Report No. 38687-MG Madagascar Public Expenditure Review Implementation of the Madagascar Action Plan: Analysis for Results Executive Summary June 28, 2007 AFTPR Africa Region Document of the World Bank The PER team consists of Guenter Heidenhof et de Henri Bemard Razakariasa (Team Leaders), Benu Bidani, Odile Keller, D. Randriamanampisoa, Laza Razafiarison, Noro Aina Andriamihaja, Maria E. Bonilla-Chacin, Patrice Joachim Nirina Rakotoniaina, Christophe Prevost, Anne Bossuyt, Margaret Kajeckas, Lanto Ramanankasina, Janette Uhlmann (World Bank), JosuC Lala Andriamanantsoa, Crescent Michel Ramorasata, Naivosoa Rakotondrainibe, Amelie Voninirina, Venonique Hubert (Ministry of Health and Family Planning), Simon Christophe Rakotonirina, Ambinintsoa Raveloarison, Jennie Rakotondrazafy, Josia Rajaobelison, Fran~oisde Paul Rakotovao, Malala Ratomaharo, Valencia Ranarivelo, Paola Valenti, Monica Pambianco, Gianluca Ferrera, Sylke von Thadden (Nutrition), Josbhine Rasoanandrasana, Herivelo Rakotondrainibe, Sylke von Thadden (Water and Sanitation), Johnson Randrianiaina, Lanto Rasoloelison, Olivier Rajaonarison, Eulalie Raharimisa, Haja Razafimaharo, Maurice Razanajato, Zoly Razafindrakoto, Rado Andriamatana (Ministry of Finance and Budget) Madagascar PublicExpenditureReview Implementation of the Madagascar Action Plan: Analysis for Results EXECUTIVE SUMMARY Introduction 1. In late 2006 Madagascar began a new phase in its economic development with the launching of a new poverty reduction strategy, the Madagascar Action Plan (MAP). The MAP, the third generation of development policy documents, follows a series of economic policy framework papers from the structural adjustment years of the late 1990s and the Poverty Reduction Strategy Paper for the years 2003 to 2006. The new development strategy has very ambitious goals; it outlines priorities and actions aimed at achieving the national vision and the Millennium Development Goals (MDGs). Like the first Poverty Reduction Strategy Paper, the MAP is underpinned by a broad-based consultative process. The new development strategy is unique as it is entirely conceived by the country and its people, taking into account the political and economic environmentwithin which Madagascar operates. 2. The success of the MAP will require a comprehensive mobilization of the country's resources, both of the private sector as an engine of growth and development, and of the public sector.The Statehas a key role in ensuring the success of the MAP. The State is at the same time a key promoter of private sector development and a powerful catalyst to support economic growth. It has an important regulatory role to facilitate MAP implementation. In addition, with its budget and oversight over the use of public resources the State is in charge of a critical tool to expedite the implementationof its new developmentstrategy. 3. The primary objective of this Public Expenditure Review is to analyze the macro-economic underpinnings of the MAP, to review if the existing procedural and institutional framework for the generation and the use of public resources facilitates MAP implementation, and to provide guidance and recommendations for effective and successful implementation of the new development strategy. This report, which follows the one published in 2005 for the 1997-2005 period, is part of a series of programmatic reviews agreed upon with the Government of Madagascar. It differs from typical expenditure reviews as it was prepared in close collaboration and partnership with the Malagasy administration and represents the joint efforts of a multidisciplinary team headed by Henri-Bernard Razakariasa, Permanent Secretary of the Ministry of Finance and Budget, on the side of the administration, and Guenter Heidenhof from the World Bank. 4. The first step in this joint effort was a general presentation to all stakeholders regarding the scope of the proposed work. This session was exclusively dedicated to the discussion of the "concept note" designed by the World Bank team, which delineated the objective and the content of the mission. After the session,joint teams were formed to address five sectors: nutrition; water and sanitation; health; revenue; and public expenditures. The work of each team started with a very broad analysis of data relevant to the sector. This initial effort helped identify the subsequent scope of the study and data required to thoroughly understand the sector. The second step involved collecting data specific to and relevant to the sector to draft the first version of the report. A smaller team was set up to discuss and develop the outline of the report. 5 . Since the report is a World Bank product, the actual drafting of the reports was done by the staff or consultants of this institution. However, the successive drafts of the report were discussed with the members of the joint teams, except for the team working on public expenditures. This was not possible because the timing coincided with the budget preparation period. A final draft of the report approved by the World Bank was submitted to the Malagasy Administration for comments, and the report was finalized after a meeting between the two parties at which recommendations for the final report were discussed. The entire process took over eight months. It should be noted that the Government was provided support from technical assistants recruited by the projects and financed by the World Bank, among others, to complete certain background studies. As well, it should be mentioned that the World Bank Team accepts entire responsibility for the report and that certain conclusions are not necessarily shared by the Government of Madagascar. 6. This Public Expenditure Review is also characterized by another innovation: the analysis has been broken down into several reports (volumes) and will not be presented in one document, mainly to improve subsequent use of the reports as reference documents for the different areas which have been analyzed. Given the scope and depth of the matters dealt with in this year's review, some parts of the analysis are still underway and are not included in this report. This refers in particular to the analysis of contingent liabilities and fiscal risks triggered by public institutions that are supported by the government budget. This analysis is expected to be completed in late 2007. Similarly, an analysis of local government finances in a sample of communes is scheduled for publication in the fourth quarter of this year. 7. This Public Expenditure Review consists of four volumes: the first volume provides a global analysis of the environment within which the MAP will be implemented. It first reviews the macro-economic situation which serves as the backdrop for the MAP. It then reviews revenue performance and policy, both on customs and on internal taxation. Finally, this volume analyzes the allocation of public resources and the public financial management system. Three other volumes deal with the health, nutrition and water and sanitation sectors. These volumes review the link between the new development strategy and sectoral policies. They also examine if public resources in these sectors are allocated and used in an efficient manner to ensure successful implementation of the MAP. These three sectors were selected jointly with the Government mainly because of their high relevance and importance to achieving the MAP objectives. 8. Most of the data used in this PER are from the Ministry of Finance and Budget. Data on customs revenues are from Customs Directorate, and the data on tax revenues were provided by the Tax Administration Directorate. The team was unable, however, to obtain reliable data on non-tax revenues. Information on allocations and expenditures was provided by the Expenditure Directorate and the Budget Office. Macroeconomic data were provided by the Directorate for the Economy and by the databases of the International Monetary Fund. 9. In general, the macro-economic data and information of tax revenues are of high quality and did not require much adjustment. The overall quality of expenditure data, however, was low, mainly because of inadequate data coverage, lack of systematic budget execution reporting, and problems in adequately applying the recently introduced new budget classification structure. For example, the team had great difficulties in collecting information on the total amount of public resources allocated to the nutrition sector because a significant part of the information was not systematically consolidated. Data on bilateral grants were generally missing. A similar situation was observed in the health sector. 10. Similarly to the Public Expenditure Review 2005, the quality of data recording is relatively low; in-year reporting on budget execution by the examined sectors is often not consistent with the data available at the Ministry of Finance as no regular reconciliation takes place. This points to a structural problem and warrants decisive actions by the authorities for the future. A key problem in this context is the lack of consistent data about the regional distribution of the budget. The aggregated nature of the information makes it impossible, for example, to conduct a special analysis of the investment budget, even though it constitutes over half of the public expenditure. This deficiency makes it difficult to adequately assess the link between the budget and the Government's current decentralization efforts. 11. In principle, Madagascar's budget framework is based on a functional classification of public expenditure. This framework has been used for a long time but is not formally reflected in the budget document. Its use is also not mandatory for the sector ministries. This poses significant problems as it does not encourage the sectors to report in a consistent manner based on the application of the functional classification in recording public expenditure. As a consequence, the teams spent significant time in adjusting budgetary information. Volume 1: Marcoeconomic Framework and Public Expenditure Management 12. The first volume analyses three key prerequisites for the successful implementation of the new development strategy: a sound macroeconomic framework, adequate revenues generated from own sources, and efficient public expendituremanagement. 