Documentof The WorldBank FOROFFICIAL USEONLY Report No: 31760-MG PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHE AMOUNT OF SDR 85.9 MILLION (US$129.8MILLIONEQUIVALENT) TO THE REPUBLICOFMADAGASCAR FORAN INTEGRATED GROWTH POLESPROJECT June 14.2005 PrivateSector Unit AfricaRegion This document has a restricted distribution and maybeused byrecipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective {April 30,2005)) CurrencyUnit = Ariary (MGA) SDR = US$1.51209 US$ = SDR0.661335 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank AFD Agence Frangaise de Developpement -French Cooperation Agency AGOA Africa Growth and Opportunity Act CAS Country Assistance Strategy CPFA Country Profile o f Financial Accountability EMP Environmental ManualPlan ESIA Environmental and Social Impact Analyses ESMF Environmental and Social Impact Management Framework FPSI Finance, Private Sector and Infrastructure G O M Government o fMadagascar CCOP Service Contract (Contrat de Conduite d'optration) CMOD Service Management Contract (Contrat de Maitrise d'Ouvrage DtlCguCe) EIB European InvestmentBank EMIP Environmental Management ImplementationPlan EPZ Export Processing Zone EU European Union FMR FinancialManagement Report GDP Growth Domestic Product G O M Government o fMadagascar ICT Information Communication Technologies IDA Intemational Development Association IFC IntemationalFinance Corporation IG2P Integrated GrowthPoles Project MIGA Multilateral Investment Guarantee Agency M S M E Micro Small and Medium Sized Enterprises NPS National Secretariat ODA OverseasDevelopment Assistance PPF Project Preparation Facility PPP Public Private Partnership RAP Resettlement Action Plan RPF Resettlement Policy Framework RTZ Rio Tinto QMM QIT Madagascar Minerals S.A. SIL SDecific Investment Loan Vice President: Gobind Nankani Country Director: James Bond Sector Manager: Demba Ba Task Team Leader: IvanRossignol FOROFFICIAL USEONLY MADAGASCAR INTEGRATED GROWTH POLES PROJECT APPRATSAL DOCUMENT AFRICA AFTPS Date: June 20,2005 TeamLeader: IvanRossignol Country Director: James P. Bond Sectors: Ports,waterways and shipping Sector ManagerDirector: Demba Ba (30%); Generalindustryandtrade sector (30%); Generaltransportation sector (20%); Generalwater, sanitation and flood protection sector (iG%); Powei (i&bj Themes: Small andmediumenterprise support (P);Infrastructure services for private sector development(P) Project ID: PO83351 Environmental screeningcategory: Full Assessment Source Local Foreign Total BORROWERRECPIEST 0.00 0.00 0.00 IYTEm-ATIONAL DEVELOPXLIENT 129.80 0.00 129.80 Total: 129.80 1 0.00 I 129.80 Borrower: Ministry of Finance, Economy andBudget - Madagascar Responsible Agency: National Secretary-Madagascar FY 6 7 8 9 10 11 12 0 0 Annual 7.00 38.00 46.00 26.00 11.00 3.00 0.00 0.00 0.00 Cumulative 7.00 45.00 91.00 117.00 128.00 131.00* 0.00 0.00 0.00 US129.8 million Project implementation period: Start September 30,2005 End: June 28,201 1 Expectedeffectiveness date: September30, 2005 Expectedclosing date: December 15,201 1 vThis document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Does the project depart from the CAS incontent or other significant respects? [ ]Yes [XINO Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [XINO I s approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] N o Project development objective The overall purpose o f the proposedproject i s to help provide the adequate business environment to stimulate and lead economic growth inthree selected regionalpoles. The specific objectives are to assist the G O M to: (i) construct and rehabilitate critical infrastructure essential for sustained economic activity inthe tourism, manufacturing, agribusiness and miningsectors; (ii) inplace appropriate incentive put measures to achieve rapid growth; (iii) the instruments to ensure equitable, sustainable develop growth; and (iv) strengthen the capacity o f local authorities to formulate, prepare, implement, and manage medium-and long-term integratedo f fbture regional development projects. Project description The project comprises 5 components: - A: Strengthening the business environment - B: Supporting export ledgrowth inAntanarivo-Antsirabe - C: Supporting tourism ledgrowth inNosy Be -- D:Miningandtourism led growth inToalagnaro E:Program andproject implementation, evaluationandmonitoring Which safeguard policies are triggered, if any? The project i s classified inCategory A for environmental assessment purposes. The approach to the safeguards triggered i s presentedbelow, and the results are summarized inAnnex 10 o f the PAD. The policies triggered are: - EnvironmentalAssessment (OP/BP/GP 4.01) ----- NaturalHabitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revisedas OP 4.11) InvoluntaryResettlement (OP/BP 4.12) Forests (OP/BP 4.36) Significant, non-standard conditions, if any: Boardpresentation: N/A Loadcredit effectiveness: 1 Issuance o f a project implementationdecree establishing the institutional structure o f the project (NPS); 2 TheNPS has beenestablished andthe National Secretary, head o fthe operational department and the head o f the fiduciary department have beenhired Covenants applicable to project implementation: Dated covenants: 1 Land access, six months after effectiveness: DeclaredRCservesfoncibres touristiques in Nosy Be can be leased to, or acquired by, interested private sector investors inthe hotel industry; 2 Eighteen months after effectiveness, fiscal incentives to promote the tourism sector must be adopted; 3 Six months after effectiveness, a GreenCharter for the sustainable development o fhotel, restaurant areas inRCserves foncibres touristiques must be developed. The green charter will identifythe norms interms ofwaste disposal, pollution, code o f ethics (including policies against HIV/AIDS), safeguards and other footprints, for private sector investment on these reserves; 4 Six months after effectiveness, local representatives of the NPS inNosy Be, Antsirabe and Taolagnaro, must be appointed; 5 Four months after effectiveness, the N S will have recruited a permanent Environmental specialist; MADAGASCAR IntegratedGrowthPolesProject CONTENTS Page A . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 1. Country and sector issues.................................................................................................... 1 2. Rationale for World Bank involvement.............................................................................. 6 3. Higher level objectives to which the project contributes.................................................... 6 B . PROJECTDESCRIPTION ................................................................................................. 8 1. Lendinginstrument............................................................................................................. 8 2. Program andproject objectives andcosting ....................................................................... 8 3. Project development objective and key indicators.............................................................. 9 4. Project components ........................................................................................................... 10 5 . Lessons learned andreflected inthe project design .......................................................... 12 6 . Alternatives considered and reasons for rejection ............................................................ 13 C . IMPLEMENTATION ........................................................................................................ 14 1. Partnership arrangements. ................................................................................................. 14 2. Institutional and implementation arrangements ................................................................ 14 3. Monitoring and evaluation of outcomes/results ................................................................ 17 4. Sustainability . . . ..................................................................................................................... 18 5. Critical risks andpossible controversial aspects ............................................................... 18 6. Loanlcredit conditions and covenants ............................................................................... 20 J). APPRAISAL SUMMARY ................................................................................................. 23 1. Economic and financial analyses ...................................................................................... 23 2. Fiduciary........................................................................................................................... 24 3. Social................................................................................................................................. 25 4. Environment ...................................................................................................................... 25 5. Safeguard policies............................................................................................................. 27 Annex 1-A: Country and Sector or ProgramBackground ..................................................... 29 Annex 1-B: Country and Sector or ProgramBackground ..................................................... 45 Annex 1-C: Country and Sector or ProgramBackground ..................................................... 50 Annex 2: Major RelatedProjects Financedby the Bank and/or other Agencies .................53 Annex 3: Results Framework and Monitoring ........................................................................ 54 Annex 4: DetailedProject Description ...................................................................................... 58 Annex 5: Project Costs............................................................................................................... 67 Annex 6: Implementation Arrangements ................................................................................. 72 Annex 7: FinancialManagement and DisbursementArrangements ..................................... 75 Annex 8: Procurement ................................................................................................................ 85 Annex 9: Economic and Financial Analysis ............................................................................. 95 Annex 10: Safeguard Policy Issues .......................................................................................... 122 Annex 11:Project Preparation and Supervision ................................................................... 133 Annex 12: Documents in the Project File ............................................................................... 135 Annex 13: Statement of Loans and Credits ............................................................................ 136 Annex 14: Country at a Glance ............................................................................................... 138 MAP IBRD33439 A. STRATEGIC CONTEXT AND RATIONALE 1. Countryandsector issues Madagascar is recovering strongly from an historical decline in per capita income. During the past three decades, Madagascar's 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 in2001, the second highestrate inAfrica at the time, mostly inthe 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 its 2001 level. This growth, however, relies on continued investor confidence in Madagascar and on 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 inEurope, while the health o f the garment industry depends on how competitive the industry i s in a post multifiber agreement, quota-free U S market, and anticipatedchanges inthe European Union (EU) garments trade regime. Private capitalflows are still extremely limited and unsustainable The current growth o f the Malagasy economy is 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 still 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 incompetitiveness, divestiture from productive assets andreduced growth3. Poor geographic redistribution of wealth Madagascar's recent growth had a comparatively low 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 men's casual shrts per machine operator per day inMadagascar 'equalsthat in South Africa; labor cost per shirt i s at $0.16 while China evidences a labor cost of $0.29. Source: Global Development Finance 2004 -The World Bank Source: World Economic Forumrankings o n competitiveness, where Madagascar i s at the 8 5 place; ~ DoingBusiness 2005 data. Source :Madagascar Country Assistance Strategy - 2003. 1 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 structurefor Malagasyfirms Initial data on 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 andtax and policy inefficiencies. UndevelopedEPZ cluster and value chain Inspite ofnumerous reforms launched since 2002, investor confidence inthe 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 productionnetworks adjust and realign to cope with the changes inthe trade regime. Sources of growth are untapped Tourism is a growing sector contributing largely to the 6 percent annual growth rate. Inspite o f the country's extraordinary flora and fauna, it is better knownto the scientific community thanto 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 Taolagnaro's main wealth, and which are in demand, cannot be exported. The large ilmenite deposits in Taolagnaro are the world's highest grade, but have never beenmined to this day. This context creates thejustijkationfor regional growthpolesproviding 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 highrisks associated with the policy environment. Inaddition, wide ranging reforms addressing the structural issues described above will yield results only in the mediumto long-term. To jump-start this process, the GOM In2003, onaverage, 85 percent ofthe populationinFianarantsoaandMahajanga and 78 percent ofthe population inToamasinaandToliary were poor. Source: Investment Climate Assessment Madagascar 2005 - Preliminary conclusions. 2 has therefore identified three regions where appro riate market conditions could be created to generate highprivate sector growth in the tourism ,mining and manufacturing' sectors. These P regions were selected for their growth potential, the regional balance they represented, as well as for the sector's 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 Be 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 on 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 is used for tourism, container traffic and fisheries i s clogged and does not meet basic safety requirements. The roadnetwork does not ensure access to the most spectacular sites o fthe island. 0 The Antananarivo-AntsirabC region: Export processing zone (garment) firms 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 of Madagascar (GOM) is currently supporting the development of a modem industrial zone in Toamasina (Tamatave) through a public-private partnership arrangement. There is 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 ICT service providers, GOTICOM, is actively pursuing discussions to establish an ICT training center and ICT business park in Antanetibe on a public private partnership basis with strongpossibilities to mobilize private financing. 0 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 region's 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 population's needs while the sewerage and sanitation system is 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 inan 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 Bank's Economic Sector Work o f the Tourism sector publishedin2003. See World Bank's Economic Sector Work o f the Export sector inMadagascar completed in2003. 3 0 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 of 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 firms fixed assets during the 2001 crisis showed that the business environment is not conducive enough to attract sustainable and longterm investmentsinMadagascar. 4 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 it i s seen as the GOM's main partner for alleviating poverty. It 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 De`veloppement (AFD), the European Investment Bank (EIB), the African Development Bank (AfDB) and the Millennium Challenge Account have also shown some interest inthe 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 requiredunder the project. The proposed project is a central element o f the World Bank's strategy in Madagascar. It 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 GOM's decentralization initiative. It further draws on the joint Intemational Development Association (IDA) - International Finance Corporation (IFC) Micro, Small and MediumEnterprises (MSME) Program for Africa, intended to achieve greater impact for the client through leveraging o f the comparative advantages of 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 policy- relatedrisks. 3. Higher levelobjectives to which the project contributes The GOM recently completed its Poverty Reduction Strategy Paper (PRSP) with the objective o f reducing poverty by half in ten years. The three key priorities set out by the PRSP are: (i) improving governance; (ii) promoting broadbased growth; and (iii) providing security. The Bank's Country Assistance Strategy (CAS), which was approvedby the BoardinNovember 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 GOM's and World Bank's overarching CAS goal to foster broad based economic growth by focusing on 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, 6 power, and transport sectors. It will address constraints inhuman 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 impedimentsthrough concrete actions on the ground. Private sector will use the public investments made under the project to leverage its own investments andreduce its risk for doing business inMadagascar. The IG2P will be a catalyst of private sector investment. 7 B. PROJECT DESCRIPTION 1. Lendinginstrument Specific Investment Loan (SIL). The proposed lendinginstrument i s a US$129.8 million credit equivalent (SIL). The SIL would be supplemented by Intemational Finance Corporation (IFC), other donor resources andprivate sector investmentson 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 fthis subcomponent i s provided inAnnex 1-B. 2. Programandprojectobjectivesandcosting 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 inthree regional poles inthe areas o fAntananarivo-Antsirabe, Nosy Be andTaolagnaro, 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. IDA'Scontribution to the five components o f the program constitutes the proposed IDAproject. At this stage, the proposed IDA financing is estimated at some US$129.8 million equivalent (about 43 percent of 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$21 million equivalent). A donor conference i s plannedto be organizedby the G O M before credit effectiveness. The project will be implemented during fiscal years 2006-201 1, closing on December 31,2010 The project design, structure and implementation plan allow it to reach the main development objectives andperformance indicators of the program. Finalamount to be confiiedbefore Board. 8 L Integrated Growth Poles Program YO Total Summarycosts with taxes and contingencies Base IDA Components US$ million)- costs Project A. Strengtheningthe businessenvironment 55 18% 21 1.Access to fmance 39 13% 7 2. MSMEcapacity building 4 1Yo 4 3. Cotintry-wide tourismdevelopmentinitiatives 3 1% 3 4. Improvingthe busmessenvironment 8 3% 7 B. Export led growth in Antananarivo & Antsirabe I 2Yo 6 I.EnhanceEPZcompetitivenes 2 1% 2 2. ICT Busmess Park Development 3 1% 3 3. Support to Antananarivo and Antsirabe municipalities 2 1Yo 2 C. Tourism led growth in Nosy Be 55 18% 32 1. Infrastructureupgrading 52 17% 30 2. Socialand Sanitary Infrastructure 1 0% 1 3. LocalInstitutionsStrengthening 2 1% 2 D. Mining and TourismledgrowthinTolagniaro (Fort Dauphin) 166 55% 55 1. Infrastructtre upgrading 162 53% 52 2. Socialand Sanitary Infrastructure 2 1% 1 3. LocalInstitutionsStrengthening 3 1% 2 E. Program andProject Implementation, EvaluationandMonitoring 21 I?4n 15 1.Supportto program& projectmnitoringand evaluation 13 4% 8 2. Support to project managementandtraining 2 1% 2 3. Technicalassistance for project management& mnitoring 4 1Yo 3 4. Operatingexpenses for project management 2 - 1% 2 Total ProgramCosts 304 100' 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 inthree 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 andmining sectors; (ii) put inplace appropriate incentive measures to achieve rapid growth; (iii) develop 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 of future regional development projects. Thekey indicatorsto monitor andmeasure the impact o f the objectives are: 0 The increase in the number o f tourists arriving at Nosy Be and Taolagnaro airports and ports, as a proxy for growth measurement inthe tourism sector via stimulus o f small- and medium-sized Malagasy firms; 9 0 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 inTaolagnaro and inthe Antsirabe -Antananarivo components; 0 The numbero fnewjobs created inthe three poles (proxy for shared content o f growth). 4. Projectcomponents 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 of the three growth pole components, a combination of investments and technical advisory services i s proposed: ComponentA: Strengthening the businessenvironment (US$55 million equivalent of which IDA will contribute US$21 million equivaleno. Based on demand, the project will aim to provide proactive support to the Micro, Small and MediumScale enterprises (MSME) sector and to strengthen the business environment in the three geographic poles to allow Malagasy firms play a greater role in the economy. The component will also provide support for capacity buildingin tourism and will monitor specific policy changes. The main activities under this component to be developed and implemented in cooperation with the IFC 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 commercialbanks; (ii) M S M E capacity buildingto develop value chains (including in view of a possible development of the Antisrabe agribusiness zone); (iii) tourism 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 fthe investment promotion agency and creation o fregistries. ComponentB: Supporting export led growth in Antananarivo-Antsirabe (US$7 million equivalent of which IDA will contribute US$6 million equivalent). Based on demonstrated private sector demand, the project will help develop off-site investments allowing the creation o f an ICT 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 ICT 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. 10 Component C: Supporting tourism led growth in Nosy Be (US$55 million equivalent of which IDA will contributeUS$32 million equivalent). The project will create an infrastructure platform and regulatory environment to expand the tourism industry significantly. The infrastructure will be designed to accommodate a demand o f 2,000 intemational-level hotel rooms by 2010. Core activities under this component include: (i) adoption by the municipality o f a tourism development master plan and urban development plan for Nosy Be to regulate and manage development in existing protected areas; (ii) technical assistance to develop and implement business incentives measures to attract investments; (iii) upgrading o f the road network to provide access to the isolated eastern part o f the island and improve travel conditions between the airport, the main city (Hellville) and tourism sites; (iv) upgrading o f the Hellville and Ankify ports (the latter under another ongoing IDA project); (v) upgrading the public utilities system by supporting power generation and distribution, upgrading the water and sewerage system, upgrading urban solid and liquid waste management, and telecommunications; and (vi) upgrading the urban infrastructure o f Hellville and providing its hospital with a surgery block. Finally, the project will provide support to the municipality of Hellville andthe local tourism authorities through: technical assistance, training, rehabilitation o f existingfacilities andcreation o f ecotourism facilities. ComponentD: Mining and Tourism led growth in Taolagnaro (US$l66 million equivalent of which IDA will contribute US$55 million equivalent). The project 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 include: (i) the adoption by the municipality o f a tourism development master plan and urban development plan for Toalagnaro, (ii) the development (under a public private partnership) o f a new public port on the Ehoala peninsula to support the ilmenite mining operations and to facilitate market access for local production and exports, (iii)a partial rehabilitation o f the 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 inthe region, and (vi) upgrading o f selected urbaninfrastructures including the Tsiranana hospital. Theproject 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 andproject implementation, evaluation and monitoring (US$21 million equivalent of which IDA will contribute US$15 million equivalent). At the central and regional levels, the project will provide support for: (i) project implementation, project coordination, procurement and financial management and (ii) supporting the preparation 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. 11 5. Lessons learned and reflected in the project design OverseasDevelopment 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 on public funding. While proposing an additional public investment, this project i s designed to be 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 Be 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, ICT activities andagro businesses. Technical assistanceandfinancing to MSMEswill help widenthe financial markets and will be done inpartnership 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 inthe 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; (iii) finance and infrastructure; and; (iv) labor markets, will be financed through the project. These should allow generating pockets o f growth inthe shorter term. An integrated approach: Deliveringsector investments sequentially will not yield the expected results and the project will not reach its 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 regionallyfocused 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. It also builds best practices for future integrated poles inMadagascar. Decentralized and independent implementation arrangements: The IG2P is a regional project. To achieve better ownership, accountability and monitoring over the life 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 inthe 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 12 implementation o f specific activities. Catalyzed by the project, regional tourism offices will also be developed. 