascar as a country needing to improve its business registration process, labor market regulation, enforcement o f contracts access to credit and lack o f proper property registration mechanism, thus showing weak competitiveness.

The Investment Climate Assessment made in 2005, which initial results were available at Appraisal i s further evidence that the main constraints to the growth o f the private sector in Madagascar lay with the poor infrastructure, l o w access to credit, and unskilled labor.
Land management issues have also proven to be one o f the main deterrents to private investment. Until 2003, foreigners could not own land in Madagascar. This issue i s Mher complicated by local customs and ancestral traditions governing the division o f land and succession rights. Land registries are s t i l l sketchy and do not facilitate mortgaging activities. Some selected reforms are captured below: Customs and Tax Reform
0

Regulatory reforms

0 0 0

Signing of a new contract with a private company to strengthen customs Import tariffs set to zero o n a range o f investment and consumption goods. Reduction o f tariff from 7 rates, ranging from 3 to 33 percent, to 4 rates Reduction o f number o f taxes from 4 to 2 (import taxes and customs) Passing o f milestone legislation to allow foreigners to o w n land in Madagascar One-stop-shop for investors made operational Creation o f a public and private platform to discuss reforms (CAPE) Completion o f the management contract o f S I R A M A (sugar parastatal), o f J M A (energy and water), privatization o f H A S Y M A (cotton parastatal), o f TELMA (telecom)

The largest impediment to the development o f a prolific private sector, however, i s the cost o f utilities.

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Electricity (Per Kwh o f 0.05 0.09 0.03 0.10 0.07 industrial use) Water (per cubic meter 0.29 0.34 0.43 NIA o f industrial use) Cost o f local call per 3 0.03 0.08 0.02 0.04 0.01 mins Cost o f call to U S per 3 4.00 8.98 3.60 7.35 NIA mins Internet: M o n t h l y 22.9 66.5 14.7 65.6 12.3 Service Charge Internet: Telephone 0.38 0.44 0.14 0.46 0.17 Usage per minute Source: W o r l d Bank, Interviews with EPZ manufacturers and government agencies

0.05 0.36 0.04 3.05 6.5 0.05

0.03

N/A
0.09 1.98 8.5 0.33

M a i n Government strategy to strengthen the business environment

Given the scope or reforms needed, the GOMs strategy i s to focus on pockets o f growth (growth poles) where improvement in the infrastructure can be combined with regulatory reforms to support private sector growth. These reforms would first benefit the export processing zones and manufacturing sector, the tourism sector and the mining sector. This strategy must be accompanied with measures to strengthen micro small and medium sized enterprises, which represents about 52 percent o f the 408,000 f i r m s registered in Madagascar.
Access to Finance

Access to finance remains a major constraining factor for the development o f MSMEs in Madagascar. Lending to Micro enterprises represents less than 2 percent o f total loan portfolios, compared to 20 to 30 percent in some West African countries. SMEs are largely unable to access financing through commercial banks, with 80 to 100 percent o f their funding needs provided by family, friends or internal generation. These problems are due in great part to the significant gap between, on the one hand, the mainly informal M S M E sector which i s unable to respond to the requirements o f the commercial banks in terms o f Financial Statements, collateral, information, guarantees, etc. and on the other hand, the conservative commercial bank practices which have been inappropriate to meet the requirements o f MSMEs. The table below presents in summary form the main issues related to M S M E access to finance and briefly presents the solutions proposed by the project.
Constraints identified Commercial banks are the only significant players in the financial market. Commercial banks are very conservative and lack the S M E lending skills. Solutions proposed by the Government Diversification o f the financial sector with support to new intermediaries such as leasing companies, factoring companies. Provide intensive technical assistance to the banks, train bank employees and senior management and provide the necessary operating systems to service the M S M E sector. Provide the banks with the expertise and systems work with MSMEs more cheaply, speedily & safely.

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M M sector i s perceived as too S E risky by the banks, thus requiring significant collateral or guarantees that the M M s are unable to S E provide. Lack of financial expertise at the M M level and inability to prepare S E financial statements and understand the commercial bank requirements.

Provide a guarantee mechanism to participating banks as an incentive for the banks to expand their activities in this sector. Also, through the development o f the leasing sector, providing leased equipment as safer collateral. Provide TA to improve MSMEs capacity to present credible loan application packages, including proper financial statements and business plans.

The following access to finance initiatives, have been identified:

i) Support to Leasing and Factoring: Leasing is particularly well suited to the financing needs o f M M s because o f simplicity in collateral mechanisms: the security o f the lessor i s derived from S E his ability to repossess the leased asset which i s being financed. This avoids the existing onerous collateral demands o f the commercial banks.
The new Malagasy leasing law has created a significant amount o f interest in the financial sector in Madagascar and several o f the local banks have indicated willingness to co-finance investment in the sector along with IFC and IDA. A recent market size study indicates that yearly leasing demand will reach approximately US$9.5 million in 2008 which demand could be met by two competing leasing companies. Similarly, consultations with the local banks and a number o f M M s indicate that M M s are S E S E today unable to discount their receivables, despite sometimes having sizeable and reliable receivables. Introduction o f factoring could therefore be an alternate means o f financing MSMEs.

operational costs.

i) i Loan portfolio Partial Credit Guarantee Program: Though leasing and factoring will broaden S E, sources o f funds for M M s bank financing will still be required to meet their needs. Today, seven private sector banks dominate the financial sector but they consider M M s high-risk, and S E therefore refrain from lending to them or require prohibitively high collateral. International experience has shown that with adequate M M lending skills conservative commercial banks S E are able to service this sector in a sustainable fashion, managing the risks and reducing
A risk-sharingprogram which would cover 50 percent o f new MSME loan portfolios and thereby encourage the selected local commercial banks to lend to the sector could be considered. Intense Technical Assistance would accompany the guarantee scheme to improve the selected banks lending technologies and operating systems.
See Annex 1-B for more information on the risk sharing program.

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MSME Capacity Building


The G O M strategy i s to accelerate the supply response from the selected key SME sectors to the opportunities presented by the improved infrastructure platforms and business environment in the three growth poles.
The following activities have been identified:
Training

i ) Sector-Specific Trainingfor Tourism and Related Sectors The need for development o f capacity in tourism i s important (see Tourism paragraph). Detailed and repeated consultations with hoteliers and restaurant owners in Nosy Be and Taolagnaro have established that finding qualified staff and/or trainers to train existing staff i s a major problem for the sector. The hotel associations have also confirmed that a lack o f qualified suppliers o f technical services (plumbers, electricians, refrigeration experts, etc) i s another important gap. There i s also evidence o f a lack o f qualified guides, vehicle rental staff, transportation providers, etc. Studies o f handicrafts in Madagascar confirm the casual impressions o f many tourists, i.e. that the handicrafts use quality materials, but often need design improvements; in addition, many are imported, although Madagascar has the capacity to produce fine quality articles. A large proportion o f MSMEs in all growth poles key sectors suffer from insufficient levels o f expertise and lack o f access to international standards and best practice. While there are some consultancy companies and training materials available locally, these cover but a small proportion o f what i s needed.
Business Edge (BE) i s an approach to S M E training that i s based on modules, developed by the I F C and successfully implemented in several developing countries in different regions (South East Asia, North Africa, and now Sub-Saharan Africa). A pre-feasibility study shows that opportunities and challenges facing Malagasy SMEs are not significantly different from those facing regional and global counterparts, i.e. as regards strategic issues such as organizational development and competitiveness; and regarding day-to-day management issues such as: controlling costs, customer care, quality and pricing, etc. A number o f private management training and consulting f i r m s are already active in Antananarivo, and some o f these f i r m s would potentially be effective BE delivery partners. A number have expressed an interest in upgrading adult training capabilities and subject matter skills, also in acquiring new course material and content.
ii) Key-sector training using Business Edge

WorldHotel-Link.com (WHL) i s a mechanism developed by IFC in South-East Asia to provide small and medium hotels with direct access to potential clients through the Internet, offering the prospect o f increased occupancy and reducing dependence on travel agents. For Madagascar, a prime target for independent travelers, this tool is particularly relevant. Because o f the weak tourism support structures, and the l o w prevalence o f Internet access, small and medium hotels are very much in need o f a mechanism to facilitate their direct access to foreign clients.

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Before installing the Business Edge program in Madagascar, a more structured market assessment will b e conducted to perform a detailed mapping o f supply and demand, and define a clear implementation strategy.
Strengthening of Key Value Chains

A value chain approach, allowing firms to grow in their market segments should be envisaged. Participating f i r m s in each segment o f a particular value chain would be required to identify critical bottlenecks and inefficiencies up and down the entire chain, from the production o f input materials, through the processing phase to the marketing o f the finished product to domestic and/or export markets, and agree on a growth strategy to improve the competitiveness o f the value chain as a whole. The GOMs strategy i s to focus on three key value chains per pole, to ensure sufficient levels o f resources and a strong impact. The following value chains have been identified as potential targets for support: (a) in AntananarivolAntsirabC: cotton to export garments; vegetables for export; raffia for tourism and exports; (b) in Taolagnaro: shell fish and seafood to hotels and export; exotic fruits for export; vegetables for hotels and export; (c) in Nosy Be: seafood for hotels; fruits & vegetables for hotels; Ylang-ylang for cosmetic producers and exports.
The Malagasy EPZ garment manufacturing sector, currently one o f the largest employment creators and foreign exchange eamers, is expected to come under increasing competitive pressure due to the expiration o f the MFA quotas and domestic content restrictions imposed under AGOA. A comprehensive chain-wide TA approach covering every sub-segment from the production o f raw cotton to the finished garment, will help the sector to increase i t s domestic content and retain i t s competitiveness. Among vegetables for export, one product o f particular interest is potatoes, for which there i s a strong demand in the sub-region. So far Madagascar has been unable to capitalize on this export potential because o f significant shortcomings in the functioning o f the value chain. Malagasy raffia products are increasingly recognized worldwide for their quality, design and price competitiveness, but inefficiencies in the value chain have prevented Malagasy producers to meet the growing demand.
In Nosy Be, local caterers complain that the majority o f the food they serve to tourists has to be imported from the capital or abroad while the potential for local production remains unexploited. Many are willing to co-invest in the establishment o f a wholesale market that could both guarantee demand, and support local producers through the provision not only o f bulk-price inputs but also basic advice. Secondly, the fish and seafood to restaurants and hotels value chain i s also in need o f support. Fishermen complain o f a lack o f ice, coolers, and especially o f a lack o f access to a predictable market. Thirdly, the production o f ylang-ylang (a major component o f many perhmes) has remained far below potential due to inefficiencies in the value chain and a series o f targeted interventions would greatly add to the revenues o f the M S M E s in this chain. In Taolagnaro the expected growth o f the tourism sector will require a significant strengthening o f the fish and seafood value chain. A comprehensive strategy and a combination o f training and support for equipment upgrading will be required to meet the growing demand. Increased tourism and improved port facilities will also provide exotic h i t production with significant growth potential. One product examined in particular detail i s litchis where there exists a

33

significant untapped potential that will require a combination o f technical support and TA for export market development. Finally, local vegetable production for the tourism industry and export markets stands to benefit greatly from the planned enabling infrastructure, provided existing inefficiencies in the value chain will be addressed.
Creating a Lease Registry & Possible Amalgamation with Pledge Registry

The GOM i s increasing i t s effort to improve the business environment for private sector development in the country. An area where G O M would like to see some improvements i s the legal and institutional framework for leasing and secured financing systems. A new leasing law was ratified by the National Assembly in December 2004 and some other reforms have been undertaken to improve the financial sector environment. Economic development in Madagascar had been being unnecessarily hampered by inadequate legal structures for secured financing o f small and medium-sized businesses. The availability and cost o f credit is heavily influenced by the risk o f non-payment resulting from difficulties in registering and repossessing collateralized assets.
In order to address these issues the G O M will focus i t s intervention through the IG2P project on improving secured financing systems, especially through asset based financing involving moveable collateral and leasing. The improvement o f the credit system by introducing a modern and efficient secured financing system will have the effect o f mitigating much o f the risks associated with the granting o f credit that financial institutions face when providing credit to MSMEs. The creation o f a legal framework for secured financing systems in Madagascar fits also perfectly with the overall private sector growth strategy o f the GOM. This rationale i s backed by the following facts:

The development o f the leasing industry in Madagascar. This sector i s a priority o f the IG2P project, and one in which the IFC i s planning potential investments in the near fbture to boost the use o f this financial product by f i r m s that need leasing inter alia to face the huge investments in machinery and equipment to carry out infrastructure and public works. The creation o f the registry for moveable assets will be an essential tool to monitor all the leasing transactions diminishing the risks associated with leasing and credit.

The need to provide financial institutions and leasing companies with viable information on the credit market for moveable assets. Although there i s an existing Pledge Registry in Madagascar, i t s efficiency i s very limited. The existing Pledge Registry is very difficult to access, and commercial banks complain that it offers very little security in terms o f repossessing assets. For any investment in leasing to be likely, it i s essential that the new leasing registry by easily accessible, affordable, free o f corruption and efficient. Likewise, commercial banks will not be willing to increase their loans to MSMEs unless they see some improvement in secured financing systems. MSME Registration and investment promotion support through GUIDE With the creation o f GUIDE, the government has succeeded in the objective o f streamlining the administrative procedures for the creation o f companies in Madagascar. The time and cost

34

associated to starting up a business has reduced considerably since the creation o f GUIDE. Before GUIDE, it took approximately 30 days to create a company, while it now takes between 2 to 3 days. GOM wants to strengthen this mechanism, expanding GUIDESservices to the growth poles and streamlining any procedures that might s t i l l be cumbersome. There i s clearly on-going demand for GUIDES services in terms o f facilitating not only registration for new MSMEs, but providing contacts with representatives o f relevant ministries to facilitate tax returns, obtaining licenses/approvals, etc. There is also a need for stronger investment promotion. According to UNCTADs 2004 World Investment Report, Madagascar had an average o f US$47 million Foreign Direct Investment (FDI) inflows between 1998 and 2003. In 2003, FDI inflows in Madagascar accounted for US$50 million. On average, FDI inflows in Madagascar are clearly lower than those o f its immediate competitors in the region. The political instability and economic crisis that followed the Presidential election o f 2001, along with the restrictions to foreign companies to operate in the country have been the main reasons for the lack o f FDI in the country until now, For the last few years, the GOM has been making a great effort to facilitate the entry o f foreign investors in the country by eliminating major constraints for investors. Moreover, the GOM wants to strengthen the overall strategy with the creation o f an Investment Promotion Agency (PA), and the improvement o f the investment climate. In order to support this effort, technical assistance to a future P A would be provided in the areas o f investment promotion and policy advocacy for improving the investment climate.
The Export Processing Zones sector in Madagascar
Enhancing the competitiveness o the EPZ/manufacturing sector in Antananarivo-Antsirabe f

The EPZ sector, although small, i s by far the fastest growing part o f the Malagasy economy. Comprising 1 percent o f GDP and about 10 percent o f the secondary sector, i t grew at an average annual rate o f 21 percent over the 1997-2001 growth period. The sector has also shown considerable resilience in the face o f the 2002 political crisis, with employment and exports having now returned to pre-crisis levels. While a range o f activities fall under the EPZ regime, the sector i s dominated by the textiles and garment industries, which comprise 90 percent o f activity - o f this, the garment sector accounts for 40 percent o f production, and 60 percent o f output. The garment sector provided direct employment to 98,650 workers in 178 enterprises (as at March 2004).12 Madagascars comparatively l o w labor costs and preferential access to U S markets through the Africa Growth and Opportunity Act (AGOA) have been instrumental in driving the success o f textiles firms. As a result, Madagascar i s now the fourth largest exporter to the U S among AGOA suppliers. Madagascar also compares favorably with regional competitors in terms o f labor productivity and skills although s t i l l lagging behind that o f Asian countries. However, in the immediate future to the medium-term, as evidenced by recent firm closures, the sector is facing significant challenges arising from changes to the global trade regime for the
l1 Other EPZ manufacturing activities include furniture manufacturing; wood processing; handicrafts; precision medical instruments, optics and clocks; leather items and footwear; shrimp rearing/ processing and ICT firms l2 GEFP estimates, M a r c h 2004

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textile and garments sector. While the A G O A third-country provision o f y a m and fabric inputs will not expire until 2008, the expiry o f the Multi Fiber Agreement (MFA) in January 2005 has resulted in the elimination o f all quantitative restrictions (quotas) on imports from specific origins. This will effectively remove the quota cost advantage that made Madagascar an attractive destination for many o f those firms that invested in the EPZ sector to take advantage o f Madagascars unused quotas. The reliance in the past on displaced manufactures from quotabound countries, which led to narrow product concentration, will make the industry highl vulnerable to competition, now that quotas are removed and rules o f origin will begin to apply . An example o f what could happen i s the sudden closure o f six f i r m s at the end o f 2004 in Lesotho leaving about 7,000 workers unemployed. The effects o f the MFA expiry are compounded by increasing price competition from countries negotiating free trade agreements with the US, such as Mexico, Jordan and others, that might shake the average 17 percent price competitiveness Madagascar enjoys for wool and cotton garments due to i t s duty-free access. Similar price competition can be expected in the EU market as well. The garment industry in Madagascar is under increasing pressure to enhance its competitiveness through reducing costs, increasing productivity and diversifying its product range.

IY

The garment industry i s concentrated in and around Antananarivo with a few enterprises located at Antsirabe to take advantage o f lower labor costs. Attempts by a couple o f f i r m s to set up operations in Tamatave were unsuccessful, reportedly due to labor stability and productivity issues. Firms indicate a preference to be located in Antananativo-Antsirabe despite the significant logistics costs and constraints involved in two-way trucking o f imported inputs and manufactured exports via the port o f Tamatave. the Among the constraints faced by the industry currently are: (i) high cost o f land and air freight and the lack o f logistics facilities such as reliable rail services and inland container depot uncompetitive industrial rents in facilities coupled with inefficient port operations, (ii) Antananarivo (where the EPZ f i r m s are concentrated); average rents (US$3.50-4.00 per square meter) are almost double that in competitor countries, while existing private industrial parks tend to be poorly sited, do not have adequate facilities and do not enjoy EPZ status nor access to i i the centrally located Customs facilities and services; ( i ) high cost and unreliable electricity supply; (iv) the shortage o f supervisory and middle-management skills and mismatch between skills provided by the current training system and needs o f the industry; and finally (v) the high cost o f regulatory burden including inadequate legislation, inefficient trade facilitation and corruption, weak institutional arrangements for investment promotion and facilitation and weak supply chain for vertical integration o f the industry. The strategy o f the GOM to ensure sustainable growth o f the garments sector (and growth o f the manufacturing sector overall) is: (i) improving the business environment through policy and institutional reform to enhance the competitiveness o f the garments sector (through vertical and horizontal integration) as well as promote diversification into agro-processing and other light manufacturing activities; (ii) enhancing the availability, quality and cost competitiveness o f industrial infrastructure and utilities including improving access to serviced industrial sites and efficient logistics facilities and services; ( i ) i iincreasing labor productivity through investments in education, vocational training and skills development; and (iv) improving access to Business
~

l3 USAID

Study, September 2003 and ITC Study, December 2003.

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Development Services and finance at enterprise level to support the growth and competitiveness o f firms venturing into new technologies, products and markets and productivity and quality improvements including supporting Malagasy f i r m s to develop sub-contracting and supplier linkages with the EPZ firms.
Supporting the growth o the ICT sector f

The I C T sector in Madagascar is small but with encouraging potential for growth. Reliable statistics o n the performance o f the sector are unavailable. There are an estimated 50 small enterprises involved in software and I T services as well as fledgling BPO ventures involving French and Mauritian interests employing in total less than 300 people. There are around 20 firms involved in software programming, data conversion, systems integration, I T consulting and training. There are a couple o f large providers in enabling technologies and solutions and a h a n d h l o f providers o f I T enabled services such as BPO, which are partly owned by French interests. There are also a small number o f offshore data processing f i r m s (one unverifiable estimate indicates a total employment o f around 3,000 persons). These f i r m s have EPZ status. There are no existing call centers in Madagascar although there are reportedly plans to establish training and call center facilities by Mauritian interests. The I T distribution sector has been badly hit by the recent currency depreciation and while tariffs on imported I T equipment have been reduced, tariffs on software are reportedly at around 40 per cent.

The main constraints faced by the sector are the high cost and limited access to telecommunications infrastructure and the shortage o f skilled workers. The absence o f connections to trans-national fiber optic cable such as SAFE or SAT3 leaves the industry dependent on satellite connections which results in extremely uncompetitive telecommunications costs compared to regional competitors. The lack o f a transparent and effective policy and regulatory environment for the industry and the lack o f appropriate institutional arrangements to promote and facilitate I C T investments also hamper the growth o f the sector. Internet Service Providers (ISPs) face a host o f problems including l o w international bandwidth, high connection costs to use existing infrastructure, high costs o f telephone lines and difficulties in installing leased lines.
The strategy o f the G O M for the I C T sector are based on the National I C T Policy for Development (PNTIC-D) and consists of: (i) development o f I C T infrastructure including a national backbone network; (ii) promotion o f content and application development; ( i ) ii development o f I C T human resource and professional competencies; (iv) reform o f the fiscal and regulatory framework; and (v) development o f enterprises in the sector through public-private partner ships.
The Tourism sector in Madagascar

cultural resources to support tourism. The world's fourth largest island, Madagascar is home to many species found nowhere else o n the planet, among them 30 species o f lemur - currently the main tourist attraction -- along with spectacular scenery and eight varieties o f baobab.

Current situation. Madagascar has an impressive array o f biodiversity, natural beauty and

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Madagascars nearly 5,000 km o f coastline i s coupled with a continental shelf equal to 20 percent o f the islands land area which presents numerous opportunities for developing resortbased tourism to complement eco-tourism. At present, the scientific community knows Madagascar better than the traveling public. Nonetheless, Madagascar has the potential to welcome more than the current level o f 150,000 - 200,000 tourists on leisure trips, if growth i s well planned in a broad, multi-sectoral way, focusing on economic and social retums, infrastructure constraints, policy reforms, and environmental concerns.
Demand. Tourism data i s famously very weak and Madagascar i s no exception in this respect. Tourist arrivals grew in the nineties, at roughly the same rate as WTOs estimate o f 7.2 percent for Africa as a whole. Data suggests that the number o f bonufide tourists were between 68,000 and 100,000 in 1999, as compared with official estimates o f foreign visitors o f about 200,000. Total arrivals in 2004 (January to September) were about 188,000 and government estimates for

the whole year are 235,000. The Maldives and Mauritius by comparison, received about 600,000 (total, tourism and other) arrivals and Mauritius about 700,000, respectively, in 2004 (estimates).

French tourists dominate arrivals (70 percent, including 10 percent from RCunion), partly for historical and cultural reasons, and partly because o f flight itineraries; there i s potential for building the rest o f the European market (currently 4 0 percent), the Asian markets o f Japan and Australia (currently 1-3 percent). African arrivals are also a market, particularly from South Africa, currently at about 10 percent o f the total. The North American market i s small (about 3 percent), and tourists from there are often on regional tours. Because o f i t s varied asset base and distance from supplier markets, the average length o f stay in Madagascar i s long - 15days according to official statistics, down from a peak o f 20 days (with an average stay per hotel o f 4 days.)
Supply. In 2004, Madagascar had 853 hotels with 10,230 rooms as follows:

Table 1 Cumulative

H o t e l Capacity Growth

1999
Number o f hotels Number of EVPT Total Rooms Source: Ministry o f Tourism

556 33 1 7,207

2000
644 370 7,779

2001
695 413 8,435

2002
717 522 8,780

2003
768 553 9,325

853 589 10,230

2004

Only about half of these rooms meet intemational standards (star system) and the balances meet local standards, rated with palm trees (ruvinulu) or carry no rating. M a n y hotels have no more than five rooms and are operated as family businesses. Occupancies peaked at 63 percent in 2000 and are estimated to have reached these levels again in 2004. Most ground operators interviewed in Madagascar stated that they compete with each other for rooms in the small number o f hotels that meet acceptable standards and size. When there are no acceptable alternatives, tour operators use tents, or even cancel groups for peak dates.

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Employment and wages. Tourism generates some 17,564 jobs in hotels and restaurants, o f which 3,554 in travel and entertainment establishments, as shown in Table 2. These estimates do not take account o f employment generated by tourism in agriculture, fishing, agro-industries and manufact~ring~, transport and other tourism-related services (such as scuba diving, guides, in etc.,), and in the handicrafts sector15. Job creation in tourism i s estimated to have grown by 8 percent annually in the past few years. The room - employee ratio is estimated at 1:1.3 to 1.6 in three star hotels, and closer to 1:2 in higher category hotels. The local hotel school offers fairly l o w quality certificate courses and managers complain that they have to do substantial on-the-job training. Wages in the hotel industry have a premium over the minimum wage (on average 40 percent, much higher in higher quality hotels), partly reflecting the scarcity o f trained hotel staff.

Restaurants Travel & Entertainment Total

11,655 2,604 13,707 2,661 13,979

1998

12,640

1999

13,628

2000

14,010

2001

Source: Ministry o Tourism f

Economic impacts. In Madagascar, according to the Central Bank, tourism i s one o f the top three sectors in terms o f foreign exchange earnings, fluctuating in rank with the EPZs and fisheries. Tourism receipts are shown in Table 3.

Table 3. Tourism Receipts (US$ millions)

U S $ millions Av. exchange rate MF (billions)


Source: Central Bank o Madagascar f

1999 72.9 8,586 625.9

2000 91.9 8,934 821.0

2001 90.2 8,376 755.5

2002 27.8 8,773 243.88

2003 54.0 8,675 468.45

2004 104.3 13,828 1442.2

GOM revenues are generated through various taxes, including sales, value added (VAT), room, airport or departure, corporate income, payroll, social security, and property taxes, Revenues are also derived from import duties and from aircraft landing fees and cruise and boat docking fees. The exact amount o f taxes raised from tourism i s difficult to estimate but it i s estimated that Madagascar generated tax revenues MF 62.5 billion in 1999, comprising VAT and income taxes. N o studies have been carried out to estimate leakages from the tourism system.

l4 An ofien-neglected facet o f employment in the sector i s that tourism creates good jobs. Physical working conditions are healthier and safer than in sugar cane, mining, logging and, often, manufacturing, among other economic activities. But, also, hotels and tourist services create jobs such as waiters, maintenance engineers, and drivers, w h c h are relatively w e l l paid, particularly when supplemented by tips.

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M a i n constraints: Several tourism-specific factors are currently impeding the emergence o f the catalytic business environment required for tourism to thrive.
Land. Complex procedures for land acquisition and difficulty in securing financing continue to deter new investors. Madagascar i s addressing some o f this issue through a mechanism called the tourism land reserve (Rksewe fonciBre touristique), which gives clear access to special land reserves in tourist areas. Were these to carry the same benefits as the EPZ regime, they would be a very attractive package for tourism investment. In terms o f land use, the G O M has also announced plans to more than triple the size o f areas under protection from 1.7 million hectares (about 3 percent o f the countrys surface) to 6 million hectares in the next few years. Transport. Transport i s a case in point - the inability o f the sector to accommodate and transport groups o f tourists -- constrains its growth. Constraints include: (a) the cost o f intemational airline access and restrictions on internal travel. This has improved under a management contract for Air Madagascar (Lufthansa) and GOM has given CORSAIR rights to fly to Madagascar (as well as a number o f Italian charter operators). However, i t i s clear that in the medium- to long-run, a more consumer-responsive air network is required; (b) for surface travel, climate and lack o f road maintenance have been limiting factors. From January to March, the wet season brings heavy rain and only 7,000 km out o f the 35,000 km in the road network are weatherproof; and (c) rough seas can delay inter-island travel, especially on the East coast. Donor coordination on ground transport i s leading to more efficient roads; the decisions to streamline the national airline and liberalize air policy should reduce costs and make itineraries more flexible. Tourism facilities. In terms o f the supply o f tourism facilities, several shortcomings may be noted: (a) there are too few good hotels, lodges, and camps throughout the island and most are small. Group travel is a characteristic o f intemational tourism today and most hotels outside Antananarivo cannot accommodate groups o f 16 people or more; and (b) the presence o f an internationally recognized flagship resort hotel or ecotourism lodge in Madagascar would bring name recognition, raise standards through technology transfer, and bring with it intemational campaigns to promote the island. Privatization o f govemment-held hotels will lead to greater efficiency in the lodging sector. A serious campaign to both upgrade and expand the stock o f quality accommodations is necessary if Madagascar i s to compete in intemational markets. For this, an organized investment promotion campaign would facilitate the task considerably, as would support for SMEs. Economic and financial returns. M a n y willingness to pay studies indicate that tourists can be tapped to support environmental or cultural protection, either through entrance fees, departure or other taxes, and voluntary contributions. In addition, the larger accommodation units and those in sensitive ecological areas should aim for accreditation that they have met clear environmental standards. In addition to i t s intrinsic value, such an approach will enhance the islands image and

can be a powerful marketing tool.

be a formidable constraint to development. Reliable, reasonably priced, Internet connectivity is vital in terms o f advertising, reservations, and credit card purchasing for the tourism industry.