13. A sound macroeconomic framework is probably the most essential requirement for the success of the MAP. The macroeconomic performance underpinning the MAP, in terms of economic growth,revenue generation and investment levels, in particular, private investment, and the projected donor assistance, far exceeds Madagascar's recent economic performance, which in turn is superior to the performance in the 1990s. This raises questions about the realism of the macroeconomic assumptions that underpin the MAP. Second, Madagascar's revenue generation is low by international standards. While there are limits to increasing revenue mobilization in a primarily agricultural economy, it is estimated that the tax mobilization is below its potential by at least 3 percent of GDP. Thus, room exists for Madagascar to increase its revenue generation from its current levels of 10.8% of GDP in 2006 to help achieve the MAP goals. Finally, an efficient use of public resources will be required to implement the MAP. The public finance system has some problems as the analysis demonstrates. This will require accelerated implementation of the ongoing public finance reform program to ensure that public expenditures have the desired impact. Madagascar Action Plan and Macroeconomic Realities 14. A practical action plan. In contrast with the Poverty Reduction Strategy which came to an end in 2006, the MAP is based on a set of practical actions identified as "challenges" and clustered around eight "commitments" that constitute the overall development framework. The "commitments" are based on clearly defined goals and translated into specific projects and activities to ensure that the plan is operational. These activities are linked to clearly identified results and benchmarks. The MAP also assigns specific implementation responsibility for each activity which facilitatesmonitoring and evaluation. 15. The MAP sets ambitious goals. The overall goal of the MAP is to reduce the level of poverty to 50 percent by 2012 based on economic growth rates accelerating from 7 percent in 2008 to 10percent in 2011with the objective of achieving annual per capita GDP of USD 476 by 2012. The MAP aims at the same time to significantly improve the provision of basic public services to the population. In primary education, the completionrate is projected to be 85 percent (compared to 57 percent in 2006) through an improvement in the pupillteacher ratio from 52:1 to 40:1 and other quality measures. In public health, the new development strategy aims to reduce infant mortality from 94 today to 47 in 2012 (per 1,000 births) through improved vaccination coverage (100 percent instead of the current 80 percent). Safe water service coverage will be increased from the current 31percent to 65 percent by 2012. Finally, 64 percent of municipalities (comparedto the current 35 percent) will be accessible for the entire year by road by 2012. Government of Madagascar TheEight Commitments of the MAP The MAP is a five-year plan that lays out the direction and priorities for Madagascar for the period 2007-2012. It outlines eight strategic commitments with strategies and actions that will ignite rapid growth, lead to the reduction of poverty and ensure that the country develops in response to the challenges of globalization and in accordance with the national vision -Madagascar Naturally - and the MDGs. The eight commitments of the MAP are as follows: Responsible Governance -the goal is to create a Government that every citizen and the international community can trust and to build a civil service that will have integrity, be efficient and act totally professional in all its activities. The specific challenges of this commitment are to (i) provide sufficient security to protect people and property; (ii) strengthen the rule of law; (iii) reduce corruption; (iv) establish an efficient and effective Government budgetary process; (v) strengthen the provision of public services; (vi) decentralize the Government administration and (vii) become a learning nation. Connected Infrastructure -this commitment emphasizes that infrastructure is essential for the country to achieve rapid development, facilitate business and trade, enable communication and ensure that the standard of living and the access to resources and global knowledge improves for all. The challenges are to (i) prioritize infrastructure development for key growth areas; (ii) efficiently move goods and people from one place to another; (iii) improve access to transport services nationwide; (iv) ensure accessible and adequate energy supply at affordable and competitive cost; (v) ensure efficient and affordable communication system; (vi) carry out better weather forecasting and warnings of potential disasters such as cyclones; and (substantially improve access to drinking water and sanitation. Educational Transformation -the goal is to create an education system with world class standards in quality and effectiveness which provides Madagascar with the necessary human resources to become a competitive nation and a successful player in the world economy. This would be achieved through (i) ensuring access of all children to developmental opportunities before official school entry; (ii) creating a successful primary education system; (iii) creating a successful lower secondary education system; (iv) improving upper secondary school and developing vocational training; (v) transforming higher education; (vi) ending illiteracy; and (vii) developing capacities and mindsets of young people through sports and civic participation. Rural Development and a Green Revolution -the MAP recognizes that dynamic rural development through increased agricultural production is at the core of the Government's endeavors and that better infrastructure and communication networks are essential to meet this goal. The specific activities are to (i) secure land tenure; (ii) improve access to affordable rural financing; (iii) launch a sustainable green revolution; (iv) promote market oriented activities; (v) diversify rural activities; and (vi) increase the agricultural value-added and promote agri-business. Health, Family Planning and the Fight Against HIVIAIDS-the challenge here is to ensure that the Malagache people are healthy and can contribute productively to the development of the country. This commitment focuses on (i) providing quality health services to all; (ii) eradicating major diseases (malaria, TB, STIs); (iii) fighting HIVJAIDS; (iv) implementing a highly successful family planning strategy; (v) reducing infant mortality; (vi) reducing maternal and neonatal mortality; (vii) improving nutrition and food security; and (viii) providing safe water and widespread use of hygienic practices. High Growth Economy -the goal is to reach growth rates between 7-10% by 2012 through ensuring a diversified and strong private sector driven by local and international investment and trade. This challenge naturally covers many activities focused on the following: (i) ensure a stable macroeconomic environment; (ii) increase foreign direct investment; (iii) promote full employment; (iv) reform the banking and financial system; (v) strengthen domestic enterprises, SMEs and handicraft industry; (vi) enhance international trade competitiveness; (vii) intensively develop the mining sector; (viii) intensively promote and develop the tourism sector; (ix) intensively exploit regional opportunities; and (x) through diplomacy, strengthen economic synergies. Cherish the Environment -this commitment lays out the goal for Madagascar to become a world leader in the development and implementation of environmental best practice, to become a green island and to cherish and protect it? extraordinary environment. Local communities will be active participants and industries such as eco-tourism and organic agri-business will develop to minimize biodiversity damage and maximize benefits to the country and people. The activities focus on (i) increasing the protected areas for the conservation of land, lake, marine and coastal biodiversity; (ii) reducing the natural resource degradation process; (iii) developing the environmental reflex at all levels; and (iv) strengthening the effectiveness of forest management. National Solidarity - the goal is to continue to forge a strong and unified national identity that promotes participation and partnership, allows people to be proud and to take full and shared responsibility for guiding the nation into the future. The specific challenges are to (i) celebrate cultural diversity, understanding and respect; (ii) build social trust and promote civic participation; (iii) promote solidarity and pride; (iv) improve support for the very poor and vulnerable populations; and (v) promote gender equality and empowerment of women. Source: Madagascar Action Plan 2007-2012 16. The plan lacks some details. Although different actions proposed by the MAP are well defined in the new strategy, the activities are not prioritized or integrated into a sequenced implementation plan. As part of this, the interconnection between the activities identified under the different "challenges", the connection between challenges listed under the same "commitment" and those listed under different "commitments", as well as the interconnection among the "commitments" themselves, are not clearly established. An analysis of these interconnections would help identify implementation priorities among the different activities, challenges and commitments of the MAP. While the resources necessary to implement the MAP are known for some sectors, the MAP has not been fully-costed. Such a costing exercise would trigger at the level of the implementation of the MAP a much needed (political) discussion and decisions about spending priorities. It is believed that total costs of MAP implementation are between USD 8 to 11billion. 17. Strong economic growth requires a significant increase in investments. As mentioned before, strong economicperformance is the key prerequisite for the success of the MAP. The rate of investment required by the MAP is 30 percent of GDP by 2011, half of which must be contributed by the private sector (17 percent of GDP). According to the MAP the achievement of this ambitious goal requires a significant scaling-up of foreign direct investment, which is hoped to increase from USD 84 million in 2005 to USD 500 million in 2012. Higher foreign investment will be based on a substantial improvement of the business environment. To achieve this, Madagascar intends to move from position 131 to position 80 in the World Bank's 'Doing Business' rankings. The implementation of the goals requires a level of economic performance Madagascar has never experienced: the country's annual growth rate has averaged only 3.4 percent over the past ten years. This is a result of levels of investment that are lower than the average for sub-Saharancountries (14 percent of GDP). 18. The country's modest economic performance is due to a number of obstacles that discourage investment and generates low returns to existing investments: a legal environment which is not conducive to investments, the limited capacity of the private sector to mobilize resources and: finally, weak infrastructure. The legal environment for investments is characterized by administrative and bureaucratic procedures that are three times longer for entrepreneurs than international standards. These constraints are aggravated by the problem of corruption within the tax administrationand customs department.Madagascar, which is a country as large as France, Belgium, and Luxembourg combined, has a road network of only 32,000 km of which only 4,074 kilometers are paved and 5,855 kilometers are in good or fair condition. There is only one port that meets international standards, and only a single international airport. 