6. Alternativesconsideredandreasons for rejection Thisproject is not designed as a traditional multi-sector project. The focus o f the IG2P design i s on the integration of 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 of sectors, rather thanjust one. This design is new to World Bank operations inthe 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 of the component were excluded from the design of the project. The scale of 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 utilitysectors were carefully weighted in. Adding more than three regions: the scope o f the project would have beentoo wide, leadingto a real implementation challenge, and unlikely to yield the expected results. The GOM decided to limit the number o fpoles to three and based on the success of the project, would eventually add poles innew regions upon success inthe 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 bejustified ifit does not exceed US$35 million. Any public investment exceeding this amount would lead to a subsidized investment in an un- economical public infrastructure. Based on this decision framework, it is 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. It is also expected that Rio Tinto will invest in the implementation of a comprehensive community development plan o f Taolagnaro to accommodate the urban growth that will derive from the miningand port operations. 13 C. IMPLEMENTATION 1. Partnershiparrangements Role of 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. It 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 ICT business park inAntanetibe and with investors to develop the agro-techno pole project; for component A, discussions were underway with several commercial banks to implementthe guarantee mechanism. The ACCOR Group and the World Tourism and Travel Organization have also been advising the team on project design issues. Coordination of donors: At Appraisal stage, the Agence Franqaise de Dkveloppement, the Afican 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 is feasible. Regular consultations among donors will also be held. 2. Institutionalandimplementationarrangements Projectimplementationperiod. The project willbe implementedover aperiodo f five calendar years andsix fiscal years, completed by June 30,2010, and closed byDecember 31,2010. Giventhe complexity and scope o f the project, a lean and efficient implementation structure will be put inplace: Project oversight. Duringthe 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 giventhe 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 SecrCtariatNational (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 NPS 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 NPS will be: (i) consolidation o f the work programs and budgets; (ii) implementation o f all activities; (iii) maintenance o f records and accounts for all transactions related to the NPS; (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 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 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 NPS to regional representations may take place during the second half o f the implementation period (after the Mid Term Review) when capacities are deemed adequate following the assessment carried out by the World Bank's specialists. To allow rapid implementation, execution of most activities under components A, ByC and D will be entrusted to different agencies under several service contracts "Contrats de conduite d 'ope`rations" (referred as CCOP) or "Contrut h la Maitrise d `Ouvrage De`le`guke" (referred as CMOD). The service agencies will be selected on a competitive basis, and will meet IDA procurement capacity requirements. More informationon the projectimplementationis providedinAnnex 6 15 SteeringCommitteeheadedby Presidency (Govemmentand stakeholders) National Project ManagementUnit(Secrktariatnational) 4 Delegation of procurementdnd supervisiononly I of goods and services Procurement: Procurement o f works, goods and services under the project will follow World Bank Guidelines". To ensure that the project is executed in a timely, transparent, efficient and integrated approach, it 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 d'optrations (CCOP) and will follow a Procedures Manual, satisfactory to IDA. All other procurement activities will be carried out bythe NPS. For components A, ByC andD, contractual relationships will be managed by the CCOP agencies, while signature o f contracts and disbursement will be done by the NPS with the assistance o f an accounting and financial management firm (fiduciary agency to be selected competitively). The NPS 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. 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 inMadagascar which will be used for the procurement o fworks, goods and equipment, consulting services and operating costs. loWorks andGoods wholly or partlyfinancedby IDA will be procuredinaccordance with the Bank's guidelines for Procurementunder IBRD Loans andIDA Creditsof May2004. Consultancyserviceswholly or partlyfinancedby IDA will beprocuredinaccordance withthe Bank's Guidelines for SelectionandEmploymentof Consultantsby WorldBankBorrowersdatedMay2004. 16 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 Tinto's subsidiary inMadagascar. 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) the final design o f the proposed port; (ii)a final Environmental Manual Plan (EMP) for the port, approved by ONE, that is based on the EMP annexed to the environmental permit already issued to QMMby the Ministryof 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 Rio 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 of 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 strengtheningthe capacity o f regional units to implement hture projects. Monitoring. Overall project monitoring will be based on indicators confirmed at appraisal and the project implementationplanto be finalized by the NPS andto be agreed duringnegotiations. 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 NPS every six months, commencing in September 2005, and submitted to the World Bank within one month thereafter. No later than three months after the closing date o f the project, the NPS will prepare and furnishto the World Bank a report on the execution o fthe project, its costs andthe benefits derived andto be derived from it. 17 Reviews. Inaddition 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 of 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 inthe program and project activities throughout the selected growth poles to eventually reorient some activities ifthe 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 inthe program and the other involved parties. Inaddition to covering all areas included in annual reviews, the mid-termreview 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; (ii) the performance o f the NPS in, among others, addressing environmental and social issues in design and implementation o f the different components; and (iii) performance o f the NPS in addressing fiduciary responsibilities. This the will involve visits by specialists to selected sites for first-handassessment o f executing entities' performance. They will assess the environmental and social impacts o f investments, both individually and cumulatively, andthe adequacy o f safeguard procedures agreed for the project. 4. Sustainability Most o f the infrastructure investments plannedto be made under the project (roads, urban roads, water, electricity) will be commissioned byministriesor agencies which already have sustainable institutional and cost recovery mechanisms inplace through tariffs, users fees or levies to dedicated funds (e.g. Fonds d'Entretien 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 program's and project's 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 of investments is notfully funded. The current IDA allocation for this 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 inMadagascar (in consistency with the CAS), based on the satisfactory implementationo f this project. Lack of capacity impedes timelyproject implementation. The second main risk is that lack o f capacity at the NPS level or political interference with the process results in implementation delays. To reduce this risk, several steps are being taken. First, the NPS 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 d'Ouvrage 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 NPS will recruit a fiduciary agency to implement accounting and procurement activities. Fifth, the World Bank's 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 of an adequate business environment to make the infrastructure platforms 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 duringthe 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 inthe credit agreement. Subsidizing a private investment through the construction of the Ehoala port. The public investment in the port i s part o f a larger investment in an ilmenite mining project inTaolagnaro, 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. Inaddition, delays inRio Tinto's 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 sub- component not later than March 31,2006: (i) after the institutional framework i s only put inplace and Rio Tinto has invested init; (ii) procurement arrangements for clear the design, construction and supervision of the port, acceptable to IDA, have been agreed; (iii)final 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 fthe port operation is acceptable to IDA and GOM. 0 Weak capacity of the accounting profession in Madagascar. The CFAA for Madagascar concluded that country public financial management poses a major fiduciary risk. The CPFA (Country Profile o fFinancial 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; ii)effective participation o f the international auditing firm in the fieldwork; iii)reinforcement o f the accounting profession after the completion o f the ROSC mission. 6. Loadcreditconditionsand 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 fthe 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; DisbursementsInthe Ehoalaport subcomponent will nottake placeprior to: The objective o fthis disbursement condition i s to ensure that (i) procurement arrangements clear for the disbursement o f the IDA financing for the Ehoalaport subcomponent are acceptable to IDA, (ii) Borrower and QMMhave agreed on a financingplanfor the port, satisfactory to the IDA,(iii) financial analysis for the port investment is 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 31,2006. 20 Disbursementsinthe PCGsub-component will nottake placepriorto: 0 Selection o f the ParticipatingBanks 0 Opening of the account, the form o fwhich i s to be determined, where IDA funds will be deposited for the purpose o f the PCG. 0 The framework agreement has beenentered into bythe Borrower to the satisfaction o f IDA. Disbursementconditionin the Grant sub-component will nottake placeprior to: 0 Identification and implementationo fprocedures to commit and disburse the grants. Financialcovenants: 0 The IG2P shall maintain records and accounts inaccordance with sound accounting practices; 0 Records, accounts, special accounts, SOEs shall be auditedby independent auditors acceptable to IDA; 0 Production o f quarterly FMRs. DatedCovenants: A numbero finstitutional reforms musttake place to ensure success ofthe project. These reforms will be benchmarked as dated covenants: Land access, six months after effectiveness: Declared"R&sewesfonciires touristiques" inNosyBecanbeleasedto, or acquired by, interestedprivate sector investors inthe hotel industry; Eighteenmonths 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 inR&servesfonciBres touristiques must be developed. The green charter will identify the norms interms o fwaste 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 NS inNosy Be, Antsirabe and Taolagnaro, must be appointed; Four months after effectiveness, the N S will have recruited a permanent Environmental specialist; Remedies: A number ofinstitutional reforms that must take place to ensure the success o fthe 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 fNosy Be and to Taolagnaro mustbe opened to competition to allow better service interms o f timeliness and quality andcompetitive ticket pricing; 21 0EPZstrategybyMidTermReview:The implementationofEPZsectoral policies and legislativeactswhenneeded,providingfor the developmentof the EPZ sector; 0The adoptionof arevisedinvestmentpolicybyMidTermReview. 22 D. APPRAISAL SUMMARY 1. Economic and financial analyses The present value of total gross benefits from IG2P is US$203.8 million. From it, it canbe seen that tourism benefit are by far the more important o f IG2P's benefits, amounting at 57 percent o f them, followed byminingbenefit that represent 21percent o fthem. From the economic analysis point of view, the IG2P has been dividedinthree growth poles that were assessed separately: Nosy Be, Tana-AntsirabC and Tolagnaro. For each pole, cost categories have been regrouped to form the investment and recurrent cost as well as the mitigation o f the negative social and environmental externalities. For the Tolagnaro port, the residual value o f the investment has been deducted from the investment cost before calculation o f its present value. Results are presented inthe table 1below. Table1:Economic cost of the threepoles Type of investment ( US$million,PV) NOSYBE Antananarivo/Antsirabk ' Tolagnaro Total Physical, social and Sanitary Infrastructures 33.2 9.2 58.0 100.4 Business Environment 1.3 1.6 1.9 4.8 Project Management 2.3 1.8 4.4 8.5 MitigatingSocial and EnvironmentImpact 0.5 0.6 1.8 2.9 RecurrentCost 12.4 3.1 12.9 28.4 Total 49.7 16.3 79.1 145.1 For each pole, benefits have been identified and quantified: it 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 on incrementalrents associated with additional tourists andproductions. Results are presented inthe table 2 below. Table 2: Economic benefits of the threepoles Type of Benefits (US$ million, PV) NOSYBE AntananarivolAntsirabe Tolagnaro Total Tourism Rent 85.4 31.4 116.5 Agricultural Rent 20.0 20.0 Mining Rent 42.1 42.1 Textile Rent 17.2 17.6 Total 85.4 17.2 93.5 203.8 23 Benefit and cost for each pole have been compared and sensitivity analysis has been done. Net Present values (NPV) and Economic Rate o f Returns (ERR) are presented in the table 3 below. Nosy Be i s by far the most valuable pole for the country with a NPV that represents 70 percent o f IG2P's 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 GOM's ability to tap into tourist willingness to pay for nature. If the number o f years is less than three years, investment in Tolagnaro's pole is 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: CostBenefitanalysis of the threepoles NPV (IO percent,25 years) and ERR NOSY Antananarivo/AntsirabB Tolagnaro Total BE Net PresentValue (NPV) 35.7 0.9 14.5 51.5 Economic rate of Return 18.5 10.3 12.9 2. Fiduciary The assessment carried out during the Appraisal by an IDA accredited specialist determined that the IG2P financial management system doeNPS't satisfy the World Bank's 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, accounting, financial reporting and disbursement functions; ii)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 record keeping and safeguarding assets; iii)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 recruitedprior to credit effectiveness. The audit report will be submittedto IDA not later than six months after the end o f each fiscal year. It's important to mention that no significant problems have been encountered in terms o f audit covenants: all World Bank-financed projects inMadagascarhavealways submitted their audit reportsindue time their audit reports. 24 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 fhouse 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 of life 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 own 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 QMM'splanned ilmenite mine to ascertain the extent to which social impacts, generally similar to the list 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 25 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 of 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 Hell- Ville. Analysis of 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 of 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 inthe safeguards work for IG2P as well as inthe ESIA requiredby the GOM andthe EMP attached to the permit issued by the Minister o f Environment in 2001. The new port will involve construction o f a breakwater andquay, dredging(with dredged material to beusedas 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 of which IG2P seeks to strengthen. Cumulative impacts were considered in detail in the ESIAs. Direct cumulative impacts would include those o fthe QMMilmenite mine development and operationcombined 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 of intended and unintended developments. Immigration o f employment seekers, increases inproductive economic activity, growth intourist 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 growthpoles. 26 5. Safeguard policies Safeguard Policies Triggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [I PestManagement (OP 4.09) [XI [I Cultural Property (OPN 11.03, beingrevised as OP 4.11) [XI 11 Involuntary Resettlement (OP/BP 4.12) [XI [I IndigenousPeoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OP/BP 4.36) [XI [I Safety o f Dams (OP/BP 4.37) [I [XI Projects inDisputed Areas (OP/BP/GP 7.60)* [ I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [I [XI The project is classified inCategory A for environmental assessmentpurposes. The approach to the safeguards triggered is presented below, and the results are summarized inAnnex 10. OP 4.01 Environmental Assessment. The Borrower's 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 ESIA has been prepared for each growth pole, focusing on the subprojects planned for implementation in the first year o f the project and including management and monitoring plans (EMPs). Inpreparingthe ESIA and EMP for Taolognaro, the consultants carried out a "gap analysis" o f QMM'sextensive 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 in2001. Because o f the particular needs o f the marine protected area at Nosy Tanikely, a separate EMPwas 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 initialreport inJanuary 2005. OP 4.04 Natural Habitat. N o critical natural habitat is 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 on 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 inprotected 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 ESMF provides guidelines for application o f the pest management policy should it infact be triggered by any subproject. * By supportingtheproposedproject, the Bank does not intend toprejudice thefinal determination of theparties` claims on the disputed areas. 27 OPN11.03 Cultural Property. A Cultural PropertyPolicy Frameworkhas beenprepared, and its application i s explained in the ESMF. Known locations o f cultural property are mapped in the ESIAs. The ringroad for Nosy Behasbeenrealignedto avoid a sacred tree, inconsultationwith the local community as specified inthe 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 inNosy Be, as described below. 0 RAP for Rehabilitation of National Route 13 at Taolagnaro - 44 street vendors to be temporarily relocated to continue their business at nearby sites until the rehabilitation is 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 RingRoad at Nosy Be - 10 ha o f farmland andwoodland, 14.5 ha o fhouse plots affected, 14households to beresettled, total o f 814 individuals affected. A Process Framework has beenprepared for the marine protected area to be established at Nosy Tanikely (near Nosy Be), since its establishment may restrict access to customary resources by present users. OP 4.36 Forests. It is 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 inthe World Bank's Infoshop, with disclosures completed on March 8, 2005. The gap analysis will be made available to any interested party on request. A formal public comment period beganunder 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 infinal form prior to Board approval. 28 Annex 1-A: Countryand Sector or ProgramBackground MADAGASCAR: IntegratedGrowthPoles Project The BusinessEnvironmentinMadagascar The investment climate in Madagascar has dramatically improved since 2001. Structural reforms were made in the: (i) judiciary; (ii)customs sector (iii) regime applicable to fiscal 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- andmedium-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 andlack o fproper property registrationmechanism, 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, low access to credit, and unskilled labor. Landmanagement issues have also proven to be one o f the main deterrents to private investment. Until2003, foreigners could not own landinMadagascar. This issue is Mher complicated by local customs and ancestral traditions governing the division o f land and succession rights. Landregistries are still sketchy anddo not facilitate mortgaging activities. Some selected reforms are captured below: Customs and 0 Signing of a new contract with a private company to strengthen Tax Reform customs 0 Import tariffs set to zero on a range o f investment and consumption goods. 0 Reduction o f tariff from 7 rates, rangingfrom 3 to 33 percent, to 4 rates 0 Reduction o f number o f taxes from 4 to 2 (import taxes and customs) Regulatory 0 Passing o fmilestone legislation to allow foreigners to own land in reforms Madagascar 0 One-stop-shop for investors made operational 0 Creation o f a public and private platform to discuss reforms (CAPE) 0 Completion o f the management contract o f SIRAMA (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, is the cost o f utilities. 29 Electricity (Per Kwho f 0.05 0.09 0.03 0.10 0.07 0.05 0.03 industrial use) Water (per cubic meter 0.29 0.34 0.43 NIA 0.36 N/A o f industrialuse) Cost o f local call per 3 0.03 0.08 0.02 0.04 0.01 0.04 0.09 mins Cost o f call to U S per 3 4.00 8.98 3.60 7.35 NIA 3.05 1.98 mins Internet: Monthly 22.9 66.5 14.7 65.6 12.3 6.5 8.5 Service Charge Internet: Telephone 0.38 0.44 0.14 0.46 0.17 0.05 0.33 Usage per minute Source: World Bank, Interviews with EPZ manufacturers and government agencies Main Government strategy to strengthen the business environment Given the scope or reforms needed, the GOM's 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 benefitthe 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 fthe 408,000 firms registered inMadagascar. Access to Finance Access to finance remains a major constraining factor for the development o f MSMEs in Madagascar. Lendingto 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 interms 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 MSME access to finance and briefly presents the solutions proposed bythe project. Constraintsidentified Solutionsproposedby the Government Commercial banks are the only Diversification o fthe financial sector with support to significant players inthe financial new intermediaries such as leasing companies, factoring market. companies. Commercial banks are very Provide intensive technical assistance to the banks, train conservative and lack the SME bank employees and senior management andprovide the lendingskills. 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. 30 MSMEsector isperceivedas too Provide a guarantee mechanism to participating banks as risky by the banks, thus requiring anincentive for the banksto expandtheir activities in significant collateral or guarantees this sector. Also, through the development o fthe leasing that the MSMEs are unable to sector, providing leased equipment as safer collateral. provide. Lack of financial expertise at the Provide TA to improve MSMEs' capacity to present MSMElevel andinabilityto prepare credibleloanapplicationpackages, includingproper financial statements and understand financial statements and business plans. the commercial bank requirements. The following access to finance initiatives, have been identified: i)SupporttoLeasingandFactoring:Leasingisparticularlywellsuitedtothefinancingneedsof MSMEsbecause ofsimplicity incollateralmechanisms: the security ofthe lessor is derivedfrom his ability to repossess the leased asset which i s beingfinanced. This avoids the existing onerous collateral demands of the commercial banks. The new Malagasy leasing law has created a significant amount o f interest in the financial sector inMadagascar and several ofthe localbanks haveindicatedwillingness to co-finance investment inthe 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 MSMEs indicate that MSMEs are 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. ii)LoanportfolioPartialCreditGuaranteeProgram: Thoughleasingandfactoringwillbroaden sources o f funds for MSMEs, bank financing will still be required to meet their needs. Today, seven private sector banks dominate the financial sector but they consider MSMEshigh-risk,and therefore refrain from lending to them or require prohibitively high collateral. International experience has shown that with adequate MSME lending skills conservative commercial banks are able to service this sector in a sustainable fashion, managing the risks and reducing operational costs. A risk-sharingprogram which would cover 50 percent o fnewMSMEloanportfolios andthereby 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-Bfor more information on the risk sharingprogram. 31 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 beenidentified: Training i) Sector-Specific Trainingfor Tourism and Related Sectors The needfor development o f capacity intourism is important (see Tourism paragraph). Detailed and repeated consultations with hoteliers and restaurant owners inNosy Be and Taolagnaro have established that findingqualified 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, transportationproviders, 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; inaddition, many are imported, although Madagascar has the capacity to produce fine quality articles. ii) Key-sector training using BusinessEdge A large proportion of MSMEs in all growth poles key sectors suffer from insufficient levels of expertise and lack of 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 fwhat i s needed. Business Edge (BE) i s an approach to SME training that i s based on modules, developed by the IFC 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 firms are already active inAntananarivo, and some o f these firms would potentially be effective BE delivery partners. A number have expressed an interest inupgrading adult training capabilities and subject matter skills, also in acquiring new course material and content. WorldHotel-Link.com (WHL)i s a mechanism developed by IFC in South-East Asia to provide small and mediumhotels 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 low prevalence o f Internet access, small and medium hotels are very much inneed o f a mechanism to facilitate their direct access to foreign clients. 