Communications. The absence o f adequate telecommunications capacity in Madagascar used to

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W h i l e local tour operators note that communications have improved greatly, compared with fe v i years ago, with the widespread use o f cell phones and e-mail, there remains a shortfall in effective communications network, a lifeline for tourism.
Data for decisions. Tourism lacks a solid database to assist in decision-making, Tourism i s included in sectoral GDP as Trade, Hotels and Restaurants. By lumping trade with tourism, the contribution o f neither can be well understood. The G O M is fully cognizant o f the implications o f this lack of information and until better data sets are available, i t will be difficult to estimate the true value of the sector. The G O M intends to implement a Tourism Satellite Account (TSA) to provide a credible measure o f tourisms true contribution to the national economy. Linkages. Forward and backward linkages are not well developed in the main tourism destinations and most consumption goods are imported; there i s also pressure on local supplies, such as shellfish and fish, in terms both o f price and availability. A priority i s to address these issues as part o f the overall approach to developing tourism in a broad context. In a similar vein, health services are not o f a high enough standards to provide adequate delivery in the event of catastrophic events and inspire confidence that tourists can find the kind o f services they require.

Strategy for developing the sector:


Regional priorities. To address these issues in a consistent manner and ensure sustainability, the GOM completed integrated master plans for its tourism zones. With the support o f GAT0 AG (a German apex organization for tourism), i t has prepared a concept for tourism, to provide shortand long-term frameworks for i t s growth. These participatory studies examined tourisms potential externalities and attempted to integrate i t into the macroeconomic framework, to create linkages to other productive sectors. The key poles for development are the following:

North: Antsirarana and Nosy Be, including the Montagne Ambre East: I l e Ste. Marie and Pkrinet South: Region around Taolagnaro, linking to the west. West: Tuelar/ Morondave Central core: Antananarivo to Isalo With this framework in place, in agreement with the Bank, the government selected Nosy B e in the north and Taolagnaro in the southern part o f the country. The former i s the leading destination in terms o f demand, but it i s under stress as a result o f growth and underinvestment in public infrastructure; the latter, Taolagnaro i s an emerging destination, with latent demand for i t s exceptional assets (Berenty, Andohalela), where tourism infrastructure, accommodation and tourism facilities, have yet to be created. Nosy B e i s well known worldwide as the destination o f choice for beach tourism in Madagascar. Hellville, the main population center, has historical significance, although with recent budgetary constraints, much o f i t s historical assets are in a parlous state. Several historic and cultural patrimony sites are in urgent need o f repair and are candidates for rehabilitation with modest funding under the project. The project will assist in the restoration o f the citys charm and help

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integrate local small- and medium-scale businesses into the mainstream o f economic l i f e in Nosy Be. Local crafts and artisans are an integral part o f this cultural and historic heritage, as well as being a valuable selling point for the town and the island more generally. Taolamaro (Fort Dauphin) For a long time, Taolagnaro was the last call in the Southem circuit, Madagascars principal tourism program (38 percent o f all visitors to Madagascar used to visit the area). There has been a downturn in the past few years as the supply o f tourism facilities has not kept up with demand and Taolagnaro has been isolated, following the cessation o f a flight from Reunion in 2000 (operated by TAM). Taolagnaro has the assets to create an attractive destination for a weeklong visit. The surrounding region has mountains, beach, sea and forest, all o f which offer a variety o f activities. The region i s also home to Madagascars indigenous lemurs. Taolagnaros only weak point i s i t s seasonal rainy climate (primarily o n the East coast) The Andohalela National Park, a leading attraction, has a management plan in place but lacks good access and tourism facilities. The growth o f tourism in Taolagnaro is also closely linked to the private reserve (Berenty), run by the Sociktk H6teliBre et Touristique de Madagascar (SHTM). S T H M also founded the Anosy Historical Museum and the Saiadia botanical gardens. Recently, sports and adventure activities, some new to Madagascar (hang-gliding, kite-surfing) have started up in Toalagnaro and add to the l i s t o f leisure options. The Mining Sector in Madagascar Madagascar is the world leader in production o f gemstones, and i s placed among those countries with the largest and highest-grade resources o f ilmenite. Recent exploration also led to the discovery o f one o f the largest reserves o f nickel in the world. This potential i s currently largely untapped: the gemstones sector has been fragmented due to lack o f institutional reform, while large mining investments have not materialized due to lack o f infrastructure, high country risk premiums and environmental concerns. The mining royalty due by the mining operators in 2002 totaled U S $ 1.9 million only.
1998 12,350,529 2,63 1,325 566,566 1999 11,104,068 12,202,836 798,868 2001 14,759,192 13,828,591 1,496,606 2002 8,360,076 5,943,702 808,779 2003 7,821,590 7,628,621 1,40 1,0 11

Chromite, Mica, Graphite Precious Stones Semi-precious

Development o f the mining sector has been hampered by weakness in the administration and lack o f management o f mining royalties. Because o f cumbersome procedures and lack o f cooperation between the mining and the tax administrations, only about 10 percent o f potential royalties was effectively collected. The collection o f the key sector-specific tax - the mining royalty (redevance miniBre) - i s slow, complex and inefficient.

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In 2001, the Mining Cadastre collected the equivalent to about US$ 450,000 in fees. Because o f the lack o f adequate mechanisms, it has not been able to transfer the 30 percent o f revenues due to the Provinces (and communes), and the equivalent o f 40 percent o f the revenues has been transferred to the Central Government. A reform o f the mining fiscal regime (in coordination with the Ministry o f the Economy, Finance and Budget) is expected to substantially increase fiscal revenues from mining in resource rich communes, and to channel resources directly to them.

One o f the most promising investments in the mining sector in Madagascar involves the extraction o f ilmenite in Taolagnaro. Ilmenite contains Titan dioxide (Ti02) used to produce white pigment for paint (95 percent) and titan (5 percent). Worlds current production i s 4 million tons per annum (tpa) and i s supposed to grow at a rate o f 2-3 percent per annum. Rio Tintos estimated share o f the market is 40 percent. The Taolagnaro Ilmenite deposit holds approximately 60 percent o f Titanium bioxyde and i s richer than the other world depositslocated in Canada, USA, Australia and South Africa.
A mining license was awarded to QIT M A D A G A S C A R M I N E R A L S S.A. (QMM). QMMi s a joint venture company held at 80 percent by QIT-FER, a subsidiary o f RIO TINT0 (Great Britain and Australia) and at 20 percent by the Malagasy State through the Office des Mines Nationales et des Industries Stratkgiques (OMNIS). The deposit contains 67 million tons o f high quality ilmenite, a world-class deposit. This mine would be the least cost, most profitable ilmenite mine in the world.

The mining project cost i s US$225m in Phase 1 and US$75m in Phase 2. Ilmenite production at end o f Phase 1 i s 375,000 tpa; and 750,000 tpa after 12 years. A preliminary investment decision will be taken in February 2005, while QITs Board will consider the investment decision in July 2005. However, i t is not clear at this stage whether QMMwill start to invest in 2005.
This mining project has been considered for more than a decade both by the GOM and by R i o Tinto. Several factors have prevented i t s development so far: (i) saturation o f the world ilmenite markets: Rio Tinto i s the main provider o f ilmenite on the world markets; (ii) difficulties in the design o f a new port in the Taolagnaro area to permit the export o f ilmenite area, which led to i i lack o f concessional protests by several NGOs o n the development o f the projectI6; ( i ) financing to leverage the relatively large private investment required; and (iv) environmental concerns. The mining operation should be planned in parallel with a strategy for exporting the ilmenite. R i o Tinto is planning to ship the ilmenite through a new multi-modal port. Taolagnaros current port facility has a maximum and declining capacity o f 30,000 tpa and cannot be used for the purpose o f the mine operation that i s supposed to export 750,000 tpa. QMMi s requesting GOM to finance, through the World Bank, a portion o f the multimodal port.
New Port on the Ehoala Peninsula. The implementation o f the Rio Tinto mining project on the ilmenite sands deposit in the vicinity o f Taolagnaro provides an opportunity to build o n this
~~

l6 These protests l e d to a change in the design o f the port. The current design o f the port i s n o t expected t o have as m u c h impact o n the flora and fauna o f the Taolagnaro region.

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development to extend potential economic benefits to the region as a whole by improving its physical connections to the rest o f the country and i t s extemal regional environment. The main vehicle for this purpose will be the new deepwater port to be built on the north side o f the Ehola Peninsula. I t is expected that this new infrastructure will be financed in partnership with the private sector through a contribution by the Rio Tinto subsidiary in charge o f the mining operation. The Project will support part o f the investment cost related to the protection works, in particular the breakwater.

The initial design at Appraisal evidenced a port layout with the following features:

600 m long breakwater, 238 m by 60 m quay to accommodate vessels up to 35,000 DWT ship (water draft = 13.5 metres), including bulk carriers, fuel tankers, container ships (equipped with their own crane) and cruise ships 7000 m 2 short term storage area adjacent to quay. Storage for ilmenite and zircon, Open area for third party users, Conveyor from ilmenite storage to mobile ship loader, (Supplied by Rio Tinto on a separate budget) Mobile ship loader, running parallel to the quay, suitable to load either a 35,000 or 60,000 dwt ship at 1000 tonslhour. (Supplied by R i o Tinto o n a separate budget) Basic infrastructure to allow construction o f a fuel tank farm connected to manifold on the quay wall (to be built by others), Dredging designed to accommodate a 35,000 D W T ship, Marine structures designed to accommodate a 60,000 DWT vessel in the future, Small craft harbor for tug, line boat, pilot boat, work boat and local use (including fishing boats), Groin structure to prevent deposition o f sediments in the dredged area, Temporary areas for construction to become area for administration buildings and commercialhdustrial uses.

Out o f a total cost estimate, at this stage, based on the initial design communicated to the World Bank team, for the basic port infrastructure o f 70 million Euros equivalents, IDA financing in the port would contribute funding for the breakwater and protection works up to a total commitment o f US$35 million.
Limited Rehabilitation of the Existing Port. The Project will support emergency works required to restore a minimum level o f operational effectiveness, which will benefit the conversion o f the existing port into leisure and small fishing activities and will cover the transition period until the new port comes into operation. Works supported by the Project will include:

Dredging o f port basin Repair o f slipway Repair o f tugboats and lighters and purchase o f one forklift

The total cost estimate for IDA financing amounts to US$1 million.

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Annex 1-B: Country and Sector o r Program Background MADAGASCAR: Integrated Growth Poles Project

(Risk Sharing Mechanism: the Partial Credit Guarantee)


General Description

The I D N I F C Partial Credit Guarantee (the PCG) i s a risk-sharing program proposed to commercial banks established and operating in Madagascar. The PCG i s aimed at encouraging these banks to lend to SMEs by partially back-stopping potential losses resulting from nonpayments o f their respective SME loan portfolios. The PCG will cover portfolios o f SME loans originated by the Participating Banks (as defined below) for new productive activities. The P C G component o f the IDA credit serves as partial financial back-up to the P C G mechanism, as described below. Disbursements o f the partial credit guarantee component o f the IDA credit will be made in tranches, on a Participating Bank-by-Participating Bank basis, equal to 100 percent o f the GOMs first loss guarantee obligation v i s - h i s such Participating Bank, as and when Guarantee Agreements are signed with each such Participating Bank.
Leveraging structure

The P C G will leverage both GOM and I F C resources and capabilities: US$2.5 million allocated for this component i s expected to mobilize up to US$10 million I F C guarantee, which in turn will bring about up to US$25 million equivalent o f new commercial banks loans to SMEs.

The disbursements o f the IDA credit will be made into an escrow or trust account (the PCG Account) on terms satisfactory to IDA, I F C and the GOM. The GOMs portion o f liability with respect to claims payments to the Participating Banks, following a call under a partial credit guarantee, will be drawn from the P C G Account. I t is anticipated that the PCG Account will be denominated in U S dollars and will be administered by IFC, as appointed by GOM. Risk Sharing under the Partial Credit Guarantee Program
Participating Bank: [45-351% Participating Bank: [5-151%
I I

IFC:[45-35]% G o M (IDA ,credit): [5151%

2nd loss
1st loss
I I

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Implementing structure

The I F C will act as administrator o f the PCG and to this effect no special implementing structure would be necessary. As administrator, IFC will manage the guarantees issued under the scheme, and may subcontract, as necessary, monitoring and review finctions to a local agent, such as an independent accounting firm. The local agent would have primary responsibility for verifying the documentation submitted by Participating Banks in cases o f a call being made.

A guarantee cannot be issued unless the IFC, as administrator o f the PCG program, authorizes the issuance in accordance with the terms set forth in the Guarantee Agreement executed with the Participating Bank. This agreement would provide, among other things, clear loan eligibility criteria for guarantee coverage and require periodic portfolio reporting by each Participating Bank.
Participating Banks

Based o n their financial strength and demonstrated intention to expand into the S M E sector, the G O M will select two banks which are already established in the three Growth Poles. The selection criteria will be acceptable to IDA, IFC and GOM. The banks selected in this fashion would be hrther appraised by IFC for eligibility based on their credit underwriting, credit management policies, procedures, standards, historical experience, portfolio o f SME loans, diversification as well as other checks that I F C would determine. In-depth appraisal and selection o f banks will be at the final discretion o f IFC, and banks that would not meet the I F C appraisal standards could not be retained for the PCG. Those banks retained for the program (the Participating Banks) would be matched with selected TA providers to ensure positive synergies
Guarantee mechanism

The PCG will cover 50 percent o f net outstanding principal amount o f a portfolio o f new loans originated by local Participating Banks, on a pari-passu basis with the Participating Banks. As SMEs are perceived to be higher-risk borrowers and usually lack cash collateral needed to obtain bank loans, the PCG will provide banks with the credit protection needed to mitigate the perceived high risk o f S M E lending. The 50-50 pari-passu risk sharihg ensures that Participating Banks conduct proper borrower credit appraisal and apply strict loan underwriting criteria (including taking proper security) in establishing the loan portfolio. Guarantee Agreements, in form and substance acceptable to IDA, would be entered into with each Participating Bank, to define the terms and conditions o f the PCG. Upon a guarantee call being made by a Participating Bank in compliance with the terms and conditions o f the agreements, I F C would, as required, honor the call by issuing a finding request for payment from the PCG Account in respect o f first loss guarantee coverage provided by the GOM and, if required, by causing finds to be disbursed by IFC, on i t s own account, as second loss guarantee provider.

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The Participating Banks will be authorized to call on the partial credit guarantee no more than once per quarter to pay amounts equivalent to the aggregate o f defaults net o f all amounts recovered by the Participating Bank. The Guarantee Agreements will provide that guarantee calls can be made: (a) no fewer than an expected period o f [90 to1801 days after the occurrence o f such loan default, during which the Participating Bank will be obliged to make recovery efforts to cure such default; (b) with a written guarantee call notice with documents required under the Guarantee Agreements including certification o f the amount o f loan principal guaranteed and due but unpaid and evidence that the demand notice has been made to the borrower and due efforts have been made by the relevant Participating Bank to demand repayment o f monies due.

The amount to be paid under the PCG will be the product o f the amount o f such loan loss multiplied by 50 percent (aggregate o f G O M (IDA credit) and IFC guarantee coverage ratio), subject to the necessary allocation between the first loss G O M (IDA credit) and IFCs second loss guaranteed amounts.
Pricing

The final pricing and size o f the guarantee i s contingent o n the detailed appraisal o f the Participating Banks. Guarantee charges (up-front fees, commitment fees, guarantee fees, etc.) will be payable by Participating Banks at levels to reflect market conditions, program management expenses to be incurred and the development nature o f this PCG. The share o f guarantee charges allocated to the guarantee coverage provided by the GOM through the IDA credit and collected by I F C as PCG Program administrator will be paid into the PCG Account as a reserve against future calls on the guarantee.
The PCG Account and disbursement structure I t i s proposed that the IDA credit proceeds allocated to the P C G will be disbursed into the interest-bearing PCG Account, which will be held on terms and with an entity to be agreed upon between IDA, IFC and GOM. Disbursements o f the partial credit guarantee component o f the IDA credit will be made in tranches, on a Participating Bank-by-Participating Bank basis, equal to 100 percent o f the GOMs first loss guarantee obligation vis-&-vis such Participating Bank, as and when Guarantee Agreements are signed with each such Participating Bank. Implementation Arrangements: I t i s anticipated that the following are the key agreements which will be put in place to allow the structure set up:

Guarantee Facility Agreement between I F C and each Participating Bank: This agreement sets out the scope o f guarantee coverage, the eligibility criteria relating to underlying loans qualifying for coverage under the PCG, as well as procedure relating to calls under the guarantee. This agreement shall be in form and substance acceptable to IDA.

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Framework Agreement, expected to be entered into between I F C and GOM: This agreement will outline the operation o f the PCG Program, the allocation o f guarantee coverage between GOM and IFC, provisions relating to the final selection and appraisal o f the Participating Banks, and provisions for supervision and review o f program operations. It i s anticipated that t h i s agreement will also contain provisions relating to withdrawals o f amounts from the PCG Account and relating to the application o f funds remaining in the PCG Account at certain points in time over the l i f e o f each PCG. This agreement shall be in form and substance acceptable to IDA.
Remedial Actions

Participating Bank, which may include (a) the reduction o f the unused facility amount, and (b) the suspension o f the issuance o f new guarantees under the Program. This procedure will allow mitigation o f losses incurred under the PCG.
Performance Criteria

In order to minimize the amount o f guarantee losses, i t i s contemplated to include safeguard provisions in the agreements with each Participating Bank to define triggers in terms o f cumulative amounts paid to meet guarantee calls to: require remedial action plans by the

Utilization and underlying portfolio performance will be the benchmark for the successful implementation o f the PCG. In particular the Participating Banks will be asked to collect and provide information on the following: (a) number and aggregate volume o f new SME loans extended; (b) quality o f borrowers and loans such as the share o f new borrowers vs. the share o f follow-on loans; size distribution among SME borrowers; share o f term loans, share o f unsecured loans, etc. (c) guarantee claims made and paid, the default performance o f the loan portfolio, determined as the ratio o f performing loans (portion o f outstanding loans with current payments on due dates); default ratio (the cumulative loan loss amount vs. cumulative loan amount in the guaranteed loan portfolio), ratio o f principal loss claims and recovery; etc. IFC as the administrator o f the Program will also prepare annual supervision reports and quarterly credit risk assessment reports. If the utilization will not reach a benchmark measure, the amount unused by a Participating Bank could be reallocated to other Participating Bank/s to maximize utilization during the remaining availability period.
Technical Assistance:

In parallel to the PCG, Technical Assistance will be provided to the Participating Banks.

TA Provider: To ensure the transfer o f know how to a Participating Bank, a TA Provider will be selected, to include an experienced, internationally recognized S M E banker, supported by some local financehanking specialists. As needed, the TA Provider i s expected to leverage relevant specialists in areas o f weakness o f the participating bank.
Scope o f TA: Working closely with the participating bank, the TA Provider will develop an appropriate TA program for the bank .This is expected to include I for all SME loan officers an ) in-depth training program (to cover credit scoring, interviewing, loan structuring, collateral

48

valuation & registration, environmental risk assessment, and problem loan management, basic i analysis o f the existing SME loan application and review accounting and cash flow analysis); i ) procedures and development o f adjustments as necessary; i i establishment o f an appropriate i) S M E department if not yet in existence, with establishment o f necessary M I S , procedures and incentives for staff in the department. The TA Providers team will be situated in the partner bank full-time, helping the loan officers and monitoring the departments adherence to business development, loan processing procedures, and credit risk assessment. Strong preference will be given to Partner Banks that allow the TA Manager to be a member o f the Credit Committee reviewing loans covered by the PCG.

TA Cost-Sharing: The SME TA will be provided for two years. I t i s expected that the Partner Bank cover a proportion o f the costs/overheads associated with this TA such as furnished office space, telephones, internet connection including where possible, computers/peripherals, and business transportation. In the first year, all financial costs (salaries, benefits, etc.) would be covered by IDA. In year two, the Participating Bank i s expected to contribute to a portion o f the financial costs. The TA will be performance-based grant, and after an initial period (expected 12 months), the TA will only continue if agreed performance thresholds have been met.

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Annex 1-C: Country and Sector o r Program Background MADAGASCAR: Integrated Growth ,Poles Project (Risk Sharing Mechanism: the Partial Credit Guarantee - Conflict o f Interests Management Framework)

I F C and IDA have and will continue to collaborate in the preparation, financing and supervision o f the Project as part of the I D N I F C MSME Program approved by the Executive Directors o f IDA. The coordination o f investment and advisory activities between the two institutions i s designed to improve the quality o f their advice and financial support so as to enable the G O M to develop a better program that accurately reflects the needs o f MSMEs in Madagascar. However, notwithstanding the benefits o f improved coordination, it i s recognized that the multiple roles o f the IFC in the preparation and implementation o f the proposed Project may raise potential or perceivable conflicts o f interest issues. Consistent with the World Bank Groups Conflict o f Interest Guidelines, this Annex outlines the framework for identifying and managing such conflicts o f interest that has been agreed between IDA, IFC and the GOM.
In line with the philosophy o f the I D N I F C PMSME Program, the proposed Project includes a Partial Credit Guarantee Program component consisting o f a sub-component related to partial credit guarantees (PCGs Sub-component) issued by IFC to support lending by participating banks to small and medium enterprises in Madagascar; and a technical assistance subcomponents (the TA Sub-components) that relate to the provision o f capacity building grants to: (i) banks selected to participate in the PCG; (ii) banks that need institutional capacity building assistance to qualify for participating in the PCG; and ( i ) i ipotential and existing SME clients o f the selected and potential P C G partner banks. In the case o f the PCGs issued by IFC, it i s envisaged that there will be risk sharing between G O M and IFC. IDA funding will be used to finance the GOM obligations with respect to the PCG, and to fund the TA Component.

The Project preparation team has determined that there i s a possibility that some existing or potential IFC clients could receive support from the Project via the PCGs andor the TA Subcomponents. Should such a situation arise, IFC will disclose i t s interests.
The Project has been designed and will be supervised by a joint team o f IDA and IFC staff (the I D N I F C Advisory Team). In the case o f the PCGs Sub-component, the I D N I F C Advisory Team would assist GOM in identifying appropriate selection criteria for participating banks and advise the G O M in the selection o f applicant banks in accordance with such criteria. Once participating banks have been selected, a separate team composed o f staff from IFCs Global Financial Markets Department (the IFC Investment Team) will conduct a detailed appraisal o f selected banks. Thereafter, the IFC Investment Team will be solely responsible for working with G O M to process the investment. This work will include design o f the financing terms o f the PCGs, and negotiating and concluding legal documentation for the PCGs. The proposed investment will be subject to IFCs internal approval o f the client banks and terms o f the investment.

50

Consistent with the World Bank Groups Conflict o f Interest Guidelines and IDA policies, the I F C Investment Team would not participate in the selection o f the partner banks, i.e. the World Bank Group would maintain separate teams for i t s advisory and i t s investment role. However, in the interest o f providing appropriate design o f the T A Sub-component, after participating banks have been selected by the GOM, a member o f the I D N I F C Advisory Team will accompany the I F C Investment Team in the appraisal o f selected participant banks, solely for the purposes o f appraising the TA Sub-component o f the Project and subject to obtaining prior informed consent of the selected banks. This joint arrangement would help leverage each teams expertise and facilitate the design o f an effective approach to S M E finance, which integrates financing with capacity building efforts. The IFC-IDA collaboration in the preparation o f this Project will help to develop a significantly better overall program that accurately reflects the needs o f SMEs in Madagascar while preserving the interests o f the GOM. However, it i s recognized that this design raises the risk o f potential conflicts o f interest, or the perception thereof, between IDA and I F C activities in Madagascar if any existing or potential I F C clients benefit from support under the Project as mentioned above. Accordingly, IDA and I F C have established a framework for identifying and managing conflicts o f interest in this Project. This framework will involve disclosure to concerned parties in communications and a set o f measures to manage any potential or perceived conflicts o f interest arising from the multiple roles o f IFC. GOM has confirmed i t s acceptance o f this framework. Specific measures that will be implemented include: a) Except for the joint appraisal o f selected P C G banks mentioned above, separate teams , with no overlapping team leaders, will handle the joint I D N I F C Project preparatiodsupervision assignments on the one hand, and I F C investment assignments, o n the other hand. Accordingly, no IDA and I F C staff members that have been part o f the I D N I F C Advisory Team would be assigned to work on the I F C financing o f actual or potential beneficiaries o f the Project. b) N o confidential information will be shared between the I D N I F C Advisory Team and the I F C Investment team. Accordingly, the I D N I F C Advisory Team will not provide the I F C Investment team any confidential or privileged information obtained by the preparation and supervision team in the course o f the Project; and members o f the I F C Investment team would not provide members o f the I D N I F C Advisory Team any confidential or privileged information obtained as a result o f their work with an I F C client. c) The advice o f the I D N I F C Advisory Team has been and will continue to be separate and independent from any I F C role or investment in a potential Project beneficiary. The I D N I F C Advisory Team will continue to provide stand-alone, independent advice based on international best practice and experience, and without regard to the possibility that I F C might eventually become a lender to or investor in a Project beneficiary.

51

d) The selection o f participating banks and other Project beneficiaries will be based on best practice and transparent eligibility criteria approved by the GOM.

52

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MADAGASCAR: Integrated Growth Poles Project

[ Guideline: (Recommended length 1page)


This annex should summarize recent projects supported by the World Bank and other international agencies in the country in the same sector or related sectors. For each project listed, indicate which o the sector issues discussed in B.2 have been or would be addressed. For f Bank-.named projects completed in the last five years, OED 's rating should be provided. For ongoing Bank-jhancedprojects, the I P and DO ratings from the latest Project Status Report should be shown.]

53

Annex 3: Results Framework and Monitoring MADAGASCAR: Integrated Growth Poles Project Results Framework

PDO
To help provide an adequate business environment to stimulate and lead economic growth in three selected regional poles.

Outcome Indicators
Through stimulus t o MSMEs, an increase in the number o f additional tourists arriving at Nosy B e and Taolagnaro airports and ports Volume o f merchandise shipped through the Taolagnaro and Tamatave ports and Ivato airport Number o f j o b s created id the three poles

Use o f Outcome Information


4irport and port statistics Ministry o f Tourism, Ministry o f rransport 4ir Madagascar Port Authority [NSTAT

. .