19. The achievement of the MAP "commitments"will require significantly higher levels of investment financed by higher levels of external assistance and domestic revenue mobilization, and private sector participation. Significant foreign direct investments in the mining sector make the growth rates of the MAP attainable, but there is a risk that this will not deliver broad-based growth. The recent investment decision by Dynatec to invest over $2.5 billion over the next three years in nickel mining will boost growth and investment in the economy, but the extent to which this growth translates into broader benefits for the people of Madagascar will depend critically on the level of resources generated for the Treasury, and the transparent and effective use of public resources for improved service delivery. 20. There is room for improving revenue mobilization from current low levels of around 11% of GDP. One of the main MAP priorities in 2007 is to undertake major tax reform, rationalizing tax policy and procedures, modernizing tax and customs administration, and improving human resource capabilities with the overall objectives of revenue generation, improved service quality and establishing a favorable climate for investment. However, given the experience of the recent past, where shortfalls in revenue collection, partly linked to over- optimistic revenue projections, have led to mid-year expenditure cuts and hampered budget execution, the current goals of attaining 15 % by 2012 may need to be revisited. 21. Madagascar could effectively absorb scaled up development assistance. Traditionally only a few donors have actively operated in Madagascar. Key development partners, including the World Bank and the European Union, have recently finalized their country assistance strategies. But the Governmentis aiming to attract new developmentpartners to help them scale- up implementation of the MAP, while encouraging the donors present to scale up their developmentassistance. 22. Overall, a macroeconomic framework that is in line with identified resource flows provides the best hope for smooth execution of the budget and implementation of the MAP. The annual Budget Law provides the opportunity to update the macro-economic outlook and budgetary allocations, in line with identified developmentpartner assistance, realistic projections of revenue mobilization and investment prospects. If the overall resources available are inadequate to attaining the MAP goals, prioritization among the competing objectives will be necessary, as will a realignment of the results framework for the MAP. Madagascar Action Plan and Government Revenues 23. The MAP'S objectives with regard to revenue generation are both quantitative and qualitative: the Government seeks to generate revenue equal to 15 percent of GDP. At the same time, it intends to revise and simplify the tax system in a fundamental way to improve revenue mobilization, especially through expansion of the tax base and through the creation of a tax environmentconduciveto private investment. 24. Madagascar has one of the lowest levels of fiscal revenues in sub-SaharanAfrica.With a tax/GDP ratio of less than 11 percent (compared to 18 percent for sub-Saharan Africa), Madagascar seems to have enormous scope for improving its fiscal inflows. Efforts to improve fiscal revenue face two main challenges: establishing an incentive-driven fiscal framework to promote investments,and reducing tariffs to adhere to regional integration agreements. 25. Fiscal revenues will increasingly come from internal taxes. Like most underdeveloped countries, a significant portion of Madagascar's fiscal revenues come from international trade. Because of tariff simplifications and the impact of regional integration, these taxes have steadily declined over the past ten years. Customs revenues fell from 60 percent of total revenues in 1998 to 52 percent in 2005. Duties and taxes on imports are also decreasing and being replaced by indirect taxes. Internal taxes have so far not been sufficientto fill this gap. 26. The narrow tax base and the complexity of the tax structure are the two factors hampering internal taxation. Fewer than 10taxes in Madagascar account for 90 percent of total tax revenues. Moreover, over 90 percent of tax revenues are collected by three tax collection centers in Antananarivo. At the same time, the legal and procedural framework for taxation and tax collection is complex and outdated. The existing legislation foresees more than 28 different types of taxes and several cases of exemptions. This situation is further exacerbated by significant variations in applying existing rules and regulations. For example, although tax collection is generally done on a declaration basis, some taxpayers can pay in installments while others have to pay cash upfront as there are no clearly established and enforced rules. 27. The MAP sets itself a tax/GDP ratio benchmark of 15 percent to finance its 'bcommitments".The achievement of this goal requires fundamental reforms of revenue policies and administration. To date, only customs has developed a consistent reform strategy which has been implemented for the last two years. This strategy is focusing mainly on modernizing the customs administration and combating fraud and conuption. The tax administration is in the process of developing and refining its reform strategy. The intention is to move beyond ten years of piecemeal reform towards a more fundamental reform program which is based on five pillars and will be implemented in the upcoming five years. The five pillars include: (i) immediate implementationof measures to strengthen tax administration; (ii) reform and simplification of tax regulations; (iii) strengthening and modernizing the institutional framework for tax administration; (iv) modernizing tax administration procedures and operating systems; and (v) developing and mobilizing human resources. Reforms will also ensure better territorial deployment of personnel. 28. Great potential for increasing internal tax revenue exists in several sectors. The agricultural, livestock and fisheries, mining, tourism, and hotel sectors, as well as the service industry are high value-added sectors that are presently under-taxed because of difficulties in assessing their tax base and in organizing an effective collection system. The additional income from the above-mentioned sectors could substantially increase tax revenues. Moreover, better management and collection of certain local taxes could result in improved revenue performance. This is particularly the case for real estate taxes which could be collected more effectively by the municipalities. Madagascar Action Plan and Public ExpenditureManagement 29. The MAP implementation will require the effective and efficient use of public resources, it is therefore important to ensure that the existing legal and procedural framework for public expenditure management, as well as the instruments which are used to implement public expenditures are consistent with the ambitious goals and objectives of the new development strategy. This will require an allocation of public resources in line with MAP priorities, a sound and well applied legal and procedural framework for the use of public resources, and the effectivenessof the tools and mechanisms for expendituremanagement. 30. A first MAP budget in line with the past. The budget for 2007, i.e., the first year of MAP implementation, is formulated in line with identified resources, and therefore, does not yet involve any "quantum leap." The sectoral allocations are in line with the budgets of the last ten years. The total expenditure envelopeprogrammed for 2007 represents 20 percent of GDP, and is nominally 14percent higher than that of 2006. There is also a trend toward improving allocations for social and economic sectors, particularly agriculture, thereby consolidating the implementation achievements of the PRSP. To the extent that the MAP priorities are not explicitly apportioned among the eight "commitments", it is not possible to say whether this first budget corresponds to the priorities of the new development strategy. Breakdown of allocations of the last three budgets Average 03- 2005 2006 06 2007 General services of the public administration 29.16 24.93 29.47 25.85 Defense 4.90 4.43 5.34 5.15 Public security and security services 2.81 2.97 3.00 3.50 Other economic services 7.39 13.76 8.74 9.26 Environmental protection 1.56 1.77 2.13 1.67 Public housing and community facilities 2.71 2.22 2.75 1.52 Health 9.72 8.16 8.96 8.97 Sport and cultural affairs 0.59 0.75 0.70 1.05 Education 18.12 17.89 18.31 18.09 Social Welfare 0.55 0.97 0.68 0.56 Agriculture 5.41 5.83 5.44 8.13 Transport 17.10 16.32 14.48 16.25 Total 100.00 100.00 100.00 100.00 Source: Ministry of Finance and Budget; calculations by the World Bank. 31. Reasonable budgetary alignment with the priorities has been one of the strong points of PRSP implementation. Although budgets over the 2003 to 2006 period were not completely aligned with PRSP priorities, allocations during the period favored strategic priority sectors, and particularly the social sectors and those that support economic growth. The education sector received on average over 18percent of total expenditure (against 13 percent over the 1997-2001 period). The transportation sector accounted for more than 14 percent of expenditures over the PRSP period, whereas it had only received 12percent previously. 32. The MAP lacks an adequate and consistent Medium-Term Expenditure Framework (MTEF). A draft MTEF which has been prepared and attached to the 2007 budget is incomplete, since the framework only establishes a portion of the financing required over the five-year life of the MAP. Paradoxically, the MTEF even assumes a decrease of budgetary allocations necessary for the implementation of the MAP from 2009 onward. This shortcoming is a result of a failure to clearly identify the overall costs of MAP implementation as well as to sequence and prioritize MAP activities. 33. The current state of public expenditure management does not guarantee the success of the MAP. Independent evaluations have pointed to several deficiencies in public expenditure management. These deficiencies mainly concern the system of internal and external controls, and budgetary reporting, Internal controls are considered ineffective because they are incomplete and do not adequately evaluate the total costs of services rendered. External controls which are exercised by the Accountant General and by Parliament focus on reducing the backlog of passed budget execution laws but do not provide timely independent oversight over government activities. Inadequate budget execution reports, poor bookkeeping, and the lack of regular reconciliation of accounts between the Treasury and the sector ministries are additional weaknesses of the Malagasy expenditure management system. These weaknesses risk compromising the effectiveness of MAP implementation. 