32 Before installing the Business Edge program in Madagascar, a more structured market assessment will be 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 intheir market segments should be envisaged. Participating firms 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 GOM's 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 quota's 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 its domestic content and retain its competitiveness. Among vegetables for export, one product o f particular interest is potatoes, for which there i s a strong demand inthe 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 preventedMalagasyproducers to meet the growing demand. InNosy Be, local caterers complain that the majority of 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 inputsbut also basic advice. Secondly, the fish and seafood to restaurants andhotels value chain is also inneed 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 inthe value chain and a series o ftargeted interventions would greatly add to the revenues o fthe MSMEs inthis chain. InTaolagnaro the expected growth of 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 inthe value chain will be addressed. Creating a Lease Registry & Possible Amalgamation with Pledge Registry The GOM i s increasing its 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 inMadagascar 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 inregistering and repossessing collateralized assets. Inorder to address these issues the GOM will focus its 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 of 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 backedby the following facts: The development o f the leasing industry in Madagascar. This sector is a priority o f the IG2P project, and one inwhich the IFC i s planning potential investments inthe near fbture to boost the use o f this financial product by firms 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 diminishingthe 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 inMadagascar, its efficiency i s very limited. The existing Pledge Registry is very difficult to access, and commercial banks complain that it offers very little security interms o f repossessing assets. For any investment in leasing to be likely, it is 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 insecured financing systems. MSMERegistration and investment promotion support through GUIDE With the creation o f GUIDE, the government has succeeded inthe 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, expandingGUIDE'Sservices to the growth poles and streamlining any procedures that might still be cumbersome. There i s clearly on-going demand for GUIDE'Sservices interms 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 UNCTAD's 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 FDIinthe country untilnow, 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. Inorder 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 of the EPZ/manufacturing sector in Antananarivo-Antsirabe The EPZ sector, although small, i s by far the fastest growing part o f the Malagasy economy". Comprising 1percent o f GDP and about 10percent o f the secondary sector, it 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 is 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 Madagascar's comparatively low labor costs and preferential access to U S markets through the Africa Growth and Opportunity Act (AGOA) have been instrumental in drivingthe success o ftextiles firms. As a result, Madagascar is now the fourth largest exporter to the U S among AGOA suppliers. Madagascar also compares favorably with regional competitors interms oflaborproductivity andskills althoughstill laggingbehindthat ofAsian countries. However, inthe 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 l1Other EPZ manufacturing activities include furniture manufacturing; woodprocessing; handicrafts; precision medical instruments, optics and clocks; leather items and footwear; shrimp rearing/ processing and ICT firms l2GEFP estimates, March2004 35 textile and garments sector. While the AGOA third-country provision o f yam and fabric inputs will not expire until 2008, the expiry o f the Multi Fiber Agreement (MFA) inJanuary 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 investedinthe EPZ sector to take advantage o f Madagascar's unused quotas. The reliance in the past on displaced manufactures from quota- bound 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 beginto apply IY. An example o f what could happen is the sudden closure o f six firms 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 its 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, increasingproductivity and diversifying its product range. 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 of firms 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. Among the constraints faced by the industry currently are: (i)the high cost o f land and air freight and the lack o f logistics facilities such as reliable rail services and inland container depot facilities coupled with inefficient port operations, (ii)uncompetitive industrial rents in Antananarivo (where the EPZ firms are concentrated); average rents (US$3.50-4.00 per square meter) are almost double that incompetitor countries, while existingprivate industrial parks tend to be poorly sited, do not have adequate facilities and do not enjoy EPZ status nor access to centrally located Customs facilities and services; (iii) the 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 of regulatory burden including inadequate legislation, inefficient trade facilitation and corruption, weak institutional arrangements for investment promotion and facilitation and weak supplychain for vertical integration o fthe 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 of industrial infrastructure and utilities including improving access to serviced industrial sites and efficient logistics facilities and services; (iii)increasing labor productivity through investments ineducation, vocational training and skills development; and (iv) improving access to Business ~ l3USAID Study, September 2003 andITC Study, December2003. 36 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 firms to develop sub-contracting and supplier linkages with the EPZ firms. Supporting the growth of the ICT sector The ICT sector in Madagascar is small but with encouraging potential for growth. Reliable statistics on 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 insoftware programming, data conversion, systems integration, IT consulting and training. There are a couple o f large providers in enabling technologies and solutions and a handhl o f providers o f IT enabled services such as BPO, which are partly owned by French interests. There are also a small number o f offshore data processing firms (one unverifiable estimate indicates a total employment o f around 3,000 persons). These firms 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 beenbadly hit by the recent currency depreciation and while tariffs on imported IT 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 inextremely 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 ICT investments also hamper the growth o f the sector. Internet Service Providers (ISPs) face a host o f problems including low international bandwidth, highconnection 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 ICT sector are based on the National ICT Policy for Development (PNTIC-D) and consists of: (i) development o f ICT infrastructure including a national backbone network; (ii)promotion of content and application development; (iii) development o f ICT human resource andprofessional competencies; (iv) reform o f the fiscal and regulatory framework; and (v) development o f enterprises in the sector through public-private partnerships. The Tourismsector inMadagascar Current situation. Madagascar has an impressive array o f biodiversity, natural beauty and cultural resources to support tourism. The world's fourth largest island, Madagascar is home to many species found nowhere else on the planet, among them 30 species o f lemur - currently the main tourist attraction -- along with spectacular scenery and eight varieties o f baobab. 37 Madagascar's nearly 5,000 km o f coastline i s coupled with a continental shelf equal to 20 percent o f the island's land area which presents numerous opportunities for developing resort- based 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, andenvironmentalconcerns. 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 WTO's 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, in2004 (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 buildingthe 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 its 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. In2004, Madagascar had 853 hotels with 10,230 rooms as follows: Table 1 Cumulative Hotel Capacity Growth 1999 2000 2001 2002 2003 2004 Number of hotels 556 644 695 717 768 853 Number ofEVPT 331 370 413 522 553 589 Total Rooms 7,207 7,779 8,435 8,780 9,325 10,230 Source: Ministry of Tourism 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. Many 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. 38 Employment and wages. Tourism generates some 17,564 jobs inhotels 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'~,in transport and other tourism-related services (such as scuba diving, guides, etc.,), and in the handicrafts sector15. Job creation in tourism i s estimated to have grown by 8 percent annually inthe 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 low 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 minimumwage (on average 40 percent, muchhigher inhigher quality hotels), partly reflecting the scarcity o ftrained hotel staff. 1998 1999 2000 2001 11,655 12,640 13,628 14,010 Restaurants Travel & 2,604 2,661 Entertainment Total 13,707 13,979 Source: Ministry of Tourism Economic impacts. InMadagascar, accordingto the Central Bank, tourism i s one ofthe top three sectors interms o f foreign exchange earnings, fluctuating inrank with the EPZs and fisheries. Tourism receipts are shown inTable 3. Table 3. TourismReceipts(US$millions) 1999 2000 2001 2002 2003 2004 US$ millions 72.9 91.9 90.2 27.8 54.0 104.3 Av. exchange rate 8,586 8,934 8,376 8,773 8,675 13,828 MF(billions) 625.9 821.0 755.5 243.88 468.45 1442.2 Source: Central Bank of Madagascar 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 is difficult to estimate but it is estimated that Madagascar generated tax revenues MF 62.5 billion in 1999, comprising VAT and income taxes. No studies have beencarried out to estimate leakages from the tourism system. l4 An ofien-neglected facet o f employment in the sector is 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 well paid, particularly when supplemented by tips. 39 Main constraints: Several tourism-specific factors are currently impedingthe emergence o f the catalytic business environment requiredfor 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 mechanismcalled the "tourism land reserve" (RksewefonciBre touristique), which gives clear access to special land reserves intourist 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 country's surface) to 6 million hectares inthe next few years. Transport. Transport i s a case inpoint - the inability o f the sector to accommodate andtransport 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 GOMhas givenCORSAIR rights to fly to Madagascar (as well as a number o f Italian charter operators). However, it i s clear that inthe 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 andonly 7,000 kmout o f the 35,000 kminthe roadnetwork 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 andliberalize air policy should reduce costs andmake 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 andfinancial returns. Many "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. Inaddition, the larger accommodation units and those in sensitive ecological areas should aim for accreditation that they have met clear environmental standards. Inaddition to its intrinsic value, such an approach will enhance the island's image and can be a powerful marketing tool. Communications. The absence o f adequate telecommunications capacity in Madagascar used to 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. 40 While local tour operators note that communications have improved greatly, compared with five 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 GOM is fully cognizant o f the implications o f this lack of information and untilbetter data sets are available, it 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 tourism's 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. Ina 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 kindo 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 integratedmaster plans for its tourism zones. With the support o f GAT0 AG (a German apex organization for tourism), it has prepared a "concept for tourism", to provide short- and long-term frameworks for its growth. These participatory studies examined tourism's potential externalities and attempted to integrate it into the macroeconomic framework, to create linkages to other productive sectors. The keypoles for development are the following: North: Antsirarana andNosy Be, including the Montagne Ambre East: Ile Ste. Marie andPkrinet South: Region around Taolagnaro, linkingto the west. West: Tuelar/ Morondave Central core: Antananarivo to Isalo With this framework inplace, inagreement with the Bank, the government selected Nosy Be in the north andTaolagnaro inthe southern part o fthe country. The former is the leading destination interms 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 emergingdestination, with latent demandfor its exceptional assets (Berenty, Andohalela), where tourism infrastructure, accommodation and tourism facilities, have yet to be created. Nosy Be i s well known worldwide as the destination o f choice for beach tourism inMadagascar. Hellville, the main population center, has historical significance, although with recent budgetary constraints, much of its 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 inthe restoration o f the city's charm and help 41 integrate local small- and medium-scale businesses into the mainstream o f economic life inNosy Be. Local crafts and artisans are an integral part o f this cultural and historic heritage, as well as beinga valuable sellingpoint for the town and the islandmore generally. Taolamaro (Fort Dauphin) For a long time, Taolagnaro was the last call inthe Southem circuit, Madagascar's principal tourism program (38 percent o f all visitors to Madagascar used to visit the area). There has been a downturn inthe 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 surroundingregion has mountains, beach, sea and forest, all o f which offer a variety o f activities. The region i s also home to Madagascar's indigenous lemurs. Taolagnaro's only weak point is its seasonal rainy climate (primarily on 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). STHM 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 inToalagnaro and add to the list o f leisure options. The Mining Sector inMadagascar Madagascar is the world leader inproduction 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 inthe 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 miningroyalty due by the miningoperators in2002 totaledUS$ 1.9 million only. 1998 1999 2001 2002 2003 Chromite, Mica, 1 12,350,529 I 11,104,068 I 14,759,192 1 8,360,076 7,821,590 Graphite PreciousStones 2,63 1,325 12,202,836 13,828,591 5,943,702 7,628,621 Semi-precious 566,566 798,868 1,496,606 808,779 1,401,011 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") - is slow, complex and inefficient. 42 In2001, the MiningCadastre collected the equivalent to about US$ 450,000 infees. Because of 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 of 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). World's current production is 4 million tons per annum (tpa) and i s supposed to grow at a rate o f 2-3 percent per annum. Rio Tinto's estimated share of the market is 40 percent. The Taolagnaro Ilmenite deposit holds approximately 60 percent o f Titaniumbioxyde and i s richer thanthe other world depositslocated inCanada, USA, Australia and SouthAfrica. A mining license was awarded to QIT MADAGASCAR MINERALS S.A. (QMM). QMMis 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 inthe world. The miningproject cost is US$225m inPhase 1andUS$75m inPhase 2. Ilmenite production at end o f Phase 1i s 375,000 tpa; and 750,000 tpa after 12 years. A preliminary investment decision will be taken inFebruary 2005, while QIT's Board will consider the investment decision inJuly 2005. However, it is not clear at this stage whether QMMwill start to invest in2005. This mining project has been considered for more than a decade both by the GOM and by Rio Tinto. Several factors have prevented its 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 of ilmenite area, which led to protests by several NGOs on the development o f the projectI6; (iii)lack o f concessional 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. Rio Tinto is planningto ship the ilmenite through a new multi-modal port. Taolagnaro's 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 is 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 miningproject on the ilmenite sands deposit in the vicinity o f Taolagnaro provides an opportunity to build on this ~~ l6 These protests led to a change inthe design o f the port. The current design o f the port is not expected to have as muchimpact on the flora and fauna o f the Taolagnaro region. 43 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 its 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. It 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 aport layout withthe following features: -- 600 mlongbreakwater, 238 mby 60 mquay 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 m2 short term storage area adjacent to quay. Storage for ilmenite andzircon, - Open area for thirdpartyusers, Conveyor from ilmenite storage to mobile ship loader, (Supplied byRio Tinto on a - separatebudget) Mobile ship loader, runningparallel to the quay, suitable to load either a 35,000 or - 60,000 dwt ship at 1000 tonslhour. (Suppliedby Rio Tinto on a separate budget) Basic infrastructure to allow constructiono f a fuel tank farm connected to manifold on the quay wall (to bebuiltby others), -- Dredgingdesignedto accommodate a 35,000 DWT ship, Marine structures designed to accommodate a 60,000 DWT vessel inthe 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 inthe dredged area, Temporary areas for construction to become area for administrationbuildings 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 inthe port would contribute funding for the breakwater and protection works up to a total commitment o fUS$35 million. Limited Rehabilitation of the Existing Port. The Project will support emergency works required to restore a minimumlevel o f operational effectiveness, which will benefit the conversion o fthe existing port into leisure and small fishing activities and will cover the transition period untilthe newport comes into operation. Works supported bythe Project will include: - -- Dredgingo fport basin Repair o f slipway Repair o f tugboats and lighters andpurchase o f one forklift The total cost estimate for IDA financing amounts to US$1 million. 44 Annex 1-B:Country andSector or ProgramBackground MADAGASCAR: IntegratedGrowthPolesProject (Risk SharingMechanism:the PartialCredit 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 non- payments o f their respective SME loan portfolios. The PCG will cover portfolios o f SME loans originated by the ParticipatingBanks (as definedbelow) for new productive activities. The PCG component o f the IDA credit serves as partial financial back-up to the PCG mechanism, as described below. Disbursements o f the partial credit guarantee component o f the IDA credit will be made intranches, on a ParticipatingBank-by-Participating Bank basis, equal to 100 percent o f the GOM's first loss guarantee obligation v i s - h i s such Participating Bank, as and when Guarantee Agreements are signed with each such ParticipatingBank. Leveraging structure The PCG will leverage both GOM and IFC resources and capabilities: US$2.5 million allocated for this component i s expected to mobilize up to US$10 million IFC guarantee, which in turn will bringabout up to US$25 million equivalent o fnew 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, IFC and the GOM. The GOM's portion o f liabilitywith respect to claims payments to the Participating Banks, following a call under a partial credit guarantee, will be drawn from the PCG Account. It is anticipated that the PCGAccount will be denominated inU S dollars andwill be administered by IFC, as appointedby GOM. RiskSharingunderthe Partial Credit Guarantee Program Participating 2nd loss Bank: [45-351% IFC:[45-35]% Participating G o M (IDA 1st loss Bank: [5-151% ,credit): [5- I `151% I I I 45 Implementing structure The IFC will act as administrator o fthe 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 andreview finctions to a local agent, such as an independent accounting firm. The local agent would have primary responsibility for verifying the documentation submitted byParticipatingBanks incases 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 ParticipatingBank. 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 on their financial strength and demonstrated intention to expand into the SME 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 IFC would determine. In-depthappraisal and selection o f banks will be at the final discretion o f IFC, and banks that would not meet the IFC 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 perceivedto 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 highrisk o f SME lending. The 50-50 pari-passu risk sharihg ensures that Participating Banks conduct proper borrower credit appraisal and apply strict loan underwriting criteria (including takingproper security) inestablishing 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, IFC 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 its own account, as second loss guarantee provider. 46 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 fmonies 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 GOM (IDA credit) and IFC guarantee coverage ratio), subject to the necessary allocation between the first loss G O M (IDA credit) and IFC's second loss guaranteed amounts. Pricing The final pricing and size o f the guarantee is contingent on 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 IFC as PCG Program administrator will be paid into the PCG Account as a reserve against future calls on the guarantee. ThePCGAccount and disbursementstructure It is proposed that the IDA credit proceeds allocated to the PCG 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 intranches, on a ParticipatingBank-by-Participating Bankbasis, equal to 100 percent o f the GOM's first loss guarantee obligation vis-&-vis such ParticipatingBank, as andwhen Guarantee Agreements are signed with each such ParticipatingBank. Implementation Arrangements: It is anticipated that the following are the key agreements which will be put inplace to allow the structure set up: Guarantee Facility Agreement between IFC 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 inform and substance acceptable to IDA. 47 Framework Agreement, expected to be entered into between IFC and GOM: This agreement will outline the operation o f the PCG Program, the allocation o f guarantee coverage between GOM and IFC, provisions relatingto the final selection and appraisal ofthe Participating Banks, and provisions for supervision and review o f program operations. It i s anticipated that this agreement will also contain provisions relating to withdrawals of amounts from the PCG Account and relating to the application o f funds remaining inthe PCG Account at certain points intime over the life of each PCG. This agreement shall be inform and substance acceptable to IDA. Remedial Actions In order to minimize the amount of guarantee losses, it is 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 Participating Bank, which may include (a) the reduction o f the unused facility amount, and (b) the suspension o f the issuance o fnew guarantees under the Program. This procedure will allow mitigation o f losses incurredunderthe PCG. Performance Criteria 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 SMEborrowers; share o f term loans, share of 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 duringthe remaining availability period. TechnicalAssistance: Inparallelto thePCG, Technical Assistance willbeprovidedto the ParticipatingBanks. TA Provider: To ensure the transfer o fknow how to a ParticipatingBank,a TA Provider will be selected, to include an experienced, internationally recognized SME banker, supported by some local financehanking specialists. As needed, the TA Provider is expected to leverage relevant specialists inareas o f weakness o fthe 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) all SME loan officers an for in-depth training program (to cover credit scoring, interviewing, loan structuring, collateral 48 valuation & registration, environmental risk assessment, and problem loan management, basic accounting and cash flow analysis); ii)analysis o f the existing SME loan application and review procedures and development o f adjustments as necessary; iii)establishment o f an appropriate SME department if not yet in existence, with establishment o f necessary M I S ,procedures and incentives for staff inthe department. The TA Provider's team will be situated in the partner bank full-time, helping the loan officers and monitoring the department's 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. It is expected that the Partner Bank cover a proportion of the costs/overheads associated with this TA such as furnishedoffice space, telephones, internet connection including where possible, computers/peripherals, and business transportation. In the first year, all financial costs (salaries, benefits, etc.) would be coveredby IDA. Inyear two, the Participating Bank i s expected to contribute to a portion o f the financial costs. The TA will beperformance-based grant, and after an initial period (expected 12 months), the TA will only continue if agreed performance thresholds have beenmet. 49 Annex 1-C: CountryandSector or ProgramBackground MADAGASCAR: IntegratedGrowth,PolesProject (Risk SharingMechanism:the PartialCredit Guarantee-ConflictofInterests ManagementFramework) IFC and IDA have and will continue to collaborate inthe 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 is 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 inMadagascar. However, notwithstanding the benefits o f improved coordination, it i s recognizedthat the multiple roles o f the IFC in the preparation and implementation of the proposed Project may raise potential or perceivable conflicts o f interest issues. Consistent with the World Bank Group's Conflict of Interest Guidelines, this Annex outlines the framework for identifying and managing such conflicts o f interest that has been agreed betweenIDA, IFC and the GOM. Inline with the philosophy of the IDNIFC 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 sub- components (the "TA Sub-components") that relate to the provision of capacity building grants to: (i)banks selected to participate inthe PCG; (ii) that need institutional capacity building banks assistance to qualify for participating inthe PCG; and (iii) potential and existing SME clients o f the selected and potential PCG 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 is a possibility that some existing or potential IFC clients could receive support from the Project via the PCGs andor the TA Sub- components. Should such a situation arise, IFC will disclose its interests. The Project has been designed and will be supervised by ajoint team o f IDA and IFC staff (the "IDNIFC Advisory Team"). Inthe case of the PCGs Sub-component, the IDNIFC Advisory Team would assist GOM inidentifying appropriate selection criteria for participating banks and advise the G O M inthe selection o f applicant banks inaccordance with such criteria. Once participating banks have been selected, a separate team composed o f staff from IFC's 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 IFC's internal approval o f the client banks and terms o f the investment. 