Component A: Strengthening the business environment

Intermediate Results One per Component

Improved access t o finance, comprehensive supply chain strategy and moveable collateral registry established for the benefit o f Malagasy firms

Component A: Participating banks M S M E loan portfolio increases Leasing a n d o r factoring increase Volume o f sales flowing out o f the value chains increases by over 25% over 5 years Increase of number o f collateral registrations by 100% over 5 years Component B :

Results Indicators for Each Component

Use o f Results Monitoring


Component A:

Central Bank INSTAT

Component B: Export led growth in Antananarivo

Component B:

Upgrading o f ICT business park and o f industrial parks through provision o f hard and soft infrastructure
Component C: Tourism ledgrowth in Nosy Be

10 firms will have set up operations in the ICT park E P Z strategy implemented
Component C:

GUIDE INSTAT
Component C:

Upgrading o f tourism and urban infrastructure through provision o f roads, public utilities, and other urban and tourism services
Component D: Mining and Tourism led growth in Taolagnaro

# o f tourists

Ministry o f Tourism INSTAT Ministry o f Transport

Component D:

Component D: Ministry o f Tourism INSTAT

Open the region up through upgrading o f tourism infrastructure,

# o f tourists Volume o f merchandise shipped

54

ncludina roads , public utilities, i ._ ports, urban and tourism services


I

I Ministry o f Transport,
Minis& o f Mines OMNIS

Component E: Implementation arrangements Delivery o f an integrated platform for growth by the 4th project year in Nosy Be, Taolagnaro and Antananarivo- Antsirabe

Component E: Objectives o f the Project Implementation Plan met

Component E:

55

m o w
m N

o m 9 m e

4 0

re

0 0 0 0

4 2

Annex 4: Detailed Project Description MADAGASCAR: Integrated Growth Poles Project

Component A: Strengtheningthe business environment (Total including taxes and contingenciesU S 5 5 million of which IDA financing i s US$21 million - Expected IFC financing o f US$16million)

The project will focus on strengthening the business environment through regulatory reforms and providing support to macro, small and medium sized enterprises (MSMEs) in all three increase access to finance; (ii) build MSME capacity; (iii) development geographic poles to: (i) o f country-wide tourism initiatives; and (iv) improve the business environment. The main objective o f this component is to create business opportunities for the Malagasy firms around the sectors targeted by the project. Such business opportunities will further help realize the development potential o f the IG2P.
Access to finance (IDA financing US$6.9 million)
Development o leasing &factoring (IDA US$ 1.2 m). I t is expected that additional IFC and f This private sector financing will supplement this amount by an additional US$lO.Om. component will comprise a technical assistance (TA) program that will facilitate know-how transfer and strengthen technical expertise needed to develop the leasing and/or factoring sectors in Madagascar. In particular, i t i s envisaged that the technical support, which will be provided to companies selected on the basis o f agreed country-specific eligibility criteria, would include: i) provision o f international experts, as shadow CEOs to the selected leasing companies; i ) i development and implementation o f Management Information Systems and other required i) systems; i i training o f key personnel; iv) setting up o f policies and procedures; and v) any other support determined necessary to develop the particular business, in order for i t to better provide services to the target market. The specifics o f the TA interventions may differ depending on the respective strengths, weaknesses and needs o f the companies selected for this project. The technical expertise, which i s absent in Madagascar, would need to be provided by international experts. Partial Credit Guarantee Program (PCG) (IDA US$5.7 million). I t is expected that the IFC and the Banking sector would supplement I D A financing (at this stage IFC with a US$lO million guarantee while the Banking sector wouldfund up to US$25 million in new loans). This component will consist o f three sub-components: (i) Partial Credit Guarantee Facility by I D N I F C , under which the combined I D N I F C guarantees would provide participating intermediaries up to 50 percent pro-rata credit risk cover on an agreed S M E loan portfolio (IDA: US$2.5 million); (ii) technical assistance and training o f personnel o f banks participating in the PCG program, to support expanded S M E lending (US$2.6 million); and ( i ) i itraining o f SMEs that wish to apply for loans, to provide them basic financial management skills (US$0.6 million).

58

MSME capacity building (IDA financing US$4.2 million)

MSME Training (IDA US$ 2.2 million) supplemented with other donor funding (the Swiss Foundation and the Departement de 1'Oise (France)).
Provision o f training to micro, small and medium enterprises in the tourism sector in the Nosy Be region and in the Taolagnaro region along the two following actions:

i) Tourism sector-specific training in Nosy B e & Taolagnaro: Based o n effective demand, the project would offer training modules to hotel, restaurant and other M S M E s closely linked to tourism. At the beginning, most o f the modules would be taught by expatriate training experts, with the help o f local trainers - gradually, the local trainers would take over such that after 2-4 years the local consultant is independent.
training materials (e.g. self-training manuals, modules for seminars, etc.) as well as marketing tools (promotional materials, etc.). The various modules can be grouped into five main categories: HR management; marketing management; financial management; operations management and strengthening o f inter-personal skills. The various modules can be combined flexibly to create made-to-measure training programs. This training will be executed by trainers who will be under contract, after having been trained themselves by experienced Business Edge trainers. The project would cover the costs o f an international Business Edge trainer for 6 months, as well as part o f the costs o f the local consultant, plus training materials, classroom, etc. Attendees will pay a fee, which will in turn cover part o f the costs o f the local consultant.
Supporting the NPS to develop Key Value Chains (IDA US$2.0 million)

i) i Key-sector training usina Business Edge: Business Edge, designed by I F C, provides

Supporting the National Secretariat to provide technical assistance for the development o f key value chains and for the financing o f micro-projects through the provision o f grants to certain beneficiaries.
In order to be eligible for this support, a value chain will have to meet the following criteria: (i) the chain must include at least two different segments/links; (ii) actors at various levels o f the chain must be willing and able to establish a consultative mechanism covering the entire chain, i i retailers/exporters downstream must be willing to make and establish a growth strategy; ( i ) tangible investments to support the producers upstream. Under this scheme, the amount o f capital investment that a strategic sector i s willing to make to improve the functioning o f i t s supply chain would be matched by grants to finance expert support services. In certain situations, grants would also be available to alleviate critical bottlenecks in the key supply chains (e.g. ice machines and cold storage for fish and seafood, collectiodsortinghtorage points in agribusiness). Provisionally, the following value chains have been identified as having much Antananarivo / Antsirabe: Raffia production to tourist shops and development potential: (i) export; Vegetable production to export; Cotton to export garments; (ii) Taolagnaro: shell fish and seafood to hotels and export; Exotic fruit production to export; Vegetable production to hotels

59

and export; and (iii) Nosy Be: seafood to hotels; Fruit & vegetables to hotels; Ylang-ylang to cosmetic producers & export.
Support to Tourism Development Initiatives (IDA financing US$3.0 million, supplemented by IFC grants):

(a) Supporting the Borrowers capacity to manage the tourism sector, through the provision of: (i) technical advisory services and training for national and regional staff o f the Ministry o f Tourism and Regional Tourism Offices to strengthen their capacity to implement the regional tourism master plans; (ii) technical advisory services and training to strengthen the capacities o f the Ministry o f Tourism and the National Tourism Office to manage, regulate, market and enhance the quality o f services and a new information system; (iii) technical advisory services and training to the Ministry o f Tourism to develop a communication strategy and carry out an international marketing campaign for promotion o f the relevant areas; and (iv) technical advisory services and training to the Ministry o f Tourism and the National Tourism Office to develop the Green Charter.

(b) Supporting the development o f the marketing capacity o f selected micro, small and medium enterprises, through the provision o f (i) technical advisory services to such enterprises for the creation o f websites; and (ii) support for such enterprises to j o i n WorldHotel-Link.com.
(c) Strengthening GOMs national tourism training system, through: (i) provision o f the technical advisory services to redefine the National Institute for Hotel and Tourism Training (NMTT)s role; (ii) rehabilitation o f NIHTT facilities; and ( i ) training o f trainers in the i ithe tourism-related subjects.

Improving the Business Environment (IDA financing US$ 7.0 million, supplemented by IFC grants)

(a) Supporting the development o f the Lease Registry through: (i) provision o f legal and the technical advisory services for establishing the Lease Registry; (ii) provision o f training for the the Lease Registry staff; and ( i ) provision o f technical advisory services to carry out an i i the information dissemination campaign regarding the Lease Registry, and surveys with financial institutions and clients.

(b) Strengthening the promotion o f investments and the registration o f micro, small and medium enterprises, through: (i) provision o f technical advisory services to GUID and the relevant ministries to carry out investment promotion activities needed to attract foreign direct investment; and (ii) supporting GUIDE for a five-year period in connection with the establishment of GUIDE in Nosy Be, Taolagnaro and Antsirabe.
(c) Supporting the monitoring of institutional reforms to increase private sector investments, through the provision o f technical advisory services to: (i) relevant ministries to carry out a 60

dialogue with the private sector company involved in the Ilmenite Mining Project in Taolagnaro; (ii) Ministry o f Transport to achieve an efficient open skyheedom sky policy; and ( i ) i i to Ministry o f Agriculture to improve land access by private investors.

(6) Supporting the J I R A M A operation restructuring (IDA US$5 million). As an element o f a larger recovery plan for JIRAMA, the project will finance the purchase o f petroleum products for JIRAMA in the amount o f U S $ 5 million.
Component B: Export led growth in Antananarivo- Antsirabe (Total including taxes and contingenciesUS$7 million o f which IDA financing i s US$6 million)
Enhance EPZ/manufacturing sectors competitiveness (IDA US$l.8 million): The project objectives under this component are to enhance the competitiveness o f the EPZ and manufacturing sector through: (i) strengthening the policy, institutional and regulatory i) environment for investment promotion and facilitation; ( ienhancing the availability and quality and reducing the cost o f industrial infrastructure and utilities; and (iii)increasing labor productivity through strengthening delivery mechanisms for vocational training and skills development through innovative public-private partnerships.

The project activities to be financed under this component are: (a) the provision o f technical advisory services to relevant ministries and authorities to support EPZ activities, the adoption and implementation o f a new regulatory framework for private sector investment in Madagascar, and EPZ legislation; (b) the provision o f technical advisory services to the Ministry o f Private Sector for the establishment o f an institutional and funding system to support enterprise-based skills development through public-private partnerships; (c) the provision o f technical advisory services to build capacity o f relevant ministries in the fields o f trade negotiations, formulation and adoption o f policies and strategies for strengthening vertical and horizontal integration o f the textiles and garments industry; (d) the provision o f technical advisory services to improve capacity o f the Ministry o f Private Sector in the field o f logistics and trade facilitation, including customs administration; and (e) the provision o f technical advisory services and works to the Ministry o f Private Sector to establish an industrial zone or an agrotechnopole in a strategic location in Antananarivo and/or Antsirabe.
ICT Business Park development (IDA US$3.0 million): The projects objectives are to help develop an I C T business park o f international level, and assist in the development o f an incubator. The activities to be financed under this component consist o f the following: (i) the provision o f works, technical advisory services, goods and training to the Ministry o f Telecoms to establish an I C T business park in Antanetibe; (b) the provision o f technical advisory services to the Ministry o f Telecom to select a private investment partner to develop and manage the business park; and (c) the provision o f technical advisory services to develop and implement a new regulatory framework for the I C T sector and to strengthen i t s capacity in this field.
Provide support to the Municipalities o Antananarivo and Antsirabe through: technical f assistance, training, rehabilitation o f existing facilities, office equipment. (IDA U S $ 1.4 million)

61

Component C: Tourism led growth in Nosy Be (Total including taxes and contingencies US$55 million o f which IDA financing i s US$32 million)

The project will create the infrastructure and regulatory environments allowing the tourism industry o n the island o f Nosy B e to grow. The infrastructure will be designed to accommodate a demand o f 2000 intemational-level hotel rooms by 2010. The project will finance the following activities:
0

Adoption o f a tourism master plan and urban plan to regulate and manage development in existing areas, through the hiring o f local and international consultants; In a participatory and transparent way, open up land acquisition in the main tourism areas as defined by the plan, with the assistance o f local and international consultants; Technical assistance to assess and develop business incentives to attract investments, with the support o f local and international consultants; Upgrading o f the road network to allow better flow o f people from the main city and airport to tourism sites. The main road segments to be upgraded are: Fasckne airport to the North (1O h ) , link to the national road East through Mount Passot (13km), Hellville to the Fascbne airport (maintenance only), Hellville to the Indian Village, the hotel training site and the national road (16km). Access to the northem part o f the island i s not envisaged under this component. Recruitment o f consultants services for the design and supervision; Upgrading o f the Hellville (in two phases ) and Ankify ports. This will allow rationalization o f traffic from Nosy B e to the main island, hence giving direct access to the RN6, through a spur to Ankify port. The Hellville port will be rehabilitated to accommodate traffic from: (i) industrial fisheries; (ii) various agricultural products; ( i ) ii passenger traffic between Nosy Be and the main island; (iv) cruise ship passengers; and (v) artisanal fishermen. For the Hellville port, financing will be provided to: (a) rehabilitate the North and East berths (b) construction o f a new llOm berth with 8.0m water clearance, (c) construction o f slipways, (d) dismantling o f warehouses and demolition o f buildings, (e) rehabilitation o f warehouse and offices, (f) pavement, fencing and utilities, (g) rehabilitation o f passenger and cruises terminal. For the Ankify port, financing will be provided for: (A) construction o f a new lOOm berth with 2.50m water clearance, (B) rehabilitation o f the existing slipway and berthing slope. Financing would cover design and supervision (local and intemational consultants), works; Upgrading o f selected urban infrastructure in the city o f Hellville, Ambatokoaka and Djamadjary to accommodate the increased number o f visitors. This will include the financing for upgrading o f tarred and not tarred roads, water drainage, and infrastructure against erosion. Financing would cover design and supervision (local and intemational consultants), works; Investments in telecommunication towers on a public private partnership basis to allow development o f a reliable network. The size o f the investment required i s designed to accommodate the growth o f the tourism sector. Investments in telecommunication towers with microwave transmission (3 pylons), electrical connections, exit antennas and related equipment, will help induce private investments in telecommunications networks. Such investment, take place simultaneously with private investments. Financing will cover design and supervision (local and international consultants) o f works ; 62

Upgrading of the power system to allow existing hotels access to reliable power generation, and accommodate growth in the sector. The main investments to be financed through the project consist of: (i) rehabilitation o f the most recent existing generators and installation o f 6 M W o f new capacity though purchase retiring o f the four oldest ones; (ii) i imaintenance o f the generators over the life o f the project; (iv) o f new generators; ( i ) extension o f medium-tension lines to the tourist areas, as defined by the tourism master plan. I t i s not expected that the project will finance the relocation o f the power generation site. Financing will cover design, supervision, works (local) and equipment. Upgrading o f the water and sewerage system to give 80 percent o f the local population access to potable water by 2010, with priority given in the sequencing to the tourist areas. The main investments to be financed through the project are: (i) development o f the Amparibe lake as the main water source for the island o f Nosy B e including pumping, water treatment, transport, water reserves; (ii) rehabilitation and upgrading o f the water distribution system, including water meters; (iii) destruction o f the existing facilities that are contaminated; (iv) solid and liquid waste management. Financing will cover design, supervision, works (local) and equipment. Upgrading the medical facilities at the Hellville hospital. The objective i s to provide modem facilities that can provide immediate care for emergencies before evacuation to the main island. The project will finance the rehabilitation o f the second floor o f the hospital to bring it to appropriate sanitary requirements and will provide it with a surgery block, Financing will cover will cover design, supervision, works (local) and equipment; Provide support to the Municipality o f Nosy B e through: technical assistance, training, rehabilitation o f existing facilities, development o f a strategic urban development plan creation o f ecotourism facilities, including to provide access to land for tourism development;

Component D: Mining and Tourism led growth in Taolagnaro (Total including taxes and contingencies US$166 million o f which IDA financing i s US$55 million)

The project will create the infrastructure and regulatory environments open up the region o f Taolagnaro and allow growth o f the tourism industry, encourage agribusiness and accommodate the growth resulting from the ilmenite mining project. The infrastructure will be designed to accommodate a demand o f 850 international-level hotel rooms by 2010. The project will finance the following activities:
0

Adoption o f a tourism master plan and urban plan to regulate and manage development in existing areas, through the hiring o f local and international consultants; Develop o f a new public port on the north side o f Ehoala peninsula: O n a public private partnership basis with QIT, finance a portion o f the investment costs associated with the construction o f a new port with a 600m long breakwater, 238m by 60m to accommodate vessels up to 35,000 DWT, 7000m2 short-term storage area adjacent to the quay, open an area for third party users, storage for ilmenite and zircon, conveyor belt from the ilmenite storage area to a mobile ship loader, mobile ship loader running parallel to the quay, basic infrastructure to for construction o f a fuel tank farm, dredging designed to accommodate 35,000STW ships, a small craft harbor for tug, line boat, work boat and local use, groin structure to prevent sediments in the dredged area, administration 63

buildings. Financing will cover design and supervision (international consultants) and works. Works for the existing port financed under the project will include: (i) dredging i) o f port basin; and ( irepair o f slipway, repair o f tugboats and lighters, and purchase of a forklift. Rehabilitate the road network to allow better traffic between tourist sites and Taolagnaro, better access from the rural areas, and open up the city. The project will finance design, supervision and works. Investments in telecommunication towers on a public private partnership basis to allow development o f a reliable network. The size of the investment required i s designed to accommodate the growth o f the region. Investments in telecommunication towers with microwave transmission (pylons), electrical connections, exit antennas and related equipment, will help induce private investments in telecommunications networks. Such investment i s designed to take place simultaneously with private investments. Financing will cover design and supervision (local and intemational consultants), works; Upgrading o f the power system to allow 15 percent growth in power demand. The main investments to be financed through the project consist of: (i) rehabilitation low-tension installation o f 1.6MW o f new capacity through purchase o f and medium tension lines; (ii) new generators; and (iii) maintenance o f the generators over the life o f the project, (iv). I t i s not expected that the project will finance the additional power need resulting from the mining operation. Financing will cover design, supervision, works (local) and equipment. Upgrading o f the water and sewerage system to allow for population access to potable water by 2010. The main investments to be financed through the project are: (i) stabilization o f the Lakandava production, preparation o f the E F A O site including rehabilitation o f 1O k m o f water pipes (Bezavona to city, Laniaro station to Bezavona); ( i i) new pumps; (iii) rehabilitation o f 2 k m o f secondary network for distribution; (iv) preparation o f the new production site at Efaoa; (v) solid and liquid waste management. Financing will cover design, supervision, works (local) and equipment. Upgrading the urban infrastructure o f Taolagnaro by focusing on some strategic roads, allowing access to the city through a square shaped network, cross roads RN13 with access to the hospital and RN12A, portion o f the RN12A following the shore. The use o f P a d s Autobloquants i s proposed. Financing will cover design and supervision (local and intemational consultants), works Upgrading the medical facilities at the Tisranana hospital. The objective i s to provide modern facilities that can provide immediate care for emergencies before evacuation to the main island. The project will finance the rehabilitation of a portion o f the hospital to meet sanitary requirements and will provide it with a surgery block. Financing will cover will cover design, supervision, works (local) and equipment; Provide support to the Municipality o f Taolagnaro through technical assistance, training, rehabilitation of existing facilities, construction o f basic sanitary facilities, rehabilitation o f the slaughterhouse, development a strategic urban and regional development plan to regulate and manage development o f Taolagnaro;

64

Component E: Program and project implementation, evaluation and monitoring (Total including taxes and contingencies US$21 million of which IDA financing is US$15 million)

The project will support, at both central and regional levels: aproject implementation, project coordination, procurement and financial management through the provision o f technical advisory services, training services, goods and small works for the carrying out o f technical audits and financial audits and monitoring and evaluation activities under the Project.

b. the preparation and implementation o f regional development plans and local land use plans, and the implementation o f the provisions o f the EMPs, as well as the carrying out o f all environmental and social activities under the Project.

65

Integrated Growth Poles Program Summary costs with taxes and contingencies Components A. Strengthening the business environment

YO Total

1
IDA Project

21

1. Access to fmance 2. MSME capacity building 3. Country-wide tourism developmentinitiatives 4. Improving the business environment
B. Export led growth in Antananarivo & Antsirabe

7 4 3 7
6

1. Enhance EPZ competitivenes 2. ICT Business Park Development 3. Support to Antananarivo and Antsirabe municipalities
C. Tourism led growth in Nosy Be

2 3 2

32 30 1 2
55

1. Infrastructure upgrading 2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening

D. Mining and Tourism led growth in Tolagniaro (Fort Dauphin) 1. Infrastructure upgrading 2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening E. Program and Project Implementation, Evaluation and Monitoring 1. Support to program & project monitoring and evaluation 2. Support to project management and training 3. Technical assistance for project management& monitoring 4. Operating expenses far project management
Total Program Costs

52 1 2 1s 8 2 3 2
130

66

Annex 5: Project Costs MADAGASCAR: Integrated Growth Poles Project

Annex 5-Table A Republic o f Madagascar Integrated Growth Poles Program & Project Components Project costs Summary

(US% million)
Project components

A. Strengtheningthe business environment B. Export led growth in Antananarivo & Antsirabe C. Tourism led growth m Nosy Be D. Mmmg and Tourism led growth m Tolagniaro (Fort Dauphin) E. Program and Project Implementation,Evaluation and Monitoring Total Baseline Costs Physical Contingencies Price Contingencies Total Project Costs Note: Figures may not add up to total due to rounding

Local Foreign -

Y o %Total Foreign Base Total Exchange Costs


53 7 50 156 19 285 7 12 304
68 51 55 72 50 48 55 66 66

22
43

17 3

10 96 3 4 103 -

36 4 28 113 9 189 4 8 201

18 2 18 55 I 100 3 4 107

67

Annex 5-Table B Republic o f Madagascar Integrated Growth Poles Program & Project Components Project detailed costs

A. Strengtheningthe business environment 1. Access to fmance 2. MSME capacity building 3. Countrywide tourism development initiatives 4. Improving the business environment Subtotal Strengtheningthe business environment B. Export led growth in Antananarivo & Antsirabe 1. Enhance EPZ competitivenes 2. I C T Business Park Development 3. Support to Antananarivo and Antsirabe municipalities Subtotal Export led growth in Antananarivo & Antsirabe C. Tourism led growth in Nosy Be 1. Infrastructure upgrading 2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening Subtotal Tourism led growth in Nosy Be

12 2

26 2 2

38 4 3

-++I

1 2 3 1

1 1

2/ 3

0- 28 22

D. Mining and Tourism led growth in Tolagniaro (Fort Dauphin) 1. Infrastructure upgrading 2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening Subtotal Mining and Tourism led growth in Tolagniaro (Fort Dauphin) E. Program and Project Implementation, Evaluation and Monitoring 1. Support to program & project monitoring and evaluation 2. Support to project management and training 3. Technical assistance for project management & monitoring 4. Operating expenses for project management Subtotal Program and Project Implementation, Evaluation and Monitoring Total Baseline Costs Physical Contingencies Price Contingencies Total Project Costs

- 2 113

42 1 1 43

111

- 0 9 - 189 96 3 103 - 201


I

7 0 1 2 10

I
Note: Figures may not add up to total due to rounding

68

Annex 5-Table C Republic ofMadagascar Integrated Growth Poles Program & Project Components Project costs and financing

A. Strengthening the business environment 1. Access to fmance 2. MSME capacity building 3. Country-wide tourism developmentinitiatives 4. Improving the busmess environment B. Export led growth in Antananarivo & Antsirabe
1. Enhance EPZ competitkenes 2. ICT Busmess Park Development 3. Support to AIItaMMIiVO and A n t s h k municipalities

17 12 2 1 1
3

36

53

68

18

26 2 2 7
4

38 4 3 8

68 42 86

13 1 3

7
2 3 2
50

51
68 47 51

2
1 1 2

1 2 1

1 1 1

C. Tourism led growth in Nosy Be 1. Infrastructure upgrading 2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening D. Mining and Tourism led growth in Tolagniaro (Fort Dauphin)
1. Infrastructure upgrading 2. Social and Sanitary Infrastructure 3. Local Institutions Strengthening

22
22 0 0
43

28
26 0 1
113

55
55 51 76

18
17
1 55

48 1 2

156
152 2 2

72
73 51 76

42 1 1

111 1 2

53 1 1

E. Program and Project Implementation, Evaluation and Monitoring


1. Support to program & project monitoringand evaluation 2. Supprt to project management and training 3. Technical assistance for project management & monitoring 4. Operating expenses for project management

10
7 0 1 2 96 3 4

9
5 1 3 0

19
12 2 3 2

50
41 76 76 10
48

7
4 1 1 1 100 3 4
107

Total Baseline Costs Physical Contingencies Price Contingencies Total Project Costs Total Financing, ofwbicb Government IDA IFC Private Sector Other identifiid donors To be fmnced Note: Figures may not add up to total due to rounding

189
4 8

285
7 12
304 304

55 66
66

103 103 39 32 5 9 11 7

201 201
0 97 11 62 17 13

100%

39 130 16 70 28 21

13% 43%

23%

69

B
0

E:
cu

a,

%4
0

Annex 6: ImplementationArrangements MADAGASCAR: Integrated Growth Poles Project Project implementation period. The project will be implemented over a period o f five calendar years and six fiscal years, completed by June 30,2010, and closed by December 31,2010.

Given the complexity and scope o f the project, a lean and efficient implementation structure will be put in place:
Project oversight. During the project implementation, a Steering Committee (Comite national de pilotage), chaired by the Minister o f Finance, composed o f representatives o f the sector ministries, public utilities entities, region and town administrations, Office National de lEnvironnement, the Office National du Tourisme, and relevant ministries, will be established. The Steering Committee will be responsible for policy guidance and overall project oversight, and will ensure communication and cooperation among stakeholders (including the private sector). Only when performance objectives given to the N P S are not met (see below), will the Steering Committee be in a position to influence or delay the project implementation process. The Steering Committees Secretariat will be assumed by the N P S . Project coordination and implementation (SecrCtariat National). The overall coordination and implementation o f the project will be camed out by the SecrCtariat National (NPS), established at the national level, with three regional representations. Headed by a SecrCtaire National recruited o n a competitive basis, the N P S will be responsible for project execution, including procurement, financial management, and monitoring and evaluation, o f the various activities supported under the project. The N P S s performance will be benchmarked against timely implementation o f the project implementation plan.

I,
Sedtaire national Environnement

Contracted Out

72

The main activities o f the N P S will be: (i) consolidation o f the work programs and budgets; (ii) implementation o f all activities; ( i ) i imaintenance o f records and accounts for all transactions related to the N P S ; (iv) preparation and production o f consolidated annual financial statements and quarterly FMRs; (v) contracting and supervision; (vi) management o f disbursements for components under its responsibility and replenishment applications for the special account; and (vi) monitoring and evaluation o f the various activities supported under the project.

The three regional representations will be based in Antsirabe, Taolagnaro and Nosy Be. These regional representations will have a monitoring and coordinating role mostly. I t i s expected that some transfer o f financial management and procurement responsibilities from the N P S to regional representations may take place during the second h a l f o f the implementation period (after the Mid Term Review) when capacities are deemed adequate following the assessment carried out by the Banks specialists.
To allow rapid implementation, execution o f most activities under components A, B, C and D will be entrusted to different agencies under several service contracts Contrat de Conduite d Operations (referred as CCOPs or CCOP) or Contrat de Maitrise d Ouvrage DeZeguee(referred as CMOD). The service agencies will be selected on a competitive basis.

Steering Committee headed by Presidency (Government and stakeholders)

Delegation of procurement nd supervision only

1
of goods and services

73

Monitoring and evaluation arrangements


Supervision. The World Bank will devote an estimate 70 staff weeks per year for supervision o f credit progress through fiscal 2011. During the first two years, supervision will focus on performance o f the executing entities in managing contracts, procurement, and financial matters, as well as in completing the agreed implementation plans. During the following years supervision will focus on progress in executing works, developing the sector strategies, and strengthening capacity o f the regional units to implement future development projects. Monitoring. Overall project monitoring i s based o n indicators confirmed at Appraisal (Annex 2) and the project implementation plan to be finalized by the N P S and to be agreed during negotiations. Monitoring will be carried out by the Steering Committee and assisted by consultants as necessary. Progress under each project component will be monitored and coordinated by the NPS under the guidance o f the Steering Committee. Progress reports will be prepared by the N P S every six months, commencing in September 2005, and submitted to the World Bank within one month thereafter. N o later than three months after the closing date o f the project, the G O M will prepare and furnish to the World Bank a report on the execution o f the project, i t s costs and the benefits derived and to be derived from it. Reviews. I addition to intensive supervision by the World Bank staff, reviews by the World n Bank, together with the GOM and the other involved parties to assess progress in implementing the agreed activities will be carried out on a regular basis every six months. The Steering Committee, through the NPS, will be responsible for: (i) preparation o f the necessary documentation for the reviews; and (ii) planning o f review meetings. During the first reviews, special attention will be paid to assess the private sector participation and their implication in the program and project activities throughout the selected growth poles to eventually reorient some activities if the situation requires it. Mid-term review. A mid-term review will be carried out no later than December 2008 by the World Bank, together with the G O M , the donors involved in the program and the other involved parties, In addition to covering all areas included in annual reviews, the mid-term review will assess the implementation status o f the national and regional components, institutional and financial arrangements, the PPP mechanisms put in place and the capacities o f the regional units for their increased role in the second phase o f the project implementation. Prior to the mid-term review, the Borrower will contract a consultant (under project finance) to review and assess the progress o f implementation and prepare the necessary documentation for the review. The review will evaluate progress in reaching project and program objectives and identify measures needed to reach objectives. Careful attention will be paid to: (i) effective PPP mechanisms put in place under the project; (ii) performance o f the N P S in addressing environmental and social issues the in design and implementation o f the different components; and ( i ) performance o f the N P S i ithe in addressing fiduciary responsibilities. This will involve visits by specialists to selected sites for first-hand assessment o f executing entities' performance. They will assess the environmental and social impacts o f investments, both individually and cumulatively, and the adequacy o f safeguard procedures agreed for the project.