34. Budget preparation remains inadequate. Differences in the preparation process for the investment budget, for the recurrent budget and for the personnel budget negatively impact the consistency of the budget. The absence of an adequate budget preparation process that provides for sufficient time for a dialogue between the sector ministries and the Ministry of Finance remains a significant weakness in the budget preparation process. In the last two years budget preparation, began late, i.e., in mid-year, and often took only two to three months to complete, before the draft budget law was submitted to Parliament. This period of time is not sufficient for the technical ministries to adequately prepare their budget. The Government is trying to address this issue -the budget preparation for fiscal year 2008 has started in March 2007 and will provide more room for discussions about sectoral allocations. 35. The last ten years have seen a marked improvement in budget execution. The average budget execution rate rose from 89 percent for the 1997-2001 period to over 97 percent for the 2003-2006 period. This improvement, however, does not mean that budget execution has been smooth and without problems: the increase in the budget execution rate is mainly a result of better implementation of donor funded project and programs which do not use the government's own execution process. The situation is rather different for internally financed expenditure: in each of the last two years, the Ministry of Finance had to adjust in-year budgetary allocations mainly because of significant shortfalls in revenue generation. When revenues picked up toward the end of the year major parts of the budget were executed during the last few months of the year. As an example, three quarters of the 2006 budget was committed in only three months. This raises questions about the soundness of the budget and the quality of these expenditures. 36. The complexity of expenditure procedures negatively impacts budget execution. The expenditure execution process remains complex and long: according to one evaluation, on average twenty different steps and at least seven days are required to process an expenditure if regular procedures are followed. A main reason for this is excessive oversight and approval requirements, which according to independent evaluations does not translate into higher quality of servicesbut simply adds red tape and ineffective administrativeprocedures. 37. Outdated "standardpractices" undermine efforts to reform expendituremanagement. Review and evaluation have repeatedly flagged the problem of non-application of new rules and regulations and the adherence to "former practices". An example are the regulations governing the program budget system which were introduced in 2004: the new regulations foresee an integrated budget preparation process under which both recurrent and investment budgets are summarized under the program structure which is linked to specific outcomes. Nevertheless, the recurrent budget continues to be prepared separately from the investment budget, thereby leading to distortion and inconsistencies in the execution process. The non-compliance with the current legislation is primarily a result of missing explanatory guidance and regulations for the application of the new legislation. 38. New procurement legislation not sufficiently applied. In 2004, Madagascar put in place a new procurement code that follows international standards. A recently completed audit of four sector ministries confirmed that the contracting authorities (i.e., the sector ministries and other public entities) do not yet sufficiently apply the new legislation. A main reason is that the procurement units in the sector ministries and the procurement oversight authority required to be established under the new regulations are not fully operational. As a consequence, the ministries and departments continue to apply old procedures. Certain provisions of the new law, such as those dealing with competitive bidding processes or the time frame for preparing offers, are not enforced. It is estimated that the strict application of the new procurement regulations could lead to savings of between 25 to 30 percent. 39. An inadequate system of internal and external controls. Although five different entities are responsible for monitoring and overseeing expenditure management and budget execution, weaknesses in this area continue to exist. A key problem is the unclear distribution of roles and responsibilities between the institutions responsible for internal control. The institution with the broadest mandate, the State Inspectorate General, can only intervene "on request". An overall internal control mechanism for the Ministry of Finance (Inspection GCnerale des Finances) exists only on paper and is not yet operational. The internal control cadre of the Treasury and the Auditor General lack adequate funding to effectively fulfill their functions. The commitment control systemhas major deficienciesand needs to be radically reformed and modernized to bring it to an adequate standard which goes beyond an only formal approval functions. 40. The capacity of the sector ministries to adequately implement the MAP is another determining factor for the success of the new development strategy. The MAP foresees a significant improvement in service provision to the population. Apart from financial resources effective service provision depends on the managerial capacity of service delivery ministries, departments and agencies. This managerial capacity is generally considered very low. The most obvious manifestation of this is the absence of a sector strategy which is the case for some ministries. Even where such a strategy exists it is often not sufficiently linked to and integrated with the budget. The mismatch between budget and sector strategy negatively impacts design and provision of services to the population. A first important step to address weak managerial capacity is to clarify the roles and responsibilities of units and managers within the organization, in particular their contribution to the delivery of services. This should go hand-in-hand with training and capacity building of relevant staff. Conclusions and Recommendations 41. The existence of a homegrown development strategy summarized in the MAP and the fact that it was made operational immediately after the Poverty Reduction Strategy Paper was completed, is a considerable advantage. It is the key reference document for understanding the challenges and strategies for Madagascar's developmentover the next years. 42. The biggest challenge of the MAP is the successful implementation and attainment of its ambitious objectives. This problem is magnified in light of past economic and development performances, and by the fact that significant public sector management deficiencies can undermine the successful implementation of the MAP. A key problem area in this context remains public expenditure management: although the procedural and institutional fi-ameworkas well as public finance capacity have improved since 2004 some important issues remain unsolved, in particular problems in the areas of internal control, budgetary reporting and public procurement. 43. A key recommendation is to clearly establish the overall costs of MAP implementation. This costing exercise would provide the basis for the development of an adequate Medium-Term Expenditure Framework that underpins the MAP. The full costing of the MAP and the development of a MTEF should go hand-in-hand with a prioritization and sequencing of MAP actions, also to assess the most economic and effective combination of activities. 44. Improved revenue generation and collection are vital not only to meet the goals of the MAP but also to exploit the country's undeveloped revenue potential. In order to achieve this goal, reforms already agreed upon in the area of customs and tax administration must be decisively implemented, especially the simplification of the tax system and the development of a coherent tax policy that is conducive to private sector development. These reforms must be accompanied by a reorganization and modernization of the tax and customs directorates, which should include the establishmentand enforcement of standards of service. 45. Sustained implementation of the public expendituremanagementreform program will be critical for better delivery of public services, and hence for effective implementation of the MAP. The ongoing comprehensive public finance reform program will be consolidated by capitalizing on achievements, in particular the modernization of the regulatory Eramework for public financial management and procurement, as well as the introduction of the integrated financial management system. Measures taken to improve performance involve the strict application and enforcement of the provision of the new Organic Finance Law of July 2004 by defining clear rules and mechanisms for integrated preparation of the recurrent and investment budgets. These measures will help improve consistency of resource allocation and facilitate budget execution. These activities should be completed by further simplification of the budget execution process to eliminate unnecessary bureaucratic steps and to reduce red tape. The implementation of the recommendations of the independent audit of the commitment control system is another important step to improve overall effectiveness of the execution process. Improvements in expenditure monitoring and reporting are also critical to ensure that MAP implementation progresses as planned. In this context, the Government should take full advantage of the new integrated public financial management system (SIGFP) which provides timely and accurate information about the status of the implementation of the budget. Budget implementation reports should be discussed at both technical and political levels on a regular basis, to identify implementation bottlenecks and to track the implementation status of MAP activities. 46. The enforcement of the provisions of the new public procurement code is another key element for the successful implementation of the MAP. Application of the new regulations will not only reduce transaction time and costs but also result in significant cost savings for the Government. 47. Efforts should also continue to improve capacity at the level of the sector ministries, not only at technical levels but also at managerial levels. The ongoing capacity building program should be reinforced and should provide comprehensive assistance to MAP priority sectors and institutions. These programs should be completed by targeted assistance to improve service delivery at the sub-national levels of government, in line with the decentralizationpolicy of the Government. Volume 2: The Health Sector 48. The health sector faces important challenges to achieve the Madagascar Action Plan (MAP) goals. The Government of Madagascar has identified in this action plan various indicators whose status to date are far below the ambitious targets. Achieving these goals, which are both comprehensive and numerous, requires sustained efforts by the authorities and its development partners. Primarily to implement the programs and activities already identified by the MAP it is essential to mobilize more human and financial resources and to improve the management of these resources. Current Health Situationin relationto the MAP objectives 49. The last decade has seen an improvement in the health status of the population, particularly in terms of child survival thanks to effective public interventions. Despite these improvements, and even though Madagascar has better health indicators than other comparable countries in the region, the health sector continues to be plagued by a number of problems. 