50 Consistent with the World Bank Group's Conflict o f Interest Guidelines and IDA policies, the IFC Investment Team would not participate in the selection o f the partner banks, i.e. the World Bank Group would maintain separate teams for its advisory and its 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 IFC 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 team's expertise and facilitate the design o f an effective approach to SME finance, which integrates financing with capacity buildingefforts. The IFC-IDA collaboration inthe 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 IFC activities in Madagascar if any existing or potential IFC clients benefit from support under the Project as mentioned above. Accordingly, IDA and IFC have established a framework for identifying and managing conflicts o f interest in this Project. This framework will involve disclosure to concerned parties incommunications and a set o f measures to manage any potential or perceived conflicts o f interest arising from the multiple roles o f IFC. GOMhas confirmed its acceptance o f this framework. Specific measures that will be implemented include: a) Except for the joint appraisal o f selected PCGbanks mentioned above, separate teams , with no overlapping team leaders, will handlethejoint IDNIFCProject preparatiodsupervision assignments on the one hand, andIFC investment assignments, on the other hand.Accordingly, no IDA and IFC staff members that have beenpart o f the I D N I F C Advisory Team would be assigned to work on the IFC financing o f actual or potential beneficiaries o f the Project. b) No confidential information will be shared between the IDNIFC Advisory Team and the IFC Investment team. Accordingly, the I D N I F C Advisory Team will not provide the IFC Investment team any confidential or privileged information obtained by the preparation and supervision team inthe course o f the Project; and members o f the IFC 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 IFC client. c) The advice o f the I D N I F C Advisory Team has been and will continue to be separate andindependent from any IFCrole or investment ina 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 IFC might eventually become a lender to or investor in a Project beneficiary. 51 d) The selection of participating banks and other Project beneficiaries will be based on best practice and transparenteligibility criteria approved by the GOM. 52 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies MADAGASCAR: IntegratedGrowth Poles Project [Guideline: (Recommended length 1page) This annex should summarize recentprojects supported by the WorldBank and other international agencies in the country in the same sector or related sectors. For eachproject listed, indicate which of the sector issues discussed in B.2 have been or would be addressed. For Bank-.named projects completed in the lastfive years, OED's rating should beprovided. For ongoing Bank-jhancedprojects, theI P and DO ratingsfrom the latest Project StatusReport should be shown.] 53 Annex 3: Results FrameworkandMonitoring MADAGASCAR: IntegratedGrowthPoles Project ResultsFramework PDO OutcomeIndicators Use ofOutcomeInformation To help provide an adequate Through stimulus to MSMEs, 4irport and port statistics business environment to an increase inthe number o f Ministry o fTourism, Ministry o f stimulate and lead economic additional tourists arriving at rransport growth inthree selectedregional Nosy B e and Taolagnaro 4ir Madagascar poles. . airports and ports Port Authority Volume o f merchandise [NSTAT . shipped through the Taolagnaro and Tamatave ports and Ivato airport Number ofjobs created idthe three poles IntermediateResults ResultsIndicatorsfor Each Use of ResultsMonitoring Oneper Component Component ComponentA: Strengthening the ComponentA: ComponentA: business environment Participating banks M S M E loan portfolio increases Improved access to finance, Leasing andor factoring increase Central Bank comprehensive supply chain strategy Volume o f sales flowing out o f the INSTAT and moveable collateral registry value chains increases by over 25% established for the benefit o f over 5 years Malagasy firms Increase of number o f collateral registrations by 100%over 5 years ComponentB:Export ledgrowth ComponentB : ComponentB: in Antananarivo Upgrading o f ICT business park and 10 firms will have set up GUIDE o f industrial parks through provision operations inthe ICT park INSTAT o f hard and soft infrastructure EPZ strategy implemented ComponentC: Tourism ledgrowth ComponentC: ComponentC: in Nosy Be Upgrading o f tourism and urban # o ftourists Ministry o f Tourism infrastructure throughprovision o f INSTAT roads, public utilities, and other Ministry o fTransport urban and tourism services ComponentD:Mining and ComponentD: ComponentD: Tourismled growth in Taolagnaro Open the regionup through # o ftourists MinistryofTourism upgrading o f tourism infrastructure, Volume of merchandise shipped INSTAT 54 -includinaroads ,. public utilities, IMinistryofTransport, I _ ports, urban and tourism services Minis& ofMines OMNIS ComponentE: Implementation ComponentE: ComponentE: arrangements Delivery of an integrated platform Objectives of the Project for growthby the 4th project year in Implementation Plan met Nosy Be, Taolagnaro and Antananarivo-Antsirabe 55 m o w m N o m 9 m e 4 0 0 r- e 0 0 0 0 4 2 m Annex 4: DetailedProjectDescription MADAGASCAR: IntegratedGrowthPolesProject ComponentA: Strengtheningthe businessenvironment(Totalincludingtaxes and contingenciesUS55 millionofwhichIDA financingis US$21million-ExpectedIFC financingof US$16million) The project will focus on strengthening the business environment throughregulatory reforms and providing support to macro, small and medium sized enterprises (MSMEs) in all three geographic poles to: (i)increase access to finance; (ii) build MSME capacity; (iii) development 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 of the IG2P. Access to finance(IDA financingUS$6.9 million) Development of leasing &factoring (IDA US$ 1.2 m). It is expected that additional IFC and private sector financing will supplement this amount by an additional US$lO.Om. This component will comprise a technical assistance (TA) program that will facilitate know-how transfer and strengthentechnical expertise needed to develop the leasing and/or factoring sectors inMadagascar. Inparticular, it is envisagedthat the technical support, whichwill beprovidedto 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; ii) development and implementation o f Management Information Systems and other required systems; iii)training ofkey personnel; iv) settingup o fpolicies andprocedures; andv) any other support determined necessary to develop the particular business, in order for it 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$5.7 million). It is expected that the IFC and the Banking sector would supplement IDAfinancing (at this stage IFC with a US$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 GuaranteeFacilityby IDNIFC, under which the combined I D N I F C guarantees would provide participating intermediariesup to 50 percent pro-rata credit risk cover on an agreed SME 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 SME lending (US$2.6 million); and (iii) training o f SMEs that wish to apply for loans, to provide them basic financial management skills (US$0.6 million). 58 MSMEcapacitybuilding(IDA financingUS$4.2 million) MSME Training (IDA US$ 2.2 million) supplemented with other donor funding (the Swiss Foundation andthe Departement de 1'Oise (France)). Provision o f training to micro, small and medium enterprises in the tourism sector in the Nosy Beregionandinthe Taolagnaro region along the two following actions: i)Tourismsector-specifictraininginNosyBe&Taolagnaro:Basedoneffectivedemand, the project would offer training modules to hotel, restaurant and other MSMEs 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. ii)Key-sectortrainingusinaBusinessEdge:BusinessEdge,designedbyIFC,provides 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 inturn cover part o f the costs o f the local consultant. Supporting the NPS to develop Key Value Chains (IDA US$2.0 million) 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. Inorder 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) at various levels o f the actors chain must be willing and able to establish a consultative mechanism covering the entire chain, and establish a growth strategy; (iii) retailers/exporters downstream must be willing to make 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 its supply chain would be matched by grants to finance expert support services. In certain situations, grants would also be available to alleviate critical bottlenecks inthe 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 development potential: (i) Antananarivo / Antsirabe: Raffia production to tourist shops and 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) Be: seafood to hotels; Fruit & vegetables to hotels; Ylang-ylang to Nosy cosmetic producers & export. Support to Tourism DevelopmentInitiatives(IDA financing US$3.0 million, supplemented by IFC grants): (a) Supporting the Borrower's capacity to manage the tourism sector, through the provision of: (i)technical advisory services and training for national and regional staff o f the Ministry of Tourism and Regional Tourism Offices to strengthen their capacity to implement the regional tourism master plans; (ii) technical advisory services and training to strengthen the capacities of the Ministry o f Tourism and the National Tourism Office to manage, regulate, market and enhance the quality o f services and a new information system; (iii) technical advisory services and training to the Ministry o f Tourism to develop a communication strategy and carry out an international marketing campaign for promotion o f the relevant areas; and (iv) technical advisory services and training to the Ministryo f Tourism and the National Tourism Office to develop the GreenCharter. (b) Supporting the development o f the marketing capacity o f selected micro, small and mediumenterprises, through the provision o f (i) technical advisory services to such enterprises for the creation o fwebsites; and (ii)support for such enterprises to join WorldHotel-Link.com. (c) Strengthening GOM's national tourism training system, through: (i)the provision o f technical advisory services to redefine the National Institute for Hotel and Tourism Training (NMTT)'s role; (ii) the rehabilitation o f NIHTT facilities; and (iii) training o f trainers in the tourism-related subjects. Improving the Business Environment (IDA financing US$ 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 (iii) provision o f technical advisory services to carry out an 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)the provision o f technical advisory services to GUID and 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 inNosy 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 inthe Ilmenite MiningProject inTaolagnaro; (ii)Ministry of Transport to achieve an efficient open skyheedom sky policy; and (iii)to Ministryo fAgriculture to improve landaccessbyprivate investors. (6) Supporting the JIRAMA operation restructuring (IDA US$5 million). As an element o f a larger recovery plan for JIRAMA, the project will finance the purchase o fpetroleum products for JIRAMA inthe amount o fUS$5 million. Component B: Export led growth in Antananarivo- Antsirabe (Total including taxes and contingenciesUS$7 millionofwhichIDA financingis US$6 million) Enhance EPZ/manufacturing sector's competitiveness (IDA US$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 environment for investment promotion and facilitation; (ii) enhancing the availability and quality and reducing the cost of 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 inMadagascar, 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 fpolicies 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 Ministryo f Private Sector inthe field o f logistics and trade facilitation, including customs administration; and (e) the provision o f technical advisory services and works to the , Ministryof Private Sector to establish an industrial zone or an agrotechnopole in a strategic location inAntananarivo and/or Antsirabe. ICT Business Park development (IDA US$3.0 million): The project's objectives are to help develop an ICT 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 Ministryo f Telecoms to establish an ICT 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 newregulatory framework for the ICT sector andto strengthen its capacity inthis field. Provide support to the Municipalities of Antananarivo and Antsirabe through: technical assistance, training, rehabilitation o f existing facilities, office equipment. (IDA US$1.4 million) 61 Component C: Tourism led growth in Nosy Be (Total includingtaxes and contingencies US$55 millionof which IDA financingis US$32 million) The project will create the infrastructure and regulatory environments allowing the tourism industryon the islando fNosy Be 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 andurbanplan to regulate andmanage development in existing areas, through the hiringo f local and international consultants; 0 Inaparticipatoryandtransparent way, openup landacquisitioninthe maintourism areas as definedby the plan, with the assistance o f local andinternational consultants; 0 Technical assistance to assess and develop business incentives to attract investments, with the support o flocal and international consultants; 0 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; 0 Upgrading o f the Hellville (in two phases ) and Ankify ports. This will allow rationalization o f traffic from Nosy Be 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) agricultural products; (iii) various 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 fbuildings, (e) rehabilitation o fwarehouse andoffices, (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; 0 Upgrading of 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; 0 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 intelecommunications networks. Such investment, take place simultaneously with private investments. Financing will cover design and supervision (local and international consultants) o fworks ; 62 0 Upgrading of the power system to allow existing hotels access to reliable power generation, and accommodate growth inthe sector. The main investments to be financed through the project consist of: (i) rehabilitation o f the most recent existing generators and retiring o f the four oldest ones; (ii)installation o f 6 M W o f new capacity though purchase o f new generators; (iii) maintenance o f the generators over the life o f the project; (iv) extension o f medium-tension lines to the tourist areas, as defined by the tourism master plan. It is not expected that the project will finance the relocation o f the power generation site. Financing will cover design, supervision, works (local) and equipment. 0 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 inthe 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 Be 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. 0 Upgrading the medical facilities at the Hellville hospital. The objective is 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 bringit to appropriate sanitary requirements and will provide it with a surgery block, Financingwill cover will cover design, supervision, works (local) and equipment; 0 Provide support to the Municipality o f Nosy Be 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 includingtaxes and contingenciesUS$166 millionof which IDA financingis US$55 million) The project will create the infrastructure and regulatory environments open up the region o f Taolagnaro and allow growth of 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 andurban planto regulate andmanage development in existing areas, through the hiring o f local and international consultants; 0 Develop o f a new public port on the north side o f Ehoala peninsula: On 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 o f port basin; and (ii)repair o f slipway, repair o f tugboats and lighters, and purchase of a forklift. 0 Rehabilitate the road network to allow better traffic betweentourist sites and Taolagnaro, better access from the rural areas, and open up the city. The project will finance design, supervision and works. 0 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 andintemational consultants), works; 0 Upgrading o f the power systemto allow 15 percent growth inpower demand. The main investments to be financed through the project consist of: (i) rehabilitation low-tension and mediumtension lines; (ii) installation o f 1.6MW o f new capacity through purchase o f new generators; and (iii) maintenance o f the generators over the life o f the project, (iv). It is 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. 0 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 EFAO site including rehabilitation o f 1O k m o f water pipes (Bezavona to city, Laniaro station to Bezavona); (ii) new pumps; (iii)rehabilitation o f 2km o f secondary network for distribution; (iv) preparation o f the new production site at Efaoa; (v) solid and liquidwaste management. Financing will cover design, supervision, works (local) and equipment. 0 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 Pads Autobloquants i s proposed. Financingwill cover design and supervision (local and intemational consultants), works 0 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 andwill provide it with a surgery block. Financing will cover will cover design, supervision, works (local) and equipment; 0 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 includingtaxes and contingenciesUS$21millionofwhich IDA financingis US$15 million) The project will support, at both central and regional levels: a- project implementation, project coordination, procurement and financial management through the provision of 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 of regional development plans and local land use plans, and the implementation of the provisions o f the EMPs, as well as the carrying out o f all environmental and social activities under the Project. 65 IntegratedGrowthPoles Program YOTotal1 Summarycosts with taxes andcontingencies IDA Components Project A. Strengtheningthe business environment 21 1. Access to fmance 7 2. MSME capacity building 4 3. Country-wide tourismdevelopmentinitiatives 3 4. Improvingthe business environment 7 B. Export led growthin Antananarivo& Antsirabe 6 1. EnhanceEPZ competitivenes 2 2. ICT BusinessPark Development 3 3. Support to Antananarivo andAntsirabe municipalities 2 C. Tourism led growth in Nosy Be 32 1. Infrastructureupgrading 30 2. Socialand SanitaryInfrastructure 1 3. LocalInstitutions Strengthening 2 D. Mining andTourism led growthinTolagniaro(Fort Dauphin) 55 1. Infrastructureupgrading 52 2. Socialand SanitaryInfrastructure 1 3. LocalInstitutions Strengthening 2 E. ProgramandProject Implementation, EvaluationandMonitoring 1s 1. Supportto program& projectmonitoringand evaluation 8 2. Support to projectmanagementandtraining 2 3. Technicalassistance for projectmanagement& monitoring 3 4. Operatingexpenses far projectmanagement 2 Total Program Costs 130 66 Annex 5: ProjectCosts MADAGASCAR: IntegratedGrowthPoles Project Annex 5-Table A Republic ofMadagascar IntegratedGrowthPoles Program& Project Components Project costs Summary (US%million) Project components Yo %Total Foreign Base ----- Local Foreign Total Exchange Costs A. Strengtheningthe business environment 17 36 53 68 18 B.ExportledgrowthinAntananarivo& Antsirabe 3 4 7 51 2 C. TourismledgrowthmNosy Be 22 28 50 55 18 D.MmmgandTourismledgrowthmTolagniaro(Fort Dauphin) 43 113 156 72 55 E.ProgramandProject Implementation,Evaluationand Monitoring -----10 9 19 50 I Total Baseline Costs ----- 96 189 285 48 100 PhysicalContingencies 3 4 7 55 3 Price Contingencies ----- 4 8 12 66 4 Total Project Costs ----- 103 201 304 66 107 Note:Figures maynot add upto total due to rounding 67 Annex 5-Table B Republicof Madagascar Integrated Growth Poles Program& Project Components Project detailedcosts A. Strengtheningthe businessenvironment 1.Access to fmance 12 26 38 2. MSMEcapacity building 2 2 4 3. Countrywide tourism development initiatives 1 2 3 4. Improvingthe business environment SubtotalStrengtheningthe business environment -++I B. Export led growthin Antananarivo & Antsirabe 1. Enhance EPZ competitivenes 1 1 2. ICT Business Park Development 2 1 2/ 3 3. Support to Antananarivo and Antsirabe municipalities 31 Subtotal Export led growthin Antananarivo & Antsirabe C. Tourism led growth in Nosy Be 1. Infrastructure upgrading 2. Social and SanitaryInfrastructure 0 3. LocalInstitutions Strengthening -- 0 SubtotalTourism led growth inNosy Be 22 28 D. Mining andTourism led growth in Tolagniaro(Fort Dauphin) 1. Infrastructure upgrading 42 111 2. Social and SanitaryInfrastructure 1 3. LocalInstitutionsStrengthening -- 1 2 Subtotal Mining andTourism led growthin Tolagniaro (Fort Dauphin) 43 113 E. ProgramandProject Implementation, EvaluationandMonitoring 1. Support to program & project monitoring and evaluation 7 5 2. Support to project management and training 0 1 3. Technical assistance for project management & monitoring 1 3 4. Operatingexpenses for project management -- 2 0 Subtotal Programand Project Implementation, EvaluationandMonitoring -- 10 9 Total BaselineCosts -- 96 189 Physical Contingencies 3 Price Contingencies 4 Total ProjectCosts -- 103 201 I I Note:Figures may not add up to total due to rounding 68 Annex 5-Table C Republic ofMadagascar IntegratedGrowthPoles Program& Project Components Project costs and financing A. Strengthening the business environment 17 36 53 68 18 1.Access to fmance 12 26 38 68 13 2. MSMEcapacitybuilding 2 2 4 42 1 3. Country-widetourism developmentinitiatives 1 2 3 86 3 4. Improvingthe busmessenvironment 1 7 8 B. Export led growth inAntananarivo & Antsirabe 3 4 7 51 2 1. Enhance EPZ competitkenes 1 1 2 68 1 2. ICT BusmessPark Development 2 1 3 47 1 3. Support to AIItaMMIiVO and A n t s h k municipalities 1 1 2 51 2 C. Tourism led growth inNosy Be 22 28 50 55 18 1.Infrastructureupgrading 22 26 48 55 17 2. Social and SanitaryInfrastructure 0 0 1 51 3. LocalInstitutions Strengthening 0 1 2 76 1 D. Mining and Tourism led growth inTolagniaro (Fort Dauphin) 43 113 156 72 55 1.Infrastructureupgrading 42 111 152 73 53 2. Social and SanitaryInfrastructure 1 1 2 51 1 3. LocalInstitutions Strengthening 1 2 2 76 1 E. Program and Project Implementation, Evaluationand Monitoring 10 9 19 50 7 1. Supportto program& projectmonitoringandevaluation 7 5 12 41 4 2. Supprt to project managementandtraining 0 1 2 76 1 3. Technicalassistance for projectmanagement& monitoring 1 3 3 76 1 4. Operatingexpensesfor project management 2 0 2 10 1 Total Baseline Costs 96 189 285 48 100 PhysicalContingencies 3 4 7 55 3 Price Contingencies 4 8 12 66 4 Total Project Costs 103 201 304 66 107 Total Financing, ofwbicb 103 201 304 100% Government 39 0 39 13% IDA 32 97 130 43% IFC 5 11 16 Private Sector 9 62 70 23% Other identifiid donors 11 17 28 To be fmnced 7 13 21 Note:Figuresmay not addup to totaldue to rounding 69 B Y Y0 `E: a, cu %4 0 Annex 6: ImplementationArrangements MADAGASCAR: IntegratedGrowthPolesProject Projectimplementationperiod. The projectwill beimplementedover aperiodof five calendar years and six fiscal years, completedby June 30,2010, andclosedby December 31,2010. Giventhe complexity and scope o f the project, a lean and efficient implementationstructure will be put inplace: Project oversight. During the project implementation, a Steering Committee (Comite national de pilotage), chaired by the Minister o f Finance, composed of representatives of the sector ministries, public utilities entities, region and town administrations, Office National de l'Environnement, 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 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 assumedby the NPS. Project coordination and implementation (SecrCtariat National). The overall coordination and implementation of 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 on a competitive basis, the NPS will be responsible for project execution, including procurement, financial management, and monitoring and evaluation, o f the various activities supported under the project. The NPS's performance will be benchmarked against timely implementation o fthe project implementationplan. I,- Sedtaire national Contracted Out Environnement 72 The main activities o f the NPS will be: (i) consolidation o f the work programs and budgets; (ii) implementation of all activities; (iii) maintenance of records and accounts for all transactions related to the NPS; (iv) preparation and production of 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 fthe 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. It is expected that some transfer o f financial management and procurement responsibilities from the NPS to regional representations may take place during the second half o f the implementation period (after the Mid Term Review) when capacities are deemed adequate following the assessment carried out bythe Bank's 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'Ope`rations " (referred as CCOPs or CCOP) or "Contrat de Maitrise d 'Ouvrage De`Ze`gue`e"(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 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 inmanaging 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 on indicators confirmed at Appraisal (Annex 2) and the project implementation plan to be finalized by the NPS 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 NPS every six months, commencing in September 2005, and submitted to the World Bank within one month thereafter. No 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, its costs andthe benefits derived andto be derived from it. Reviews. In addition to intensive supervision by the World Bank staff, reviews by the World Bank, together with the GOM and the other involved parties to assess progress inimplementing 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 attentionwill be paid to assess the private sector participation and their implication inthe program and project activities throughout the selected growth poles to eventually reorient some activities ifthe 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 inthe program andthe other involved parties, In addition to covering all areas included in annual reviews, the mid-termreview will assess the implementation status o f the national and regional components, institutional and financial arrangements, the PPP mechanisms put inplace 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 andprepare the necessary documentation for the review. The review will evaluate progress inreaching project and program objectives and identify measures needed to reach objectives. Careful attention will be paid to: (i) effective PPP mechanisms put inplace under the project; (ii) performance o f the NPS inaddressing environmental and social issues the indesign andimplementationof the different components; and(iii) performance ofthe NPS the inaddressing fiduciary responsibilities. Thiswill involvevisits byspecialists 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, andthe adequacy o f safeguard procedures agreed for the project. 