74

Annex 7: Financial Management and Disbursement Arrangements MADAGASCAR: Integrated Growth Poles Project

Specific Financial management and disbursement arrangements

Several diagnostic works carried over the last two years (CFAA, CPAR, HIPC-AAP, IMF Technical Assistance Report, European Union Financial Audit and PER) identified serious weaknesses in the country public financial management system. T o mitigate this high fiduciary risk, it was agreed that the coordination and implementation o f the Integrated Growth Poles Project will be entrusted to a national project management Unit (NPMU) to be set up within the Vice Prime Ministers offices in Antananarivo. However as indicated above some corrective actions must be taken to strengthen i t s financial management system.

The CPFA (Country Profile o f Financial Accountability) carried out in September 1998 confirmed also the weak capacity o f the accounting profession in Madagascar. A number o f accounting f i r m s were operating below the international standards due to the lack o f regulatory framework, proper auditing standards, clearly defined guidelines and procedures for systematic peer reviews, continuing education requirements, quality control mechanisms to harmonize methodology. To improve the capacity and the competitiveness o f the local auditing firms, the following measures have been taken: i) obligation for local auditors to enter into partnership with international accounting f i r m s while auditing B a W I D A financed projects in order to improve the quality o f audit reports and ensure practical training and real transfer o f methodology in the areas of organization and execution o f audit assignments; i )effective participation o f the i international accounting firm while carrying out audit works in the field and submission o f audit report jointly signed by the local and international audit firms. FM Risk Analysis
Implementing Entity: The NPS i s a new entity and has no experience with implementingan IDA- financed project.

Risks

Risk rating
Moderate

Risk Mitigation Measures


An accounting f m w i l l be recruited in conformity with Bank procedures to handle all aspects o f the project financial management including accounting, budgeting, financial reporting, and disbursement functions. This accounting f m should be hired prior to 0811 5105 NIA NIA NIA NIA

Staffing Accounting Policies and Procedures Internal Audit External Audit The CFAA for Madagascar concluded that country public

Funds Flow

Low Low Low Low Substantial

- Local auditors
75

who intend to audit the financial statements o f Bank financed

I financial management poses a


major fiduciary risk.. The CPFA (Country Profile o f Financial Accountability) carried out in September 1998 confirmed also the weak capacity o f the accounting profession in Madagascar.

Monitoring and Reporting Information Systems

Low Low

projects were invited to enter into partnership with international auditing f i to strengthen their capacity. -Effective participation o f the international auditing f i i in the fieldwork. - Reinforcement o f the accounting profession after the completion o f the ROSC mission. - Recruitment o f technical auditors to ensure the effectiveness and quality o f workslactivities carried out by the executing agencies. NIA NIA

Strengths and weaknesses


In order to meet efficiently the challenges o f this project, the IG2P financial management will be entrusted to an accounting firm having strong experience in managinglauditing World Bank funds. The organizational structure in place defines the lines o f responsibilities and authority that exist and seems appropriate for planning, directing and controlling operations. The main deficiencies noted in the N P S financial management system are summarized in the following table which also provides relevant measures to address them:

Simificant Weaknesses
The N P S responsible for the coordination o f IG2P i s a new created entity. The main weaknesses are the followings: ingredients for sound project financial management are: Absence o f a Chart o f accounts reflecting project components and activities outlined in the PCNPAD. Absence o f an Accounting manual o f procedures

Resolution
Recruitment o f a qualified accounting firm in conformity with the Bank procedures and under Terms o f reference satisfactory to IDA to handle all aspects o f the project financial management. Elaboration and implementation o f an accounting and financial manual o f procedures describing the new organizational structure, the staff job description, the chart o f accounts, the formats and contents o f the FMRs to be produced, the integrality o f control procedures required for ensuring timely preparation o f reliable information and safeguarding assets; The selected accounting f i in charge o f project financial management will provide IG2P with an adequate number o f skilled and experienced accounting staff;

The project accounting staff (NPMU) i s not recruited yet;

Absence o f a computerized system capable o f producing timely FMRs and other reports required for managing and monitoring project activities

A consulting f i acceptable to IDA w i l l be selected to design and install a computerized financial management system to satisfy project requirements and ensure timely production o f financial statements and FMRs.

Absence o f acceptable arrangement in

76

auditing.

I Recruitment o f an auditing firm acceptable

1 to IDA to carry out the audit o f project

Flow of Funds

The flow o f funds from IDA, the GOM and other donors i s presented as follows:

Escrow Account (PCG):

Component A

(Direct Payment): Coln~onent A

JRAMA

Port Company
(Direct Payment): Component D

Special account SecrCtariat national

Agencies

CCOP

Disbursement from IDA credit

For the implementation o f IG2P the following bank accounts will be opened in local commercial banks under conditions satisfactory to IDA:
0

Special Account: Denominated in U S US$, disbursements from the IDA credit will be deposited on this account to finance IG2P activities under components A, B, C, D and E (except for components A1 and D1) in accordance with the disbursement percentages indicated in the D C A .

77

Escrow/Trust Account : Denominated in U S US$, disbursement from the IDA credit will be deposited on this account to finance the FC-managed PCG in component A under terms and conditions acceptable to IDA;

Funds deposited in these accounts will be used to ensure timely payments o f contractors, suppliers o f goods and services, CCOP and C M O D agency. The initial advance to CCOP and C M O D agencies would be made in conformity with the terms o f contract/convention between the N P S and these entities. Subsequent payments will be based on physical progress after appropriate authorization and approval by the N P S .
The special account would be replenished o n the basis o f documentary evidence provided to I D N o t h e r donors by the N P S , justifying the payments made from the account for works, goods and services that are eligible for financing under the credit. All supporting documents will be retained by the N P S and made available for review by periodic donors supervision missions and external auditors. The project implementation and accounting manuals will describe in details all procedural aspects regarding financial management and disbursements from the special account(s), escrow account and project account (payments, replenishment, reporting, internal control).
Staffing

The N P S i s not staffed yet. The recruitments o f the head o f the NPS, head o f the operations department and head o f the fiduciary departments will have to be completed prior to credit effectiveness. The accounting staff (including Head o f fiduciary department, accountant/accounting assistant) will be provided by the accounting firm in charge o f the financial management o f IG2P.
Accounting Policies and Procedures

The N P S will be responsible for all aspects o f the project financial management including budgeting, administration o f the special accounts, record keeping, and production o f the project financial statements and quarterly FMRs. The N P S will use an accounting system in compliance with generally accepted accounting standards and IDA requirements. This accounting system will use standard book accounts (journals, ledgers and trial balances) to enter and summarize transactions and will operate on a double entry accrual principles. The financial statements will be prepared under the historical cost convention. Project accounts will be maintained in MGA (Malagasy Ariary). As a result, the opening and closing balances o f the Special Accounts (SA) held in foreign currencies should be translated at the rate ruling respectively on the opening and closing dates. Expenditures made out o f the SA should be stated at the rate ruling o n the transaction dates. The actual exchange rates used should be disclosed. To ensure timely production o f financial information required for managing and monitoring project activities, the project will be equipped with integrated accounting software.

78

To strengthen the IG2P financial management system it was agreed that a consultant will be recruited to update the project procedures manual which will describe inter alia the outline o f the project organizational structure, the structure o f the accounting system, the accounting policies to be followed, the Chart o f accounts, the financial reporting, and relevant information to facilitate record keeping and maintenance of proper control over assets. H e will also provide adequate training to staff to ensure better understanding and proper application by the staff o f all procedures described in the manual.
Internal Audit

Since FM and procurement activities will be handled by N P S staff during the first period o f the project implementation, the recruitment o f an internal auditor i s not presently justified. The FM adviser within the N P S in collaboration with Monitoring & Evaluation specialist could play easily this role to ensure appropriate execution o f workdactivities in compliance with the terms o f contracts/convention. But should the transfer o f FM and procurement activities to regional representations be effective during the second phase o f the project (between MTR and the closing date) an internal auditor needs to be hired to mitigate risks associated with such a decentralized structure. The internal auditor will carry out all necessary controls to ensure efficient use o f funds, consistent application o f procedures (on procurement, financial management, disbursement) and adequate protection o f project assets. H e will also focus on capacity building and will report directly to the Steering Committee and the National Project Implementation Coordinator. All issues identified during internal audit should be addressed quickly to improve the project performance.
External Audit

The IG2P and the CCOP/CMOD agency(ies) financial statements will be audited annually by an international private accounting firm acceptable to IDA, in accordance with hternational Standards o f Auditing and the new Guidelines describing Audit Policy and Practices for World Bank-financed Activities. The audited financial statements should reflect the activities supported by the credit. The auditors will provide a single opinion o n the annual financial statements instead o f expressing separate audit opinions on special accounts and statements o f expenditures (SOEs), provided such statements reflect the balances and transactions associated with any special accounts and SOEs. This opinion will state whether the financial statements fairly present the financial transactions and balances associated with the implementation o f the project, and if the expenditures financed by the credit were appropriate. The auditors will be also required to carry out a comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit report will be submitted to IDA not later than six months after the end o f each fiscal year. The auditors should be recruited prior to Board presentation. Since the project i s expected to be effective before October 2005, separate audit i s not required for the PPF: amounts disbursed for this purpose will be accounted for in the first reporting period o f the new project. The terms o f reference o f the audit will be reviewed by the financial management specialist o f the Bank/IDA to ensure the adequacy of the audit scope, drawing special attention to particular risk areas identified during project preparation or implementation, that may not be emphasized under a normal audit.

79

Reporting and Monitoring


To monitor project implementation, the N P S will produce the following reports that should be prepared in compliance with international accounting standards:
Annualfinancial statements comprising:

a) Summary o f sources and uses o f funds (by components/project activitiedcredit category and showing all sources o f funds); b) Project Balance Sheet; c) Special account statement; and d) Statement o f Expenditures showing individual withdrawal applications by reference number, date and amount.
Quarterly FMRs

The FMRs includes financial reports, physical progress reports and procurement reports to facilitate project monitoring. The FMRs should be submitted to IDA within 45 days o f the end o f the reporting period (quarter).
The form and content o f FMRs and annual financial statements will be determined as part o f project appraisal and be agreed at negotiations. Models o f these reports will be presentedin the project accounting manual o f procedures.
Information Systems

The IG2P will use an integrated and networked financial management system capable o f recording and producing in a timely manner all financial reports required for managing and monitoring project activities. This computerized system would in particular facilitate: annual programming o f activities and project resources, record-keeping (general accounting and cost accounting), financial and budgetary management, fixed assets management, procurement management, follow-up o f project implementation progress, monitoring o f key indicators to assess the results and impact o f the project, preparation o f quarterly Financial Monitoring Reports as required by the Bank/IDA. The TORS for this consultant will be reviewed by the World Bank Financial Management Specialist. The new computerized system will be fully functional before project implementation begins.
Impact of procurement arrangements

Procurement arrangements do not present substantial risk.


Disbursement Arrangements
Method o Disbursement: f

80

During the first year o f project implementation, the N P S would follow the transaction-based disbursements procedures (traditional mode) outlined in the Bank's Disbursement Handbook., The use o f report-based disbursements could be possible if requested by the borrower and i f the following criteria are met: i) FM rating has been maintained at satisfactory level; and i ) the i the submission o f at least three quarterly satisfactory FMRs that could be relied upon for purposes o f disbursement. Detailed disbursement procedures will be described in the project accounting manual o f procedures. Minimum o Application Size: f

The minimum application size for direct payments, to be withdrawn directly from the Credit Account, and special commitments is 20 percent o f the amount advanced to the related special account.
Use o Statements o Expenses (SOEs): f f

Disbursements would be made against Statement o f Expenses (SOEs) for contracts and goods not requiring the Bank's prior review. Therefore disbursements for all contracts for: Contracts for works o f less than U S US$500 000 ; Contracts for equipment and goods in an amount inferior to US$200 000 ; Contracts for consulting services, training by f i r m s o f less than U S $ 100 000 ; Contracts for consulting services, training by individual o f less than U S $ 5 0 000 ; Training not subject to contract and all incremental operating expenses; would be made on the basis o f SOEs and certified by the NPS. SOE statements would be audited semi annually by independent auditors acceptable to the Bank. All SOEs supporting documentation would be kept therefore by the NPMU and made available for review by World Bank implementation support missions and external auditors.
Special Accounts

The project i s expected to be completed over a six-year period, and the Credit closing date will be December 31, 2010. Payments from the IDA Credit and other donors funds would be administered by the N P S from two separate Special Accounts which would be opened in a commercial bank on terms and conditions acceptable to IDA. The authorized allocation for the special account covering IDA's contribution would be US$8 millions covering IDA's share o f four (4) months of estimated expenditures.. The N P S would be responsible for preparing disbursement requests. The Special Accounts would finance all project eligible expenditures under components A, B, C, D and E. They would be used for all payments inferior to 20 percent o f the authorized allocation and replenishment applications would be submitted at least o n a monthly basis. However to allow regular payment o f suppliers and contractors i t would be more appropriate to do this more often (i-e.: every two weeks). Further deposits by I D N o t h e r donors into the Special Accounts would be made against withdrawal applications supported by

81

appropriate documents. The Special Accounts would be audited annually by independent auditors acceptable to the Bank.
Action Plan

The present action plan agreed with the borrower describes main actions to be taken to strengthen the IG2P financial management systems and to build i t s capacity to produce quarterly Financial Monitoring Reports:
Actions Agreement on Terms o f reference for the recruitment of: i)the accountinp firm in charpe of FM aspects for IG2P: ii)external auditors. Recruitment process of the accounting firm responsible for the proiect FM aspects: 0 Finalization and issuance of the Request for Proposal (RFP); 0 Reception of proposals, evaluation, selection; 0 Appointment of the accounting firm ; Appointment of the NPMU accounting staff. The consultant starts the preparation of the accounting manual of procedures: 0 First draft of the manual for comments 0 Validation of the final draft; 0 Implementation of the manual of
procedures and users trainina.

Completion date 3513 112005

Responsible NPS and IDA

06115/05 0713 1/05 08/05/05


08/15/05
08/24/2005 0813 112005 0813 1/2005

NPS
NPS
NPS Consultant Consultant NPSIAcc firme Consultant

Desipn and implementation of the computerized system:


0 0

NPS
Consultant Consultant Consultant Consultant

0 0

06/15/2005 0713 1/05 Appointment of the consultant; Installation of the computerized 08/12/05 08/19/05 svstem; 08/26/05 System testing Corrective actions and retesting; Complete users traininp and start operating the system;

82

Recruitment process o f external auditors: 0 Finalization and issuance o f the Request for Proposal (RFP); 0 Reception of proposals, evaluation, selection; 0 Appointment of external auditors; Production of the first FMRs (Oct, Nov, Dec 2005) and submit them to the Bank.

0613012005
08/15/2005 0813 1/2005

NPS

1
02/15/2006

83

Annex 7- Table A Republic o f Madagascar IntegratedGrowth Poles Program & Project Disbursement by year (inUS$million) World Bank FY - 1 July-30 June FY 2006 : July 1,2005-June 30,2006 O M Disbursement

Annual Cumulative Percentage Annual I D A Disburseme nt


, -

2 2 4% 4%

22 23 60% 56%

9 32 83% 23%

6 38 97% 15%

1 39 99% 2%

0 39 100% 1%

39 39

. B w m

1.
I

2006

I
I

2007
38 44 35% 30%

I
I

2008

2009

Annual Cumulative Percentage Annual

7 7 5% 5%

46 91 71% 36%

26 116 92% 20%

2010

2011

I
3

Total
130 130

11 127 98% 6%

130 100% 2%

Annual Cumulative Percentage Annual

20 20 7% 7%

152 172 57% 51%

69 240 80% '23%

48 289 96% 16%

12 300 99%

3%

4 304 100% 1%

304 304

Note: Figures may not add up to total due to rounding The difference is : other donors (including IFC and private sector)

84

Annex 8: Procurement MADAGASCAR: Integrated Growth Poles Project A. Procurement Arrangements

The third Country Procurement Assessment Review (CPAR) has been conducted in November 2002 for Madagascar and a workshop took place on M a y 2003 for the validation o f a joint C P M C F A A action plan to ensure rapid implementation o f procurement reforms. A new Procurement Code was issued on July 26,2004. Since the elaboration o f the regulatory texts for the application o f the new code is underway, circulars issued during the preparation o f the new code which are not in contradiction will still continue to govern until the set o f application texts of the new code will be produced up and adopted. N o special exceptions, permits or licenses need to be specified in the Credit documents for international competitive bidding since Madagascar procurement practices allow IDA procedures to take precedence over any contrary provisions o f local regulations.
Use o f World Bank Guidelines

1. Goods and works financed by IDA will be procured in accordance with the I D A Guidelines for Procurement under IBRD Loans and I D A Credits dated May 2004. World Bank Standard Bidding Documents (SBD) and Standard Evaluation Report (SER) will be used for both International Competitive Bidding (ICB) and National Competitive Bidding (NCB) procedures. N C B advertised locally will be carried out in accordance with the Madagascars procurement laws and regulations, acceptable to IDA provided that they assure economy, efficiency, transparency, and broad consistency with key objectives o f the World Bank Guidelines. For N C B procedures, the G O M will give assurance during negotiations that the following principles would be adhered to: (i) bids would be submitted in one envelope to be opened publicly; (ii) all point systems would not be used for bid evaluation for works; ( i ) award o f contracts would i ithe be announced to all bidders; (iv) any bidder would be given adequate response time (at least four weeks) for preparation and submission o f bids; (v) bid evaluation and bidder qualification criteria would be clearly specified in biddindpre-qualification documents and will not be applied arbitrarily; (vi) eligible firms would not be precluded from participation; (vii) no preference margin i s granted to domestic contractors and suppliers; (viii) contracts would be awarded to the lowest evaluated bidder in accordance with predetermined and transparent methods; and (ix) bid evaluation reports would clearly state the reasons to reject any non-responsive bid. To mitigate risks o f delays for the proposed project, proper prerequisites for the use o f World Bank standard bidding documents, including evaluation reports for National Competitive Bidding procedures (NCB) will be agreed upon with GOM during negotiations and the Procedures Manual would have to be submitted to IDA and found satisfactory to IDA by effectiveness.
2. Consultancy services financed by IDA will be procured in accordance with the IDA Guidelines for the Selection o f Consultants by World Bank Borrowers dated M a y 2004. The Standard Request for Proposals (RFP) as developed by the World Bank will be used for the

85

selection o f consulting firms. Simplified contracts, acceptable to the World Bank, will be used for short t e r m assignments, i.e. those not exceeding six months, or for those costing less than US$200,000. The GOM will be briefed during appraisal as well as negotiations about the features o f the most recent consultants Guidelines, in particular with respect to advertisement, proposals opening and the various steps o f IDA review. 3. A General Procurement Notice will be published in UN Development Business and Development Gateway Market (DgMarket) and will show all Intemational Competitive Bidding (ICB) for goods and works and major consulting service requirements. Specific Procurement Notices will be issued in Development Business and DgMarket and at least one newspaper with nationwide circulation for I C B contracts and before preparation o f shortlists with respect to consulting contracts above US$200,000, in accordance with the Guidelines.
Procurement methods

Procurement o f Works The project will finance works contracts for an estimated total amount o f US$221 million equivalent, o f which IDA will finance some US$60 million. Works procured under this project would include the rehabilitation or expansion o f roads, electric power supply, water and sanitation, and urban works and the construction o f the new port at Ehoala peninsula. To the extent practicable, contracts shall be grouped into bid packages estimated to cost the equivalent o f US$500,000 or more and would be procured through I C B procedures. Prequalification will be done for works contracts o f US$10 million or more. Works with an estimated value per contract o f less than US$500,000 may be procured on the basis o f N C B in accordance with the provisions o f paragraphs 3.1, 3.3, 3.4, 3.14, and 3.15 o f the Guidelines. The bidding documents shall include a detailed description o f the works, including basic specifications, the required completion date, basic forms o f agreement acceptable to IDA and relevant drawings where applicable. Works estimated to cost less than US$30,000 per contract may be procured on the basis o f Shopping in accordance with the provisions o f paragraphs 3.1 and 3.5 o f the Guidelines. Shopping procedures involve at least three quotations from suppliers or contractors. Procurement o f Goods The project will finance the purchase o f goods for an estimated total amount o f US$2.0 million equivalent, o f which IDA will finance US$1.5 million Goods procured under this project would include, office fbmiture and equipment, vehicles, trucks, motorbikes, computer hardware and software, office equipment, pumps and other water related equipment, urban equipment, etc. To the extent possible and practicable, equipment and supplies to be purchased for each o f the components would be grouped into bid packages to take advantage o f bulk purchase. Each contract for goods estimated to cost the equivalent o f US$200,000 or more would be procured under I C B procedures. Goods with a total estimated value per contract o f less than US$200,000 may be procured on the basis o f N C B in accordance with the provisions o f paragraphs 3.1, 3.3, 3.4, 3.14, and 3.15 of the Guidelines. Goods estimated to cost less than US$30,000 per contract may be procured on the basis o f Shopping in accordance with the provisions o f paragraphs 3.1 and 3.5 o f the Guidelines.

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Procurement o f Non-Consulting Services Procurement from United Nations agencies for supplies and works carried out under their own procedures m a y include UNICEF, WHO, UNDP, U N C D F and/or the International Agency Procurement Services Organization (IAPSO). The standard form o f contract with U agencies N will be used for such procurement. The items to be procured from U agencies would be agreed N on in the procurement plan if and when to be used. Selection o f Consultants The project will finance the contracting o f consultancy services under the C M O D or CCOP procedures, studies, technical assistance, training and study tours up to an estimated total amount o f US$42 million, of which US$30 million will be financed by IDA Consultant services are and will be required for the designs o f most o f the civil works included in the project phase 1 and phase 2, construction supervision, studies, and technical assistance for project implementation, Consultant services will be procured through a Quality-and-Cost-Based Selection (QCBS) or other appropriate methods as specified in the procurement plans. Consultant assignments estimated to cost US$200,000 or more would be advertised in UN Development Business and dgMarket to invite expressions o f interest, as specified in paragraph 2.5 o f the Consultants Guidelines. Small consulting assignments may be procured through Consultant Qualification Selection (CQS) or Least Cost Selection (LCS), in accordance with paragraphs 3.2, 3.3, 3.4, and 3.6 o f the Consultants Guidelines and for the items specified in the procurement plan SingleSource Selection (SSS) may be used in exceptional cases, where the provisions o f paragraphs 3.9 to 3.13 o f the Consultants Guidelines are met. These items would include specialized advisory services to the Steering Committee and the N P S for the program and project implementation monitoring and for the Panel o f Experts hired to monitor the program and project implementation and in particular the social, environmental and cultural impact o f the project, Specialized advisory services would be procured through Individual Consultants Selection (ICs), based on the qualifications o f individual consultants for the assignment in accordance with the provisions o f paragraphs 5.1 through 5.3 o f the Consultant Guidelines. Other Procedures Training workshops and study tours will be conducted according to annual training programs that will be submitted to IDA for review prior to initiating the training. The program will specify the type o f training (courses, study tours, workshops, o n the job, etc.), subjects, number of trainees, duration o f training, staff months, timing, estimated cost, etc. The procurement of any training activities that involve the hiring o f consultants will follow the Consultants Guidelines by using the QCBS, CQS or LCS for firms and Qualification, I C s for individuals. The appropriate methods will be specified in the procurement plans.
Operating Costs financed through the project would be procured using the implementing agencys administrative procedures, which were reviewed and found acceptable to the Bank.

Other costs Procedure that will be followed for the Guarantee fund and for the payment o f the mitigation measures, within the framework o f the ESIA, financed by IDA o n behalf o f the GOM.

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Direct Contracting for works and goods may be used in exceptional cases, such as for the extension o f an existing contract, standardization, proprietary items, spare parts for existing equipment, and urgent repairs and emergency situations, according to paragraphs 3.6 and 3.7 o f the Guidelines. The items to be procured through Direct Contracting would be agreed on in the procurement plans.
BiddinP Documents and Forms o f Contract

The Banks standard bidding documents, including those for evaluation reports, will be used for all procurement under I C B and N C B procedures. An electronic system may be used, acceptable by IDA, to (a) distribute the bidding documents and receive bids or quotations for works and goods, and (b) distribute the RFP and receive proposals for consulting services, in accordance with paragraphs 2.1 1, 2.44, and 3.5 o f the Guidelines and paragraphs 2.9 and 2.13 o f the
Consultants Guidelines.

The language o f the procurement documents and forms o f contract will be as follows:
0

I C B - Prequalification and bidding documents in English or French; contract for I C B in EnglisWrench, i.e. the same language as that o f the bid, according to paragraph 2.15 o f the Guidelines; N C B and Shopping - The documents may be prepared only in French; Consultants - Request for proposals in English or French; contract for I C B in English or French, according to paragraph 1.20 o f the Consultants Guidelines.

Review bv the World Bank o f Procurement Decisions

The thresholds for prior review by World Bank are specified in the procurement plans. Table A shows (a) the proposed thresholds for the different procurement methods, and (b) the proposed initially-agreed thresholds for prior review by the Bank. The World Bank will preview procurement arrangements proposed by the Borrower for the items specified in the procurement plans for their conformity with the Development Credit Agreement and the applicable Guidelines. Any procurement item not specified for prior review may b e subjected to a postreview o f the procurement process.

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Table A: Thresholds for Procurement Methods and Prior Review Expenditure Category
~

Contract Value Threshold (US$)

Procurement Method
~

Contracts Subject Review (US$)

to

Prior

Works

500,000 or more ICB 30,000 or more N C B and less than 500,000 Less than 30,000 Shopping
200,000 or more ICB 30,000 or less than N C B 200,000 Less than 30,000 Shopping 100,000 or more

All (to be defined) First 3 contracts

Goods

All (to be defined) First 3 contracts

Consultant Services Firms Consultant Services Individuals

50,000 or more

Is

I QCBS/CQS/LC

: all (to be defined)

: all (to be defined)

ICs

Notes: Prior review o f the firsts 3 contracts applies to each phase o f the project. ICB International Competitive Bidding N C B National Competitive Bidding QCBS Quality and Cost Based Selection CQS Selection Based o n Consultants Qualifications L C S Lest Cost Selection IC Individual Consultants

Procurement Section of the Financial Procedure Manual and Proiect ImplementationPlan

Manuals on procurement procedures have been written under other Bank-assisted projects, namely the updated version for the Transport Sector A L 3, for goods and works and for P consultants. These will be used to prepare the procurement section o f the financial procedure manual and for the project implementation plan for this project.

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Table B: Project costs by procurement arrangements

Annex 8-Table B Republic o f Madagascar IntegratedGrowth Poles Program & Project Project Costs by Procurement Arrangements

1. Works

161
(79)

6 (4) 1 (1) 36 (3 1) 6 (5) 2 (2) 11 (7) 55 (45)

46

213 (82) 1 (1) 40 (32) 6 (5) 2 (2) 42 (7) 304 (130)

2. Goods
3. Services 4. Training
5. Operating costs

4 (1)

6. Other costs
Total

31
81 (1)

161 (79)

7 (5)

Procurement Plan

A procurement plan for project implementation has been prepared during appraisal, which governs the choice o f the procurement methods used for all the contracts. I t covers the phase 1 project activities that would be financed from the IDA hnds for the first eighteen months o f project implementation. This plan [is to be] agreed on between the Borrower and the Project Team during negotiations. The approved procurement plan will be posted on the Banks public website after the credit has been approved by the Board. Furthermore, the award results for the procurement o f individual contracts will be publicly disclosed according the procedures prescribed by the Bank. The procurement plan will be updated annually, or sooner as required, to reflect the project implementation needs and improvements in the institutional capacity. Any proposed revisions to the agreed procurement plan will be submitted to the World Bank for i t s prior approval.