50. Access to quality health care remains inadequate. The first challenge of the MAP (see box below) is to ensure the provision of quality health services to the entire population. To achieve this goal, the new development strategy aims at increasing the rate of outpatient consultations at primary health care centers (PHC) from 49 percent in 2005 to 70 percent in 2012. The MAP also aims at increasing the percentage of births in health facilities to 50 percent by 2012. However, if past trends continue and no extra efforts and resources are mobilized, it will not be possible to reach these goals. For instance, the percentage of births taken place in health facilities slightly decreased from 34% to 32% between 1997 and 2004. Similarly, the poor and people living in rural isolated areas are less likely to receive quality health care when in need than the rest of the population. Box 1 : Madagascar Action Plan- Objectives and indicators for the health sector To provide quality health care to all, the MAP has as objectives to: (i) increase the supply of adequate and quality health care to ensure easy access, affordability and reliability; (ii) educate the population so that they understand and use quality health services and treatment options; and (iii) create partnerships with community agents and the private sector at local levels. Indicators: percentage of new consultations using basic health centers, percentage of births taking place in Basic Health Centers, and average life expectancy. To eradicate the main communicable diseases the objectives of the MAP are to: (i) effectively control malaria; (ii) eradicate congenital syphilis and tuberculosis; and (iii) reduce the prevalence of main endemic, epidemic, and tropical diseases. Indicators: number of presumed malaria cases, percentage of malaria mortality in hospitals, percentage of cured tuberculosis patients, percentage of new cases of tuberculosis detected, percentage of syphilis among pregnant women. To win the fight against HIVIAIDS the objectives are to: (i) maintain HIV prevalence below 1% in the general population, while ensuring care for HIVIAIDS patients; (ii) reduce the number of new infections, and (iii) increase the number of HIVIAIDS patients receiving treatment. Indicators: prevalence of HIV among pregnant women, prevalence of condom use for males and females in high risk category (15 to 25 years old), and percentage of adults and children on ARV who are still alive 12months after initiation of ARV. To implement a highly successful family planning strategy the goals are to: (i) reduce the average size of the Malagasy family to improve the well-being of each family member, the community and the nation; and (ii) meet the demand for contraception. Indicators: total fertility rate, and fertility rate in urban and rural areas, contraceptive prevalence rate, contraceptive prevalence rate among teenagers, percentage of teenagers (15-24) having access to information on family planning. To reduce infant mortality the goals are to: (i) reduce by half the infant mortality rate; (ii) increase the demand for pregnancy services at the basic health care centers; (iii) broader community participation in child health. Indicators: infant mortality rate, percentage of DPT coverage, percentage of children getting supplementary nutrition, percentage of one year olds immunized against tuberculosis, percentage of one year olds immunized against measles. To reduce maternal and neonatal mortality the goals are to: (i) increase demand for antenatal care and preventive services; (ii) ensure that all urban and rural areas have reliable obstetrical emergency services; and (iii) promote adequate home-based care for mother and child health. Indicators: maternal mortality ratio, and neonatal mortality ratio. To improve nutrition and food security the goals are to: (i) reduce the malnutrition ratio of children under five; and (ii) reduce the ratio of food insecurity among households and vulnerable groups. Indicators: percentage of malnutrition among children under five, percentage of food insecurity among households. To provide safe water and to spread the use of hygienic practices the goals are to: (i) have educated children in safe sanitary and hygienic practices; (ii) significantly decrease infant mortality due to water related diseases; and (iii) significantly decrease the number off lost working and school days. Indicators: percentage of coverage on safe water supply, percentage of coverage by a sanitary infrastructure, number of local communities with the WASH program. Source: Madagascar Action Plan 51. Communicable diseases, especially malaria, diarrhea, and respiratory track infections, often in associationwith malnutrition,are the main causes of mortality and morbidity in the country, especially among children under five. Although there is no reliable and complete information on causes of mortality and morbidity in the country, data on health facility utilization can be indicative of the burden of disease in Madagascar. The MINSANPF statistical yearbook 2004 shows that 24% of outpatient consultations are due to respiratory track infections, followed by 18% due to fever (suspected malaria), and 8% due to diarrheal illnesses. Among children under five respiratory track infections, suspected malaria, and diarrheas represented 33%, 22%, and 14%of the consultationsthat year. 52. Even though the adult HIV prevalence rate is low, this rate has rapidly increased among risk groups. The MAP aims to continue the fight against HIVIAIDS in Madagascar and has set the goal of maintaining the adult prevalence rate of about 1percent. Although the country has one of the lowest rates of HIVIAIDS, the challenge of combating this disease should not be underestimated, as the country has a high rate of other sexually transmitted diseases (the rate of active syphilis amongpregnant women is about 8%). 53. Recent improvements in child survival. The MAP aims at reducing the infant mortality rate by 50 percent in 2012. If the current efforts are maintained this objective is likely to be achieved. The last decade has seen remarkable improvements in child survival; between 1997 and 200314, infant and child mortality rates were reduced by 43 percent and 41 percent, respectively. Other child survival indicators such as morbidity and health care coverage have also improved. Nevertheless, income has a major impact on the infant mortality rate, which is three times higher among the poorest 20 percent of the population than among the richest 20 percent. 54. The country is progressing towards achieving the family planning MAP goals. The results from two Demographic and Health Surveys indicate that the total fertility rate, one of the MAP indicators, has decreased from 6.1 children per women in 1992 to about 5.2 in 200312004. Similarly,the contraceptiveprevalence rate, another indicator, has increased from 9 percent to 18 percent. To achieve the objectives of the MAP, the country should continue its efforts regarding information, education, and communicationas well as improving access to contraceptives. 55. Stagnation of the maternal mortality rate. The maternal health indicator and the access mothers have to quality health care remain a concern. The MAP envisions almost halving the maternal mortality rates (MMR) by 2012. This objective will be very difficult to achieve without considerable extra efforts. In the last years the MMX has only slightly changed from 488 per 100,000live births in 1997 to 469 in 2004. If higher maternal survival rates are to be achieved, the percentage of women receiving prenatal care must increase, as well as the percentage of deliveries attended by skilled personnel. The low demand for maternal services, particularly deliveries attended by qualified health personnel, is due in part to the lack of competent staff (i.e. midwives) and obstetric equipment. The MAP intends to address these two problems. Improved accessto contraception will also be important, as lower fertility rates imply lower maternal risks. Health SystemChallenges to achieve the health related MAP goals 56. To achieve the health related MAP goals by the year 2012, the followingbottlenecks would need to be lessened or removed in the sector: 57. Financial barriers, limited physical access to services in some areas, and the low quality of services remain obstaclesto ensure accessto quality health care for all. A revision of the criteria used to identify the beneficiaries of the Equity Funds will be needed to lessen the financial barriers to accesshealth care. In addition, focusing efforts and resources on underserved areas will also be needed to eliminateregional and socio-economic disparities in access to quality health care. Similarly,particular attention should be given to basic health centers to improve not only their physical infrastructurebut also the technical quality of the services they offer. Finally, it will also be important to ensure the continuity in the stocks of medicines and medical supplies in PHC facilities. 58. Shortage of qualified health workers. The insufficient number of qualified health workers, particularly nurses and midwives, poses a significant challenge to the delivery of quality health services. With 33 nurses per 100,000 inhabitants, the nurselinhabitant ratio is among the lowest in Sub-Saharan Africa. In addition, absenteeism among health workers is high and negatively impacts service delivery. More workers must be recruited, and both initial and continuous training programs must be revitalized to improve this situation. 