74 Annex 7: FinancialManagementandDisbursementArrangements MADAGASCAR: IntegratedGrowthPolesProject Specific Financialmanagementanddisbursementarrangements 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. To 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 Minister's offices in Antananarivo. However as indicated above some corrective actions must be taken to strengthen its 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 firms 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 firms 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 inthe areas of organization and execution o f audit assignments; ii)effective participation o f the international accounting firm while carrying out audit works inthe field and submission o f audit reportjointly signed by the local and international audit firms. FMRiskAnalysis Risks Riskrating RiskMitigationMeasures ImplementingEntity: The NPS is a new entity and Moderate An accounting fm will be recruited in has no experiencewith conformity with Bank procedures to handle implementingan IDA- financed project. all aspects of the project financial management including accounting, budgeting, financial reporting, and disbursement functions. This accounting fm should be hiredprior to 08115105 FundsFlow L o w NIA Staffing L o w NIA Accounting Policies L o w NIA and Procedures Internal Audit L o w NIA External Audit The CFAA for Madagascar Substantial - Local auditors who intendto audit the concluded that country public financial statements of Bank financed 75 Ifinancial management poses a projects were invitedto enter into major fiduciary risk..The partnership with international auditing CPFA (Country Profile o f f itostrengthentheir capacity. Financial Accountability) -Effective participation o f the international carried out inSeptember i iinthe fieldwork. 1998 confirmed also the weak -auditing f Reinforcement o f the accounting profession capacity o fthe accounting the completion o f the ROSC mission. profession inMadagascar. -after Recruitment o f technical auditors to ensure the effectiveness and quality o f workslactivities carried out bythe executing agencies. Monitoringand Reporting Low NIA InformationSystems Low NIA Strengths and weaknesses Inorder to meet efficiently the challenges ofthis project, the IG2Pfinancial management willbe entrusted to an accounting firm having strong experience in managinglauditing World Bank funds. The organizational structure inplace defines the lines o fresponsibilities 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 Resolution The NPS responsible for the coordination of IG2P is Recruitment o f a qualified accounting firm in a new created entity. The mainweaknesses are the conformity with the Bank procedures and under followings: ingredients for sound project financial Terms of reference satisfactory to IDA to handle all management are: aspects o f the project financial management. Absence o f a Chart o f accounts reflecting Elaboration and implementation o f an accounting project components and activities outlined and financial manual o f procedures describing the inthe PCNPAD. new organizational structure, the staff job Absence o f an Accounting manual o f description, the chart o f accounts, the formats and procedures 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; Theproject accounting staff(NPMU)is not The selected accounting f i in charge of project recruited yet; financial management will provide IG2P with an adequate number o f skilled and experienced accounting staff; Absence o f a computerized system capable A consulting f i acceptable to IDA will be o f producing timely FMRs and other selected to design and install a computerized reports required for managing and financial management system to satisfy project monitoring project activities requirements and ensure timely production o f financial statements and FMRs. Absence of acceptable arrangement in 76 I auditing. I1Recruitment of an auditing firm acceptable to IDA to carry out the audit of project I Flow of Funds The flow o f funds from IDA, the GOM and other donors i s presented as follows: Escrow JRAMA Port Special account Account (Direct Company (PCG): Payment): (Direct SecrCtariat national Component A Coln~onent Payment): A ComponentD 1 CCOP Agencies Disbursement from IDA credit For the implementation o f IG2P the following bank accounts will be opened inlocal 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 inthe DCA. 77 Escrow/Trust Account :Denominated inU S US$, disbursement from the IDA credit will be deposited on this account to finance the FC-managed PCG in component A under terms andconditions 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 CMOD agency. The initial advance to CCOP and CMOD agencies would be made in conformity with the terms o f contract/convention between the NPS and these entities. Subsequent payments will be based on physical progress after appropriate authorization and approval bythe NPS. The special account would be replenished on the basis o f documentary evidence provided to IDNother donors by the NPS, 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 retainedby the NPS andmade available for review byperiodic donors' supervision missions and external auditors. The project implementation and accounting manuals will describe indetails 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 NPS 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. AccountingPoliciesandProcedures The NPS will be responsible for all aspects of 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 NPS 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 inMGA (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 on 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 accountingpolicies 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 inthe manual. InternalAudit Since FM and procurement activities will be handledby NPS staff during the first period o f the project implementation, the recruitment o f an internal auditor is not presently justified. The FM adviser within the NPS 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. ExternalAudit 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 on 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 inthe first reporting period o f the new project. The terms o f reference o f the audit will be reviewedby the financial management specialist o fthe Bank/IDAto ensure the adequacy of the audit scope, drawing special attention to particular risk areas identified during project preparationor implementation, that may not be emphasized under a normal audit. 79 Reporting and Monitoring To monitor project implementation, the NPS will produce the following reports that should be prepared incompliance with internationalaccounting 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) ProjectBalance Sheet; c) Special account statement; and d) Statement o f Expenditures showing individual withdrawal applications by reference number, date andamount. Quarterly FMRs The FMRs includes financial reports, physical progress reports and procurement reports to facilitate project monitoring. The FMRs should be submittedto IDA within 45 days o fthe endofthe reportingperiod (quarter). The form and content o fFMRs andannual financial statements will be determined as part o f project appraisal andbe agreed at negotiations. Models o f these reports will be presentedinthe project accountingmanual o fprocedures. InformationSystems 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 TORSfor this consultant will be reviewed by the World Bank Financial Management Specialist. The new computerized system will be fully functional before project implementationbegins. Impactofprocurementarrangements Procurement arrangements do not present substantial risk. DisbursementArrangements Method of Disbursement: 80 During the first year o f project implementation, the NPS 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 if the following criteria are met: i)the FM rating has been maintained at satisfactory level; and ii)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 fprocedures. Minimum of Application Size: 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 of Statements of Expenses (SOEs): 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 thanU S US$500 000 ; Contracts for equipment and goods in an amount inferior to US$200 000 ; Contracts for consulting services, training by firms o f less thanUS$ 100 000 ; Contracts for consulting services, training by individual o f less than US$ 50 000 ; 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 implementationsupport missions and external auditors. Special Accounts The project is 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 NPS 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 NPS 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 beusedfor all payments inferior to 20 percent o f the authorized allocation and replenishment applications would be submitted at least on a monthly basis. However to allow regular payment o f suppliers and contractors it would be more appropriate to do this more often (i-e.: every two weeks). Further deposits by IDNother 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. ActionPlan The present action plan agreed with the borrower describes main actions to be taken to strengthenthe IG2P financial management systemsand to buildits capacity to produce quarterly FinancialMonitoringReports: Actions Completiondate Responsible Agreementon Terms of referencefor the 3513112005 NPS andIDA recruitmentof: i)the accountinpfirmin charpeof FMaspects for IG2P: ii)external auditors. Recruitmentprocess of the accountingfirm responsiblefor the proiectFMaspects: 0 Finalizationandissuanceof the 06115/05 - NPS Requestfor Proposal(RFP); 0 Receptionof proposals, evaluation, 07131/05 NPS selection; 08/05/05 - NPS 0 Appointmentof the accountingfirm ; Appointmentof the NPMUaccountingstaff. 08/15/05 Consultant The consultantstarts the preparationof the accountingmanualof procedures: 0 Firstdraft of the manualfor comments 08/24/2005 Consultant 0 Validation of the final draft; 0813112005 NPSIAccfirme 0 Implementation of the manual of 08131/2005 Consultant procedures and users trainina. Desipnandimplementationof the -NPS computerizedsystem: 06/15/2005 Consultant 0 Appointment ofthe consultant; 07131/05 Consultant 0 Installation of the computerized 08/12/05 Consultant svstem; 08/19/05 Consultant 0 Systemtesting 08/26/05 0 Correctiveactions andretesting; 0 Complete users traininp and start operatingthe system; 82 Recruitment process of external auditors: 0 Finalization and issuanceof the 0613012005- NPS Request for Proposal (RFP); 1 0 Reception of proposals, evaluation, 08/15/2005 selection; 08131/2005 0 Appointment of external auditors; Production of the first FMRs (Oct, Nov, Dec 02/15/2006 2005) and submit them to the Bank. 83 Annex 7- Table A Republic ofMadagascar IntegratedGrowthPoles Program& Project Disbursementby year (inUS$million) World Bank FY 1 July-30 June - FY2006 :July 1,2005-June 30,2006 O MDisbursement Annual 2 22 9 6 1 0 39 Cumulative 2 23 32 38 39 39 39 Percentage 4% 60% 83% 97% 99% 100% Annual 4% 56% 23% 15% 2% 1% IDA Disbursement ,- .wBm 1I. 2006 II 2007 II 2008 f , 2009 II 2010 2011 ITotal Annual 7 38 46 26 11 3 130 Cumulative 7 44 91 116 127 130 130 Percentage 5% 35% 71% 92% 98% 100% Annual 5% 30% 36% 20% 6% 2% Annual 20 152 69 48 12 4 304 Cumulative 20 172 240 289 300 304 304 Percentage 7% 57% 80% 96% 99% 100% Annual 7% 51% '23% 16% 3% 1% Note:Figuresmaynot addup to totaldue to rounding The difference is :other donors (includingIFC andprivate sector) 84 Annex 8: Procurement MADAGASCAR: IntegratedGrowthPoles Project A. ProcurementArrangements 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 of World Bank Guidelines 1.Goods andworks financedbyIDAwill beprocuredinaccordance with the IDA Guidelinesfor Procurement under IBRD Loans and IDA 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 Madagascar's 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 duringnegotiations that the following principles would be adhered to: (i)all bids would be submittedin one envelope to be opened publicly; (ii) point systems would not be used for bid evaluation for works; (iii) award o f contracts would the 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 inbiddindpre-qualificationdocuments and will not be applied arbitrarily; (vi) eligible firms would not be precluded from participation; (vii) no preference margin i s grantedto 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 submittedto IDA and found satisfactory to IDAby 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 term 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 of 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 inDevelopment Business and DgMarket and at least one newspaper with nationwide circulation for ICB contracts and before preparation o f shortlists with respect to consulting contracts above US$200,000, inaccordance with the Guidelines. Procurementmethods Procurement o f Works The project will finance works contracts for an estimated total amount of US$221 million equivalent, of 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. Prequalificationwill 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 inaccordance with the provisions o f paragraphs 3.1 and 3.5 o f the Guidelines. Shoppingprocedures 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 ICB procedures. Goods with a total estimated value per contract o f less thanUS$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 fthe Guidelines. 86 Procurement o f Non-Consulting Services Procurement from United Nations agencies for supplies and works carried out under their own procedures may include UNICEF, WHO, UNDP, UNCDF and/or the International Agency Procurement Services Organization (IAPSO). The standard form o f contract with UN agencies will be usedfor suchprocurement. The itemsto beprocured from UNagencies would be agreed on inthe procurement planifandwhen to be used. Selection o f Consultants The project will finance the contracting o f consultancy services under the CMOD 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 Single- Source Selection (SSS) may be used inexceptional cases, where the provisions o fparagraphs 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 NPS for the program and project implementation monitoring and for the "Panel o f Experts" hired to monitor the program and project implementation and inparticular the social, environmental and cultural impact o fthe 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 fparagraphs 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, on 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 hiringo 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 inthe procurement plans. Operating Costs financed through the project would be procured using the implementing agency's 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 on behalf o f the GOM. 87 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 inthe procurementplans. BiddinPDocumentsandFormsof Contract The Bank's standard bidding documents, including those for evaluation reports, will be used for all procurement under ICB 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 2.11, 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 ICB - Prequalification and bidding documents in English or French; contract for ICB in EnglisWrench, i.e. the same language as that o f the bid, according to paragraph 2.15 o f the Guidelines; 0 N C B and Shopping- The documents may be prepared only inFrench; 0 Consultants - Request for proposals inEnglishor French; contract for ICB inEnglish or French, accordingto paragraph 1.20 o fthe Consultants Guidelines. Review bv the World Bank of ProcurementDecisions The thresholds for prior review by World Bank are specified inthe 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 inthe procurement plans for their conformity with the Development Credit Agreement and the applicable Guidelines. Any procurement item not specified for prior review may be subjected to a post- review o f the procurement process. 88 TableA: Thresholdsfor ProcurementMethodsandPrior Review ExpenditureCategory ContractValue Procurement Contracts Subject to Prior Threshold (US$) Method Review (US$) ~ ~ Works 500,000 or more ICB All (to be defined) 30,000 or more NCB First 3 contracts and less than 500,000 Less than 30,000 Shopping Goods 200,000 or more ICB All (to be defined) 30,000 or less than NCB First3 contracts 200,000 Less than 30,000 Shopping ConsultantServices - 100,000 or more QCBS/CQS/LC : all (to be defined) Firms II s ConsultantServices - 50,000 or more : all (to bedefined) Individuals I ICs Notes: "Prior review of the firsts 3 contracts" applies to eachphase of the project. ICB International Competitive Bidding N C B National Competitive Bidding QCBS Quality and Cost Based Selection CQS Selection Based on Consultants' Qualifications LCS Lest Cost Selection IC Individual Consultants ProcurementSectionof the FinancialProcedureManualandProiectImplementationPlan Manuals on procurement procedures have been written under other Bank-assisted projects, namely the updated version for the Transport Sector APL 3, for goods and works and for consultants. These will be used to prepare the procurement section o f the financial procedure manual and for the project implementation planfor this project. 89 Table B: Projectcosts by procurementarrangements Annex 8-Table B Republic ofMadagascar IntegratedGrowth Poles Program& Project Project Costs by ProcurementArrangements 1. Works 161 6 46 213 (79) (4) (82) 2. Goods 1 1 (1) (1) 3. Services 36 4 40 (3 1) (1) (32) 4. Training 6 6 (5) (5) 5. Operating costs 2 2 (2) (2) 6. Other costs 11 31 42 (7) (7) Total 161 7 55 81 304 (79) (5) (45) (1) (130) ProcurementPlan 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. It 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 duringnegotiations. The approvedprocurement plan will be posted on the Bank's 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 inthe institutional capacity. Any proposed revisions to the agreed procurement plan will be submitted to the World Bank for its prior approval. 90 Assessment of Procurement Capacitv InstitutionalArrangements for Procurement A SecrCtariat National (NPS) is established under the Steering Committee and will manage the procurement and implementation activities o f the whole integrated growth poles project. It 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 d'OpCrations" (CCOPs). Under the CCOP structure, the NPS 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 CMOD structure, all procurement and contract management activities will be delegated under the services contract. The main procurement hnctions o f the NPS are to (a) coordinate the preparation and updating o f the procurement plans (prepared by the CMOD or CCOP agencies andconsolidatedbytheNPS) inatimely mannerand submit themto the World Bank for review; (b) monitor the preparations o f the technical aspects o fprocurement (terms o f reference, bills o f quantities, technical specifications, and the like) by the CMOD agencies in consultation with participating ministries and agencies and assist them in the preparation as necessary; (c) ensure that the CMOD or CCOP agencies carry out the procurement according to the Bank's 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 CMOD or CCOP agencies in collaboration with the participating ministries and agencies and assist them with contract management as necessary. The CCOP or CMOD agencies inconsultationwith the NPS will beresponsible for preparingthe initial requirements for procurement, including the terms o f reference, bills o f quantities, specifications, and the like, and providing them to NPS for review and no objection. The CCOP or CMOD agencies will conduct the procurement process, under the NPS monitoring up to the award o f contract. NPS may participate inthe 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 CMOD agencies. Depending on the implementation agreement reached under each component, the contracts will be signed either by the head o f the NPS or by the CMOD agency. The NPS will monitor contracts. Under CCOP arrangements only, payments for contracts will be madeby the NPS against certification received from the ministqdagency responsible for the particular contract. Procurement RiskAssessment and RiskMitigation Three major problems were identified: transparency, enforcement, and lack o f capacity. Specifically: 0 Weaknesses of the legal framework and lack of enforcement. The procurement code as o f august 1998 i s complex and could not assure an efficient andtransparent competition. The new code is addressing this issue. 0 Weak procurement organization and capacity. The ambition o f the new procurement code i s to be inline with internationalpractices. An assessment o f institutional capacity 91 will be conducted to assess the capacities anddefine the appropriate capacity building andrecruitment program. 0 Weak audit and anti-corruptionmechanisms. The promulgation ofthe decree 2002- 1128 on Sept 30,2002 settingup the CSLCC (the anti-corruption council) was the first measure inthe implementation ofthe anti-corruption strategy of GOM. It was followed bythe implementationofthe BIANCO andthe PenalChain 0 Paymentdelaysresultin higher awardprices. The CPAR/CFAA joint mission came upwith the assessmenton the chain ofpublic finance expenditure. The analysis shows that there is a lot o f delays inpayment, mainly for the VAT which resultedto higher contract prices. This i s also combined with the highcost o f imported goods at the custom level. The overallproject risk for procurement is MODERATE Frequencyof ProcurementSupervision The frequency o f procurement supervision i s proposed to be once every 4 months inthe first year andonce every 6 months insubsequent years. Every supervisionmission should include a post- review o fprocurement decisions. 92 Annex &Table C Republic ofMadagascar IntegratedGrowthPoles Program& Project ProjectComponents by Year -Totals IncludingContingencies (US%MCbn) ------__2008 TotalIncludingContingencies 2006 2007 2009 2010 2011 Total A. Strengtheningthe business environment I.Accesstofmance 4 10 11 9 3 3 39 2. MSMEcapachybuilding 0 1 2 1 0 0 4 3. Countrywide tourbmdevelopmentinitiatives 0 1 2 1 0 0 3 4. Improvh.lgthe businessenvironment -------5 1 1 0 0 0 8 Subtotal Strengtheningthe business environment 9 14 15 11 3 3 55 B. Export led growth in Antananarivo & Antsirabe I.EnhanceEPZcompetitivenes 0 1 1 0 0 0 2 2. ICT BusinessParkDevebpment 1 2 0 0 0 0 3 3. Support to AntananalivoandAntsirabemunkipafities ------__ 0 1 1 0 0 0 2 SubtotalExport led growth in Antananarivo & Antsirabe 1 4 2 0 0 0 7 C. Tourismled growthinNosy Be I.Infrastructureupgrading 2, 15 21 13 0 0 52 2. SocialandSanitaryInfrastructure 0 0 0 0 0 0 1 3. LocalInstituhnsSeengthening SubtotalTourism led growthin Nosy Be 3 16 22 14 0 0 55 D. Mining and Tourism led growthin Tolagniaro (Fort Dauphin) I. hhmuctureupgrading 3 112 23 I 8 4 1 162 2. Socialand SanitalyInfrastructure 0 1 0 0 0 0 2 3. LocalInstitutbm Strengthening -------0 1 1 0 0 0 3 SubtotalMining and Tourism led growth in Tolagniaro (Fort Dauphin) 4 114 25 18 4 1 166 E. Program and ProjectImplementation,Evaluationand Monitoring I.Supporttoprogram&projectmonitoringandevaiuation 1 2 3 4 3 0 1 3 2. Support to projectmanagementandtraining 1 1 0 0 0 0 2 3. Technicalassistance for propctmanagement& monitorhg 1 1 1 1 1 0 4. Operatingexpenses for propctmanagement 0 0 0 0 0 0 SubtotalProgramand Project Implementation,Evaluation and Monitoring -------421 --- 3 4 4 5 5 0 2 Total Project costs --- 20 152 69 48 12 4 304 93 Republic ofMadagascar Integrated GrowthPoles Program & Project Detailed AUocation o f I D A Credit Proceeds .Works (a) Works under Part A 10 85% of total expenditures @) Works under Part B 2 6 85% of total expenditures (c) Works under Part C 213 85% of total expenditures (d) Works under PartD 49 2 85% of total expenditures Subtotal Works 80.1 !.Equipment & Goods (a) Goods under Part A 5 1 100% of foreign expenditures, 85% of localexpenditures @) Goods under Part B 0 5 100%of foreign expenditures, 85% of local expenditures (c) Goods under Part C 100%of foreign expenditures, 85% of localexpenditures (d) Goods under Part D 100% of foreign expenditures, 85% of localexpenditures (e) Goods under Part E 0 5 100%of foreign expenditures, 85% of localexpenditures Subtotal Equipment & Goods 6.1 3. Engineering & Consulants' Services (a) Engineering Services 2.8 ( i ) underPartA 100%of foreign expenditures, 85% of localexpenditures ($ under Part B 100% of foreign expenditures, 85% of local expenditures (@ underPart C 1 5 100% of foreign expenditures, 85% of localexpenditures (iv)underPart D 1 4 100%of foreign expenditures, 85% of localexpenditures (v) under Part E 100%of foreign expenditures, 85% of localexpenditures (b) Consultant Services 4.4 ( i ) under Part A 0 9 100% of foreign expenditures, 85% of localexpenditures (n) under Part B 1 0 100% of foreign expendims, 85% of localexpenditures (@ underPart C 0 0 100% of foreign expenditures, 85% of localexpenditures (iv) under Part D 0 5 100% of foreign expenditures, 85% of localexpenditures (v) underPart E 2 0 100% of foreign expenditures, 85% oflocalexpenditures (c) Technical Assistance 17.6 (i) underPartA (aunder 8 9 100% of foreign expendims, 85% oflocalexpenditures Part B 1.5 100% of foreign expenditures, 85% of local expenditures (m) under Part C 1 6 100% of foreign expenditures, 85% of local expenditures (iv)under Part D 1 8 100%of foreign expenditures, 85% of local expenditures (v) under Part E 3.8 100%of foreign expenditures, 85% of localexpenditures Subtotal Engineering & Consultants'Services 24.9 4. Training (9 under Part A 2 1 100% of foreign expenditures, 85% of local expenditures (n) under Part B 0 5 100%of foreign expenditures, 85% of localexpenditures (m) under Pan C 100% of foreign expenditures, 85% of localexpenditures (iv) under Part D 100%of foreign expenditures,85% of localexpenditures (v) under Part E 1.5 100% of foreign expenditures, 85% of local expenditures Subtotal Training 4.1 5. Insurance capacity under Part A 2.6 100%of total expenditures 6. Operating costs under Pan E 1.9 100% of total expenditures 7. Other costs (ESIA moitigation measures under Part B, C and D) 4.0 100% of total expenditures 8. JlSJlE Grants under Part A 1.o 100% of total expenditures [Unallocated 3.2 1.9 \Total Credit Amount 129.8 94 Annex 9: EconomicandFinancialAnalysis MADAGASCAR: IntegratedGrowthPolesProject Export ledgrowth in Antananarivo-Antsirabe The main objective of the Antananarivo-Antsirabe Pole component o f the IG2P is 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 inAntananarivo. This objective should be achieved by (i) improving off-site physical and social infrastructures (water and sanitation, electricity, roads, telecommunications) around a forthcoming ICT Business park in Antanetibe and around the existing EPZ in Antananarivo and Antsirabe, (ii) improving the EPZ administration and customs procedures; and (iii) developing labor skill and services to micro, small and medium enterprises (MSMEs). The total amount o f investment from the IG2P inthis particular component will beU S US$17.5 million (see: 4. economic costs). InMadagascar, the key areasofcompetitiveness for the garmenthextile industryare inlabor cost andproductivity, cost and quality o f utilities (energy and telecommunications), cost o f industrial facilities (factory space rental or construction), logistics cost andtime, 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 MultiFiber Agreement (MFA) and Africa Growth and Opportunity Act (AGOA) could seriously threaten Madagascar's competitiveness inthe 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 ICT firms, resulting in a better investment climate for higher output and increased employment. On 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 Madagascar's textile/garment EPZs for an increased competition on price and quality with emerging competitors like China. 