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Assessment of Procurement Capacitv

Institutional Arrangements for Procurement A SecrCtariat National ( N P S ) i s established under the Steering Committee and will manage the procurement and implementation activities o f the whole integrated growth poles project. I t will work with agencies recruited under service contracts Contrat de Maitrise d Ouvrage Dklkguke (CMOD), or a less delegated form o f these contracts, Contrat de Conduite dOpCrations (CCOPs). Under the CCOP structure, the N P S will retain the ultimate responsibility for procurement and contract management for the Borrower, but delegates all procurement activities as well as some contract management activities under the service contracts. Under the C M O D structure, all procurement and contract management activities will be delegated under the services contract. The main procurement hnctions o f the N P S are to (a) coordinate the preparation and updating o f the procurement plans (prepared by the C M O D or CCOP agencies and consolidated by the N P S ) in a timely manner and submit them to the World Bank for review; (b) monitor the preparations o f the technical aspects o f procurement (terms o f reference, bills o f quantities, technical specifications, and the like) by the C M O D agencies in consultation with participating ministries and agencies and assist them in the preparation as necessary; (c) ensure that the C M O D or CCOP agencies carry out the procurement according to the Banks Guidelines and the provisions o f the Development Credit Agreement; and (d) monitor the procurement processes and the management o f the contracts done by the C M O D or CCOP agencies in collaboration with the participating ministries and agencies and assist them with contract management as necessary.
The CCOP or C M O D agencies in consultation with the N P S will be responsible for preparing the initial requirements for procurement, including the terms o f reference, bills o f quantities, specifications, and the like, and providing them to N P S for review and no objection. The CCOP or C M O D agencies will conduct the procurement process, under the N P S monitoring up to the award o f contract. N P S may participate in the preparation o f short lists, o f the terms o f reference when required and the evaluation o f bids and proposals under the direction o f the CCOP or C M O D agencies. Depending on the implementation agreement reached under each component, the contracts will be signed either by the head o f the N P S or by the C M O D agency. The N P S will monitor contracts. Under CCOP arrangements only, payments for contracts will be made by the N P S against certification received from the ministqdagency responsible for the particular contract.
Procurement Risk Assessment and Risk Mitigation Three major problems were identified: transparency, enforcement, and lack o f capacity. Specifically:
0

Weaknesses o f the legal framework and lack of enforcement. The procurement code as o f august 1998 i s complex and could not assure an efficient and transparent competition. The new code i s addressing this issue. Weak procurement organization and capacity. The ambition o f the new procurement code i s to be in line with international practices. An assessment o f institutional capacity

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will be conducted to assess the capacities and define the appropriate capacity building and recruitment program.
0

Weak audit and anti-corruption mechanisms. The promulgation o f the decree 20021128 on Sept 30,2002 setting up the CSLCC (the anti-corruption council) was the first measure in the implementation o f the anti-corruption strategy o f GOM. I t was followed by the implementation o f the B I A N C O and the Penal Chain Payment delays result in higher award prices. The CPAR/CFAA joint mission came up with the assessment on the chain o f public finance expenditure. The analysis shows that there i s a lot o f delays in payment, mainly for the VAT which resulted to higher contract prices. This i s also combined with the high cost o f imported goods at the custom level.

The overall project risk for procurement i s MODERATE


Frequency o f Procurement Supervision

The frequency o f procurement supervision i s proposed to be once every 4 months in the first year and once every 6 months in subsequent years. Every supervision mission should include a postreview o f procurement decisions.

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Annex &Table C Republic ofMadagascar IntegratedGrowth Poles Program & Project Project Components by Year Totals Including Contingencies (US% MCbn)

A. Strengthening the business environment I. Access to fmance 2. MSME capachy building 3. Countrywide tourbm development initiatives 4. Improvh.lgthe business environment Subtotal Strengthening the business environment
B. Export led growth in Antananarivo & Antsirabe I. Enhance EPZ competitivenes 2. ICT Business Park Devebpment 3. Support to Antananalivo and Antsirabe munkipafities Subtotal Export led growth in Antananarivo & Antsirabe C. Tourism led growth in Nosy Be

2006 - _ - - -2007 2008 -- _

Total Including Contingencies 2009 2010 2011


11 2 2 1 15

Total 3 0 0 0 3
39 4 3 8 55

- - - - - 0 1 0 1 1 2 1 4 1 0 1 2 0 0 0 0 0 0 0 0 0 0 0 0 2 3 2 7

4 0 0 5 9

10 1 1 1 14

9 1 1 0 11

3 0 0 0 3

---_ --- _
2, 0 3

I. Infrastructure upgrading
2. Social and Sanitary Infrastructure 3. Local Instituhns Seengthening Subtotal Tourism led growth in Nosy Be
D. Mining and Tourism led growth in Tolagniaro (Fort Dauphin)

15
0 16

21 0 22

13 0 14

0
0 0

52 1 55

0
0

I. hhmucture upgrading
2. Social and Sanitaly Infrastructure 3. Local Institutbm Strengthening Subtotal Mining and Tourism led growth in Tolagniaro (Fort Dauphin)

112

23

I8

1
0

162 2

010 0 0 3 - 1141 - 18 - 1 4 25 4 166

E. Program and Project Implementation, Evaluation and Monitoring I. Support to program & project monitoringand evaiuation 2. Support to project management and training 3. Technical assistance for propct management & monitorhg 4. Operatingexpenses for propct management Subtotal Program and Project Implementation, Evaluation and Monitoring
Total Project costs

- - 5 -0 - 4 -5 2 - 152 - 48 12 4 304 - 69 20
- -

1 1 1 0 3

2 1 1 0 4

3 0 1 0

4 0 1 0

3 0 1 0

0 0 0 0

3 2 4 2 1

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Republic ofMadagascar Integrated Growth Poles Program & Project Detailed AUocation o f I D A Credit Proceeds

(a) Works under Part A @) Works under Part B (c) Works under Part C (d) Works under Part D Subtotal Works !. Equipment & Goods (a) Goods under Part A @) Goods under Part B (c) Goods under Part C (d) Goods under Part D (e) Goods under Part E Subtotal Equipment & Goods 3. Engineering & Consulants' Services (a) Engineering Services ( i ) underPartA ($ under Part B (@ under Part C (iv) under Part D (v) under Part E (b) Consultant Services ( i ) under Part A (n) under Part B (@ under Part C (iv) under Part D (v) under Part E (c) Technical Assistance (i) under Part A under Part B (m) under Part C (iv) under Part D (v) under Part E Subtotal Engineering & Consultants'Services

. Works

10 26 21 3 49 2 80.1
51 05

85% o f total expenditures 85% o f total expenditures 85% o f total expenditures 85% o f total expenditures

05

100% o f foreign expenditures, 85% 100% o f foreign expenditures, 85% 100% o f foreign expenditures, 85% 100% of foreign expenditures, 85% 100% of foreign expenditures, 85%

o f local expenditures o f local expenditures o f local expenditures o f local expenditures o f local expenditures

6.1 2.8

15 14 4.4 09 10 00 05 20 17.6 89 1.5 16 18 3.8 24.9

100% of foreign expenditures, 85% 100% of foreign expenditures, 85% 100% o f foreign expenditures, 85% 100% of foreign expenditures, 85% 100% o f foreign expenditures, 85%

o f local expenditures o f local expenditures o f local expenditures o f localexpenditures o f local expenditures o f local expenditures o f local expenditures o f local expenditures o f local expenditures o f local expenditures oflocalexpenditures o f local expenditures o f local expenditures o f local expenditures o f local expenditures

100% of foreign expenditures, 85% 100% o f foreign expendims, 85% 100% o f foreign expenditures, 85% 100% of foreign expenditures, 85% 100% of foreign expenditures, 85% 100% of foreign expendims, 85% 100% of foreign expenditures, 85% 100% of foreign expenditures, 85% 100% of foreign expenditures, 85% 100% of foreign expenditures, 85%

(a

4. Training (9 under Part A (n) under Part B (m) under Pan C (iv) under Part D (v) under Part E Subtotal Training 5. Insurance capacity under Part A 6. Operating costs under P a n E 7. Other costs (ESIA moitigation measures under Part B, C and D) 8. JlSJlE Grants under Part A [Unallocated

21 05

1.5 4.1 2.6 1.9 4.0 1.o 3.2 1.9 129.8

100% of foreign expenditures, 85% 100% of foreign expenditures, 85% 100% of foreign expenditures, 85% 100% o f foreign expenditures,85% 100% o f foreign expenditures, 85%

o f local expenditures o f local expenditures o f local expenditures o f local expenditures o f local expenditures

100% o f total expenditures 100% o f total expenditures 100% o f total expenditures 100% o f total expenditures

\Total Credit Amount

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Annex 9: Economic and FinancialAnalysis MADAGASCAR: Integrated Growth Poles Project


Export led growth in Antananarivo-Antsirabe

The main objective of the Antananarivo-Antsirabe Pole component o f the IG2P i s to attract new Foreign Direct Investments (FDI) in the garmenthextile and informatiodcommunication industries to create jobs for unskilled and semi-skilled workers in existing export processing zones (EPZs) in AntsirabC and Antananarivo and in a new information, communication and technologies (ICT) business park in Antananarivo. This objective should be achieved by (i) improving off-site physical and social infrastructures (water and sanitation, electricity, roads, telecommunications) around a forthcoming I C T Business park in Antanetibe and around the existing EPZ in Antananarivo and Antsirabe, (ii) improving the EPZ administration and customs procedures; and ( i ) i ideveloping labor skill and services to micro, small and medium enterprises (MSMEs). The total amount o f investment from the IG2P in this particular component will be U S US$17.5 million (see: 4. economic costs).
In Madagascar, the key areas o f competitiveness for the garmenthextile industry are in labor cost and productivity, cost and quality o f utilities (energy and telecommunications), cost o f industrial facilities (factory space rental or construction), logistics cost and time, trade facilitation costs and time (primarily customs processes) and speed o f government services (investment, work permits and visa approvals). Moreover, the likely dismantling o f the Multi Fiber Agreement (MFA) and Africa Growth and Opportunity Act (AGOA) could seriously threaten Madagascars competitiveness in the nearby future.

By investing in infrastructure, improving procedures and developing labor skills, the appraisal team expects the project to reduce the current various costs faced by existing garmenthextile and emerging I C T firms, resulting in a better investment climate for higher output and increased employment. O n the one hand, the forthcoming changes to the trade regimes governing the global textile and garment industry may result in a major exogenous risk for this component. But, on the other hand, it can be seen as a means to prepare Madagascars textile/garment EPZs for an increased competition on price and quality with emerging competitors like China.

2. EPZ and ICT in Madagascar The EPZ sector i s dominated by fairly well established garment and textile firms, located mostly in Antananarivo and AntsirabC, which contribute to almost 90 percent o f its value added and i s the fourth largest exporter to the U S among AGOA suppliers. The industry has rapidly grown to over 230 f i r m s employing around 130,000 workers in 2004, with an average annual rate o f 21 percent between 1996 and 2001. O f those workers, 75 percent are women. EPZ exports contributed about US$200 million in 2003 (40 percent o f Madagascars total exports), 10 percent o f the secondary sector GDP and 2 percent o f the national GDP. During the political crisis in 2002, the industry suffered a major setback, mainly due to disruptions in transport and logistics

This section i s built on the Development Policy Review, Volume 1 - Technical Annex, World Bank, 2004 and preliminary 1 results from two studies: Feasibility study for an ICT business park in Antananarivo, forthcoming and Economic and technical feasibility study for developing export processing zones in Antananarivo and Antsirabi, Madagascar , Interim report, Tebodin B.V., 2004.

95

that led to firm closures and massive unemployment. Recent data from the sector suggest, however, that EPZ activity returned to the levels seen before the crisis in 2001. The I C T sector in Madagascar i s small but has encouraging potentials for growth, specifically: (i) small enterprises involved in software and I T services employing 300 people; (ii) f i r m s 50 20 involved in software programming, data conversion, systems integration, I T consulting and training and ( i ) small number o f offshore data processing firms. There are no existing call i ia centers in Madagascar, although Mauritian entrepreneurs are reportedly planning on establishing training and call center facilities. Most o f the existing I C T f i r m s have an EPZ status and will be classified as such in this economic analysis. Although a small number o f textile and garment firms are located within private industrial zones, the rest are scattered in outer, congested urban areas. The f i r m s lease space from Malagasy property owners at high rental rates, which are not competitive, compared to other countries in the region. The Municipal Authority for Antananarivo (CUA) has identified several possible sites for developing an EPZ based on urbanization pattems, road development, traffic circulation planning and land availability. G O M has identified an unused telecommunications training facility located in Antanenbe to develop the I C T Business Park. The 8 hectares site i s unoccupied and has open spaces available for the construction o f new facilities.
3. Basis o f the economic analysis*

This Benefit Cost Analysis (BCA) considers that the project to be technically sound. In other words, the mixture o f hard and soft infrastructures i s the right one to achieve the components objectives such that the value o f benefits will exceed costs. The enclave approach o f offshore manufacturing (see infra for reference) demonstrates that only financial flows between the domestic economy and EPZ foreign f i r m s (both garment and I C T firms) affect welfare. Financial flows between the EPZ and the rest o f the world are indeed not relevant because net benefits are measured from the point o f view o f the domestic economy, not the EPZ itself. Within this framework, the five major types o f benefits are: (i) employment creation, if the wage received by the worker exceeds the social opportunity cost o f employment in the zone, (ii) backward linkages o f EPZ or I C T firm purchase o f domestic materials and capital goods, if part o f these materials and capital goods are purchased locally at the price that exceeds the marginal purchase o f utilities (water, electricity, telecommunications), if rates cost o f supplying them; (iii) paid exceed the long run marginal cost o f supplying additional water, electricity and communication; (iv) taxes and fees payable to the GOM or any domestic entities, if they are higher than EPZ firm rent subsidies; and (v) a foreign exchange premium such that wages, utilities, taxes, goods and services are purchased through the exchange o f foreign currency eamings at the official exchange rate, and this rate remains higher than the shadow price o f foreign exchange (the social value o f foreign exchange). Export-led growth i s often cited as a rationale for investment in EPZ f i r m s . Exports, however, are an exchange between the export processing firm and the rest o f the world, and do not inherently bring any direct economic benefit to the host economy (although they do raise the output of the foreign EPZ firms, and thus GDP). The B C A only takes into account exports when
This section i s built upon Adam Schwartzmans Economic analysis, IG2P Component 1, Concept note, processed, 2004; Peter G. Warrs Export processing zones: The economics o offshore manufacturing, processed, 1987; and Alessandro Nicita and Susan f Razzazs K4o benejts and how much? How gender affects welfare impacts o a booming textile industry. World Bank, 2003. f

96

foreign currency is exchanged into domestic currency to make payments in the local economy. Also, significant technology transfer i s unlikely in Madagascar, as most EPZ f i r m s are engaged in low-skill, light manufacturing.

4. Economic Costs
Economic costs associated with investment in the Antananarivo-AntsirabC pole are divided into investment cost o f off-site physical and social infrastructures; i ) i investment four categories: (i) cost o f labor training, services to MSMEs, EPZ administration and customs procedures; ( i ) ii recurrent costs that occur only on physical and social infrastructures after project completion (starting in 201 1 in that case), (iv) negative environmental externalities associated with off-site physical infrastructures. Regarding the project, investment costs (hard and soft infrastructures) are divided into three categories: (i) f l base-cost without taxes and duties o f the IG2Ps component B (Export Led the i l growth in Antananarivo and Antsirabe?; (ii) percent o f the f l base-cost without taxes o f 30 il IG2Ps component A (Strengthening the business environment) and; (iii) percent o f the base20 cost without taxes o f component E (Program and project implementation, evaluation and monitoring). The total amount o f investment costs, as mentioned in the introduction, i s equal to US$17.5 million. That total amount doers not include the provision for mitigating negative environmental externalities but maintain the US$5 million investment in physical infrastructure. Hypothetically, only the infrastructure part o f component B will have recurrent costs, which are estimated to be US$0.6 million (5 percent o f the investment cost o f US$11.2 million) per year at the fifth year o f the project (physical infrastructure investment occurs during the four years o f the project). Negative externalities associated with hard infiastructure investments and related private investments in Antananarivo and Antsirab6 are believed to be negligible and can be associated with the cost o f the projects environmental and social prevention. Provisions for environmental and social impact prevention are included in the project management component. Hypothetically, 20 percent o f the base cost without tax, or US$2.5 million, is supposed to be used for the Antananarivo-AntsirabC pole, the cost o f negative environmental externalities in that component.
The cost o f achieving the projects objectives is summarized in table 1 below. I t also shows the contribution o f each o f the major cost categories to the calculated present value o f the Antananarivo-AntsirabC pole component. The calculations assume a real discount rate o f 10 percent, a total life o f public investment o f 25 years and use o f foreign currency (US$) at the border price level.

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Table 1: Antananarivo-Antsirabk Pole investment, recurrent and mitigation costs (US$ million)

Type o f investment (US$ million/Fiscal year) PV

2006 2007 2008 2009 2010 2011 2012-2030

Proiect management Mitigating social and Environment impact Recurrent cost Total

US$1.8 C US$0.6 0.1 Or0 US$3.1 USs16.3 1.8

0.1 0.0 5.8

0.2 0.0 5.1

0.2 0.0 3.9

0.2 0.0 0.4

0.0 0.6 0.6

0.0 11.2 11.2

Source: Proposed Investments per pole i n IGZP-links COSTAB-Appraisal Construct New FD Port.

Cumulatively, the hypothetical present value o f the Antananarivo-Antsirab6 poles economic cost is estimated at US$16.3 million, largely composed o f investments in physical and social infrastructure that account for 59 percent o f the present value. Recurrent costs with a present value o f US$3.1 million or 19 percent o f the component economic cost are not negligible and will weigh on the fiscal impact o f the project. The cost o f the projects environmental and social prevention i s negligible, accounting for less than 4 percent o f the present value.

5. Economic Benefits
As stated in the section 3, incremental economic benefits o f the IG2Ps investment in the Antananarivo-Antsirabk pole are likely to be wages, taxes, backward linkages, purchase o f utilities and foreign exchange effect associated with the first four benefits. Those incremental benefits will be derived from the additional output that i s going to be produced by the EPZ as a whole, including the I C T firms, compared to the situation without IG2Ps investment in the Antananarivo-Antsirabk pole.

51. Wages
Wages will provide economic benefits from the countrys perspective if the wage received by the worker exceeds the social opportunity cost o f employment in the zone. Estimations o f the incremental wage bill paid to domestic workers associated with activity o f new f i r m s located in the new industrial park normally require data collection on the characteristics o f f i r m s in the EPZ sector. The social opportunity cost o f employment in the zone can be drawn from existing studies or guess-estimations.

At appraisal time, the Investment Climate Assessment (ICA) results were not available for the appraisal team and thus no solid data o n wage bills for unskilled and semi-skilled workers in EPZ exist. Despite this lack o f data, guess-estimates o f the economic cost o f labor in Madagascar suggest a social opportunity cost for employment o f US$1 per day (50 percent o f the net o f tax US$2 a day wage bill). This additional dollar per day given to workers in the EPZ supposedly include the premium on foreign exchange given that EPZs are converting foreign currency into M a r y at the official exchange rate to pay their wage bills. Consequently, it i s assumed in the analysis that economic benefits to the country o f an additional j o b in the EPZ i s US$1 a day or approximately US$330 a year or US$27.5 a month. Nicita and Razzaz (2003) found US$65 for the average increase o f monthly income o f textile workers. However, because o f the volatile exchange rate, this analysis stayed o n the conservative side
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The beneficiary i s only the worker and hisher family because this additional wage i s net o f tax, The effect o f j o b creation in the textile industry goes beyond increase in income and greater stability o f employment experienced by i t s workers. Textile jobs offers benefits such as healthcare, paid leave and pension that previously were rarely available for these workers. They also provide a good opportunity for women, as most o f them were employed only marginally outside the household. Other members of households in which one or more members work in the textile industry are indirectly affected. It is believed that each worker affects the welfare o f about 4.2 individuals.
52, Taxes, other Fiscal Revenues and Backward Linkages

study for developing export processing zones in Antananarivo and Antsirabe, Madagascar, estimations o f each o f the affected sectors and comparisons with their social opportunity costs (the shadow prices). Some information could be, in theory, derived from the on-going ICA.

Financial cash flow estimates for rent, tax, electricity and material goods paid by EPZ f i r m s require data collection o n the firm characteristics in the EPZ sector. For analysis, the sources should be the commissioned financial and technical study: Economic and technical feasibility

As for the wage bill, these estimations were not available for the team at appraisal. Consequently, the analysis uses guess-estimates and should not be interpreted as precise calculations.
EPZs usually make little contribution to a countrys tax revenue because they are granted as part of incentive packages to attract foreign investment in them through tax and duty holidays. In Madagascar, EPZs are exempt from corporate, trade and duty taxes, and Value Added Taxes n (VAT) are paid back, as stated in L a w on EPZ (LO1 No. 89-027, 91-020). I some cases, tax exemptions are removed after a period o f time, but tax revenues still stay l o w because o f transfer-pricing practices.

Records show that the impacts o f EPZs on local raw material to be generally l o w because foreign firms competing on global markets are very careful with material quality. They do not take the risk of contracting local suppliers and duty tax exemption makes the import o f raw material competitive with domestic sources. On rent and utilities, Madagascar ranks high: Rent per square meters can be as much as US$2.5 to US$3 per month. In contrast, prices in China are as l o w as US$0.80. Imported fuel and power shortages keep electricity fees high compared to international standards. Consequently, the Antananarivo-AntsirabC pole i s likely going to subsidize those two costs to improve the investment climate o f Madagascar, until the fee reaches their long term marginal cost.
In sum, i t i s unlikely that EPZs are going to pay tax revenues and additional rent o n raw material, land and utilities well above their social opportunity costs.

6. Results o f the Benefit-Cost Analysis

The previous section suggested that, based on guess-estimates, the likely economic benefits o f the Antananarivo-AntsirabC component would be limited to the incremental wage paid to additional domestic workers in EPZs, i.e. US$330 per additional worker and per year. That result is coherent with the fact that for companies in the garment and textile industries, the availability
l9

Nicita and Razzaz, 2003

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and trainability of labor in addition to low labor costs provide the major incentives to establish a manufacturing plant in Madagascar.

If the investment in a mix o f hard and soft infrastructure i s technically sound, part o f the fkture rate o f growth o f output from EPZs should be a consequence o f it. Without any major external shock, the EPZs rate o f growth should be at least 5 percent a year, the average rate o f economic growth targeted by the GOMs poverty reduction strategy. Hypothetically, 20 percent o f that rate o f growth (a 1 percent growth rate) could be seen as direct a result o f the IG2P and should correspond to a 1 percent growth in employment in the EPZs.

7I
25 20

Figure 1: Number o textilejobs created by IG2P f


cumulative number of additional textile jobs (,OOO)

15 10

5
0
I I

Staying on the conservative side and assuming that there are currently 100,000 full-time workers employed in the EPZs, the IG2P would then stimulate the creation o f 1,000 additional jobs each year (see figure above) that will result in US$330,000 o f incremental economic benefits a year and in 25,000 in 25 years, 25 percent more jobs than in the current situation. If those benefits arise during the fourth year o f the project, after the bulk o f investment in physical and social infrastructure have been made, and these benefits sustain for 20 years after the project completion, then the present value o f benefit flows will US$17.2 million, approximately U S $ l million (US$0.88 million exactly) above the present value o f costs, corresponding to the Economic Rate o f return (ERR) o f 10.5 percent. This break-even economic analysis reveals that the investment in Antananarivo-AntsirabC i s worthwhile for the country if at least 1,000 new jobs that provide an additional US$1 a day to workers compared to their previous situation are created for 20 consecutive years after project completion. As it is a break even analysis, both 1000 new j o b each year and US$1 a day represents the switching values. I t means that if less than 1,000 new jobs are created each year or if a US$a day as the textile industrys wage premium i s overestimated; the NPV o f Antananarivo-AntsirabC pole component will be negative. The most critical variable for the components worth i s undeniably the number o f new jobs that will be created each year. Madagascar car has indeed the potential to create with IG2Ps help such a number o f jobs, but its magnitude will depend a lot from factors outside o f the project. M a i n gainers of the investment will be local rural and urban population o f Antananarivo and AntsirabC, especially unemployed women that would find life-changing opportunities. Under the 100

conservative hypothesis that there will not be any additional fiscal revenues generated from the project, the GOM is the main loser in this simple analysis because it does not receive any fiscal compensation in return. Further work i s needed on that particular subject in order to assess the sustainability o f the investment.

7. Summary and Conclusions


In Madagascar, like in many other countries, EPZs economic impacts are limited to j o b diversion from rural areas. In this case and in the absence o f reliable data, guess-estimates show that diverting 1,000 workers from rural areas (a conservative hypothesis used as the lower bound limit) toward EPZs would justify the IG2P's investment in physical infrastructures and the business environment in the Antananarivo-AntsirabC pole.

However, the investment decisions o f EPZ f i r m s are likely to be determined by a range o f factors outside o f the project especially by the international trade environment. Indeed, in addition to taking advantage o f cheap labor, most EPZs in Madagascar take advantage o f favorable AGOA, MFA and other regional trade agreements related to textiles. If Madagascar is unable to continue to benefit from these trade agreements or unable to maintain its advantage in terms o f unit labor costs, then the impact o f the investment could be greatly diminished. In other words, there i s a non-negligible external risk associated with that investment.
Tourism led growth in Nosy Be

With a population o f 60,000 inhabitants (12,000 households), the economic activity o f the 320 square kilometer island o f Nosy Be, 15 kilometers o f f the north coast o f Madagascar, has concentrated on sugar production and processing, shrimp processing (farmed on the northern coast) and nature-based tourism for many decades. S W A Yhowever, the sugar cane public enterprise which used to be greatest employer on the island with approximately 1,500 jobs, i s facing a de facto bankruptcy situation.
25,000 tourists currently visit Nosy B e each year, making the small island Madagascar's primary tourist destination. Tourism is indeed an increasingly important economic sector in Madagascar. The number o f tourists grew at a rate o f 10 percent during the last fifteen years, reaching 220,000 in 2004, and the World Tourism Organization (WTO) i s forecasting tourism in the region to grow at a rate o f at least 6 to 8 percent a year for the next ten years. Bringing in more than US$lOO million, tourism i s now one o f the top three sectors in terms o f foreign exchange earnings (fluctuating in rank with EPZs and the shrimp industry) and provides an additional 20,000 jobs, a significant source o f employment outside the agricultural sector. The objective o f the Nosy Be pole component o f the IG2P is to increase tourism in Nosy B e and facilitate new foreign direct investment (FDI) in the tourism sector o f the island. The project aims to accommodate 100,000 tourists by 2010, four times the current number, including the development of 1,000 additional rooms2'. This objective would be met through a US$49 million public investment in a combination of hard and soft infrastructure specifically, physical, social and sanitary infrastructure (water and sanitation, electricity, roads and telecommunication) will be upgraded, local institutions will be strengthened and the business environment o f micro, small and medium sized enterprises (MSMEs) will be enhanced.

*' These additional rooms would cost the tourism industry an investment o f at least $80 million.
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2. Tourism in Madagascar and in Nosy Be


Madagascar i s primarily an ecotourism destination, a modem-day Garden o f Eden for many people. Tourism sector studies suggest that 60 percent o f foreign tourists visit Madagascar primarily because o f nature-based attractions. In particular, ten protected areas actively contribute to the development o f tourism in the region, attracting more than 100,000 visitors each year. Five additional protected areas, however, remain untapped ecotourism destinations. Tourism in Nosy B e and the surrounding archipelagos are not exactly a sun-sand-and-sea destination like Seychelles or Maldives. O n the other hand, short sea excursions allow tourists sojourning in Nosy B e to visit numerous natural sites, such as Tany Kely for i t s natural reefs; Nosy Komba and Sakatia, two small volcanic islands that are known for their vanilla, gnarled ylang-ylang, coffee, pepper and colorfbl bougainvillea trees (Nosy Bes nickname i s the perfbmed island) and the Mitso, Nosy Hara and Radama archipelagos, further from the main island but famous for their spectacular coral reefs. Lokobe natural reserve i s another (popular) destination situated in the southern region o f the main island. The tiny reserve protects the last remaining natural forest o f Nosy Be, which i s home to the black lemur and other endemic species, including the rare sportive lemur (which sleeps on branches during days rather than in tree holes). Currently, neither the reserve, nor the other excursions sites, i s adequately equipped with the infrastructure to receive tourists. Some o f them, in addition, already face pollution problems due to an excessive number o f visitors during the high (and unregulated) tourism season.
3. Basis for Economic Analysis2

The approach to estimating the economic benefits o f the Nosy B e pole component i s novel . Most o f the investment aims to provide the infrastructure necessary to spawn hotel capacity development, enabling the region to support a greater tourist inflow both in existing and new properties. Thus, the economic benefits o f the project are based o n a projected increase in additional tourist activity in the region, compared with tourist activity in the without project situation. Specifically, the economic analysis o f the incremental economic benefit from the component the depends on estimating: (i) additional numbers o f tourists that will come to Nosy Be staying in current and future hotel capacity, and (ii) economic rents that will be collected from current the and additional tourists. Because nature-based tourism hinges o n scarce and finite natural resources, i t has a unique ability to generate economic rents that are proportional to the very uniqueness o f the tourism asset, being fairly l o w for sun-sand-and-sea destinations, and potentially very high for eco-tourist destinations l i k e Nosy Be. Tourism rents can be captured in a variety o f ways, including airport and visa fees, hotel taxes (room fee, value added tax and income tax) and fees to enter natural sites, such as national parks and reserves. If GOM, as the owner o f these natural resources, is not putting forth the efforts and regulations necessary to capture these tourism rents, the rents ultimately end up in the hands o f the private sector (which i s not necessarily a bad thing if rents remain within the country as extra-wage earnings for the local population) or remain in the pockets o f the tourist (that is, the tourists full willingness to pay to enjoy these natural resources i s not maximized).