59. Uneven geographical distribution of health workers. Most health workers are concentrated in the province of Antananarivo. Although the province has only 28 percent of the total population, 46 percent of public sector doctors work there. The insufficient number of workers at health care facilities, particularly in rural areas, remains a major barrier to improving services. The unequal geographical distribution impedes uniform access to quality health care throughout the country. According to MAP goals, this specifically rural problem will be addressed by transferring more skilled workers and resources to the underserved areas. It is recommended that the MAP actions for hiring and redeploying qualified health workers to underprivileged regions, and for improving their working conditions, be implemented on a priority basis. The MAP envisions introducing incentive schemes for health workers, such a career plan, supplementary income, and allowances to encourage staff to work at regional locations. All of these activities should be integrated into a comprehensive human resource management strategy for the health sector to ensure that quality health care services are provided especially to the most vulnerable areas. Key Public ExpenditureChallenges 60. Insufficient budget allocation. Madagascar's health expenditure is relatively low when compared with other sub-Saharan African countries. An examination of trends of MINSANPF's real per capita budget (annual variation), shows a decrease between 2001 and 2004. However, after 2005, there was an increase in the real per capita budget allocations reaching a level higher than that of 1997. Nevertheless, the actual level of per capita expenditure in health is not sufficient to reach the health related Millennium Development and MAP goals. In addition, the share of MINSANPF out of the total government budget has only slightly increased in the last years. Between 1997and 2007, while the share of the Ministry of Education and the Ministry of Public Works in the government budget increased significantly, the share of MINSANPF remained between 6 and 8 percent and diminished after 2002. In 2006, despite an increase in the real budget allocation to the sector, this share was only 5.9% which is lower than the share in 1997(7.1%). 61. There are large regional differences in the distribution of financial resources to the sector. Large regional disparities remain in the allocation of the recurrent budget. The actual distribution benefits richer regions more. In addition, the percentage of resources allocated to the functioning of health centers, transferred by the District Health Services is minimal and some districts do not make any transfer. These regional disparities could be lessened through distribution criteria that take into account the population size, the number of health facilities, and the poverty rate. 62. Resource distribution within the health sector is generally in line with Government priorities but can be improved. In the year 2003, the distribution of public resource reflected government health sector priorities given that the highest percentage was used for preventive public health and outpatient services. However, there is room for improvement as one-fifth of all resources have been allocated to the central administration of the ministry. Similarly, the construction of a medical imaging unit, estimated to cost Ar 3 billion or 0.5 percent of the MINSANPFbudget for 2006, may not be fully in line with MAP goals. 63. Budgetary management remains weak and centralized. Despite the decentralization policy, MINSANPF manages its budget in a very centralized and insufficiently transparent manner. There are many challenges the ministry confronts in budget planning and preparation: (i) the Medium-Term Expenditure Framework (MTEF) is not updated or operational; (ii) the budget preparation process starts late; (iii) salaries, other recurrent resources, and investment resources are dealt separately in the budget preparation; (iv) external support is volatile and uncertain which makes the budget preparation difficult; (v) there are no clear criteria to distribute the budget among deconcentrated levels of the Ministry. To address these issues, it is recommended, among other things, to: (i) finalize the Health Sector Development Plan and actualize the MTEF; (ii) start the earliest possible the budget preparation and integrate salaries, other recurrent, and investment resources in this process. It will also be important to reinforce donor coordinationto better plan foreign support. It is also necessary to establish clear criteria to distribute the budget in a more equitable manner. Finally, the budget classification (nomenclature) needs to be improved to achieve a more transparent presentation and ensure a better control and evaluation from the Parliament. 64. Budget execution needs improvement. The large variation in execution rates of the ministry over the last few years, particularly of investment expenditure, reflects some difficulties in budget management within the Ministry. Some of these difficulties are: (i) the late start in the budget execution due to late nomination of actors in the budgetary chain; (ii) frequent budgetary cuts and blockages in budget commitments; (iii) late and complex procurement procedures; (iv) lack of correspondence between the budget programs and the Ministry's structure; and (v) insufficientknowledge in the management of budget programs. To improve the budget execution rate it will be important to nominate the staff responsible for the execution of the budget as soon as the budget becomes available. It will also be necessary to reinforce the capacity of the budgetary actors and clarify the roles of the different people responsible for the execution process, notably by reinforcing their authority in the management of programs as established by the Organic Law of Finances. Finally, it will be necessary to improve procurement organization and procedures. 65. Unpredictability of external funding poses a serious challenge. The health sector has been financed primarily by external aid over the past decade. This dependency, along with the high degree of volatility of these external funds and the uncertainty surrounding external assistance, has made it very difficult for the Government to plan and program health sector activities. To achieve the MAP goals, mobilization of domestic and external funds must be increased but in a more coordinated manner. External assistance should be integrated into a Sector-Wide Approach, using an updated MTEF as a reference framework. This would also harmonize external funding and might - over time - lead to an improvement in the predictability and alignment of external assistancein line with the sector priorities. Volume 3: The Nutrition Sector 66. Strong commitment by the Governmentto combat malnutrition.Madagascar has one of the highest malnutrition rates in Africa. Stunting (resulting from chronic malnutrition) affects almost one in two children under age five. Despite this, Madagascar's efforts to combat malnutrition have been exemplary. As a result of ongoing efforts over the past ten years, Madagascar stands out as one of the few African countries that have managed to develop a community-based program designed solely to combat malnutrition, which expanded rapidly between 1998 and 2006 as a result of the National Community-based Nutition ProgradSEECALINE, a pilot project that now covers the entire country. The Government's commitment to reduce malnutrition was again demonstrated in 2006 when the nutrition program was included as one of the priorities of the MAP. The Main Challenges for the Nutrition Sector 67. Reaching the nutrition goals set forth in the MAP seems feasible. The first MAP nutrition goal is to reduce the malnutrition rate among children under age 5 from 42 percent in 2005 to 28 percent in 2012. While this is a very optimistic goal, it is achievable given the priority accorded to the extension and strengtheningof relevant nutrition interventions. It is estimatedthat lack of adequate funding for nutrition could result in economic losses for the country of up to US$2.15 billion between 2006 and 2015. 68. Good outcomes of the nutrition program. A ten percent reduction in underweight individuals was noted after two years of on-site work in areas and sites served by the nutrition program. These outcomes have contributed to Madagascar's success in reversing the negative trend in malnutrition between 1997 and 2004, with an annual reduction in underweight individuals of one percent at the national level. Considering the impact of the nutition program, reducing the malnutrition rate to 28 percent may be feasible, provided that investment increases to facilitate the extension of program coverage to the entire target population under the age of three. It is likely, however, that this goal would be achieved in 2015 rather than 2012. It would require the strengthening of community level activities, such as the provision of micronutrient supplementsand basic health services (with particular attentionpaid to pregnant women). 69. The Government should continue to expand and strengthen the existing nutrition program throughout the country and guarantee the financing of the program for the years ahead. The program should give priority to rural and isolated areas which are particularly affected by malnutrition. Efforts should also be stepped up in potentially vulnerable areas. In particular, greater emphasis should be placed on malnutrition prevention for young children, in particular those under the age of two, to ensure that these childrenreceive the assistance necessary to ensure adequate growth. Similarly, pregnant women should receive targeted assistance by the nutrition program. 70. Well-functioning programs should be strengthened. Nutrition assistance should be channeled through the community-based nutrition program which has proven very effective in lowering malnutrition rates. It is recommended to further strengthen these community-based nutrition activities and to ensure adequate funding in the years ahead. In addition, the National Nutrition Office should be supported in its efforts to encourage maternal lactation to increase further the "exclusive breastfeeding" rate both in its current nutrition programs and at health facilities. At the same time, distribution of micronutrients and iron supplements, as well as vitamin A for pregnant women, should receive greater attention. The Government should improve access to and availability of these micronutrients through existing programs. Finally, the Government should strengthen and expand school nutrition programs in all school districts to reduce malnutritionrates of pupils. 71. The MAP goals of reducing food insecurity will be achievableonly if a more structural approach is applied. A second MAP nutrition indicator intends to reduce household food insecurity from 65 percent in 2005 to 48 percent in 2012. Faced with this challenge, interventions must be based on a thorough analysis of the factors causing food insecurity, in particular to reduce some of the food and nutritional crises that occur each year. In addition, targeted assistance could help lower the number of cases of severe malnutrition. Food security activities at the national and regional levels should be strengthened by the rural sector, as described in MAP commitmentnumber 4. 