2. EPZ and ICT inMadagascar" The EPZ sector is dominated by fairly well established garment and textile firms, located mostly inAntananarivo and AntsirabC, which contribute to almost 90 percent of its value added andis the fourth largest exporter to the U S among AGOA suppliers. The industryhas rapidlygrown to over 230 firms employing around 130,000 workers in 2004, with an average annual rate o f 21 percent between 1996 and 2001. Of those workers, 75 percent are women. EPZ exports contributed about US$200 million in2003 (40 percent o fMadagascar's total exports), 10percent 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 sectionisbuilt ontheDevelopment PolicyReview, Volume11-Technical Annex, WorldBank,2004andpreliminary 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 ", Interimreport, TebodinB.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 seenbefore the crisis in2001. The ICT sector in Madagascar is small but has encouraging potentials for growth, specifically: (i) smallenterprisesinvolvedinsoftwareandITservicesemploying300people;(ii) firms 50 20 involved in software programming, data conversion, systems integration, IT consulting and training and (iii) a small number o f offshore data processing firms. There are no existing call centers inMadagascar, although Mauritian entrepreneurs are reportedly planningon establishing training and call center facilities. Most o f the existing ICT firms have an EPZ status and will be classified as such inthis economic analysis. Although a small number o f textile andgarment firms are locatedwithin private industrial zones, the rest are scattered in outer, congested urban areas. The firms 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. GOM has identified an unused telecommunications training facility located inAntanenbe to develop the ICT Business Park. The 8 hectares site i s unoccupied and has open spaces available for the constructiono fnew facilities. 3. Basis of 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 component's 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 firms (both garment and ICT 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 fbenefits are: (i) employment creation, ifthe wage received by the worker exceeds the social opportunity cost o f employment in the zone, (ii) backward linkages o f EPZ or ICT 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 cost o f supplyingthem; (iii) purchase o f utilities (water, electricity, telecommunications), ifrates 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 firms. 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 sectioni s built upon Adam Schwartzman's Economic analysis, IG2P Component 1, Concept note, processed, 2004; Peter G. Warr's Export processing zones: Theeconomics of offshore manufacturing, processed, 1987; andAlessandro Nicita and Susan Razzaz's K4o benejts and how much? How gender affects welfare impacts of a booming textile industry. World Bank, 2003. 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 firms are engaged inlow-skill, lightmanufacturing. 4. Economic Costs Economic costs associated with investment in the Antananarivo-AntsirabC pole are divided into four categories: (i) investment cost o f off-site physical and social infrastructures; ii)investment cost o f labor training, services to MSMEs, EPZ administration and customs procedures; (iii) recurrent costs that occur only on physical and social infrastructures after project completion (starting in 2011 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)the fillbase-cost without taxes and duties o f the IG2P's component B (Export Led growth in Antananarivo and Antsirabe?; (ii) percent o f the fill base-cost without taxes o f 30 IG2P's component A (Strengthening the business environment) and; (iii) 20 percent o f the base- cost without taxes o f component E (Program and project implementation, evaluation and monitoring). The total amount o f investment costs, as mentioned inthe 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 inphysical 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 duringthe 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 project's environmental and social prevention. Provisions for environmental andsocial impact prevention are included inthe project management component. Hypothetically, 20 percent o f the base cost without tax, or US$2.5 million, is supposed to be used for the Antananarivo-AntsirabC pole, the cost o fnegative environmental externalities inthat component. The cost o f achieving the project's objectives is summarized intable 1below. It also shows the contribution o f each o f the major cost categories to the calculated present value o f the Antananarivo-AntsirabC pole component. The calculations assume a real discount rate o f 10 percent, a total life o f public investment o f 25 years and use o f foreign currency (US$) at the border price level. 97 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 US$1.8 C Mitigating social and Environment impact US$0.6 0.1 0.1 0.2 0.2 0.2 0.0 0.0 Recurrent cost Or0 0.0 0.0 0.0 0.6 11.2 ~ US$3.1 0.0 Total USs16.3 1.8 5.8 5.1 3.9 0.4 0.6 11.2 Source: Proposed Investments per pole in IGZP-links COSTAB-Appraisal Construct New FD Port. Cumulatively, the hypothetical present value o f the Antananarivo-Antsirab6 pole's 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 project's environmental and social preventioni s negligible, accounting for less than 4 percent o fthe present value. 5. EconomicBenefits As stated in the section 3, incremental economic benefits of the IG2P's 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 ICT firms, compared to the situation without IG2P's investment in the Antananarivo-Antsirabk pole. 51. Wages Wages will provide economic benefits from the country's perspective ifthe wage received by the worker exceeds the social opportunity cost of employment in the zone. Estimations o f the incremental wage bill paid to domestic workers associated with activity o f new firms located in the new industrialpark normally require data collection on the characteristics of firms inthe EPZ sector. The social opportunity cost o f employment inthe 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 on wage bills for unskilled and semi-skilled workers in EPZ exist. Despite this lack o fdata, guess-estimates o fthe economic cost o f labor inMadagascar 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 job 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 of the volatile exchange rate, this analysis stayed on the conservative side 98 The beneficiary i s only the worker and hisher family because this additional wage i s net o f tax, The effect o f job creation in the textile industry goes beyond increase in income and greater stability o f employment experienced by its 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 membersof households inwhich one or more members work inthe textile industryare indirectly affected. It is believed that eachworker affects the welfare o f about 4.2 individuals". 52, Taxes,other Fiscal Revenuesand Backward Linkages Financial cash flow estimates for rent, tax, electricity and material goods paid by EPZ firms require data collection on the firm characteristics in the EPZ sector. For analysis, the sources should be the commissioned financial and technical study: "Economic and technical feasibility 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, intheory, derived from the on-going ICA. 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 country's 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 (VAT) are paid back, as stated in Law on EPZ (LO1 No. 89-027, 91-020). In some cases, tax exemptions are removed after a period o f time, but tax revenues still stay low because o f transfer-pricing practices. Records show that the impacts o f EPZs on local raw material to be generally low 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. Incontrast, prices inChina are as low 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, untilthe fee reaches their long term marginal cost. Insum, it is unlikely that EPZsare goingto paytax revenues andadditional rentonraw material, land and utilities well above their social opportunity costs. 6. Resultsof the Benefit-CostAnalysis 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 inEPZs, i.e. US$330 per additional worker and per year. That result is coherent with the fact that for companies inthe garment and textile industries, the availability l9Nicita andRazzaz, 2003 99 and trainability of labor inaddition to low labor costs provide the major incentives to establish a manufacturingplant inMadagascar. Ifthe investment ina mix ofhardand soft infrastructure is technically sound, part ofthe fkture rate o f growth o f output from EPZs should be a consequence o f it. Without any major external shock, the EPZ's rate o f growth should be at least 5 percent a year, the average rate o f economic growth targeted by the GOM's 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 1percent growth inemployment inthe EPZs. 7- Figure 1:Number of textilejobs created by IG2P cumulative number of additional textile jobs (,OOO) I 25 I 20 15 10 5 0 I I Staying on the conservative side and assuming that there are currently 100,000 full-time workers employed inthe 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 freturn (ERR) o f 10.5 percent. This break-even economic analysis reveals that the investment in Antananarivo-AntsirabC is 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 job each year and US$1 a day represents the switching values. It means that ifless than 1,000 newjobs are created each year or if a US$a day as the textile industry's wage premium is overestimated; the NPV o f Antananarivo-AntsirabC pole component will be negative. The most critical variable for the component's worth is undeniably the number o f new jobs that will be created each year. Madagascar car has indeedthe potential to create with IG2P's help such a number o fjobs, but its magnitude will depend a lot from factors outside o f the project. Main gainers of the investment will be local rural and urban population of 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 InMadagascar, likeinmanyother countries, EPZseconomic impacts are limitedtojob 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 inthe Antananarivo-AntsirabC pole. However, the investment decisions o f EPZ firms 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 inMadagascar take advantage o f favorable AGOA, MFA andother regional trade agreements relatedto textiles. IfMadagascar is unable to continue to benefit from these trade agreements or unable to maintain its advantage interms 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 Be each year, making the small islandMadagascar's primary tourist destination. Tourism is indeed an increasingly important economic sector inMadagascar. The number o f tourists grew at a rate o f 10percent duringthe last fifteen years, reaching220,000 in 2004, and the World Tourism Organization (WTO) is 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 Bepole component o f the IG2P is to increase tourism inNosy Be 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 fmicro, small and medium sized enterprises (MSMEs) will be enhanced. *'These additionalrooms would cost the tourismindustry an investmentof at least $80 million. 101 2. TourisminMadagascarandin 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 ftourism inthe region, attractingmore than 100,000 visitors each year. Five additional protectedareas, however, remainuntapped ecotourism destinations. Tourism in Nosy Be and the surrounding archipelagos are not exactly a sun-sand-and-sea destination like Seychelles or Maldives. On the other hand, short sea excursions allow tourists sojourning in Nosy Be to visit numerous natural sites, such as Tany Kely for its 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 Be's nickname i s the "perfbmed island") and the Mitso, Nosy Hara and Radama archipelagos, further from the main islandbut famous for their spectacular coral reefs. Lokobe natural reserve is another (popular) destination situated in the southern region of 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, inaddition, already face pollutionproblems due to an excessive number o f visitors duringthe high(andunregulated) tourism season. 3. Basisfor EconomicAnalysis2' The approach to estimating the economic benefits o f the Nosy Be 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 on 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 depends on estimating: (i) the additional numbers o ftourists 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 on scarce and finite natural resources, it has a unique ability to generate economic rents that are proportional to the very uniqueness o f the tourism asset, being fairly low for sun-sand-and-sea destinations, and potentially very highfor eco-tourist destinations like 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. IfGOM, as the owner o f these natural resources, is not puttingforth the efforts and regulations necessary to capture these tourism rents, the rents ultimately end up in the hands o f the private sector (which is not necessarily a bad thing if rents remain within the country as extra-wage earnings for the local population) or remain inthe pockets o f the tourist (that is, the tourists' full willingness to pay to enjoy these natural resources i s not maximized). *' Thissection i s based on John Dixon's Estimating Jordan Tourist Rent, 1998 and Hamilton, Carret's Madagascar Public Expenditure Review on the Environment, 2004. 102 Consequently, major categories of incremental economic benefits from the component will be: (i)primary sources of fiscal revenue from tourists; (ii) implicit rent in average tourist the expenditures during visitation, (iii) the difference between the social opportunity cost o f labor andthe average working wage inthe tourism sector; and (iv) the portion o ftourist's willingness- to-pay surplus that can be tapped through an excursion site entrance fee, assuming a demand for recreationinelastic to a moderate excursion site entrance fee. 4. EconomicCosts Economic costs associated with investment inthe Nosy Be pole are divided into four categories: (i)investment cost of physical, social and sanitary infrastructure; (ii)investment cost of reinforcing local institutions and the business environment o f MSMEs, (iii) continual cost o f social and sanitary infrastructure; and (iv) negative environmental externalities. Regarding the project, investment costs are divided into three categories (i) the 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 inthe introduction, US$48.9 million (see table 1below). 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 million per year at the fifth year o f the project (physical infrastructure investmentoccurs duringthe first four years). Negative externalities associated with hard infrastructure investments and related private investments in Nosy Be are negligible and can be assimilated in the cost o f the project's 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. Inthe latter case, roads will not be improved or extended in fragile and useful ecosystems like 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 MECIE framework. Provisions for the cost o f the environmental and social impact prevention are included in the project management component. Costs for hotel EIAs will be supported by the private sector and consequently are not taken into account in that component's economic analysis. Hypothetically, 20 percent o fthe base cost without tax or US$700,000 is targeted for use inthe Nosy Bepole. The cost o f meeting the project objectives are summarized in table 1below, which also shows the contribution o f each o f the major cost categories to the calculated aggregate present value o f the Nosy Be pole's economic cost. The calculations assume a real discount rate o f 10 percent, a total life o f public investment o f 25 years and use o f foreign currency (US$) at the border price level. 103 Table 1:Nosy Be GrowthPole Project investment, recurrent and mitigation costs (US$million) ~~ ~ PV Type of Investment (US$ millionlFiscalyear) 2006 2007 2008 2009 2010 2011 2012-2030 Tourism Led Growth 33.2 2.1 13.2 17.6 10.4 0.2 0.0 0 Business Environment 1.3 0.1 0.5 0.5 0.4 0.1 0.1 0 Project Management 2.3 0.4 0.8 0,9 0.9 0.0 0.0 0 Mitigating Social and Environment Impact 0.5 0.1 0.1 0.2 0,2 0.1 0.0 0 Recurrent Cost 12.4 0.0 0.0 0.0 0.0 2.1 2.1 39.8 Total 49.7 2.7 14.5 19.2 12.0 2.5 2.2 39,8 Source: Proposed Investmentsper pole in IG2P-1inksCOSTAB-Appraisal Construct New FD Port. According to these hypotheses, the present value o fNosy Be's 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 cost's present value. Recurrent costs are 25 percent o f the total, a non-negligible leveljustified 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 component's present value. This percentage, however, does not include provisions for managing the natural assets, regions that will be subjected to four times the current numbero ftourists. 5. Economic Benefits As stated insection 3, incrementalbenefits o f the IG2P's investment inthe Nosy Be 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 andwages 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. InMadagascar, EPZs are exempt from corporate, trade anddutytaxes andthe value added tax (VAT) i s paidback, as stated inlaw 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 is 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, still 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 tourist's use o f the destination. International experience has shown that demand for hotel rooms inquality tourist destinations such as Nosy-Be which i s not a regularbeach destination, is quiteprice-inelastic. 104 Assuming that a visitor spends an average 5 days (studies suggest that the average length o f visits is usually more than two weeks) inthe small island on a 1.5 double occupancy rate basis, nightly hotel tax and visas fee revenues are US$37.5 per additional visitor to Nosy Be at current level o f the nightlyhotel tax. Economic Rent Portion on the Expenditures (Backward Linkages) Inaddition to taxes on hotel rooms and meals, visitors purchase many other services and goods while in Nosy Be. These include transportation, guide services, souvenirs and other day-to-day expenditures. Although not all of these expenditures directly benefit the Madagascan economy (for example, vehicles and fuel used for transportation are both usually imported), a portion of these expenditures can be counted as tourism rent. This analysis estimates that the rent share on average expenditures per person per day, for transportation, guides and souvenirs i s about 20 percent o f their expenditures over and above hotel price. For a typical visitor to Nosy Be, room, breakfast and dinner are provided at US$lOO per day by most o f the hotels, including VAT. As stated above, visitors mainly stay on 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 on 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 on average expenditures i s 20 percent, then each visitor accounts for an additional US$12 per stay. Excursion Site Entrance Fees All Nosy Be excursion sites, such as bays, forests and reefs, belong to the GOM. Currently, no fees are imposed at tourist sites andtourists 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. InMadagascar, park entrance fees are US$8 for foreigners and have been recently increased to US$12.5 for the 10 most frequented protected areas. Half 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 Be 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. TourismIndustry 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 22Less frequent expenditures in scuba diving, fishing, sailing and other tourist options inNosy Be, are not included inthis calculation. 105 tourist that visits Nosy Be 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 job creation in the tourism industry goes beyond increase in income and greater stability of employment experienced by its 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. It i s believed that each worker affects the welfare of about 5 individuals. Composition, Availability and Impact of the Incremental TourismRent Each additional visitor to Nosy Be generates about US$97 o f incremental benefit for the country, based on a 5 day average stay (see figure 1below). Two-thirds o f this value, derivedfrom fiscal revenues (visa fee, hotel tax and a shared entrance fee), will benefit the state. The local community will receive the remaining one-third through employment generation (hotel wages andbackward linkages) andthe shared entrance fee. Figure1:Composition of incremental benefit from additional visitor 35 , I 28 ee 21 14 7 0 Interms ofthe availability ofincrementalbenefits, visa fee revenue will go to the GOM, butthe hotel tax and entrance fees, ifconsumer's surplus i s captured by the GOM, would be available at the local level, which could be used to finance any recurrent incremental cost generated by infrastructure investments. Through employment creation and backward linkages, the project may also help to alleviate poverty inthe region. Currently, most o f the island inhabitants live around or below the absolute poverty line (US$l a day), the standard for rural areas in Madaga~car~~.Consequently, people benefiting from employment will move from the absolute poverty line to the relative poverty line (US$2 a day) approximately, one Nosy Be 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 23InMadagascar, povertyis rural innaturewith 80 percentofthe ruralpopulationbeingpoor in2003 comparedto apovertyrate of 52 percentinurbanareas. Source:DevelopmentPolicy Review, 2004. 106 their own needs and their children as well. Consequently, the impact o f employmenton poverty alleviation will be greater than the monetary aspect. Additional Visitors The islandis now endowed with 900 hotel rooms that have a thirty percent year round average with peaks at year end and the highseason. On average, the double occupancy is 1.5 tourists and the average length o f stay 5 days, during a 330 day season. Each year, it 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 of tourists sojourning inNosy Be will remain constant is tenuous at best, even with the recent extensionofthe airport runway to accommodate planes the size o f Boeing 767s and a new liaison between Milan and Nosy-Be. Figure2: Number of additional tourist and tourism industryjobs with IG2P I 250,000 12,000 200,000 9,000 150,000 Numberof additional 6,000 tourists ~ 100,000 N r h r of cumlatie 50,000 3,000 I 0 0 2006 2010 2014 2018 2022 2026 2030 I With investments in the Nosy Be pole, the appraisal team believes that the number o f hotel rooms will grow at a rate of 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 of IG2P's implementation and 245,000 people in 2030, a third o f the present number of 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 inthe tourism industry o f Nosy Be will then be 3,000 in 2012 and 12,000 in2030, half the number o f jobs that should be created in the textile industry (see Antananarivo-Antsirab6 pole economic analysis) 6. Resultsof 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 18percent, substantiallyabove the cut-off discount rate or 10percent. 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 component's outcome i s GOM's capacity to tap into tourist willingness to pay (WTP) to enjoy nature, which could be realized through the 107 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 inthe scenario with an excursion area entrance fee at US$8. The component's worth is also sensitive to the number o f additional rooms that are going to be created. 400 additional rooms built at project completion inspite of 1,000 will make the NPV negative and is then the switching value andthe investment inthe Nosy Be pole i s not worth for the country. However such a slow pace o f room construction is considered very unlikely given the current tourist industry dynamic inthe Indian Ocean region, particularly inNosy Be. Table2: Summary of costs and benefits, NPV as of 2004 (2004 US$million) PV Type of investment (US$ millionlFiscal year) 2006 2007 2008 2009 2010 2011 2012-2030 Visa Fee 17.5 0.1 0.3 0.5 0.7 0.9 1,3 76.6 HotelTax 3.8 0.0 0.1 0.1 0.1 0.2 0,3 16.5 Backward Linkage 33.8 0.2 0.5 0.9 1.3 1.8 2.4 148.3 Wage 10.9 0.1 0.2 0.3 0.5 0,7 0.9 44.2 NaturalArea Entrance Fee 19.4 0.7 0.9 1.0 1.2 1.4 1.6 71.5 Cost (Investmentand Recurrent) (49.7) -2.7 -14.5 -19.2 -12.0 -2.5 -2.2 -39.8 Net Benefit (ERR 17.9%) 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) Be locals, with a net benefit o f US$44.7 Nosy million without entrance fee; (ii) the U S with US$21.3 million without entrance fee, and 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 Be 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 IntheNosyBepole, the expectedincrementalbenefits, basedonreasonableassumptions about a sustainable increase inthe number o f visitors and GOM's 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. Inaddition, the development ofthe tourist industry inthe islandwill create 3,000 newjobs at 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.MiningandTourismledgrowth inTaolagnaro The objective o f the Tolagnaro pole component is to promote export-based growth inthe 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 inMadagascar: GDP per capita is US$180, a stark contrast to the nation's 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 projectedto 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 inthree areas: (i) rehabilitation, in road order to increase export-oriented cash crop production (sisal, litchi and rosy periwinkle) and promotion of nature-based tourism; (ii) social infrastructure (water, electricity, telecommunication and public health) in Tolagnaro, to improve public amenities; and (iii) local 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 its participation to the financing o f the new port according to the fallout o f the PPP andthe expected additional impact o fthe port on export-oriented activities. 