* This section i s based on John Dixons Estimating Jordan Tourist Rent, 1998 and Hamilton, Carrets Madagascar Public
Expenditure Review on the Environment, 2004.

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Consequently, major categories of incremental economic benefits from the component will be: (i) primary sources of fiscal revenue from tourists; ( i the implicit rent in average tourist i) expenditures during visitation, (iii) difference between the social opportunity cost o f labor the and the average working wage in the tourism sector; and (iv) the portion o f tourists willingnessto-pay surplus that can be tapped through an excursion site entrance fee, assuming a demand for recreation inelastic to a moderate excursion site entrance fee.

4. Economic Costs
Economic costs associated with investment in the Nosy B e pole are divided into four categories: (i) investment cost o f physical, social and sanitary infrastructure; (ii) investment cost o f reinforcing local institutions and the business environment o f MSMEs, ( i ) i i continual cost o f social and sanitary infrastructure; and (iv) negative environmental externalities. the Regarding the project, investment costs are divided into three categories (i) full-base cost without taxes o f component C (Tourism led growth in Nosy Be); 45 percent o f base cost without taxes of component A (Strengthening the business environment) and; 30 percent o f cost without taxes of component E (program and project implementation, evaluation and monitoring). Thus, the total amount o f investment cost is, as mentioned in the introduction, US$48.9 m i l l i o n (see table 1 below). Recurrent costs only apply to component Byan estimated 5 percent o f the total investment cost. Therefore total recurrent cost will be US$2.2 m i l l i o n per year at the fifth year o f the project (physical infrastructure investment occurs during the first four years). Negative externalities associated with hard infrastructure investments and related private investments in N o s y Be are negligible and can be assimilated in the cost o f the projects environmental and social prevention components. The rationale i s that infrastructure investments allow for the upgrading o f pre-existing infrastructure, with the exception o f roads that open up the north-eastern part o f the island. In the latter case, roads will not be improved or extended in fragile and useful ecosystems l i k e mangroves and forests. Moreover, new private investments stimulated by public investments (mainly new or upgraded hotels along the beach) will be made after an Environmental Impact Assessment (EIA) is done under the M E C I E framework. Provisions for the cost o f the environmental and social impact prevention are included in the project management component. Costs for hotel E I A s will be supported by the private sector and consequently are not taken into account in that components economic analysis. Hypothetically, 20 percent o f the base cost without tax or US$700,000 is targeted for use in the Nosy B e pole. The cost o f meeting the project objectives are summarized in table 1 below, which also shows the contribution o f each o f the major cost categories to the calculated aggregate present value o f the Nosy B e poles economic cost. The calculations assume a real discount rate o f 10 percent, a total life o f public investment o f 25 years and use o f foreign currency (US$) at the border price level.

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Table 1: Nosy B e Growth Pole Project investment, recurrent and mitigation costs (US$ million)
~~ ~

Type of Investment (US$ millionlFiscal year) Tourism Led Growth Business Environment Project Management Mitigating Social and Environment Impact Recurrent Cost Total

PV

2006 2007 2008 2009 2010 2011 2012-2030 33.2 2.1 13.2 17.6 10.4 0.2 0.0 0 1.3 0.1 0.5 0.5 0.4 0.1 0.1 0 0 2.3 0.4 0.8 0,9 0.9 0.0 0.0 0 0.5 0.1 0.1 0.2 0,2 0.1 0.0 39.8 12.4 0.0 0.0 0.0 0.0 2.1 2.1 49.7 2.7 14.5 19.2 12.0 2.5 2.2 39,8

Source: Proposed Investments per pole in IG2P-1inksCOSTAB-Appraisal Construct New FD Port.

According to these hypotheses, the present value o f Nosy Bes pole economic cost i s estimated at US$49.7 million. The bulk o f the cost lies in investments in infrastructure upgrading, which account for 67 percent o f the project costs present value. Recurrent costs are 25 percent o f the total, a non-negligible level justified on the basis o f the need for infrastructure upgrading. On the other hand, negative environmental externalities appear to be manageable at 4 percent o f the components present value. This percentage, however, does not include provisions for managing the natural assets, regions that will be subjected to four times the current number o f tourists.

5. Economic Benefits
As stated in section 3, incremental benefits o f the IG2Ps investment in the Nosy B e pole will be derived from additional tourism rents associated with additional and existing visitors. Additional tourism rents are likely to be visa fee and hotel taxes, visitor rent expenditures, excursion site entrance fees and wages for hotel workers.
Visa Fee and Hotel Taxes

Hotel taxes that are not specific to tourism activities are not taken into account in this economic analysis, which puts incremental benefits estimations on the lower end. According to the dated covenants o f the Project Appraisal Document (PAD), the hotel would likely benefit from EPZ status. I Madagascar, EPZs are exempt from corporate, trade and duty taxes and the value added n tax (VAT) i s paid back, as stated in law on EPZ (Laws N o 89-027 and 91-020). The G O M collects a visa fee for each foreign visitor and this collection occurs more and more frequently upon airport arrival. Visa fees are currently set at US$31 per visit. In addition, hotels collect a nightly hotel tax on the room, food and other services provided to guests. Since April 1, this tax i s approximately US$2 for five-star hotels, independent o f the total bill and earmarked for the National Office of Tourism. This tax can be increased to roughly US$5 per night, s t i l l extremely modest by international standards, in order to increase the portion o f tourism rent captured by the country. The hotel tax is indeed the preferred way to capture tourism rents because it i s proportional to the tourists use o f the destination. International experience has shown that demand for hotel rooms in quality tourist destinations such as Nosy-Be which i s not a regular beach destination, i s quite price-inelastic.

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Assuming that a visitor spends an average 5 days (studies suggest that the average length o f visits i s usually more than two weeks) in the small island on a 1.5 double occupancy rate basis, nightly hotel tax and visas fee revenues are US$37.5 per additional visitor to Nosy Be at current level o f the nightly hotel tax.
Economic Rent Portion on the Expenditures (Backward Linkages)
In addition to taxes on hotel rooms and meals, visitors purchase many other services and goods while in Nosy Be. These include transportation, guide services, souvenirs and other day-to-day expenditures. Although not all of these expenditures directly benefit the Madagascan economy (for example, vehicles and fuel used for transportation are both usually imported), a portion of these expenditures can be counted as tourism rent. This analysis estimates that the rent share o n average expenditures per person per day, for transportation, guides and souvenirs i s about 20 percent o f their expenditures over and above hotel price.

For a typical visitor to Nosy Be, room, breakfast and dinner are provided at US$lOO per day by most o f the hotels, including VAT. A s stated above, visitors mainly stay o n the main island and can visit natural sites using sea or land transportation. Hypothetically, the average tourist i s believed to do three excursions during an average five-day stay in Nosy Be. Data collected during the pre-appraisal mission shows that o n the average, excursions are billed at US$20 per capita, including lunch22. Thus average expenditures per person and per stay are US$60. If the rent share o n average expenditures i s 20 percent, then each visitor accounts for an additional US$12 per stay.
Excursion Site Entrance Fees

All Nosy B e excursion sites, such as bays, forests and reefs, belong to the GOM. Currently, no fees are imposed at tourist sites and tourists are not asked to comply with any rules or regulations concerning the use o f the natural resources or the number o f tourists allowed to visit each site each day. Excursion sites like Tany Kely, Sakatia or Lokobe already receive a hundred visitors a day, Consequently, one can already observe small levels o f environmental degradation because of the current lack o f infrastructure and rules to properly deal with crowded sites during the high season.
In Madagascar, park entrance fees are US$8 for foreigners and have been recently increased to US$12.5 for the 10 most frequented protected areas. H a l f o f this revenue i s given back to the local community. Review o f the environmental valuation literature for Madagascar confirms that foreign visitors are willing to pay between US$12 and US$18 to visit protected areas. Based on the assumption o f three visits per tourist per stay, each additional tourist to Nosy B e will withhold a consumer surplus o f at least US$24 (3 times US$8) that the GOM and surrounding community has failed to capture.
Tourism Industry Wages

Data collected from the hotel owners during the pre-appraisal mission gave a ratio o f 2.5 direct jobs per room, mostly non-qualified jobs for formerly unemployed women. The difference between the social opportunity cost o f labor and the tourism industry wage is supposed to be US$1 per day for 330 working days a year. According to these hypotheses, each additional
22

in this calculation.

Less frequent expenditures in scuba diving, fishing,

sailing and other tourist options in Nosy Be, are not included

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tourist that visits Nosy B e will provide additional US$23 remuneration for the island's labor force. That additional remuneration mostly goes to uneducated women; most o f them were employed only marginally outside the household, who receive basic training from the hotels themselves.

The effect o f j o b creation in the tourism industry goes beyond increase in income and greater stability o f employment experienced by i t s workers. Tourism jobs offers benefits such as healthcare, paid leave and pension that previously were rarely available for these workers. They also provide a good opportunity for women, as. Other members o f households in which one or more members work in the tourism industry are indirectly affected. I t i s believed that each worker affects the welfare o f about 5 individuals.
Composition, Availability and Impact o the Incremental Tourism Rent f

Each additional visitor to Nosy B e generates about US$97 o f incremental benefit for the country, based on a 5 day average stay (see figure 1 below). Two-thirds o f this value, derived from fiscal revenues (visa fee, hotel tax and a shared entrance fee), will benefit the state. The local community will receive the remaining one-third through employment generation (hotel wages and backward linkages) and the shared entrance fee.
Figure 1: Composition o incremental benefit from additional visitor f
35

28
ee

21
14

7 0

In terms o f the availability o f incremental benefits, visa fee revenue will go to the GOM, but the hotel tax and entrance fees, if consumer's surplus i s captured by the GOM, would be available at the local level, which could be used to finance any recurrent incremental cost generated by infrastructure investments.
Through employment creation and backward linkages, the project may also help to alleviate poverty in the region. Currently, most o f the island inhabitants live around or below the absolute Consequently, people poverty line (US$l a day), the standard for rural areas in M a d a g a ~ c a r ~ ~ . benefiting from employment will move from the absolute poverty line to the relative poverty line (US$2 a day) approximately, one Nosy B e inhabitant will move from the absolute to the relative poverty line for each four additional tourists. Women in particular will benefit the most. Those employed by the hotels are likely to have better access to basic education and health services for
In Madagascar, poverty i s rural in nature with 80 percent o f the rural population being poor in 2003 compared to a poverty rate o f 52 percent in urban areas. Source: Development Policy Review, 2004.
23

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their o w n needs and their children as well. Consequently, the impact o f employment on poverty alleviation will be greater than the monetary aspect.
Additional Visitors

The island i s n o w endowed with 900 hotel rooms that have a thirty percent year round average with peaks at year end and the high season. O n average, the double occupancy i s 1.5 tourists and the average length o f stay 5 days, during a 330 day season. Each year, i t i s estimated that 25,000 tourists sojourn in Nosy Be, each participating in an average o f 3 excursions, which yields 75,000 excursions a year. Without investment, and a lack o f pre-existing and good quality physical, social and sanitary infrastructure, the assumption that the number o f tourists sojourning in Nosy B e will remain constant i s tenuous at best, even with the recent extension o f the airport runway to accommodate planes the size o f Boeing 767s and a new liaison between Milan and Nosy-Be.
Figure 2: Number o additional tourist and tourism industry jobs with IG2P f
250,000 200,000 150,000 100,000 50,000 12,000 9,000
I

6,000

Number of additional tourists N r h r of c u m l a t i e

3,000
0

2006 2010 2014 2018 2022 2026 2030

With investments in the Nosy Be pole, the appraisal team believes that the number o f hotel rooms will grow at a rate o f 15 percent during the four last years o f project implementation and at a 5 percent rate during the next twenty years. The occupancy rate will grow at 2 percent a year, contingent on a sound program to market the destination. Under these hypotheses, the number o f additional visitors will reach 50,000 people at the end o f IG2Ps implementation and 245,000 people in 2030, a third o f the present number o f tourists in Maurice, the neighboring resort island which i s 6 times the size o f Nosy Be. The number o f additional jobs created in the tourism industry o f Nosy Be will then be 3,000 in 2012 and 12,000 in 2030, h a l f the number o f jobs that should be created in the textile industry (see Antananarivo-Antsirab6 pole economic analysis)
6. Results o f the Benefit-CostAnalysis

Table 2 summarizes the contribution o f each benefit and cost category to the calculated aggregate net present value o f the Nosy Be pole. Costs appear as negative items. The calculations each assume a real discount rate o f 10 percent and a total life o f public and private investment o f 25 years (without replacements). As table 3 shows, the project is likely to increase the welfare o f the country by about US$36 million, corresponding to an economic rate o f return (ERR) o f 18 percent, substantially above the cut-off discount rate or 10 percent.

Under the strong hypothesis that all the hotels are going to benefit from EPZ incentives, the variable that has the greatest impact on the potential components outcome i s GOMs capacity to tap into tourist willingness to pay (WTP) to enjoy nature, which could be realized through the
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creation o f an excursion area entrance fee o f US$8. Without this entrance fee, NPV would be US$16.3 million, almost US$20 million less and ERR 13.7 percent, US$percent less than in the scenario with an excursion area entrance fee at US$8. The components worth i s also sensitive to the number o f additional rooms that are going to be created. 400 additional rooms built at project completion in spite of 1,000 will make the NPV negative and is then the switching value and the investment in the Nosy B e pole i s not worth for the country. However such a slow pace o f room construction is considered very unlikely given the current tourist industry dynamic in the Indian Ocean region, particularly in Nosy Be.
Table 2: Summary o costs and benefits, NPV as o 2004 (2004 US$ million) f f

Type of investment (US$ millionlFiscal year) Visa Fee Hotel Tax Backward Linkage Wage Natural Area Entrance Fee Cost (Investment and Recurrent) Net Benefit (ERR 17.9%)

PV

2006 2007 2008 2009 2010 2011 2012-2030 76.6 17.5 0.1 0.3 0.5 0.7 0.9 1,3 16.5 3.8 0.0 0.1 0.1 0.1 0.2 0,3 33.8 0.2 0.5 0.9 1.3 1.8 2.4 148.3 44.2 10.9 0.1 0.2 0.3 0.5 0,7 0.9 19.4 0.7 0.9 1.0 1.2 1.4 1.6 71.5 (49.7) -2.7 -14.5 -19.2 -12.0 -2.5 -2.2 -39.8 35.7 -1.5 -12.6 -16.4 -8.1 2.5 4.3 317.4

Beneficiaries o f the project are o f two kinds: (i) Nosy B e locals, with a net benefit o f US$44.7 million without entrance fee; (ii) U S with US$21.3 million without entrance fee, and the US$40.7 with entrance fee. Without the introduction o f an excursion area entrance fee, the overall fiscal impact o f the investment in the Nosy B e pole i s not sustainable. With the fee, the situation looks better, especially if the project put in place user charge mechanisms for services rendered by the new infrastructure, such as the Hell-Ville port.

7. Summary and Conclusions


I the Nosy B e pole, the expected incremental benefits, based on reasonable assumptions about a n sustainable increase in the number o f visitors and GOMs ability to tap into tourist willingness to pay for nature are sufficient to justify the investments from an economic and even, with small arrangements, from a financial point o f view.
I addition, the development o f the tourist industry in the island will create 3,000 new jobs at n project completion, twice the number o f jobs previously given by SIR4MA, most o f them for formerly un-employed women. Moreover, this analysis only focused on benefits from increased international visitation and did not value improved access to basic education and health services for women and their children, extremely important livelihood measures.

1. Mining and Tourism led growth in Taolagnaro


The objective o f the Tolagnaro pole component i s to promote export-based growth in the 16,000 square kilometer Anosy region, the closed hinterland o f Fort Dauphin, and the home o f 360,000 inhabitants. The Tolagnaro region is indeed one o f the poorest in Madagascar: GDP per capita is US$180, a stark contrast to the nations mean o f US$270, and regular famines have prompted the need for repeated food-security projects. With a regional population growth rate o f 3 percent a 108

year, the poverty situation will likely worsen, and in the absence o f any public investment in regional development, GDP per capita is projected to decrease to US$115 by 2020.

The IG2P aims to encourage new private investments in the agricultural and tourism sectors o f the Anosy region. Direct investments will be undertaken in three areas: (i) rehabilitation, in road order to increase export-oriented cash crop production (sisal, litchi and rosy periwinkle) and (ii) social infrastructure (water, electricity, promotion of nature-based tourism; telecommunication and public health) in Tolagnaro, to improve public amenities; and ( i ) i ilocal institutions and business environment development for micro, small and medium sized enterprises (MSMEs).
To promote export-oriented economic growth, the appraisal team proposed that, in addition to regional infrastructure the IG2P should invest in a regional gateway using a new multi-modal port in a public-private partnership (PPP) with Rio Tinto, a mining company that has been planning to start an ilmenite mining operation in Fort Dauphin for more than a decade. The IG2P, however, will tailor i t s participation to the financing o f the new port according to the fallout o f the PPP and the expected additional impact o f the port on export-oriented activities.

2. Agriculture, Tourism and Mining in the Tolagnaro Region


Nearly 15,000 tons o f irrigated rice and 12,000 tons o f sisal are produced along the national road west o f Tolagnaro; 2,000 tons o f coffee and 5,000 tons o f litchis are produced in the Ranomafana Valley, North o f Tolagnaro. In addition, 300 tons o f high quality lobster are harvested along the east coast o f Tolagnaro. Sisal and lobster are exported (not coffee and litchis). Additional rice i s imported every year, such as at the national level, through the existing port to adequately supply the regional demand. The Anosy region i s part o f the Southern tourism trail o f the country: it attracts 15,000 tourists a year, eager to see the lemurs o f the Berenty private reserve, the spiny desert and dry forest landscapes o f the Andohahela national park. Most tourists come by plane from Antananarivo and TulCar, some by road, and a few take cruising boats from South Africa (5 boats a year). Currently, mining activities are non-existent, but Rio Tinto has been planning to start an ilmenite mining operation in Tolagnaro for at least the last fifteen years. Ilmenite contains Titan bioxide (TiOZ), which i s used to produce white pigment (95 percent) and titan (5 percent). The Ilmenite of Tolagnaro i s one o f the worlds highest grades: I t holds approximately 60 percent o f TiOz, r u t i l e and zircon and i s richer than the other world deposits located in Canada, USA, Australia and South Africa. The worlds current ilmenite production i s 4 million tons, and i s projected to grow at a rate o f 2 to 3 percent per annum. R i o Tintos estimated share o f the ilmenite market i s between 25 and 40 percent.
3. Basis for Economic Analysis

The type and magnitude o f the expected incremental economic benefits o f the project depend o n what would have been the situation in the absence o f IG2P investment. Thus, the counterfactual situation i s described and defended before presenting the different types o f expected benefits resulting from the project.
Counterfactual Situation

rich metal deposit o f ilmenite, zircon and rutile, but without the project, this necessary 109

I t is probable that R i o Tinto would eventually invest in the mine because o f the exceptionally

investment in mining operations would be delayed many years (they have already been working on investment plans for 15 years). In the with-project situation, the natural pace o f investment will be forced by a legal agreement with the World Bank (including a financial penalty) stating that port construction should start in conjunction with the IG2P in 2006. The time needed for investment in the mine in the two situations depends then on following the i) factors: (i) evolution o f demand for ilmenite in the world market, ( ithe socio-economic context in the other countries where ilmenite i s mined, and (iii) negotiations between the the mining company and the GOM. With these factors in mind, the appraisal team reasonably projects that in the without-project situation, the mine would be developed in four years (2009) and production and exportation would start within nine years (2014), in spite o f production and exportation starting in 2009 in the with-project situation. From Rio Tintos point o f view, the mining operation needs to be developed along with a strategy to export the ilmenite. Fort Dauphins current port facility has a maximum declining capacity o f 30,000 tons per year and cannot be used for the purpose o f the mine operation. After the start o f the mining project, Rio Tinto projects exports to be 375,000 tons a year after 5 years, and 750,000 tons a year after 12 years. Two options can be envisaged: (i) ilmenite with a load floating buoy facilitg4 (single point mooring / slurry pump) with frequent interruptions due to waves and an estimated US$35 million investment (and additional operating costs), or ( iload i) the ilmenite through a new multi-modal port with a breakwater (no interruptions due to waves) at an estimated total o f US$S5 million. Without public participation in the multi-modal port, i t is believed that Rio Tinto would invest in a floating buoy facility, at i t s own expense, to export the ilmenite to its Richards Bay facility in South Africa. The capacity o f the existing port, approximately 27,000 tons per years, would then decline hrther because the G O M i s unlikely to invest US$15 million needed to upgrade the old port and remove the Wellborn shipwreck in the absence o f the IG2P. There i s a plausible alternative at the Tolagnaro component as it has been designed by the appraisal team: Keeping all the investment in the three areas unchanged except for the new port and then rehabilitate the old Fort dauphin port for an amount o f US$15 million which corresponds at present value o f around US$10 million. The costs o f the component will then be reduced from an amount o f US$20 million (the difference between the two ports, see section 4.1. o f this analysis), or US$10 million in present value. But the economic benefits will also b e reduced. In particular, the expected benefits o f capturing the mining rent earlier than in the counterfactual situation will not be associated with that alternative: I t s present value has been calculated for that analysis between US$25 and US$40 million, a fimction o f the number o f years gained. Moreover, some o f the incremental agricultural benefits are linked with a more efficient port that will lead to reduction in international freight rate. If the old port i s rehabilitated for US$15 million, this type o f benefit will not appear and then the benefits associated with agriculture will be diminished. On the other hand, tourism benefits will remain unchanged in the two alternatives.
In sum, in the alternative in which the old port is rehabilitated, the NFV o f the project will be diminished from an amount o f at least US$15 million. For that reason, it has been rejected by the appraisal team
Another option, a dredged sheltered port in the Anosy River has been rejected for environmental reasons.

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Benefit Categories

If the IG2P finances part of the new multi-modal port in a PPP with Rio Tinto, the mining investment will occur, as formalized in a legal agreement, at the beginning o f the project in 2006, and production will start four years later (2010). If the project i s implemented, the expected incremental economic benefits2 of the Tolagnaro pole component will be threefold: (i) agricultural rent associated with additional crop production and exportation, (ii) tourism rent associated with additional visitors, and (iii) anticipated mining rent captured by the country from the ilmenite project compared with a situation where the mining investment would be delayed for another five years.
Note that cost savings associated with the progressive restoration o f the former export and import capacity o f the port cannot be counted as benefits for the country because the new port will probably be run by a R i o Tinto s u b s i d i d 6 . Consequently, savings in port operating costs, such as cost o f ship time in port and cargo handling charges on normal regional conventional traffic, will partly benefit to the country. Benefits from national transshipment and international transshipment will not, conservatively, be retained. On the other hand, savings in transportation costs to and from the two other ports (Manakara and Toamasina), which are currently incurred to compensate the declining capacity o f the Tolagnaros port, and saving o n international freight rate will benefit the country.

4. Economic Costs
The Tolagnaro pole economic costs are composed of: (i) public portion o f port investment the and recurrent costs in port infrastructure, (ii) other related physical and social infrastructure the i i the and business environment investments in the port hinterland (Anosy Region), and ( i ) negative environmental externalities borne by the Anosy region.
Government Contribution to the Multi-Modal Port

The construction o f the multi-modal port i s supposed to take place at the Northern promontory o f the Ehola Peninsula beach. Three other locations (pointe Evatra, Ehola southern promontory and Fort Dauphin site) have also been explored, but the Northern promontory location seems to be the best locale to protect the port from extreme waves27 and sedimentation28 as well as the least costly and most environmentally sound option. Currently, the port consists o f a 600-meter long protective breakwater, a specialized ore berth capable o f accommodating container and o i l traffic (150 meters long with a 13.5 meter depth), and a multi-purpose terminal (150 meters long with a 9 meter depth and associated yard) that
Due to limited data, and the greater relative importance o f other factors, shadow pricing i s not included in this analysis. Consequently, n o foreign exchange premium has been calculated. 26 The new public port o f Tolagnaro would be operated within a global management and operation concession entrusted to a subsidiary o f Rio Tinto. Within this global management and operation concession, the State entrusts the concessionaire with: (i) role o f Port authority (policing ship movements, managing port property); ( ithe the i) routine maintenance, major repairs and renewal o f infrastructure; and ( i ) port operation services: handling, i i the warehousing, ship servicing (pilotage, mooring, possibly towage). Analysis o f extreme waves gives a 100 year retum period for significant wave height o f 7.5 meters at the head of a breakwater. W i t h the existing situation, there i s no deposition in the proposed area for the port but a groin (?) extending to the minus 5 to 7 meters contour may be required to prevent sand deposition i the port area. n
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will have a capacity two or three times the old ports one. Two technical options were available for the breakwater: artificial blocks (called core-loc) or natural rocks2. The second option was finally chosen and which brought the ports cost down to US$90 million.

The investment cost to the domestic economy will depend on the agreement results between the GOM and the mining company. Based on a financial analysis o f the mining rent sharing, the GOM has agreed to contribute US$35 million, the consequent amount retained as the investment cost to the domestic economy. The running and maintenance costs o f the port will be at the expense o f the concessionaire and will not have any cost to the domestic economy.
Investment and Recurrent Costs

Investment costs are composed of: (i) full base-cost without taxes o f component D (Mining the and Tourism led growth in Fort dauphin), (ii) percent o f base cost without taxes o f 25 component A (Strengthening the business environment), and (iii) percent o f base cost without 50 taxes o f component E (Program and project implementation, evaluation and monitoring). In addition, the residual value o f the port i s removed from the investment cost. Total investment cost will then be US$89.4 million (see table 1 below) o f which US$35 million are designated for the port as the public contribution to the PPP and US$54.4 million to the other investments in physical infrastructure and the business environment. Recurrent costs will only occur for the infrastructure part o f component D, an estimated 5 percent o f the investment cost, port excluded30. Total recurrent costs will be US$2.2 million per year at the fifth year o f the project (physical infrastructure investment occurs during the first four years o f the project). Negative externalities associated with hard infrastructure investments and related private investments in Tolagnaro are believed to be fixed and can be associated with the cost o f the projects environmental and social prevention. Infrastructure investment will basically upgrade existing infrastructure, excluding the port3. Private investment in the mining operation, new, hotels and existing hotel upgrading will require an Environmental Impact Assessment (EIA), as stipulated in the MECIE framework. R i o Tinto i s already planning to commit US$2 million per year as part o f i t s social, community and environmental programs in order to discharge i t s corporate citizen responsibility2. Provisions for the cost o f environmental and social impact

The altemative solution faces two technical constraints: (i) natural rocks o f sufficient caliber or size (minimum o f 20 tons) have to be found near the p o r t site; ( iwith natural rock, the investment cost i s then lower, but recurrent i) costs might be h g h e r as w e l l as foregone revenues due t o interruption o f the port functioning after cyclone damages, t h i s risk will have to be addressed in the concessions contract. 30 That proposition i s true if the financial analysis o f the p o r t shows a positive return. I f not, the government will have t o subsidize the private operator and the recurrent cost o f the project will increase f o r m 2.2 m i l l i o n a year to 3.9 m i l l i o n a year, 3 1 In that case, the loss o f recreational value o f the Ehola Peninsula beach due t o the p o r t construction inside the bay, which harbors the beach, will encourage people t o go further t o find pristine beaches. A s sea tourism and recreation activities are poorly developed in the F o r t Dauphin area (among other deterrents, such as sharks), it i s believed that the externality exists but weighs little in comparison with the investment cost in the n e w multi-modal port. Moreover, Fort Dauphin will not develop in term o f beach tourism. 32 A Social and Environmental Impact Assessment (SEIA) for its ilmenite mining project was reviewed in 2001 by Conservation International (CI) and, in 2004, by Environmental Resources L a w (only for the social aspects). At this stage, there are some concerns about potential negative issues linked t o the social impact o f the project, as mentioned in the above social assessment. An independent S E I A financed by the World B a n k was disclosed o n M a r c h 8,2005.
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prevention are included in the project management component. Hypothetically, 60 percent o f the base cost without tax or US$2.5 million i s supposed to be used for the Tolagnaro pole. By hypothesis, the incremental residual value i s taken at 50 percent o f the GOM investment in the multimodal port and counted as a benefit that occurs the last year o f the project. With a public investment in the port 35 million, i t diminishes the present value o f the initial investment in the port from an amount o f 1.6 million. The costs o f project objective achievement are summarized in table 1 below, which also shows the contribution o f each o f the major cost categories to the calculated aggregate present value o f the Tolagnaro poles economic cost. The calculations assume a real discount rate o f 10 percent, total l i f e o f public investment o f 25 years and use o f foreign currency (US$) at the border price level.
Table 1: Tolagnaro Growth Pole Project investment, recurrent and mitigation costs (US$ million)

Type of investment PV 2006 2007 2008 2009 2010 2011 2012 ( US$million/Fiscal year) -2030 Mining and Tourism Led Growth US$58.0 2.4 23.6 28.1 24.8 0.0 0.0 -17.5 Business Environment US$1.9 0.0 0.9 1.1 0.5 0.0 0.0 Project Management US$4,4 0.7 1.5 1.8 1.8 0.0 0.0 Mitigating Social and Environment Impact US$1,8 0.3 0.4 0.5 0.7 0.5 0.0 Recurrent Cost US$12.9 2.2 2.2 41.6 Total US$79.1 3.4 26.3 31.5 27.7 2.7 2.2 24.1
Source: Proposed Investments per pole in IG2P-1inksCOSTAB-AppraisalConstruct New FD Port.