72. Reorientation towards prevention. Food and nutritional crises occur regularly in Madagascar, generally following climate variations, cyclones or other natural disasters. These crises affect many regions and communities. The MAP intends to address seasonal food insecurity largely through social protection and highly labor-intensive activities. A more systematic approach, however, is recommended to achieve the MAP goal of reducing the number of households affected by seasonal insecurity. Such an approach should primarily look at structural preventive activities that target the root causes of food insecurity rather than seek to mitigate crises. Main Public ExpenditureChallenges 73. Transparency and monitoring of budget executionrequiresimprovement. The work of the National Nutrition Office (ONN) in the areas of monitoring and budgetary reporting has several shortcomings.The periodic reports that ONN sends to the MEFB should clearly establish, in addition to program activities, the link between the budgetary allocations and the actual spending per program andlor strategic goal. Moreover, the structure of ONN's budget should be consistent with its activities to facilitatethe financial monitoring of ONN's activities. 74. To improve transparency of ONN operationsthe status of the deposit accounts should be published periodically.ONN should also prepare an annual performancereport, which allows for the monitoring of financial and physical activities based on budgetary allocations. A number of measures are being developedby ONN to strengthen budget execution and monitoring. These include the preparation of a financial summary report for 2006 and a report that includes an analysis of externally-fundedactivities. These reports are expected to be completed by the end of June 2007. The preparation of these reports would benefit from technical assistance. 75. Budgetary allocations are in line with government priorities, as set forth in the National Action Plan for Nutrition (PNAN) and restated in the MAP (the priorities in the PNAN were incorporated into the objectives of the MAP). Several ministries fund nutrition activities, but ONN manages the largest budget. In the financing of nutrition-related activities, greatest priority is given to preventive programs (almost 60 percent of total nutrition-related expenditure or US$7.1 million in 2005). This demonstrates that Madagascar is one of a few African countries that have managed to reduce the rate of malnutrition by adopting a preventive approach. These preventive programs such as community-based nutrition, school nutrition, and fortification with micronutrientsare in line with the priority actions outlined in the MAP. The cost of funding these programs at the national level is estimated at US$99 million for the period 2007-2011. However, the MAP also envisions financing food security activities with an estimated budget of US$29.1 million for the period 2007-2011. If the Government fails to mobilize sufficient resources for the entire program, it would be advisable to give priority to preventive programs when allocating availableresources. 76. Despite increased government budgetary commitment since 2004, the total financing for nutritionunder the MAP still needs to be negotiated. The budget for the nutrition program increased 200% between 2000 and 2005, increasingto US$21 million in 2005. In 2007 the budget allocation for nutrition is about US$12.4 million, while the financing the MAP objectives would require a budget of US$ 15 million for the same year. Total financing of the MAP nutrition objectives is approximately US$ 150 million for the period 2007-2011. In the short term (2007- 2008), the sector will receive US$ 10 million in World Bank support; for out years, however, the Governmentfaces an important challenge to mobilize sufficientresources. 77. ONN performance over the last few years has been hampered by financial constraints., When budget allocationswere either transferred very late in the fiscal year or were reduced in the context of overall budget cuts, ONN's performance was negatively affected. This explains in part the relatively low budget execution rate (57 percent) in September 2006. Additional reasons for the low executionrate include delays in organizing and implementingprocurement processes. 78. Decentralization of activities poses a major challenge.A large portion of ONN's budget (approximately 80 percent of its total actual expenditures in 2006) and PNNCISEECALINE's budget (around 67 percent of total expenditures in 2005) is managed at the provincial level. To strengthen the coordination of activities in the field, ONN is setting up 22 regional nutrition offices. As part of the government's decentralization policy, the new PNNC approach emphasizes the delegation of responsibility for the management funds to local communities, with assistance from government entities (ONN, ministries) and NGOs. This builds on the success of the capacity building programs for NGOs in recent years (with recruitment and training of 227 new NGOs in 2006). As a consequence, the National Directorate of PNNC/SEECALINE is gradually withdrawing from implementation activities and focusing on the management and the monitoring of the program. This withdrawal should, however, be accompanied by scaled-up capacity building activities of local NGOs, communes and villages to ensure adequate management and monitoring of nutrition-related expenditure. For now the approach is limited to the 22 communes in the pilot PNNC program. 79. A human resources management policy should be part of the nutrition institutionalization process, particularly for the ONN. Transitioning from a project to a national program requires redefining personnel policies. Under the nutrition project, employees had annual contracts, which could be renewed each year until the end of the project (five years). It is generally recognized that working under contract is different from being a government employee in that there is no job security or defined career path. In the course of the institutionalizationprocess, there is a plan to review staffing levels and the salary scale based on performance measures and career path, which the national budget can support when it becomes responsible for paying all program personnel in 2009. Currently, technical assistance funded by the PGDI assists the ONN on the revision of the staffing structure and salary grille. 80. Budget management procedures allow ONN greater flexibility in the management of funds. This entails: (i) the opening of a deposit account at the Treasury that facilitates commitment of expenditures and helps shorten the expenditure management process; and most importantly (ii) allows the use of funds beyond the fiscal year. Furthermore, ONN can open accounts with private banks, thereby guaranteeingimproved flow of funds, particularly to NGOs. These features allow ONN to secure funding and ensure the functioning of its national PNNCISEECALINE program. It avoids disruptions in funding which could jeopardize the sustainability of nutrition efforts. However, management of public funds through the deposit account has drawbacks and reduces budget transparency. Management through the deposit account is not fully in line with general public financial management principles, in particular the principle of annual budgeting and transparency in the use of funds. As a result, ONN programming and reports are aligned with the annual work program rather than with the annual budget law. It is recommended that ONN and the Ministry of Finance review the validity of these mechanismswhich were instituted at a time when funding for the nutrition program did not seem secure. It would be useful to find a solution that more adequately adheres to the public financial management principles of accountability and transparency, particular with regard to the existence of the various ONN accounts (for example through closer monitoring and better documentation of the management of funds). 81. It is difficult to obtain an accurate picture of the government's financial commitment to the nutrition sector in Madagascar. The public expenditure analysis faced a number of difficulties in the collection of data generated by the information system of the Ministry of Finance and Budget. For example: (i) nutrition-related expenditure is classified as investment expenditure because of deficiencies in the functional classification; (ii) the analysis of expenditure by category does not allow for a detailed breakdown of expenditure by nutrition- related activities, such as greater use of micronutrients, and nutritional emergencies; (iii) the information system excludes all external funding for sector projects; and (iv) executed expenditure cannot be analyzed because of lack of adequate budgetary reporting. To improve monitoring of nutrition-related expenditure, it is important to discuss how the nutrition sector can be better integrated into the existing functional nomenclature. In addition, a review should be conducted to clarify the roles and the responsibilities within the nutrition units of the Ministry of Health and Family Planning to ensure consistency of nutrition-related activities and expenditure. Lastly, ONN should strengthen its system of collecting and processing information related to external funding. Volume 4: The Water and SanitationSector 82. The drinking water and sanitation sector is facing serious challenges in achieving the MAP goals. Over the last six years, water services provided to rural populations in Madagascar have improved, and govemment interventions have begun to reduce the disparities among the six provinces. Moreover, promotion of hygiene education through the "Water, Sanitation and Hygiene" (WASH) initiativehas substantially increased the impact of access to drinking water on the health sector. Owing to a number of problems that persist to this day, Madagascar still ranks among African countrieswith the lowest access rate to drinking water. 83. Achieving the MAP goals requires significant investments in infrastructure and institutional capacity-building. While these goals pose a formidable challenge, they also present an excellent opportunity to build capacity through institutional reforms, and to develop new types of partnerships. To move closer toward achieving the MAP goals, the drinlung water and sanitation sector should: (i) improve programming; (ii) increase its absorptive capacity; (iii) increase public expenditureefficiency; and (iv) secure sufficientresources for the sector. Main MAP Challenges for the Water and Sanitation Sector 84. Limited access to drinking water. In 2005, 70 percent of people living in rural areas still did not have access to drinking water. The challenge for the MAP is to significantly increase access to drinkingwater and improvehygiene. According to the MAP, by 2012,53 percent of the rural population will have access to drinking water. As part of MAP priority activities, 6,000 water facilities are planned, including boreholes, pumps, water pipe systems, and standpipes. However, if the current pace of the implementation of the reform program continues, these goals will not be accomplished. Sector capacity must increase significantly to build on average 1,200 drinlung water supply systems per year for the next five years. This will require average annual financing of U S 3 4 million (2007-201I), while the 2007 DEPA (Directorate of Drinking Water and Sanitation)budget allocationis only US$14 million. 