2. Agriculture,TourismandMininginthe TolagnaroRegion 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 producedinthe Ranomafana Valley, North o f Tolagnaro. Inaddition, 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 is imported every year, such as at the national level, through the existing port to adequately supply the regionaldemand. 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 byroad, and a few take cruising boats from South Africa (5 boats a year). Currently, miningactivities are non-existent, but Rio Tinto has beenplanningto start an ilmenite miningoperation in Tolagnaro for at least the last fifteen years. Ilmenite contains Titanbioxide (TiOZ), which is used to produce white pigment (95 percent) and titan (5 percent). The Ilmenite of Tolagnaro i s one o f the world's highest grades: It holds approximately 60 percent o f TiOz, rutile and zircon and i s richer than the other world deposits located in Canada, USA, Australia and South Africa. The world's current ilmenite production i s 4 million tons, and is projected to grow at a rate o f 2 to 3 percent per annum. Rio Tinto's estimated share o f the ilmenite market i s between 25 and40 percent. 3. Basis for EconomicAnalysis The type and magnitude o f the expected incremental economic benefits o f the project depend on what would have been the situation inthe 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 It is probable that Rio Tinto would eventually invest in the mine because o f the exceptionally rich metal deposit o f ilmenite, zircon and rutile, but without the project, this necessary 109 investment in miningoperations would be delayed many years (they have already beenworking 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 inconjunction with the IG2P in2006. The time needed for investment in the mine in the two situations depends then on following factors: (i) the evolution o f demand for ilmenite in the world market, (ii) socio-economic the context in the other countries where ilmenite i s mined, and (iii) the negotiations between 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 in2009 inthe with-project situation. From Rio Tinto's point o f view, the mining operation needs to be developed along with a strategy to export the ilmenite. Fort Dauphin's 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 miningproject, 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$35 million investment (and additional operating costs), or (ii) load the ilmenite through a new multi-modal port with a breakwater (no interruptions due to waves) at an estimated total o fUS$S5 million. Without public participation inthe multi-modal port, it is believed that Rio Tinto would invest in a floating buoy facility, at its own expense, to export the ilmeniteto its Richard's 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 inthe 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 inthe 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 fUS$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 be 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: Its present value has been calculated for that analysis between US$25 andUS$40 million, a fimction o f the number o f years gained. Moreover, some o f the incremental agricultural benefits are linkedwith 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 inthe two alternatives. In sum, in the alternative inwhich the old port is rehabilitated, the NFV of the project will be diminished from an amount o f at least US$15 million. For that reason, it has beenrejectedby the appraisal team 24Another option, a dredged sheltered port inthe Anosy River has beenrejected for environmental reasons. 110 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 ina legal agreement, at the beginningo f the project in2006, 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 miningrent captured by the country from the ilmenite project compared with a situation where the mininginvestmentwouldbe delayed for another five years. Note that cost savings associated with the progressive restorationo fthe former export andimport capacity o f the port cannot be counted as benefits for the country because the new port will probably be runby a Rio Tinto subsidid6. Consequently, savings inport operating costs, such as cost o f ship time inport and cargo handling charges on normal regional conventional traffic, will partly benefit to the country. Benefits from national transshipment and international trans- shipment will not, conservatively, be retained. On the other hand, savings intransportation costs to and from the two other ports (Manakara and Toamasina), which are currently incurred to compensate the declining capacity o f the Tolagnaro's port, and saving on 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) the other related physical and social infrastructure and business environment investments in the port hinterland (Anosy Region), and (iii)the negative environmental externalities borne by the Anosy region. Government Contributionto the Multi-Modal Port The construction o f the multi-modal port i s supposed to take place at the Northern promontory of 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 waves27and sedimentation28as 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 oil 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 25 Due to limited data, and the greater relative importance o f other factors, shadow pricing i s not included in this analysis. Consequently, no foreign exchange premiumhas beencalculated. 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); (ii) the the routine maintenance, major repairs and renewal o f infrastructure; and (iii) the port operation services: handling, ''warehousing,oship servicing (pilotage, mooring, possibly towage). Analysis f extreme waves gives a 100 year retumperiod for significant wave height o f 7.5 meters at the head of a breakwater. '*With the existing situation, there i s no deposition inthe proposed area for the port but a groin (?)extending to the minus5 to 7 meters contour mayberequiredto prevent sand deposition inthe port area. 111 will have a capacity two or three times the old port's 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 port's 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 of the mining rent sharing, the GOMhas 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 fthe concessionaire andwill not have any cost to the domestic economy. Investment and Recurrent Costs Investment costs are composed of: (i)the full base-cost without taxes o f component D (Mining and Tourism led growth in Fort dauphin), (ii) 25 percent o f base cost without taxes o f component A (Strengthening the business environment), and (iii) 50 percent o fbase cost without 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 1below) 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 duringthe 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 project's 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. Rio Tinto i s already planning to commit US$2 million per year as part o f its social, community and environmental programs in order to discharge its corporate citizen responsibility2. Provisions for the cost o f environmental and social impact 29 The altemative solution faces two technical constraints: (i) rocks o f sufficient caliber or size (minimumo f natural 20 tons) have to be found near the port site; (ii) natural rock, the investment cost is then lower, but recurrent with costs might be hgher as well as foregone revenues due to interruption o f the port functioning after cyclone damages, this risk will have to be addressed inthe concession's contract. 30 That proposition i s true if the financial analysis o f the port shows a positive return. If not, the government will have to subsidize the private operator and the recurrent cost o f the project will increase form 2.2 million a year to 3.9 million a year, 31Inthat case, the loss o frecreational value o fthe Ehola Peninsulabeachdue to the portconstruction inside the bay, which harbors the beach, will encourage people to go further to findpristine beaches. A s sea tourism and recreation activities are poorly developed inthe Fort 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 new multi-modal port. Moreover, Fort Dauphin will not develop interm o fbeach tourism. 32A Social and Environmental Impact Assessment (SEIA) for its ilmenite miningproject was reviewed in2001by Conservation International (CI) and, in2004, by Environmental Resources Law (only for the social aspects). At this stage, there are some concerns about potential negative issues linked to the social impact o f the project, as mentioned in the above social assessment. An independent SEIA financed by the World Bank was disclosed o n March 8,2005. 112 prevention are included inthe project management component. Hypothetically, 60 percent o f the base cost without tax or US$2.5 million i s supposedto be used for the Tolagnaro pole. By hypothesis, the incremental residual value is taken at 50 percent o f the GOM investment in the multimodal port and counted as a benefit that occurs the last year o f the project. With a public investment inthe port 35 million, it diminishes the present value o f the initial investment inthe port from anamount o f 1.6 million. The costs of project objective achievement are summarized in table 1 below, which also shows the contribution o f each o f the major cost categories to the calculated aggregate present value o f the Tolagnaro pole's economic cost. The calculations assume a real discount rate o f 10 percent, total life of public investment o f 25 years and use o f foreign currency (US$) 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 BusinessEnvironment 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 MitigatingSocial 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 Investmentsper pole in IG2P-1inksCOSTAB-AppraisalConstruct New FD Port. Thus, the present value o f Tolagnaro pole's economic costs will beUS$80.7 million. The bulk of the cost lies in infrastructure investment (including participation in the multi-modal port), which accounts for 73 percent o f the component cost's present value. Recurrent cost will be important, representing 16 o f the remaining27 percent o f the component cost's 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. Inthe worst case, inwhich GOM has to finance 100percent the recurrent cost o f its investment part, present value would be US$10 millionmore important. 5. EconomicBenefits As stated inthe section 3, incremental benefits o f investment inthe 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 ingreater 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 113 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. Inaddition 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, redpepper and onions. With FOB prices are US$700 per ton of 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 androsy 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 infarmer organization for benefit realization to occur. Ifwe consider that additional productionswill start four years after the beginning ofthe project, andthat economic benefitswillbe additional unitrents for current production andtotal economic unit rents for additional production, the present value of 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, includedworkers insisal enterprises. Additional Tourism Rent The Anosy region presents numerous opportunities to develop eco-tourism, especially with its two existing attractions: Andohahela National Park, Berenti Private Reserve. If infrastructure constraints are removed, encouraging private investment inhotels, 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 inthe late 1990s. It i s situated about 45 km from Tolagnaro, along the main road to the west and is a rather easily accessible yet protected area. Its proximity to Tolagnaro - especially the "transition forest" parcel Tsimelahy - means that visitors can easily do day trips inthe region. In the park, visitors can see three major Madagascan eco-systems: one of the southernmost tropical rainforests inthe world, an unusualdry forest with species adapted to life with very little 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 to the tropical forests o f Madagascar. Its main natural habitat i s the deep South but the plant is also found along the east coast. Traditional Madagascan healers used its hypoglycemic properties primarily to treat diabetes. French explorers brought it back to the royal court in 1757. The herb quickly spread around the world to cure sore throat, pleurisy, dysentery and diabetes. Inthe 1950s, scientists experimented with periwinkles in search o f a diabetes cure. Instead, they found tumor-inhibiting properties that resulted intwo very important cancer-fighting medicines: Vinblastine and Vincristine, both o f which 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 Vincristinei s used to treat Hodgkins' Disease. 114 chameleons, tortoises, bats and five species o f lemur can be easily seen, much more so than in anyprotected areainthe nationalnetwork. 8,000 visitors travel to the reserve each year. If project investments lead, like inNosy 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 its neighboring regions. Tourism specialists strongly believe that Tolagnaro and its region are very attractive. Therefore project investments inphysical and social infrastructure will catalyze new private investments inthe 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 its 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 intwice the current level) with a newport and additional infrastructureinvestments, makingthe nationalpark withinreach. As discussed inthe economic analysis o f Nosy Be pole, sources o f tourism rent inMadagascar 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 inTolagnaro 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 inthe natural areas i s set up (see economic analysis o f the Nosy bepole) andUS$11.8 to the localpopulation. IncrementalMiningRent 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 1below). Intotal, present value of flows of incremental miningrent 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 inthe case the number o f years gained is only 4 or 3 years (see graphic representations below inthe figure 1).It is US$35 million for a 4 years gain and US$27 inthe 3 years case. 115 Figure 1:Mining rent schedule of apparition 20 15 10 2006 2010 2014 2018 2022 2026 203C With Roject -.-.- Without Roject (Y+5) Without Roject (Y+4) -.... Without Roject (Y+3) - - The mining rent is composed o f (i) (local taxes, mining royalties, custom duties, fuel taxes taxes, income taxes from local salaries and income taxes from the salaries o f expatriates), (ii) incremental increase inwages paid to domestic workers, and (iii)portion of local expenditures a bythe mine that canbe countedas economic rent.All taxes are treated as transfers from an entity outside o fthe economy to an entity withinthe economy because Rio Tinto is a foreign firm. The hypothesis as said earlier is 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 in2012. 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$220 per ton. Below i s represented the evolution o f mining gross revenues during 30 years and the corresponding evolution o f the mining rent captured by the GOM. Figure 2: Gross mining and governmentJisca1 revenues (2006-2030) lot t o r . 2o L O 2006 2010 2014 2018 2022 2026 -Mining rent ...... Mine Gross Reenues ($ million 2005) . I Miningroyalties are calculated at 2 percent of sales revenue and would be US$2 million a year once mine production reaches 750,000 tons a year. Present value o f incrementalbenefit 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 during25 years and discounted at 10percent is estimated at US$5 million. 116 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 dividendand shareholder interest withholding tax. Present value o f incremental benefit flows during25 years and discounted at 10percent 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 incrementalbenefit flows during 25 years and discounted at 10 percent is estimated at US$6 million. However, it i s not certain that the expatriates would, in reality, pay this income tax. Their share o fthe benefitis 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 be counted as economic rent. Present value o f incremental benefit flows during 25 years and discounted at 10percent i s estimated at US$4.5 million. From this incremental mining rent, approximately US$14.1 million will go the local population andUS$28 millionto the GOM. 5. Summary of Gross Benefits Based on assumptions concerning number o f years separating investment inthe miningoperation inthe with and without project situations, the number of additional hotel rooms that would be constructed during the following years and the volume o f additional agricultural production stimulated by the port and other infrastructure, it i s clear that the number o f years separating investment inthe miningoperation plays a major role inthe aggregated benefits o f the Tolagnaro component, with mining rent accounting for 45 percent o f the gross benefit o f the project (see table 2 below). Table2: Composition of gross benefits Compositionof benefitswith /Scenario) (US$millionPV) Percentage Miningincremental rent 42.1 45% Tourismadditional rent 31.4 34% Rents from new agricultural productions 20.0 21% Total 93.5 100% This means that the credibility o f the mining company's statement that they will not invest now or later ifthe GOM does not finance part o f the port is very important injudging the importance 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. Resultsof the Benefit-CostAnalysis 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 117 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$14.5 million, corresponding to an economic rate o f return (ERR) o f 13 percent, andis, therefore, justified from thispoint o fview. Table 3: Summary of costs and benefits, NPV as of 2004 (2004 US$million) Type of Benefit ( US$million/Fiscalyear) PV 2006 2007 2008 2009 2010 2011 2012-2030 Tourism Rent 31.4 0.6 0.9 1.2 1.6 2.1 2.7 127 AariculturalRents 20.0 0.0 0.0 2.9 2.8 2.9 2.0 54 Minina Rent 42.1 0.6 1.3 3,9 5.1 5 1 5.1 85 Project Cost (investment and recurrent) -79.1 -3.4 -26.3 -31.5 -27.7 -2.7 -2.2 -24 Net benefits (ERR=12,9%) 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 its part o f the port investment. Currently, the outcome o f such an investment is uncertain for two reasons: (i) because it depends on the sincerity o f the miningcompany's statement that it will not invest if the GOM does not help to finance the port; (ii) because the causal-effect relationship between road improvement, port capacity restoration and the additional litchi, sisal and coffee production is important for the Anosy region, but not much so as to justify, in and o f itself, investments ininfrastructure such as the public-private partnership ina new multi-modal port. Therefore, the results o f the benefit-cost analysis are sensitive to: (i)the number o f years separating the investment in the mining operation with and without the project and (ii)the volume o f additional agricultural production. For the number o f years, the switching value i s 3 years. IfRio 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 can't 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 moreproduced. This is 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 inpresent value, because o f fiscal revenue. As the project i s around US$80 million for the state, the fiscal impact is slightly negative because there i s transfer between the GOM and the Anosy region local population. Thus, even ifon the one hand the ERR is not very high and on the other handrisks 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 inMadagascar. 7. Summary andConclusion Insummary, the analysis shows that the expected incremental economic rents, based on 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 118 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 on 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, like granite andmica, 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 ifthe GOM does not participate inthe new multi-modal port and that, on the other hand, it will invest immediately inthe mine if the G O M finances part o f the port, benefit will be important form a poverty alleviation point o f view, To reinforce the likeliness that the private company complies with its 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 in2006 will be fundamental to the project. 119 m -r N 0 N N ' 1 - 1 3N N N N 0 N N 3N 3 e N 0 N N - 0 0 - N 3N 0 N 3 z o9ol-90'0 l : 0 N N 3N z z 0 N 3N 2 30 0 i N 3N 3 i- z 0 N 0N z 0 2 N 3N U l 10 3 0 N 3N 9 9 0 l-?0Yor ?oQc: N 0N 2 2 0 0 N N 2 $1 0 - N 0m 0 3 4 2 8 0 N 2 2 0 N 0 N m 0 m ' I 0 0 0 N N 00 00 0 0 0 N 0 N i- 0 0 i- N 0 0 N \o 0 \o 0 0 0 - N N $ 1 I - k u 5 8 .e !I - 6B U 1 " S P - 0 - P Annex 10: SafeguardPolicyIssues MADAGASCAR: IntegratedGrowthPoles Project Figure10-1. Index of SafeguardsInstruments PolicvDocuments Environmental and Social Impact Management Framework (ESMF) Cultural Heritage Policy Framework (CPPF) Environmentaland SocialImDact AnalvsesIESIA) ESIA Taolagnaro ESIA Antananarivo/Antsirabe Environmental Environmental Management Plan Management Plan ResettlementAction Plans(RAP) RiV 13 (Taolagnaro) I Ring Road (Nosy Be)I I QMM(Tao1agnaro) I r EnvironmentalManagementPlanIEMP) Nosy Tanikely ProcessFrameworkWF) L L J Nosy Tanikely 122 A. SafeguardsDocumentsPreparedfor the Project 1. The suite of 11 safeguards instruments prepared for IG2P is described in Figure 10-1. The documents were preparedby a team o f consultants ledby 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 hlly 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 ESIA for Tolagnaro also covers the impacts o f QMM's proposed ilmenite mine and the road that will connect it with the new port at Eahoala- two activities not financed under IG2P but so closely relatedto it 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 quanyandaccess road ("QMM'inFigure 10-l), the improvement of National Route 13 inFort-Dauphin, and the Nosy Be RingRoad. The remaining documents, a Process Framework and a free-standing EMP, apply to the proposed marine protected area at Nosy Tanikeley. B. Safeguards-relatedRisks andMeasuresTakenor Proposedto 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 beingemphasized inthe project is 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 is 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. Of more concern is the possible disturbance o f dune formations 34 QMMcarriedout anextensiveESIAfor the mine androad. The ESIA includedanEMPthat hasbeenappended, to the permit issuedto QMMby GOM. Tecsultreviewedthe ESIA andEMP andpresentedits findings ina "Gap Analysis". The fmdings are summarizedinthe ESIA for Tolagnaro, andthe entire Gap Analysis is includedinthe projectfiles and available to interestedmembers ofthe public onrequestto GOM. 123 inand around the port, its associatedindustrialdevelopment zone, andthe access roadthat must traverse the dunes. It i s imperative that the dune protection and stabilization measures in the EMPbejudiciously carried out. A third direct impact, this one o fthe associated miningproject, 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. QMMis continuing to studythe potential effects andplans to promote a freshwater fishery and to engage the local community inits management. 4. In-migration o f workers i s a cumulative, secondary impact that may cause environmental stress and social conflict as well as increases inprostitution and the incidence o f HIV/AIDS. To the extent that the project succeeds in increasing tourism, it 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 planimplementation. C. Alternatives Considered to Minimize Environmental and Social Impacts 5. In the case o f the sub-projects related to development of 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 ringroad, 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 proposedroadway and ROW have been reduced so as to minimize the impacts due to involuntary resettlement. A change inalignment 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 systemlocated at "Fausse Baie des Gallions." 6. In the case of 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 well 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 fthe pedestrians and animal traction carriage. D. StakeholderParticipation 7. Inthecontext oftheprojectenvironmentalandsocialimpactsassessment,theVicePrime Ministry, concemed communes, inparticular those o f Fort Dauphin, Nosy Be and Antsirabe, as 124 well 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 regionalworkshops to launch the safeguards studies inthe 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 project's 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 MECIE decree). G O M conducted public consultations in each growth pole duringthe statutory review and comment period that began at the time o f disclosure. 8. Inthe case ofthe TandAntsirabe growth poles, public consultations were mainlyusedto 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. InNosy Be, participants underlinedproblems which inhibit the development o f this growth pole, inparticular those related to deficiencies inbasic infrastructure, such as: the degradation o f the road network, inparticular the ring road, which is unusable over most ofthe year; the degradation of 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 andprostitution. 9. Most o f the infrastructure and waste management needs raised by stakeholders are already addressed inproject design. Specific measures to mitigate impacts such as increases in HIV/AIDS exposure havebeenincorporatedinto the ESMF andEMPs. 