Thus, the present value o f Tolagnaro poles economic costs will be US$80.7 million. The bulk o f the cost lies in infrastructure investment (including participation in the multi-modal port), which accounts for 73 percent o f the component costs present value. Recurrent cost will be important, representing 16 o f the remaining 27 percent o f the component costs present value. Moreover, if the enterprise that i s going to run the port i s profitable, the G O M will have to subsidize it. Therefore, the recurrent cost o f the project will grow and so the total present value. In the worst case, in which G O M has to finance 100 percent the recurrent cost o f i t s investment part, present value would be US$10 million more important.

5. Economic Benefits
As stated in the section 3, incremental benefits o f investment in the Tolagnaro pole are likely to be threefold: additional agricultural revenue, tourism rents and anticipated ilmenite rents, the latter being a direct consequence o f the public-private partnership option for ilmenite exportation. The economic benefits are explained in greater details below.
New and Improved Agricultural Productions

Because o f the new port and road rehabilitation projects, existing crop productions are likely to increase. An ad hoc study conducted for the purpose of that economic analysis and realized by FA0 stated that 5,000 additional tons of agricultural products, mainly sisal (2,000), rosy

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periwinkle33 (1,500) and litchis (1,500) would be exported through the new port, a great advancement for the region compared with the situation without IG2P. In addition to benefits o f additional production and exportation from these three crops, savings in vehicle operation (the classic benefit from a transport project) and saving on international freight rate (the classic benefit for a port project) should materialize for the three previous crops, as well as for lobster, cloves, red pepper and onions. With FOB prices are US$700 per ton o f sisal, US$1,300 for litchis and US$1,200 for rosy periwinkle, and economic rents are likely to be significant. Existing economic rents associated with sisal, litchis and rosy periwinkle are US$83 per ton o f sisal, US$620 for litchis, US$500 for rosy periwinkle and US$4,500 for lobster. Additional economic rents from savings in vehicle operation and saving on international freight rate will be: US$23 per ton o f sisal, US$440 for litchis, US$160 for rosy periwinkle and US$500 for lobster. Rent associated with clove, red pepper and onion production and exportation have not been taken into account because they will take a greater amount o f time to materialize; production has not developed yet and will need additional investment in farmer organization for benefit realization to occur.

If we consider that additional productions will start four years after the beginning o f the project, and that economic benefits will be additional unit rents for current production and total economic unit rents for additional production, the present value o f benefit streams during 25 years, discounted at 10 percent, i s estimated to be approximately US$20.0 million, half o f it would go directly to 40,000 farmers, included workers in sisal enterprises.
Additional Tourism Rent

The Anosy region presents numerous opportunities to develop eco-tourism, especially with i t s two existing attractions: Andohahela National Park, Berenti Private Reserve. If infrastructure constraints are removed, encouraging private investment in hotels, lodging facilities, restaurants and excursion agencies, both attractions have the potential to entice a greater number o f tourists.
Since 1939, Andohalela National Park has been a 76,000 hectares reserve, which opened to tourists in the late 1990s. I t i s situated about 45 km from Tolagnaro, along the main road to the west and is a rather easily accessible yet protected area. I t s proximity to Tolagnaro - especially the transition forest parcel Tsimelahy - means that visitors can easily do day trips in the region. In the park, visitors can see three major Madagascan eco-systems: one o f the southernmost tropical rainforests in the world, an unusual dry forest with species adapted to l i f e with very l i t t l e moisture and a remarkable transition forest (with aloes, euphorbiaceous, didieraceous, pachypodium, baobabs). Berenti i s a 240 hectare private nature sanctuary located in the Mandrare Valley along the Mandrare Rive, which has belonged to the D e Haulme family since 1936. Birds, butterflies,

33 The rosy periwinkle (Catharanthus roseus) i s a toxic plant native only t o the tropical forests o f Madagascar. Its m a i n natural habitat i s the deep South but the plant i s also found along the east coast. Traditional Madagascan healers used its hypoglycemic properties primarily t o treat diabetes. French explorers brought it back t o the r o y a l court in 1757. The herb quickly spread around the w o r l d t o cure sore throat, pleurisy, dysentery and diabetes. In the 1950s, scientists experimented with periwinkles in search o f a diabetes cure. Instead, they found tumor-inhibiting properties that resulted in two very important cancer-fighting medicines: Vinblastine and Vincristine, both o f w h i c h are currently produced by pharmaceutical heavyweight Eli Lilly. Vinblastine has helped increase the chance o f surviving childhood leukemia from 10 percent to 95 percent, while Vincristine i s used t o treat Hodgkins Disease.

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chameleons, tortoises, bats and five species o f lemur can be easily seen, much more so than in any protected area in the national network. 8,000 visitors travel to the reserve each year.

If project investments lead, like in Nosy Be, to new investments in hotel facilities, a greater number o f tourists will arrive from Antananarivo to do the southern trail and visit Tolagnaro. If we consider 15,000 visitors a year who will spend an average 3 days in Tolagnaro and that the room occupancy rate i s 1.5 person per room, 30,000 nights are sold each year with 300 rooms at Tolagnaro and i t s neighboring regions. Tourism specialists strongly believe that Tolagnaro and its region are very attractive. Therefore project investments in physical and social infrastructure will catalyze new private investments in the tourism sector.
Hypothetically, the room rentals could triple in ten years. If the occupancy rate and the number o f days stay the same, then 40,000 additional tourists are going visit Tolagnaro and i t s region by 2015. In addition, tourism arrivals by sea could add 2,500 days o f visits a year (5 cruising boats per year with 250 person capacity and two-day stays will results in twice the current level) with a new port and additional infrastructure investments, making the national park within reach.

As discussed in the economic analysis o f Nosy B e pole, sources o f tourism rent in Madagascar are visa fees and a nightly hotel tax, rent part on average expenditures, park entrance fees, and additional wages for hotel workers. With an average stay in Tolagnaro o f 3 days and 2 excursions (one visit to the national park and one visit to Berenty), each additional tourist will generate an incremental tourism rent o f US$76. Based on these hypotheses concerning the composition o f the tourism rent in Tolagnaro and the expected number o f additional visitors, the present value o f benefit streams during 25 years, discounted at 10 percent, could be conservatively estimated to be US$31.4 million. From that amount, US$19.6 million will go to the GOM if a US$8 entrance fee in the natural areas i s set up (see economic analysis o f the Nosy be pole) and US$11.8 to the local population.
Incremental Mining Rent

With the Tolagnaro component o f the IG2P, the construction o f a new port will force an increased pace in the private sector investment in the ilmenite deposit. The number o f years gained compared to a situation in which the mining company should load ilmenite using a floating buoy facility would be 5 years. The incremental economic benefit from the project i s then the difference in mining rent captured by the country between the two situations during the 5 first years, as well as the next 20 years (see figure 1 below).
In total, present value o f flows o f incremental mining rent captured by the country that results from forcing the pace o f private sector investment in the ilmenite deposit i s US$42 million, the most important economic benefit o f the Tolagnaro component. Present values have also been calculated in the case the number o f years gained is only 4 or 3 years (see graphic representations below in the figure 1). I t is US$35 million for a 4 years gain and US$27 in the 3 years case.

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Figure 1: Mining rent schedule of apparition


20 15 10

2006

2010

2014

2018

2022

2026

203C

With Roject Without Roject (Y+4)

-.-.- Without Roject (Y+5) - - ....- Without Roject (Y+3)

The mining rent i s composed o f (i) taxes (local taxes, mining royalties, custom duties, fuel taxes, income taxes from local salaries and income taxes from the salaries o f expatriates), ( i i) incremental increase in wages paid to domestic workers, and ( i )portion o f local expenditures i ia by the mine that can be counted as economic rent. All taxes are treated as transfers from an entity outside o f the economy to an entity within the economy because Rio Tinto i s a foreign firm. The hypothesis as said earlier i s that in the without project situation Rio Tinto would invest in the mining operation in 2006, will start produce ilmenite in 2009 and will reach 750,000 tons a year in 2012. During the period, ilmenite Fob price is supposed to fluctuate from a minimum o f US$90 per ton to a maximum o f US$220 per ton. Below i s represented the evolution o f mining gross revenues during 30 years and the corresponding evolution o f the mining rent captured by the GOM.
Figure 2: Gross mining and governmentJisca1 revenues (2006-2030)

lo

t
2010 2014 2018 2022 2026

o r .
2006

t
-Mining rent

2o LO

....... Mine Gross Reenues ($ million 2005)

Mining royalties are calculated at 2 percent o f sales revenue and would be US$2 million a year once mine production reaches 750,000 tons a year. Present value o f incremental benefit flows is then estimated at US$4 million. Local taxes, custom duties and fuel taxes (20 percent on US$260 per ton) are in accordance with the framework agreement. Present value o f incremental benefit flows during 25 years and discounted at 10 percent is estimated at US$5 million.

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Corporate income tax, dividend and shareholder interest withholding tax rates are also subject to the framework agreement and are set at 0 percent for the first five years, 10 percent for 6 to 15 years, 15 percent after 15 years for the corporate income tax, and at 10 percent o f the gross payments for the dividend and shareholder interest withholding tax. Present value o f incremental benefit flows during 25 years and discounted at 10 percent i s estimated at US$16.5 million. Income taxes from local salary and from foreigner salary are subject to a 25 percent tax on gross salary. Present value o f incremental benefit flows during 25 years and discounted at 10 percent i s estimated at US$6 million. However, it i s not certain that the expatriates would, in reality, pay this income tax. Their share o f the benefit i s US$2 million. Incremental increase in wages paid to domestic workers i s calculated on the basis that the opportunity cost o f work is 60 percent o f the wage bill. Present value o f incremental benefit flows i s estimated at US$5 million. A portion (10 percent) o f local expenditures by the mine expatriates can b e counted as economic rent. Present value o f incremental benefit flows during 25 years and discounted at 10 percent i s estimated at US$4.5 million. From this incremental mining rent, approximately US$14.1 million will go the local population and US$28 m i l l i o n to the GOM.
5. Summary of Gross Benefits

Based on assumptions concerning number o f years separating investment in the mining operation in the with and without project situations, the number o f additional hotel rooms that would be constructed during the following years and the volume o f additional agricultural production stimulated by the port and other infrastructure, i t i s clear that the number o f years separating investment in the mining operation plays a major role in the aggregated benefits o f the Tolagnaro component, with mining rent accounting for 45 percent o f the gross benefit o f the project (see table 2 below).
Table 2: Composition o gross benefits f Composition o f benefits with /Scenario) Mining incremental rent Tourism additional rent Rents from new agricultural productions Total (US$million PV) 42.1 31.4 20.0 93.5 Percentage 45% 34% 21%

100%

This means that the credibility o f the mining companys statement that they will not invest n o w or later if GOM does not finance part o f the port is very important in judging the importance the of this opportunity for the GOM to finance part o f the multi-modal port. On the other hand, construction o f a new port can make a huge difference for the region primarily because it forces the pace o f private sector investment in the ilmenite deposit as well as to develop new agricultural export-oriented activities that otherwise would be impossible.

6. Results o f the Benefit-Cost Analysis


Because of the weakness of the available data, the benefit-cost estimates presented below are necessarily imprecise and should be treated only as orders o f magnitude, especially for

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recurrent cost and new product benefits that have not been precisely studied yet. However, the estimates made are conservative. As table 3 shows, the investment i s likely to increase the welfare o f the country by about US$14.5 million, corresponding to an economic rate o f return (ERR) o f 13 percent, and is, therefore, justified from this point o f view.
Table 3: Summary o costs and benefits, NPV as o 2004 (2004 US$ million) f f

Type of Benefit ( US$million/Fiscal year) Tourism Rent Aaricultural Rents Minina Rent Project Cost (investment and recurrent) Net benefits (ERR=12,9%)

PV 2006 2007 2008 2009 2010 2011 2012-2030 127 31.4 0.6 0.9 1.2 1.6 2.1 2.7 20.0 0.0 0.0 2.9 2.8 2.9 2.0 54 85 42.1 0.6 1.3 3,9 5.1 5 1 5.1 -79.1 -3.4 -26.3 -31.5 -27.7 -2.7 -2.2 -24 14.5 -2.2 -24.1 -23.5 -18.2 7.5 7.6 244

The variable that influences the project benefit the most i s the capacity o f the GOM to negotiate i t s part o f the port investment. Currently, the outcome o f such an investment i s uncertain for two because i t depends o n the sincerity o f the mining companys statement that it will not reasons: (i) invest if the GOM does not help to finance the port; ( ibecause the causal-effect relationship i) between road improvement, port capacity restoration and the additional litchi, sisal and coffee production i s important for the Anosy region, but not much so as to justify, in and o f itself, investments in infrastructure such as the public-private partnership in a new multi-modal port. Therefore, the results o f the benefit-cost analysis are sensitive to: (i) number o f years the separating the investment in the mining operation with and without the project and ( i the i) volume o f additional agricultural production. For the number o f years, the switching value i s 3 years. If R i o Tinto i s willing to invest no later than 2009 in the mining operation if the case the GOM i s not financing part o f the new port, then the Tolagnaro component is not worth for the country because the NPV is zero. That hypothesis cant be totally excluded. Therefore, there i s a risk associated with the investment in the Tolagnaro pole. For the volume o f agricultural production, the switching value i s the whole production o f sisal and litchi (16,000 tons) or the whole production o f litchi and rosy-periwinkle (15,000 tons) are not any more produced. This i s very unlikely. There are two equal beneficiaries o f the investment: the local population that will benefit o f US$35.5 million in present value from the investment, because o f employment generation and backward linkages, and the GOM that will benefit US$58 million in present value, because o f fiscal revenue. As the project i s around US$80 million for the state, the fiscal impact i s slightly negative because there i s transfer between the GOM and the Anosy region local population. Thus, even if on the one hand the ERR is not very high and on the other hand r i s k s are high, the Tolagnaro pole will greatly aid the local population and will have an important impact for the well-being o f the population o f the poorest region in Madagascar.

7. Summary and Conclusion


I summary, the analysis shows that the expected incremental economic rents, based on n several assumptions about the counterfactual pace o f the private investment in the mining operation, the additional agricultural productions and the expected additional number o f visitors

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to the Anosy region, are robust enough to justify the investments proposed by the Malagasy Government, even ifthe numbers themselves are not very high. However, assumptions o n additional agricultural production are conservative, as well as the incremental benefit associated to them. Moreover, benefits of new production and exportation o f other minerals than ilmenite, l i k e granite and mica, have not been taken into account into this analysis. That being said, even ifa large share o f benefits derive from the fact that it is believed that Rio Tinto will not develop the mine before 2010 if the GOM does not participate in the new multi-modal port and that, o n the other hand, i t will invest immediately in the mine if the G O M finances part o f the port, benefit will be important form a poverty alleviation point o f view, T o reinforce the likeliness that the private company complies with i t s engagement, the legal agreement with the World Bank (including a financial penalty) stating that port construction should start at the beginning o f the project in 2006 will be fundamental to the project.

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Annex 10: Safeguard Policy Issues MADAGASCAR: Integrated Growth Poles Project Figure 10-1. Index o f Safeguards Instruments
Policv Documents Environmental and Social Impact Management Framework (ESMF) Cultural Heritage Policy Framework (CPPF)

Environmental and Social ImDact Analvses IESIA) ESIA Taolagnaro ESIA Antananarivo/Antsirabe Environmental Management Plan

Environmental Management Plan

Resettlement Action Plans (RAP)

RiV 13 (Taolagnaro)

I
I
EnvironmentalManagement Plan IEMP)

Ring Road (Nosy Be)

QMM(Tao1agnaro)

r
Nosy Tanikely

Process Framework WF)

L L J
Nosy Tanikely

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A. Safeguards Documents Prepared for the Project 1. The suite of 11 safeguards instruments prepared for IG2P is described in Figure 10-1. The documents were prepared by a team o f consultants led by Tecsult Intemational, Limited, a Canadian consulting firm under contract to the Borrower. The Environmental and Social Impact Management Framework (ESMF) and Resettlement Policy Framework (RPF) are intended to guide subsequent safeguards work on specific subprojects that are as yet unknown or not h l l y defined. A Cultural Property Policy Framework was also prepared - not a required item under World Bank operational policies, but deemed important because o f the richness o f physical cultural property that could be encountered in later subprojects. Three Environmental and Social Impact Assessments (ESIA), one for each growth pole, address the environmental and social impacts o f the subprojects that will definitely be financed during the first phase o f IG2P. They each include an Environmental Management Plan (EMP). The E S I A for Tolagnaro also covers the impacts o f QMMs proposed ilmenite mine and the road that will connect i t with the new port at Eahoala - two activities not financed under IG2P but so closely related to i t that they have been considered as associated projects for safeguards purposes.34 Resettlement Action Plans (RAP) were prepared for the three sets o f first phase subprojects that involve land acquisition: the new port at Ehoala and its quany and access road (QMMin Figure 10-l), the improvement of National Route 13 in Fort-Dauphin, and the Nosy B e Ring Road. The remaining documents, a Process Framework and a free-standing EMP, apply to the proposed marine protected area at Nosy Tanikeley.
B. Safeguards-related Risks and Measures Taken o r Proposed to Address Them 2. There are no significant safeguards risks at the Antananarivo-Antsirabe Growth Pole. At Nosy Be, the significant risks are of adverse indirect impacts caused by tourist activities (e.g., sex tourism, and prostitution, increase in exposure to HIV/AIDS); damage to the natural and social environments resulting from poorly-controlled land development in response to real or anticipated tourism demand; and growth that exceeds the capacity o f municipal infrastructure (particularly solid waste and wastewater management facilities). The management approach being emphasized in the project i s establishment o f effective regional planning and o f capacity at the municipal level to actualize regional environmental plans through land planning, land development administration, and management o f municipal services.

3. At Fort-Dauphin, the situation i s more complicated because o f the cumulative impacts of the proposed ilmenite mine and its associated infrastructure, the infrastructure to be supported by IG2P, and the indirect impacts o f both developments. One direct impact o f concern is the conversion o f a portion o f the beach and nearshore water at Eahoala for construction o f a new port. The natural habitat i s not critical, and an offset will be provided in the form of protected status for the rest of the beach. O f more concern i s the possible disturbance o f dune formations
34 QMMcarried out an extensive ESIA for the mine and road. The ESIA included an EMP that has been appended, to the permit issued to QMM by GOM. Tecsult reviewed the ESIA and EMP and presentedits findings in a Gap Analysis. The fmdings are summarized in the ESIA for Tolagnaro, and the entire Gap Analysis i s included i the n project files and available to interested members o f the public on request to GOM.

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in and around the port, i t s associated industrial development zone, and the access road that must traverse the dunes. I t i s imperative that the dune protection and stabilization measures in the EMP be judiciously carried out. A third direct impact, this one o f the associated mining project, is the conversion of the occasionally-brackish lagoon system near the mine site to a permanent freshwater system. Essentially irreversible, the conversion may affect subsistence fishery. QMMi s continuing to study the potential effects and plans to promote a freshwater fishery and to engage the local community in i t s management.

In-migration o f workers i s a cumulative, secondary impact that may cause environmental stress and social conflict as well as increases in prostitution and the incidence o f HIV/AIDS. To the extent that the project succeeds in increasing tourism, i t can add to some o f these problems. From a broader perspective, there i s a risk that the hoped-for growth at this pole will exceed carrying capacity o f natural and social systems and municipal and regional infrastructure. The EMPs for IG2P and the ilmenite mine contain specific measures to deal with these impacts, and IG2P i s supporting improvement in regional planning, already rather well-developed in Tolagnaro, and capacity-building for effective plan implementation.
C. Alternatives Considered to Minimize Environmental and
Social

4.

Impacts

5. In the case o f the sub-projects related to development o f an industrial zone in the Antananarivo-Antisrabe pole, an environmental planning approach was adopted in order to determine the areas to be developed so as to avoid environmental sensitive zones and to minimize involuntary resettlement. In the same way, the project took into account the requirements in terms o f basic service provisions for water supply, energy, and solid waste and wastewater management and disposal. Concerning the Nosy Be ring road, the selected layout, for the most part, takes into account the existing Right o f Way (ROW), but the originally-planned width o f the proposed roadway and ROW have been reduced so as to minimize the impacts due to involuntary resettlement. A change in alignment was made to avoid a sacred tree. At the Fort Dauphin growth pole, detailed studies were carried out for site o f the new port and the road connecting the mine and the port, and the options with greater impact were rejected. Thereafter, optimization studies, led by QMM, resulted in a layout for the port that would minimize the initial size o f the breakwater in order to limit environmental impacts. The project has proposed a compensation program for unavoidable marine habitat loss in the form o f a coastal protection system located at Fausse Baie des Gallions.

6. In the case o f the industrial harbor zone adjacent to the port, the project provides protection measures o f the large dune o f Ehoala designed to minimize the risks o f wind erosion and the maintenance o f the port access for fishermen as w e l l as the installation o f tracks o f access connecting the road infrastructures and two coastal villages. The road will be provided with a distinct parallel track to physically separate vehicle traffic from that o f the pedestrians and animal traction carriage.
D. Stakeholder Participation

7. I the context o f the project environmental and social impacts assessment, the Vice Prime n Ministry, concemed communes, in particular those o f Fort Dauphin, Nosy Be and Antsirabe, as

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w e l l as the Consultant conducted public consultations and formal and informal meetings relating to the IG2P, in general, and the individual growth poles in particular. The National Steering Committee o f the project held regional workshops to launch the safeguards studies in the three in the three growth poles, namely: Nosy Be, Antananarivo/Antsirabe and Tolagnaro. World Bank representatives took part in those meetings. Communication and public consultation workshops were organized subsequently to discuss stakeholders concerns about the projects main environmental and social impacts. In addition, this process was an opportunity to expose stakeholders to the notion o f regional planning and strategic environmental assessment and to explain in great detail World Bank safeguard policies. All the safeguards studies were publicly disclosed in final draft form on March 8, 2005, and are accessible for public review and comment at each o f the three growth poles, in line with the Malagasy regulation on environmental assessment (the M E C I E decree). G O M conducted public consultations in each growth pole during the statutory review and comment period that began at the time o f disclosure. 8. In the case o f the TandAntsirabe growth poles, public consultations were mainly used to assist in selecting the sites of industrial parks in order to minimize adverse environmental and social impacts and to better meet the needs and expectations o f local populations. In Nosy Be, participants underlined problems which inhibit the development o f this growth pole, in particular those related to deficiencies in basic infrastructure, such as: the degradation o f the road network, in particular the ring road, which i s unusable over most o f the year; the degradation o f the port; the lack o f power; the lack o f potable water; and the level o f pollution caused by the poor management o f solid and liquid waste, including medical wastes. Land tenure issues, high airline fares, and a poor communication network were also raised as constraints on tourism development. Participants were also concerned about the environmental and social impacts and other risks associated with tourism development. These include: degradation o f beaches and the marine environment, the deterioration o f cultural property, sex tourism, control o f HN/AIDS, erosion o f moral values. and belief systems, and loss o f cultural identity. At Fort-Dauphin, many of the same topics were raised and, in addition, participants were concerned about: the need to specify precisely the impact management responsibilities o f various participating parties; arrangements for sharing benefits of the mining project so that an appropriate share accrued to the locality; management o f indirect impacts such as spontaneous migration and prostitution. 9. Most o f the infrastructure and waste management needs raised by stakeholders are already addressed in project design. Specific measures to mitigate impacts such as increases in HIV/AIDS exposure have been incorporated into the ESMF and EMPs. The most complex set o f potential impacts - indirect impacts triggered by components o f IG2P and cumulative impacts from the combination o f those components along with other planned and unplanned developments in the regions o f the three poles - can only be managed through improved regional planning that takes into account the opportunities and constraints presented by the natural and socio-cultural environments. The capacity to implement plans through effective land planning and administration is an essential adjunct. The ESMF includes terms o f reference for regional environmental planning, and the EMPs address the related requirements for capacity-building. Support for regional planning i s included in IG2P.

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E. Safeguards-related Impacts and MitigationManagement Plans


10. Table 10-1 summarizes the potential direct environmental and social impacts that could be caused by the civil works to be financed under IG2P. Table 10-1 and 10-2 l i s t the potential cumulative impacts at the growth poles o f Nosy B e and TolagnaroIFort-Dauphin. Mitigation measures are shown for all impacts.
Table 10-1. Main Impacts and Mitigation Measures Associated with Civil Works.
MAIN IMPACTS quality by dust and gas emissions PROPOSED MITIGATION MEASURES

. Cover trucks to avoid the spread of dust.

- Reduce truck driving speed in dust production zone.


- spray water on roads with high dust production.
being carried out.

- Prohibit constructionwaste burning. - Set up a communicationprogram to inform neighboring communities about the activities
quality of ground and surface water.

Limit as much as possible project activities in the vicinity of water resources (Le., river) and river crossings. Avoid river bank clearing to minimize erosion, or else install anti-erosive devices; give priority to biological protectionmethods and use mechanical protection only if necessary.

- Design works in such a way that they do not interfere with natural water drainage system - Design drainage systems taking into account rainfall patterns and watershed characteristics. - Completeworks mainly in dry season. - Exploit quarries and borrow pits so as to reduce erosion and minimize water resources - Arrange specific sites for vehicle maintenance. Sites should be impermeable, horizontal and
sedimentation.

- Envisage equipment o f used oils collection and disposal, as well as fuel storage so as to avoid
- Envisage construction of health centers for workers. - Cover slopes and borrow pit zones as much as possible. - Inspect machinery and vehicles regularly and carry out necessaryrepairs on time to prevent - Train personnelto ensure effective and timely interventions in the event of accidental - Plan lodging facilities for non-resident workers.
Soils Erosion. discharge. any discharge of oil, gasoline or other pollutants. soil and ground and surface water contamination.

located at least 50 m from nearby rivers.

-If a camping i s necessary, envisage the installation o f dry pit latrines.

- Minimize deforestationand scouring. - Plan interventions that are designed to protect zones with significant slopes and water flow. - Envisage rehabilitation measures of quarries and borrow pit immediately after work
Limit the interventions on land with high risk o f erosion.

Loss o f vegetation and degradation of habitats

- Avoid installation o f equipment near protectedareas and sensitive zones. - Limit deforestationto areas o f influence only. - Prohibit the use of mangrove wood for as constructionmaterials.
-To use current careers and lodgings.

construction; level grounds altered according to original topography and install soil stabilizing vegetation.

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M A I N IMPACTS

Loss o f coastal habitat

- Prepare conservation programs for affected coastal zones. - Ensure monitoring o f dredging material disposal sites. -

PROPOSED MITIGATION MEASURES

Modification o f seabeds characteristics

-In the event o f ocean floor dredging, examine the potential effects o f the modifications made to bathymetry to limit the effects on the adjacent zones.

Dispose dredged materials on ocean floor site, which presents similar physical and chemical characteristics as the dredged site; carry out an assessment o f such similarity, from biophysical and chemical points o f view.

Marine life

- carry out activities taking into consideration marine l i f e and their ecosystems protection - A v o i d and/or minimize land acquisition cases in areas o f high population concentration. - Apply RAP provisions outlined in the RAP reports. - Apply principles outlined in the process framework (PF).
measures.

resettlement R e s t r i c t i o n to protected areas Noise pollution during construction. Disturbance due road traffic

- Limit noise level to normal working hours. Ensure adequate maintenance o f machinery.
- D o not completely block traffic and sidewalks used by pedestrians. - Ensure permanent drainage o f surface water. - A v o i d creation o f temporary ponds.
~~

- Respect bearing capacity o f the roads and repair the damage caused to the roads at the end

vector bome diseases.

Increase in the incidence o f sexually transmitted diseases Human Health risks as a result o f poor Medical waste management

- Organize training and education programs for workers and sensitize local communities.
~~~

Ensure distribution o f condoms.

- Identify mechanisms to make sure only infectious medical waste are incinerated and that
~~~

- Organize training programs targeted at all personnel involved in the collection, transportation - Prior to program implementation prepare an exhaustive M W M P outlining institutional to
and disposal o f medical waste, including those in charge o f manipulating incinerators.

other types o f waste are encapsulated and disposed in sanitary landfill as required.

Risks o f accident during work

- Enforce the presence o f traffic signals.

carry out its implementation and monitoring.

- Provide workers with protective gears. - Strengthen worker safety measures by the establishment o f an emergency plan. - Speed control measure should be enforced.
Navigation Disturbance

- Create staffed and equipped dispensary accessible during working hours.

- Set up an action plan identifying measures to be implemented to maintain and improve - Locate the installations so as to limit their interference with sites o f historic and tourist - Implement provisions outlined in the cultural property framework.
fishery and tourism industries. significance. Ensure that the concept o f development takes into account and utilize regional planning tools.

-Envisage requisite signs informing the general public near operation sites.

landscapes o f interest

Property.
I

-In the event construction works interfere with archaeological or significant cultural sites, suspend all activities and inform the relevant authorities.

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Table 10-2. Cumul tive Impacts for the Nosy Be Growth Pole
CUMULATIVE IMPACTS
Loss o r degradation o f terrestrial, marine and estuarine habitats
Social, economic pressures l o w income households and vulnerable people [ncrease in the prevalence o f sexually transmitted diseases and HIV/AIDS. Pressures on the human habitat in urban and rural communities

PROPOSED MITIGATION MEASURES

- Assess current situation and formulate an integrated for the regional planning in Nosy Be. - Carry out tax audit in existing companies and ensure tightening o f administrative controls. - Promote the development o f local products (i.e., agriculture and fishery).
~~~~~~~ ~ ~

-Support the labor development and to ensure monitoring o f vulnerable people.

-Integration a STI HIV/AIDS component in the project, in conjunction with the actions already envisaged at the regional level and integration o f the police force in program. Fight sexual tourism.

-Initiate and support an integrated regional planning and management process.

-To make Conduct environmental and social impacts assessment studies for sub-projects to be implemented in subsequent years and other investments schemes susceptible to affect the socio-economic environment. Establish a cartographic baseline o f intervention zones using GIS method.

- Inventory land resources and establish land occupation baseline, as well as the institutional -

- Carry out the diagnosis o f Ambatoloakd Madirokely sector - Organize public information, children education program and strengthen partnership with local

setup for better control and management o f land resources. Include mechanisms for dealing with land resources litigations. Revise the concept o f land reserves involving the commune and the various business operators. Assess demographic projections 2020 with different scenarios, taking into account project impact on the Nosy B e growth pole. carry out civil engineering feasibility studies for sanitation systems.

- Finalize and support the implementation o f the urban planning.


- Prepare a tourist development plan.
Table 10-3.Cumulative Impacts for the Pole o f Tolagnaro/Fort-Dauphin
PROPOSED MITIGATION MEASURES
Atmospheric emissions contributing to deterioration o f air quality

organizations.

Green house effect.

- Examine the ways in which the country could receive international appropriations for the

-To make a conduct feasibility study to assess the usefulness o f wind power and i t s impact on reducing air pollution from generators. -Explore the possibilities o f fumishing power during operation and concession to Jirama after exploitation. Explore possibility o f obtaining a financing from multilateral institutions, such as the U N D P in order to mitigate the extra costs o f the construction o f such park and o f the necessary lines o f interconnection and to ensure the transfer o f necessary knowledge to future operators for its sustainable use.
reduction green house gas emissions, in case wind power park i s seen as a viable alternative.

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CUMULATIVE IMPACTS
Social, economic pressures on l o w income households and vulnerable people
~~

PROPOSED MITIGATION MEASURES

- Before project implementation collect baseline information o f the project, on household living
~~

- Develop a monitoring plan for vulnerable individual in the three rural communes close to the - Implement initiatives envisaged in the regional development plan. - Prepare a vector management plan, outlining sensitization programs for the local populations project. on the potential health risks involved with the transformation o f the brackish water into fresh water at lake Ambavarano.. Support regional initiatives as regards prevention o f STI, H I V / A I D S in collaboration with QMM

conditions, expenditure patterns and sources o f income.

Increase in the prevalence o f STI, o f HIV and o f the water bome diseases Pressures on the human and natural habitat in the urban and rural communities, as a result o f spontaneous population migration.

planning (Le., forestry, agriculture and fishery) to meet firewood and food security demands. -Support and formation with the regional and municipal authorities (frameworks and elected officials) b y approach leaming by doing as regards economic development and management municipal. Implementan institutional capacity strengthening program at the regional level in order to ensure adequate management o f the cumulative impacts rising f r o m the spontaneous migration, public health and basic education demands.

- Implement targeted economic development action plans to support regional development

- Create and implement microphone-credit programs adapted to individuals and companies - Finalize and support Fort Dauphin urban plan development and those o f its adjacent rural

communes. -Creation o f 50-60 ha land resources reserves for housing purposes and provide basic services.

Involuntary Resettlement. Degradation o f landscapes o f tourist importance and loss of marine habitats

- Apply RAP provisions prepared in the context o f the project..

-Work out an integrated landscape management and architectural plan for the port o f Ehoala.

- Elaborate and Support in collaboration with Q M M a coastal protection program in

compensation o f the loss o f marine habitats associated with the establishment with the port.

F. Assessment of Implementation and Monitoring Capacity and Commitment, with Recommendations for Strengthening
11. In Fort Dauphin the institutional capacity assessment revealed the existence o f a reasonable number o f institutions to address the regional development and to ensure the implementation o f proposed development objectives. However, their capacity, in terms o f human resources, needs strengthening. So does the Regional Development Committee (RDC). This should be envisaged with the assistance o f the Ministry o f Regional Planning. AGETIPA has been selected as the main implementing agency for a great number o f sub-projects and ONE, the national environmental agency, would have a presence in the region to oversee the implementation o f environmental and social mitigation measures. 12. In Nosy Be, the analysis emphasized the needs for strengthening o f technical and administrative institutions at the communal level. The establishment o f an urban planning body equipped with powerful tools for land resources management was felt as an important institutional measure to be considered in this growth pole.

129

I t was deemed that, for all the three growth poles, the following measures should be 13. considered prior to the implementation phase:
0

Determination o f the requisite institutional arrangements, outlining the roles and responsibilities o f the various parties involved to implement and monitor the plan. Backup mechanisms should be identified for each o f the persons or group o f persons in charge o f implementing the plans; Information sharing and training o f all the stakeholders, in particular those playing a role in the implementation o f the plan, in the three growth poles on the various safeguard instruments developed, in the context o f this project;

A specific training program should be targeted at those directly connected with the implementation o f the plan. This should be assured, in the first year by an international consultant and in subsequent implementation years, the environmental unit o f IG2P would be in charge o f safeguard capacity strengthening, as required for smooth implementation o f the EMP.

14. For each pole, the project has planned sound measures and earmarked resources that will be devoted to institutional capacity strengthening, in the form o f study tours, specialized training, and support to existing local initiatives like the RDC o f Anosy, which could be regarded as a source o f inspiration by other communes. The responsible institutions and approximate costs are provided in the various EMPs. It is agreed that the expected programs will serve as a framework to facilitate regional planning, the establishment o f new but needed services. I t recommended that all the relevant stakeholder groups, including the local communities, will be utilized in monitoring and evaluation o f activities.
G. Monitoring Mechanisms for the Agreed Plans

15.
0

First-year sub-projects will observe the following guidelines: Specific monitoring measures, as identified in the EMPs, to ensure the effectiveness o f identified mitigations; General surveillance measures to address unanticipated environmental and social impacts; Mechanisms to implement corrective action plans, in case performance objectives are not fblly met. Table 10-4 summarizes the monitoring arrangements typical at each growth pole.

16.

Table 10-4 summarizes the arrangements for implementation and monitoring at Nosy Be, more or less typical for each growth pole.

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Table 10-4. Typical Arrangements for EMP and RAP Implementation and Monitoring
Action Implementation Monitoring

Strengthening environmental capacity at the N P S , Local Steering Committee, and Project Management Office Land use mapping, study o n land titling Finalization o f the urban plan Preparation o f tourism development plan Integration o f E M P measures for the conceptual phase in the specifications for consultants Integration o f E M P mitigation measures in the specifications o f contracts for works Establish program for public information and complaints during construction Implementation o f mitigation and management measures during construction

Consultant Regional and local authorities Commune o f Nosy B e Concerned ministries; tourism operators; N P S Project Management Office Consultants Project Management Office; Commune o f Nosy B e Contractors

Local Monitoring Local Monitoring Committee; Commune o f Nosy Be NPS; Local Monitoring Committee; ONE Project Management Office; ONE N P S ; Local Monitoring Committee; ONE; Citizens/NGO Committee Project Management Office; Local Monitoring Committee; ONE; Citizens/NGO

Implementation o f mitigation and management measures during operations Maintenance o f record o f complaints and follow-up actions Implementation o f the RAP Independent monitoring o f R A P implementation Follow-up monitoring o f affected persons

Public and private operating entities Public and private operating entities Commune o f Nosy Be

Commune o f Nosy Be; ONE; Min. o f Health; Citizens "GO Committee Local R A P Steering Committee NGO selected by Local Steering Committee N G O appointed by responsible Ministry

H. Costs, Funding Arrangements and Implementation Schedule for EMPs and RAPS.

__ -_ , . . .. . , . ., .s 'l'he total cost 01 mitigation measures Tor airect impacts iaentifiea in m e m w ~ i v w for 17. the three growth poles is US$2.6 million, broken down as follows:
1 . 1

..

..

. . C

n - 7

m x r-

0 0
0

Antananarivo/Antsirabe NosyBe Taolagnaro

U S $ 100,000 920,000 1,580,000

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The Taolagnaro total includes US$306,000 for mitigation measures at the proposed new port at Eahoala, and QMMhas agreed to incorporate them in the final design and management plan for the port. The remainder o f these direct impact mitigation costs will be covered in the IG2P budget. In addition, there are measures proposed to address indirect and cumulative impacts, and most o f them depend on sound regional planning, based on environmental, social and economic opportunities and constraints, plus building the capacity at local and regional levels to implement the plans, through land administration, timely provision o f infrastructure services, etc. The component allocations for each o f the growth poles includes funds for capacity building. Funds for integrated regional planning are incorporated in the investment allocation for each pole. The ESMF and the individual ESIAs contain recommendations for the planning process that will be used as references in designing the actual planningprocedures and related capacity building.

I. Safeguards Requirementsin Project Legal Documents

18. Routine progress reports prepared by the Borrower will include specific information on implementation and effectiveness o f EMPs and RAPS at each growth pole. World Bank safeguards specialists will review these reports and will accompany supervision missions in the field at least twice annually. Two specialists will be required on each mission to ensure that environmental and social safeguards are adequately covered. Six staff-weeks and two, twoperson missions per year will cost approximately US$30,000, assuming travel costs can be shared with other projects. An independent Expert Advisory Panel (ESAP) has been put in place for IG2P and completed i t s first field mission in December 2004. The ESAP has three members, with expertise in social and environmental sciences and regional planning. I t will continue to operate, with at least one mission per year, providing independent advice to GOM and the Bank.
J. Arrangements for Safeguards Supervision 19. Routine progress reports prepared by the Borrower will include specific information on implementation and effectiveness o f EMPs and RAPS at each growth pole. World Bank safeguards specialists will review these reports and will accompany supervision missions in the field at least twice annually. Two specialists will be required on each mission to ensure that environmental and social safeguards are adequately covered. Six staff-weeks and two, twoperson missions per year will cost approximately US$30,000, assuming travel costs can be shared with other projects. 20. An independent Expert Advisory Panel (ESAP) has been put in place for IG2P and completed its first field mission in December 2004. The ESAP has three members, with expertise in social and environmental sciences and regional planning. I t will continue to operate, with at least one mission per year, providing independent advice to G O M and the Bank.

132

Annex 11: Project Preparation and Supervision MADAGASCAR: Integrated Growth Poles Project

PCN review Initial PID to PIC Initial I S D S to PIC Appraisal Negotiations Board/RVP approval Planned date o f effectiveness Planned date o f mid-term review Planned closing date

Planned 02/20/04 05/10/05 05/19/05 07/07/05 09/30/05 06/30/08

Actual 02/20/04 05/10/05 05/30/2005

Key institutions responsible for preparation o f the project:

. .

Coordination National du Pic Ministry o f Finance

133

World Bank staff and consultants who worked on the project included: Name Ivan Rossignol Susanne Holste Iain Christie Ganesh Rasagam Luc Vaillancourt Tamara Lansky Alej andro Alvarez Jan-Hendrick Van Leuwen Marc Juhel Paul0 de Sa Irene Xenakis Jean Christophe Carret Bertrand Loiseau Patrice Rakotoniaina Laurent Besancon Jean Charles de Daruvar Gilles Veuillot Gervais Rakotoarimanana Sylvain Rambeloson Thomas Walton Charlotte Bingham Amadou Konare Gordon Appleby Josiane Raveloarison Robert Robelus Stephan Gamier Alain Labeau Linda Cotton Sidonie Jocktane Lanto Ramiliarisoa Irene Chacon

Title Senior PSD Specialist Senior Transport Specialist Consultant Senior PSD Specialist Business development Officer Senior Investment Officer Research Analyst Consultant Lead Port Specialist Lead Operations Officer Operations Adviser Natural Resources Economist Consultant Municipal Engineer Regulatory Specialist Senior Counsel Counsel Senior FMS Specialist Senior Procurement Specialist Lead Regional Coordinator Lead Environmental Specialist Consultant Consultant Senior PSD Specialist Senior Environmental Assessment Specialist Power Engineer Lead Specialist Consultant Team Assistant Team Assistant Operations Analyst

AFTPS AFTTR AFTPS AFTPS CFSMN CGFTG CSMSE IFC TUDTR LCC5C AFTOS AFTS4 AFTEG AFTUl CITPO LEGAF LEGAF AFTFM AFTPC AFTSD ESDQC AFTSD AFTSD AFTPS AFTS 1

Unit

AFTEG AFTTR AFTPS AFTPS AFC08 AFTPS

World Bank funds expended to date on project preparation: 1. Bank resources: US$397,699 (BB) 2. Trust fbnds: US$15,400 (FAO), 3. Total:US$413,099 Estimated Approval and Supervision costs: 1. Remaining costs to approval: 2. Estimated annual supervision cost: 70 staff weeks plus variable (total o f US$300,000)

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Annex 12: Documents in the Project File MADAGASCAR: Integrated Growth Poles Project
Minutes o f Decision Meeting

06/06/2005 05/3 1/2005 05/3 1/2005 05/25/2005 05/01/2005 03/3 1/2005 03/21/2005 03/17/2005 02/16/2005 02116/2005 02/07/2005 02/05/2005 11/23/2004 03/24/2004 03/10/2004 03/02/2004 02/23/2005 01/07/2004 12/01/2003 11/27/2003

IG2P Letter Government and Aide Memoire Negotiations documents


Decrees

Minutes o f Decision Review Meeting IG2P environmental and Social Assessment IG2P Plan damknagement touristique de Nosy Be et Fort Dauphin PIC - Diffusion des Documents sur 1EIES
Minutes o f the Quality Enhancement Review

Result o f the Quality Enhancement Review

Project Information Document Integrated Safeguard Data Sheet Environmental Action Plan Countersigned integrated Safeguards Data Sheet (concept stage) Project Appraisal Document Data Sheet Project Information Document Procurement Notice in D g Market Back-To-Office Report for Mission to Madagascar Project Concept Note
Minutes o f pre PCN review meeting

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Annex 13: Statement o f Loans and Credits MADAGASCAR: Integrated Growth Poles Project
Difference between expected and actual disbursements Cancel. 0.00 Undisb. 156.63 32.08 81.29 32.59 22.59 15.15 78.80 50.44 19.64 13.61 7.02 14.36 7.89 10.77 9.57 7.23 559.66
Orig.

Original Amount in US$Millions Project I D PO82806 PO74448 PO73689 PO76245 PO72160 PO72987 PO51922 PO55166 PO52208 PO51741 PO52186 PO01559 PO01564 PO01568 PO48697 PO01533 FY 2004 2004 2003 2003 2002 2002 2001 2001 2000 2000 1999 1998 1998 1998 1997 1996 Purpose M G TRANSPORT INFRASTRUCTURE INVESTMENT Govemance and Institutional Development MADAGASCAR Rural Transport Proj APL 2

IBRD
0.00 0.00

IDA 150.00 30.00

SF

GEF

Frm. Revd

0.00
0.00

0.00 0.00
0.00

6.72 0.00 6.49 -0.13 8.23 -4.38 -21.45 -27.06 6.95 2.27 5.51 13.49 7.56 0.21 9.44 10.06 23.91

0.00
0.00

0.00

0.00
0.00

80.00
32.00 23.80 20.00 89.05 110.00 65.00

0.00
0.00 0.00

0.00
0.00

0.00
0.00 0.00 0.00

MINERAL RESOURCES GOVERNANCE PROJECT Second Private Sector Development Frojec Multisect. STI/HIV/AIDS Prev. Communit. Dev. Fund MADAGASCAR -Tramp Sector Reform & Rehab 2nd Health Sect. Sup. MICRO FINANCE Educ. Sector Dev. RURAL WATER SEC.PILO 2nd Community Nutrition URBAN INFRASTRUCTURE M G ENERGY SECTOR DEVELOPMENT PROJECT Total: MG - Rural Development Support Project

0.00 0.00 0.00


0.00
0.00

0.00 0.00 0.00


0.00 0.00

0.00
0.00

0.00 0.00

0.00 0.00
0.00

0.00 0.00

0.00

0.00
0.00

0.00 0.00
0.00 0.00

0.00
0.00 0.00
-5.58

0.00
0.00
0.00

40.00
16.40 65.00 17.30 27.60 35.00 46.00 847.15

0.00

0.00 0.00
0.00

0.00
0.00 0.00

0.00 0.00
0.00
0.00 0.00

0.00 0.00
0.00

0.00
0.00 8.62 7.42 10.46

0.00

0.00

0.00

0.00 0.00
0.00

0.00
0.00

0.00
0.00

MADAGASCAR STATEMENT OF IFCs Held and DisbursedPortfolio I Millions of U S Dollars n


Committed IFC
FY Approval 1990191 1997 1995 1992193195 1991 2000 1983189 Company AEF FIARO AEF GHM AEF Karibotel AQUALMA BNI BOA-M Nossi-Be Total portfolio:
Loan

Disbursed IFC
Partic. Loan Equity 0.19 Quasi Partic.

Equity 0.19

Quasi

0.00
0.75 0.22 0.43

0.00

0.00

0.00
0.75 0.22 0.43

0.00 0.00 0.00 0.00


0.00
0.65

0.00

0.00
0.00

0.00
0.00
0.00 0.00 0.65

0.00 0.00 0.00


0.00
0.00

0.00
0.00 0.00 2.61 0.82 0.14 3.76

0.00
0.00
0.00 0.00

0.00
2.61 0.82 0.14 3.76

0.00 0.00
0.00 1.40

0.00
0.00
0.00 1.40

0.00

0.00
0.65

0.00
0.00

0.00
0.65

0.00
0.00

136

Approvals Pending Commitment


FY Approval
2001 2001 2004 Company Besalampy COTONA I11 Cottonline Total pending commitment: Loan 0.02 Equity Quasi Partic

0.00 0.00
0.00

0.00 0.00
0.00

0.00

0.01
0.01 0.04

0.00

0.00 0.00

0.00

0.00

137

Annex 14: Country at a Glance MADAGASCAR: Integrated Growth Poles Project


POVERTY and SOCIAL
2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

SubSaharan Madagascar Africa


6.4 240 3.9 3.0 3.2 71 31 55 84 40 47 32 a3 688 450 306 2.4 2.5

Lowincome
2,495 430 1072 19 23

Development diamond' Life expectancy

Average annual growth, 1998.02 Population (%) Labor force (%) M o s t recent e s t i m a t e (latest year available, 1998-02) Poverty (% o f population belo wnational po verty line) Urban population (%of totalpopulation) Life expectancyat birth (years) Infant mortality(per looolive births) Child malnutrition (%of children under5) Access to an improvedwater source (%ofpopulation) llliteracy(%ofpopulation age a+) Gross primaryenroilment (%of school-age population) Male Female
1982 33 46 05
58 37 86 92 80

GN i per capita

Gross primary nrollment

30 59 81 76 37 95 a3 87

Access to improved water source ----Madagascar


~

a 5

a1

Low-incomegmup

KEY ECONOMIC RATIOS and LONG-TERM TRENDS


1992 3.0 112 16.4 2.9 3.9 -7.3 11 P9.3 5.8 2001 4.6 5.5 28.6 Q.3 13.2 -2.3 0.7 90.4 6.8 44.4 52.6 2002 4.5 118 8.9 5.9 5.8 -5.9 1.2

GDP (US$ billions) Gross domestic investment1GDP Exports of goods and serviceslGDP Gross domestic savingslGDP Gross national savingsiGDP Current account balancelGDP Interest paymentslGDP Total debtlGDP Total debt servicelexports Present value of debtlGDP Present value of debtlexports (average annual gro dh) GDP GDP per capita

3.5 8.5 112 -10 -3.2 -1i5 13 54.8 28.4

E c o n o m i c ratios' Trade

T
Domestic savings
L .

Investment

indebtedness -Madagascar

1982-92 1992-02

2001 6.0 3.0

2002 2002-06 -119 -14.4

15 -12

2.6 -0.5

__ Lo winco me group

STRUCTURE o f t h e ECONOMY (%of GDP) Agriculture Industry Manufacturing Services Private consumption General government consumption Imports of goods and services
1982 34.2 13.4 52.4 90.3 a.6 20.7 1992 29.1 P.5 0.4 58.4
88.9 8.2 24.7

2001 29.8 14.5 P.4 55.7 79.6 8.0 318 2001 4.0 7.6 a.7 6.1 3.9 5.7 22.6 I18

2002 27.4 P.8 a.9 59.8 862 7.8 22.8 2002 -1.4 -25.1 -25.1 -111 -5.9 -13.5 -314 -310

Growth o f i n v e s t m e n t a n d GDP (YO)


40

..

-GDI

-GDP

II

(average annualgrodh) Agriculture Industry Manufacturing Services Private consumption General government consumption Gross domestic investment Imports of goods and services

1982-92 1992-02 2.5 2.7 0.8 10 0.1 0.1 5.5 -2.4 2.0 2.3 2.5 3.3 2.9 14 5.6 5.4

Growth o f exports and i m p o r t s (%)


40 T 20

-20
-40

99

00

01

138

Madupascar
PRICES and GOVERNMENT FINANCE Domestlc prlces (%change) Consumer prices Implicit GDP deflator G o v e r n m e n t Finance (%of GDP, includes current grants) Current revenue Current budget balance Overall surpiusldeficit TRADE (US$ millions) Total exports (fob) Coffee Vanilla Manufactures Total imports (cif) Food Fuel and energy Capital goods Export price index (S95=00) Import price index (S95=00) Terms of trade (?395=M0) BALANCE o f PAYMENTS
1982 1992 15.3 14.4 2001 7.4 9.0 2002 14.8 15.4

1 I n f l a t i o n (%)
25

20

28.6

15
10 5

119 -12 -9.3

112 11 -6.5

8.6 -10 -5.8

0 97 98 99
00

01

-GDPdeflator

-CPI

1982 284 94 3 552 a 8 04 17 a4

1992 324 32 51 158 547 58 72 a9 91 92 98

2001 953 3 184 557

2002 525 3 140 28 756 75 28 00 06 95 142

T
Export a n d i m p o r t levels (US$ mill.)
1,000

1s 1

84 188 144 02 94

500 0 96 97
98

9Q

00

01

02

n o

uhports

olnports

(US$ millions) Exports of goods and services Imports of goods and services Resource balance
Net income Net current transfers Current account balance Financing items (net) Changes in net reserves Memo: Reserves including gold (US$ millions) Conversion rate (DEC, locaVUS$j

1982 377 656 -280

1992

2001 13n 1462 -146 -59 99 4 6 204 -98 396 6,588.5

2002 759 $021 -262 -77 72 -267 228 39 348 6,832.0

Current a c c o u n t balance t o GDP (X)


0

- 10

498 733 -237 -148 183 -222 239

-2 -4
-6
-8
.x)

-0

-405 384 21

-n

349.7

85 $8640

E X T E R N A L D E B T a n d RESOURCE FLC)WS (US$ millions) Total debt outstanding and disbursed IBRD IDA Total debt service IBRD IDA Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity World Bank program Commitments Disbursements Principal repayments

1982 1933 31 187 10 3 2

1992 3,911 20 887 96 4 0 203 85 -8 21 0 24 37

2001 4,BO 0 1409 92 0 34

2002

1 C o m p o s i t i o n o f 2001debt (US$ mill.)


I

G 239

58 89 48 0 0
32 34 1

155 86 -2 11 0
243 97 24

D: 442 A IBRD E IDA C-IMF

D - Othermltilateral

E - Bilateral F - Rivate G - Short-teci

139

IBRD 33439
45E 50E

Antsiranana

MADAGASCAR

Mayotte (France)
Ambilobe Vohimarina Ambanja

15S

Soalala

Angavo

iq

l
Antsohihy

Maromokotro (2,876 m)

ANTSIRANANA
Sambava

Massif Tsaratanana Tsaratanana


Bealanana Andapa

Antalaha 15S

So
Mahajanga

fia

Befandriana

Maroantsetra

Mampikony

Mandritsara Mananara

o o o r riv ar e em Be a a ba a a jam h ha ah M

Besalampy

Bo

v la

MAHAJANGA
Maevatanana

Andilamena

Soanierana-Ivongo Fenoarivo-Atsinanana

of

Cli

na

M ah

AM
Moramanga

Maintirano

Vohidiala Vohidiala Ankazobe

AS

avav y

mb

ah

IN
TO

Andriamena

Ambaravaranala Antsalova

ANTANANARIVO ANTANANARIVO
ANTANANARIVO ANTANANARIVO
Soavinandriana

Clif f

Ma

Kandreho

Lake Alaotra

ff

of
Toamasina

Tsiafajovona Tsiafajovona (2,642 m)


Antanifotsy

tttsi B B Be
a a ka bo

INDIAN
Vatomandry

20S Morondava Malaimbandy

An

Tsiribihin a

kar

Belo Tsiribihina

ata

Miandrivazo

OCEAN
20S

Mang oro

Antsirabe

Mahanoro

Mania

Ambatofinandrahana

Ambositra Ambohimahasoa

Varika

Mandabe Manja Morombe Beroroha

Fianarantsoa
goky M an
Ankazoabo

Mananjary

40

80

120

160

200 Kilometers

FIANARANTSOA
0 Ihosy 40 80 120 Miles

TOLIARA
Fih
a ch e re
na
Sakaraha Betroka

Pic Boby (2,658 m)

Manakara 50E

Man an

Farafangana

ara

MADAGASCAR
SELECTED CITIES AND TOWNS PROVINCE (FARITANY) CAPITALS NATIONAL CAPITAL RIVERS MAIN ROADS

Toliara

O n ila h y
Betioky Tsivory Tsivor y sivory MidongyAtsimo Berakete Ampanihy

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

Androka

a An en Beloha

r nd ra

au Plate Amboasar y Amboasary droy


Ambovombe

Mand rave

Tolanaro

25S

RAILROADS PROVINCE (FARITANY) BOUNDARIES INTERNATIONAL BOUNDARIES

45E NOVEMBER 2004

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