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 inthe 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 ESMFincludes "terms o f reference" for regional environmental planning, and the EMPs address the related requirements for capacity-building. Support for regional planningis included inIG2P. 125 E. Safeguards-relatedImpacts andMitigationManagementPlans 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 list the potential cumulative impacts at the growth poles of Nosy Be and TolagnaroIFort-Dauphin. Mitigation measures are shown for all impacts. Table 10-1. Main Impacts and Mitigation MeasuresAssociatedwith CivilWorks. MAINIMPACTS PROPOSEDMITIGATIONMEASURES .Covertrucks to avoidthe spreadof dust. quality by dust and gas emissions - Reduce truck driving speed indust productionzone. - spraywater onroadswith high dust production. -- Set Prohibit constructionwaste burning. up acommunicationprogramto informneighboringcommunitiesabout the activities being carriedout. - Limit as muchas possibleprojectactivities inthe vicinity of water resources(Le., river) and quality of groundand river crossings. surfacewater. - Avoid river bank clearingto minimizeerosion, or else install anti-erosivedevices; give priority to biological protectionmethodsanduse mechanicalprotectiononly ifnecessary. ---- Exploit Designworks insuchaway that they do not interferewith naturalwater drainagesystem Design drainagesystems taking into accountrainfall patternsandwatershedcharacteristics. Completeworks mainly indry season. quarries andborrowpits so as to reduceerosion andminimize water resources - sedimentation. Arrange specific sites for vehiclemaintenance. Sites shouldbe impermeable,horizontaland - Envisageequipment locatedat least50 mfrom nearbyrivers. of used oils collectionand disposal, as well as fuel storageso as to avoid --- Inspect soil andground andsurface water contamination. Envisageconstructionofhealthcenters for workers. Cover slopes andborrow pit zones as muchas possible. machineryandvehicles regularlyandcarry out necessaryrepairs on time to prevent -Trainany dischargeof oil, gasoline or other pollutants. personnelto ensure effectiveandtimely interventionsinthe event of accidental - Planlodging discharge. facilities for non-residentworkers. -Ifacampingisnecessary, envisagetheinstallationofdrypit latrines. Soils Erosion. -- Planinterventionsthat Minimizedeforestationand scouring. are designedto protectzones with significant slopes andwater flow. - Envisagerehabilitationmeasuresofquarries Limitthe interventionsonlandwith highriskoferosion. andborrowpit immediatelyafterwork construction;level grounds alteredaccording to original topographyand install soil stabilizing vegetation. Loss of vegetation and Avoid installationo fequipment near protectedareas and sensitive zones. degradationof habitats -- Limit deforestationto areas o finfluence only. -Prohibit the use ofmangrove wood for as constructionmaterials. -To use currentcareers and lodgings. 126 I MAINIMPACTS PROPOSEDMITIGATIONMEASURES Loss o f coastal habitat -- Ensure Prepare conservation programs for affected coastal zones. monitoring of dredging material disposal sites. Modification o f sea- -Inthe event ofocean floor dredging, examine the potential effects ofthe modifications made beds characteristics - to bathymetry to limit the effects on the adjacent zones. Dispose dredgedmaterials on ocean floor site, which presents similar physical and chemical characteristics as the dredged site; carry out an assessment o f such similarity, frombio- physical and chemical points o f view. I - carry out activities taking into consideration marine life and their ecosystems protection Marinelife measures. Avoid and/or minimize land acquisition cases inareas o fhigh population concentration. resettlement -- Apply RAPprovisions outlined inthe RAP reports. Restrictionto - Applyprinciples outlined inthe process framework (PF). protected areas Noise pollution during - Limit noise level to normal working hours. Ensure adequate maintenance o fmachinery. construction. Disturbance due road - D o not completely block traffic and sidewalks usedby pedestrians. traffic -Respect bearingcapacity oftheroadsandrepair the damage causedto the roadsat the end vector bome diseases. -- Avoid ~~ Ensure permanent drainage o f surface water. creation o f temporary ponds. Increase inthe - Organize ~~~ training and education programs for workers and sensitize local communities. incidence o f sexually Ensure distribution o f condoms. transmitted diseases ~~~ Human Health risks as - Identify mechanisms to make sure only infectious medical waste are incinerated and that a result o f poor other types o f waste are encapsulatedand disposed in sanitary landfill as required. Medical waste management - Organize training programs targeted at all personnel involved inthe collection, transportation - and disposal o f medical waste, including those in charge o fmanipulating incinerators. Prior to program implementation prepare an exhaustive M W M P outlining institutional to carry out its implementation and monitoring. Risksof accident - Enforce the presence o f traffic signals. duringwork ----Create staffed and equipped dispensary accessible during working hours. Provide workers with protective gears. Strengthen worker safety measures by the establishment o f an emergency plan. Speed control measure should be enforced. Navigation -Envisage requisite signs informing the general public near operation sites. Disturbance - Set upan action planidentifyingmeasuresto be implementedto maintainand improve fishery and tourism industries. - Locate the installations so as to limit their interference with sites o fhistoric and tourist landscapes o f interest - Ensure significance. that the concept o f development takes into account and utilize regional planning tools. - Implement provisions outlined inthe cultural property framework. Property. -Inthe event construction works interfere with archaeological or significant cultural sites, I suspend all activities and inform the relevant authorities. 127 Table 10-2. Cumul tive Impactsfor the Nosy BeGrowthPole CUMULATIVE IMPACTS PROPOSEDMITIGATION MEASURES Loss or degradation -Assess current situation and formulate an integrated for the regional planninginNosy Be. of terrestrial, marine and estuarine habitats Social, economic -Support the labor development and to ensure monitoringo fvulnerable people. pressures low income households and Carry out tax audit inexisting companies and ensure tightening o f administrative controls. vulnerable people -- Promote the development o f local products (i.e., agriculture and fishery). ~~~~~~~ ~ ~ [ncrease inthe -Integration a STI HIV/AIDS component inthe project, inconjunction with the actions already prevalence o f envisaged at the regional level and integration o f the police force inprogram. sexually transmitted - Fightsexual diseases and tourism. HIV/AIDS. Pressureson the -Initiate and support an integrated regionalplanning and managementprocess. human habitat in urban and rural -To make Conduct environmental and social impacts assessment studies for sub-projects to be communities implemented insubsequent years and other investments schemes susceptible to affect the -- Inventory socio-economic environment. Establish a cartographic baseline o f intervention zones using GIS method. landresources and establish landoccupation baseline, as well as the institutional setup for better control and management o f land resources. Include mechanisms for dealing with landresources litigations. Revise the concept o f landreserves involving the commune -Assess and the various business operators. demographic projections 2020 with different scenarios, taking into account project -- Carry impact on the Nosy Be growth pole. carry out civil engineering feasibility studies for sanitation systems. out the diagnosis o fAmbatoloakd Madirokely sector - Organize public information, children education program and strengthen partnership with local -- Prepare organizations. Finalize and support the implementation o fthe urban planning. a tourist development plan. Table 10-3.CumulativeImpactsfor the Poleof Tolagnaro/Fort-Dauphin PROPOSEDMITIGATIONMEASURES Atmospheric emissions -To make a conduct feasibility study to assess the usefulness o fwind power and its impact on contributing to reducing air pollution from generators. deterioration o f air quality -Explore the possibilities o f fumishing power during operation and concession to Jirama after - Explore exploitation. possibility o f obtaining a financing from multilateral institutions, such as the UNDP in order to mitigate the extra costs o f the construction o f such park and o f the necessary lines of interconnection and to ensure the transfer o f necessary knowledge to future operators for its sustainable use. Green house effect. - Examine the ways inwhich the country couldreceive international appropriations for the reduction green house gas emissions, incase wind power park i s seen as a viable alternative. 128 CUMULATIVE IMPACTS PROPOSEDMITIGATION MEASURES ~~ Social, economic - Before project implementation collect baseline information o f the project, on household living pressures on low conditions, expenditure patterns and sources o f income. income households and -Develop vulnerable people a monitoringplan for vulnerable individual inthe three rural communes close to the ~~ Increase inthe --Prepare project. Implement initiatives envisaged inthe regional development plan. a vector management plan, outlining sensitization programs for the local populations prevalence o f STI, o f on the potential healthrisks involvedwith the transformation o f the brackish water into fresh HIV and o fthe water water at lake Ambavarano.. bome diseases - Support regional initiatives as regards prevention o f STI, HIV/AIDS in collaborationwith Q M M Pressures on the - Implement targeted economic development action plans to support regional development humanandnatural planning(Le., forestry, agriculture and fishery) to meet firewood and food security demands. habitat inthe urban and rural communities, -Support and formation with the regional and municipal authorities (frameworks and elected as a result o f officials) by approach leamingby doing as regards economic development and management spontaneous municipal. population migration. - Implement an institutional capacity strengthening program at the regional level inorder to ensure adequate management o f the cumulative impacts rising from the spontaneous --Finalize migration, public health and basic education demands. Create and implement microphone-credit programs adapted to individuals and companies and support Fort Dauphinurbanplandevelopment and those o f its adjacent rural communes. -Creation o f 50-60 ha landresources reserves for housingpurposes and provide basic services. Involuntary - Apply RAPprovisionspreparedinthe context ofthe project.. Resettlement. Degradation o f -Work out an integrated landscape management and architectural plan for the port o f Ehoala. landscapes o f tourist - Elaborate importance and loss of and Support incollaborationwith Q M M a coastal protection program in marine habitats compensation o f the loss o f marine habitats associated with the establishment with the port. F. Assessmentof ImplementationandMonitoringCapacityandCommitment,with Recommendationsfor Strengthening 11. In Fort Dauphin the institutional capacity assessment revealed the existence of 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 Ministryo 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 implementationo f environmental and social mitigation measures. 12. In Nosy Be, the analysis emphasized the needs for strengthening of technical and administrative institutions at the communal level. The establishment o f an urbanplanning body equipped with powerful tools for land resources management was felt as an important institutional measure to be considered inthis growth pole. 129 13. It was deemed that, for all the three growth poles, the following measures should be 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. Back- up mechanisms shouldbe identified for each o fthe persons or group o fpersons incharge o f implementing the plans; 0 Information sharing and training o f all the stakeholders, inparticular those playing a role in the implementation o f the plan, in the three growth poles on the various safeguard instruments developed, inthe context o f this project; 0 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, inthe 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 inthe 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. It recommended that all the relevant stakeholder groups, including the local communities, will be utilized in monitoring and evaluation o f activities. G. MonitoringMechanismsfor the Agreed Plans 15. First-year sub-projects will observe the following guidelines: 0 Specific monitoring measures, as identified in the EMPs, to ensure the effectiveness o f identifiedmitigations; 0 General surveillance measures to address unanticipated environmental and social impacts; 0 Mechanisms to implement corrective action plans, incase performance objectives are not fblly met. 16. Table 10-4 summarizes the monitoring arrangements typical at each growth pole. Table 10-4 summarizes the arrangements for implementation and monitoring at Nosy Be, more or less typical for each growth pole. 130 Table 10-4. TypicalArrangementsfor EMP andRAPImplementationandMonitoring Action Implementation Monitoring 1 Strengthening environmental capacity at the NPS, Consultant Local Steering Committee, and Project Management Office Land use mapping, study on land titling Regional and local authorities Local Monitoring Finalization o f the urban plan Commune o f Nosy Be Local Monitoring Preparationo f tourism development plan Concerned ministries; tourism operators; NPS Committee; Commune ofNosy Be Integration o f EMP measures for the conceptual Project Management NPS; Local Monitoring phase inthe specifications for consultants Office Committee; ONE Integration o f EMP mitigationmeasures inthe Consultants Project Management specifications o f contracts for works Office; ONE Establishprogram for public information and Project Management NPS; Local Monitoring complaints during construction Office; Commune o f Committee; ONE; Nosy Be Citizens/NGO Committee Implementation o f mitigation and management Contractors Project Management measuresduring construction Office; Local Monitoring Committee; ONE; Citizens/NGO Implementation o f mitigation and management Public andprivate measuresduring operations operating entities Maintenance o frecord o f complaints and follow-up Public andprivate Commune o fNosy Be; actions operating entities ONE; Min.o f Health; Citizens"GO Committee Implementation o fthe RAP Commune o f Nosy Be Local RAP Steering Committee Independent monitoring o f RAP implementation NGOselected by Local Steering Committee Follow-up monitoring o f affected persons NGO appointedby responsible Ministry H. Costs, FundingArrangementsandImplementationSchedulefor EMPsandRAPS. .. .. .. 17. _ _ 'l'he total cost 01mitigation measures Tor airect impacts iaentifiea inme m w ~ i v w for -_ ,. .. .. ,- ., 1 . 1 . . C n - 7 I m x r- .-s the three growth poles is US$2.6 million, broken down as follows: 0 Antananarivo/Antsirabe US$ 100,000 0 NosyBe 920,000 0 Taolagnaro 1,580,000 131 The Taolagnaro total includes US$306,000 for mitigation measures at the proposed new port at Eahoala, and QMMhas agreed to incorporate them inthe final design and management plan for the port. The remainder o f these direct impact mitigation costs will be covered in the IG2P budget. Inaddition, there are measuresproposed 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 buildingthe capacity at local and regional levels to implement the plans, through land administration, timely provision of 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 inthe investmentallocation for each pole. The ESMF and the individual ESIAs contain recommendations for the planningprocess that will be used as references indesigning the actual planningprocedures andrelated capacity building. I.SafeguardsRequirementsinProjectLegalDocuments 18. Routine progress reports preparedby 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, two- person missions per year will cost approximately US$30,000, assuming travel costs can be shared with other projects. An independent ExpertAdvisory Panel (ESAP) has beenput inplace for IG2Pandcompleted its first field mission inDecember 2004. The ESAP has three members, with expertise in social and environmental sciences and regional planning. It will continue to operate, with at least one mission per year, providing independent advice to GOM and the Bank. J. Arrangementsfor SafeguardsSupervision 19. Routine progress reports prepared by the Borrower will include specific information on implementation and effectiveness o f EMPs and RAPSat 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, two- person 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. It will continue to operate, with at least one missionper year, providingindependent advice to GOM andthe Bank. 132 Annex 11: ProjectPreparationandSupervision MADAGASCAR: IntegratedGrowthPoles Project Planned Actual PCNreview 02/20/04 02/20/04 InitialPID to PIC Initial ISDS to PIC Appraisal 05/10/05 05/10/05 Negotiations 05/19/05 05/30/2005 Board/RVP approval 07/07/05 Planneddate o f effectiveness 09/30/05 Planneddate o fmid-term review 06/30/08 Plannedclosing date .. Key institutions responsible for preparationofthe project: Coordination National duPic MinistryofFinance 133 World Bank staff and consultants who worked on the project included: Name Title Unit IvanRossignol Senior PSD Specialist AFTPS SusanneHolste Senior Transport Specialist AFTTR Iain Christie Consultant AFTPS Ganesh Rasagam Senior PSD Specialist AFTPS Luc Vaillancourt Business development Officer CFSMN Tamara Lansky Senior Investment Officer CGFTG Alejandro Alvarez Research Analyst CSMSE Jan-Hendrick Van Leuwen Consultant IFC Marc Juhel LeadPort Specialist TUDTR Paul0 de Sa Lead Operations Officer LCC5C IreneXenakis Operations Adviser AFTOS Jean Christophe Carret Natural Resources Economist AFTS4 BertrandLoiseau Consultant AFTEG Patrice Rakotoniaina Municipal Engineer AFTUl Laurent Besancon Regulatory Specialist CITPO Jean Charles de Daruvar Senior Counsel LEGAF Gilles Veuillot Counsel LEGAF Gervais Rakotoarimanana Senior FMS Specialist AFTFM Sylvain Rambeloson Senior Procurement Specialist AFTPC Thomas Walton Lead Regional Coordinator AFTSD Charlotte Bingham Lead Environmental Specialist ESDQC Amadou Konare Consultant AFTSD Gordon Appleby Consultant AFTSD Josiane Raveloarison Senior PSD Specialist AFTPS Robert Robelus Senior Environmental Assessment AFTS1 Specialist Stephan Gamier Power Engineer AFTEG Alain Labeau Lead Specialist AFTTR Linda Cotton Consultant AFTPS Sidonie Jocktane Team Assistant AFTPS Lanto Ramiliarisoa TeamAssistant AFC08 Irene Chacon Operations Analyst 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 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: 2. Estimatedannual supervision cost: 70 staff weeks plus variable (total o fUS$300,000) 134 Annex 12: Documents inthe ProjectFile MADAGASCAR: IntegratedGrowthPolesProject MinutesofDecisionMeeting 06/06/2005 IG2P Letter Governmentand Aide Memoire 05/31/2005 Negotiations documents 05/31/2005 Decrees 05/25/2005 Minutes ofDecisionReview Meeting 05/01/2005 IG2P environmentaland SocialAssessment 03/31/2005 IG2P Plan d'amknagement touristique deNosy Be et Fort Dauphin 03/21/2005 PIC -Diffusiondes Documentssur 1'EIES 03/17/2005 Minutesofthe Quality EnhancementReview 02/16/2005 Resultofthe Quality EnhancementReview 02116/2005 Project InformationDocument 02/07/2005 IntegratedSafeguardData Sheet 02/05/2005 Environmental Action Plan 11/23/2004 CountersignedintegratedSafeguards Data Sheet (concept stage) 03/24/2004 Project Appraisal DocumentData Sheet 03/10/2004 Project Information Document 03/02/2004 ProcurementNotice inDgMarket 02/23/2005 Back-To-Office Report for Mission to Madagascar 01/07/2004 Project ConceptNote 12/01/2003 MinutesofprePCNreview meeting 11/27/2003 135 Annex 13: Statementof Loans and Credits MADAGASCAR: IntegratedGrowthPolesProject Differencebetween expected and actual OriginalAmount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO82806 2004 MG TRANSPORT INFRASTRUCTURE 0.00 150.00 0.00 0.00 0.00 156.63 6.72 0.00 INVESTMENT PO74448 2004 Govemanceand InstitutionalDevelopment 0.00 30.00 0.00 0.00 0.00 32.08 0.00 0.00 PO73689 2003 MADAGASCAR RuralTransportProj - 0.00 80.00 0.00 0.00 0.00 81.29 6.49 0.00 APL 2 PO76245 2003 MINERAL RESOURCESGOVERNANCE 0.00 32.00 0.00 0.00 0.00 32.59 -0.13 0.00 PROJECT PO72160 2002 Second Private Sector DevelopmentF'rojec 0.00 23.80 0.00 0.00 0.00 22.59 8.23 0.00 PO72987 2002 Multisect. STI/HIV/AIDS Prev. 0.00 20.00 0.00 0.00 0.00 15.15 -4.38 0.00 PO51922 2001 MG - RuralDevelopmentSupportProject 0.00 89.05 0.00 0.00 0.00 78.80 -21.45 0.00 PO55166 2001 Communit. Dev. Fund 0.00 110.00 0.00 0.00 0.00 50.44 -27.06 0.00 PO52208 2000 MADAGASCAR -Tramp Sector Reform& 0.00 65.00 0.00 0.00 0.00 19.64 6.95 0.00 Rehab PO51741 2000 2nd Health Sect. Sup. 0.00 40.00 0.00 0.00 0.00 13.61 2.27 0.00 PO52186 1999 MICRO FINANCE 0.00 16.40 0.00 0.00 0.00 7.02 5.51 0.00 PO01559 1998 Educ. Sector Dev. 0.00 65.00 0.00 0.00 0.00 14.36 13.49 -5.58 PO01564 1998 RURAL WATER SEC.PILO 0.00 17.30 0.00 0.00 0.00 7.89 7.56 0.00 PO01568 1998 2nd CommunityNutrition 0.00 27.60 0.00 0.00 0.00 10.77 0.21 0.00 PO48697 1997 URBAN INFRASTRUCTURE 0.00 35.00 0.00 0.00 0.00 9.57 9.44 8.62 PO01533 1996 MGENERGY SECTOR DEVELOPMENT 0.00 46.00 0.00 0.00 0.00 7.23 10.06 7.42 PROJECT Total: 0.00 847.15 0.00 0.00 0.00 559.66 23.91 10.46 MADAGASCAR STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsofUSDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1990191 AEF FIARO 0.00 0.19 0.00 0.00 0.00 0.19 0.00 0.00 1997 AEF GHM 0.75 0.00 0.00 0.00 0.75 0.00 0.00 0.00 1995 AEF Karibotel 0.22 0.00 0.00 0.00 0.22 0.00 0.00 0.00 1992193195 AQUALMA 0.43 0.00 0.00 0.00 0.43 0.00 0.00 0.00 1991 BNI 0.00 2.61 0.00 0.00 0.00 2.61 0.00 0.00 2000 BOA-M 0.00 0.82 0.65 0.00 0.00 0.82 0.65 0.00 1983189 Nossi-Be 0.00 0.14 0.00 0.00 0.00 0.14 0.00 0.00 Totalportfolio: 1.40 3.76 0.65 0.00 1.40 3.76 0.65 0.00 136 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic 2001 Besalampy 0.02 0.00 0.00 0.00 2001 COTONA I11 0.01 0.00 0.00 0.00 2004 Cottonline 0.01 0.00 0.00 0.00 Totalpendingcommitment: 0.04 0.00 0.00 0.00 137 Annex 14: Country at a Glance MADAGASCAR: IntegratedGrowthPoles Project Sub- POVERTY and SOCIAL Saharan Low- Madagascar Africa income Development diamond' 2002 Population, mid-year(millions) 6.4 688 2,495 Lifeexpectancy GNIpercapita (Atlas method, US$) 240 450 430 GNI(Atlas method, US$billions) 3.9 306 1072 Average annual growth, 1998.02 Population (%) 3.0 2.4 19 Labor force (%) 3.2 2.5 2 3 GNi Gross per primary M o s t recent estimate (latest year available, 1998-02) capita nrollment Poverty(% ofpopulationbelownational povertyline) 71 Urbanpopulation (%of totalpopulation) 31 33 30 Lifeexpectancyat birth (years) 55 46 59 Infantmortality(per looolivebirths) 84 0 5 81 Childmalnutrition (%of childrenunder5) 40 Access to improved water source I Access to an improvedwater source (%ofpopulation) 47 58 76 llliteracy(%ofpopulationage a+) 32 37 37 Gross primaryenroilment (%of school-age population) a 3 86 95 ----Madagascar Male a5 92 a 3 Low-incomegmup Female a 1 80 87 ~ KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 3.5 3.0 4.6 4.5 Gross domestic investment1GDP 8.5 112 5.5 118 Exports of goods and serviceslGDP 112 16.4 28.6 8.9 Trade Gross domestic savingslGDP -10 2.9 Q.3 5.9 Gross nationalsavingsiGDP -3.2 3.9 13.2 5.8 T Current account balancelGDP -1i5 -7.3 -2.3 -5.9 Domestic InterestpaymentslGDP 13 11 0.7 1.2 savings Investment Total debtlGDP 54.8 P9.3 90.4 Total debt servicelexports 28.4 5.8 6.8 Present value of debtlGDP 44.4 .L Present value of debtlexports 52.6 indebtedness 1982-92 1992-02 2001 2002 2002-06 (averageannualgrodh) GDP 15 2.6 6.0 -119 -Madagascar GDP per capita -12 -0.5 3.0 -14.4 __Lowincomegroup STRUCTURE o f the ECONOMY 1982 1992 2001 2002 (%of GDP) Growth o f investment and GDP (YO) II Agriculture 34.2 29.1 29.8 27.4 40 T Industry 13.4 P.5 14.5 P.8 Manufacturing .. 0.4 P.4 a.9 Services 52.4 58.4 55.7 59.8 Private consumption 90.3 88.9 79.6 862 Generalgovernmentconsumption a.6 8.2 8.0 7.8 Imports of goods and services 20.7 24.7 318 22.8 -GDI -GDP 1982-92 1992-02 2001 2002 (averageannualgrodh) Growth of exports and imports (%) Agriculture 2.5 2.0 4.0 -1.4 40 T Industry 2.7 2.3 7.6 -25.1 20 Manufacturing 0.8 2.5 a.7 -25.1 0 Services 10 3.3 6.1 -111 -20 99 00 01 Private consumption 0.1 2.9 3.9 -5.9 -40 Generalgovernmentconsumption 0.1 14 5.7 -13.5 Gross domestic investment 5.5 5.6 22.6 -314 Imports of goods and services -2.4 5.4 I18 -310 138 Madupascar PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 1 Inflation (%) Domestlc prlces I (%change) 25 Consumer prices 15.3 7.4 14.8 20 ImplicitGDP deflator 28.6 14.4 9.0 15.4 15 10 Government Finance 5 (%of GDP, includes current grants) I 0 Current revenue 119 112 8.6 97 98 99 00 01 Current budgetbalance -12 11 -10 Overallsurpiusldeficit -9.3 -6.5 -5.8 -GDPdeflator -CPI """T TRADE 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 284 324 953 525 Coffee 94 32 3 3 Vanilla 3 51 184 140 Manufactures 158 557 2 8 1,000 Total imports (cif) 552 547 11s 756 Food ' a8 58 84 75 500 Fueland energy 0 4 72 188 2 8 Capital goods 17 a 9 144 0 0 0 Export price index (S95=00) a 4 91 0 2 0 6 96 97 98 9Q 00 01 02 Import price index (S95=00) 92 94 95 uhports olnports Terms of trade (?395=M0) 98 no 142 BALANCE o f PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance t o GDP (X) Exports of goods andservices 377 498 13 n 759 0 Imports of goods andservices 656 733 1462 $021 Resourcebalance -280 -237 -146 -262 -2 Net income -10 -148 -59 -77 -4 Net currenttransfers -0 183 99 72 -6 Currentaccount balance -405 -222 4 6 -267 Financingitems (net) 384 239 204 228 -8 Changesin net reserves 21 -n -98 39 .x) Memo: Reserves includinggold (US$ millions) 85 396 348 Conversion rate(DEC,locaVUS$j 349.7 $8640 6,588.5 6,832.0 EXTERNAL DEBT and RESOURCE FLC)WS 1982 1992 2001 2002 (US$ millions) 1 Composition of 2001debt (US$ mill.) Total debt outstanding anddisbursed 1933 3,911 4,BO IBRD 31 20 0 I G 239 IDA 187 887 1409 I Total debt service 10 96 92 IBRD 3 4 0 IDA 2 0 34 Composition of net resource flows Official grants 58 203 155 Official creditors 8 9 85 86 E Privatecreditors 48 -8 -2 Foreigndirect investment 0 21 11 Portfolio equity 0 0 0 D:442 World Bank program Commitments 32 24 243 A IBRD - Disbursements 34 37 97 E Bilateral E IDA -- D- Othermltilateral F- Rivate Principalrepayments 1 7 24 C-IMF G- Short-teci 139 IBRD 33439 45°E 50°E Antsiranana MADAGASCAR Mayotte (France) Ambilobe Vohimarina Ambanja ANTSIRANANA Maromokotro (2,876 m) l Massif Sambava n n e Tsaratanana h a Bealanana Antsohihy Andapa Antalaha 15°S C 15°S q u e Sofia Befandriana Maroantsetra b i Mahajanga Mandritsara m Mampikony Soalala vo Mananara o z a MahajambaBemarivo a M g Besalampy B o n g o l a v aM A H A J A N G A n A Maevatanana of Clif fManambaho Betsiboka Andilamena f Soanierana-Ivongo o A Kandreho Lake Fenoarivo-Atsinanana Andriamena Alaotra Vohidiala ASIN liff C Maintirano Mahavavy Ankazobe M A Toamasina Ambaravaranala ANTANANARIVO Antsalova ANTANANARIVO TO Moramanga I N D I A N Soavinandriana Tsiafajovona (2,642 m) Vatomandry Miandrivazo a O C E A N Belo Tsiribihina Antanifotsy Tsiribihina Mangoro Mahanoro 20°S AnkaratAntsirabe 20°S Morondava Malaimbandy Mania Ambatofinan- drahana Ambositra Varika Mandabe Ambohimahasoa Manja Fianarantsoa Mananjary 0 40 80 120 160 200 Kilometers Beroroha Morombe Mangoky F I A N A R A N T S O A 0 40 80 120 Miles Manakara Ankazoabo Ihosy Pic Boby (2,658 m) 50°E T O L I A R A Fiherechana Sakaraha Mananara Farafangana MADAGASCAR Toliara Betroka Onilahy SELECTED CITIES AND TOWNS Betioky Midongy- Atsimo PROVINCE (FARITANY) CAPITALS Tsivory NATIONAL CAPITAL Berakete This map was produced by the Map Design Unit of The RIVERS World Bank. The boundaries, colors, denominations and Ampanihy Mandrave MAIN ROADS any other information shown PlateAmboasary au on this map do not imply, on RAILROADS the part of The World Bank randra Androy 25°S Group, any judgment on the Androka Tolanaro Ambovombe legal status of any territory, MenaBeloha PROVINCE (FARITANY) BOUNDARIES or any endorsement or a c c e p t a n c e o f s u c h INTERNATIONAL BOUNDARIES boundaries. 45°E NOVEMBER 2004