85. Wide disparities persist among regions within the same province and between different provinces. In 2005, the rate of access to water in 10 of the 22 regions was below the national average. This can be attributed to several factors, including: (i) isolation and difficult access; (ii) abundant water resources (rivers, lakes, traditional wells); (iii) vulnerability (lack of water resources, poverty); (iv) population density; and (v) poor targeting of program intervention areas. In addition, limited funds provided to the drinlung water and sanitation sector hamper efforts to address, in an equitable manner, the problem of access to drinking water in the poor regions. The following actions, aimed at better defining the sector's intervention strategy, should accompany the implementation of MAP priority activities: (i) an increase in the budget of the provincial directorates; (ii) training at the level of provincial directorates, regions, and communes; (iii) the establishment of a reliable database to assess the status of water and sanitation efforts; and (iv) the definition of the criteria used to select sector interventions with the objective of prioritizing the most vulnerable areas. The DEPA could also introduce special programs in areas subject to difficult hydro geological conditions (by developing financial assistance specifically geared toward communities). 86. Limited access to sanitation.In 2005, more than 50 percent of the rural population still did not have access to basic sanitation facilities, and were exposed to illnesses (i.e, diarrhea) associated with poor sanitation. This is why the MAP has set the target of a 68.5 percent access rate in the rural areas by 2012, which requires the construction of 27,000 latrines. However, the low level of financingof this sector and the lack of a reliable database will make the achievement of this objective difficult. Priority should be accorded to finalization of the National Sanitation Policy and Strategy, which will be submitted to the Parliament during the first half of 2007. Moreover, sector capacity should also be strengthened to build an average of 5,400 latrines each year which, based on the initial estimate provided by the DEPA 2007-2011 budget program, would require US$1.5 million annually in financing. 87. Weak DEPA capacity.Weak capacity is a major impediment to the improved performance of DEPA. The lack of senior technical staff, which precludes adequate programming and monitoring, is one of the main human resource constraints. The Directorate has a total of 91 staff members, with only a limited number of engineers. Furthermore, its organizational structure is still heavily centralized, with only 12 engineers assigned to the six provincial directorates. The establishment of a new Ministry of Energy responsible for the water sector provides DEPA with a unique opportunity to restructure the organization through: (i) the launching of an organizational study to clearly identify the necessary qualifications and skills based on the priority needs of DEPA and the provincial directorates; and (ii) the establishment of an administration and finance division within DEPA to improve planning and financial management, as well as a new sanitation and sewerage division. 88. Inadequate monitoring and evaluation. Based on the results of the national inventory conducted at the end of 2004, the functionalityrate of the existing water and sanitation systems is almost 90 percent nation-wide (urban and rural areas): 12 regions have a functionality rate above 90 percent, and only four regions have a functionality rate below 80 percent, with the lowest being 35 percent. A water facilities database is now in place at the level of DEPA, which is responsible for the evaluation of prevailing conditions in the sector. Nevertheless, lessons learnt about the management of facilities and experiences related to the decentralized management of drinlung water pipe systems are not collected and consolidated in a systematic manner, mainly due to staffing and information gathering constraints. To improve monitoring and evaluation of activities, a specialized division with qualified staff should be set up within DEPA. Establishing a monitoring and evaluation division and increasing resources allocated for monitoring activities would enable DEPA to increase its effectiveness in planning, programming, monitoring and evaluating interventions in the sector. More resources should also be allocated to the provincial directorates to enable them to systematically check the conditions of the facilities, relay informationto the central level, and provide meaningful support to the communes and regions. 89. Poor mobilization for hygiene education. DEPA has allocated minimal resources to hygiene education and to the promotion of hygienic and sanitary practices. Only a very small number of primary schools and communes are coveredby the activities conductedby a number of other partners (UNICEF, WaterAid, USAID, and the Ministry of Education), which are members of the WASH committee. It has nonetheless been acknowledged that activities that encourage hand washing with soap and that change hygiene habits have a significant impact on health (reduced infant mortality rates, fewer lost school and work days). As a consequence, the second MAP challenge for the sector is "to provide drinking water to the people and promote hygienic and sanitary practices." The Ministry of Health has been tasked with implementing the strategy and priority actions to respond to this challenge. In this regard, the MAP provides for strengthening implementation of the WASH strategy educational campaign. However, an increase in the number of WASH committees from 50 in 2005 to 1,500by 2012, as envisagedby the MAP, seems rather ambitious, given the low level of financing allocated to this activity in the past. To achieve the MAP goals, it will be important to: (i) clearly define the role and responsibilities of the various actors involved with hygiene education (Ministry of Health, DEPA, WASH committees, Ministry of Education, technical and financial partners); (ii) designate a coordinating entity (National WASH committee for example) to ensure proper use of mobilized resources and the complementarity of the various stakeholder activities and; (iii) increase the budgetary allocations for hygiene education. Key Public ExpenditureManagement Issues 90. Despite increased government budgetary commitment since 2004, a financing shortfall exists vis-a-vis the funding needs of the MAP. Financing for the water and sanitation sector grew five-fold between 2000 and 2006, amounting to US$18 million in 2006. The budgetary envelope in 2007 is only US$14 million, although,beginning in 2007, MAP activities would need an annual allocation of US$34 million. A comparison with other African countries shows that countries such as Burkina Faso and Benin, which have higher access rates than Madagascar, have similar or higher expenditure rates. In the short term, a significant share of the financing for the water and sanitation sector will be provided by the new program of the African Development Bank (2006-2009), totaling more than US$ 87 million. However, launching this project has proved difficult, mainly due to staffing problems; since the credit became effective (May 2006) only 1percent has been disbursed. 91. A low execution rate particularlyfor domestic financing. The executionrate for external investments has increased in recent years. However, DEPA budget management problems are reflected in the poor performance of domestic financing,the execution rate of which is lower than the rate for the national budget in particular since 2002. In the past, budget execution at the level of DEPA was subject to expenditure adjustments during the course of the fiscal year. In 2006, the situation was fwther exacerbated by the combined effects of credit cuts, suspension of commitments, and the introduction of mechanisms to control monthly commitments. A number of priority measures should focus on: (i) the authorization of DEPA to implement multi-year contracts; (ii) the improvement of communication among the actors in the expenditure process; and (iii) the improvement in the quality of procurement planning for activities financed with domesticresources. 92. Major shortcomings in budget preparation. These shortcomings include a significant gap between the sectoral objectives and the resources made available, inconsistencies in the preparation of the recurrent and investment budgets, and a budget preparation timetable that did not allow DEPA to adequately prepare and discuss its annual budget submissions. DEPA should improve certain aspects of budget programming, including: (i) the identification of average operating costs (staff and financial) necessary for investments in the sector; (ii) the identification of average unit costs for each type of facility; (iii) the integration of the provincial directorates, regions, and various partners in the sector in the budget preparation process; and (iv) the advancement of the budget execution to the beginning of the fiscal year based on a timely preparation of the annual work program and the procurementplan. 93. Very low level of financing of the sanitation sector. Based on DEPA estimates, the budgetary envelope for financing activities in the sanitation sector increased to around two percent of the total DEPA budget (approximately US$360,000) in 2006, while the financing outlined in the MAP required to achieve the goals of the sector is estimated at US$3.7 million annually between 2007 and 2011. The main challenge of analyzing the budget for the sanitation sector is that almost all of the financing for these interventions is included in the overall drinking water and sanitation budgets. Sanitation and hygiene education activities have always been considered to be supporting measures for the implementation of water pipe systems, and as such, have been neglected. The sector should focus on: (i) improving the availability of data and information concerning financing and physical activities in the sanitation sector, and (ii) increasing the level of financing for the sanitation sector. 94. Private sector involvement is an asset for the sector but requires capacity-building. The MAP focuses on the promotion of the private-public partnership (PPP). The involvement of private operators in the management of drinking water systems has already proved to be effective and is one of the solutions to the problem of limited maintenance actions, owing to the low level of cost recovery. Despite a number of positive experiences with private operators, the private sector intervenes primarily in urban areas, with only limited activity in the rural areas. This limited participation of private operators in the rural areas is due to: (i) a discouraging legal framework and a lack of incentives to small enterprises for long-term investment, and (ii) the limited capacity of the private sector due to the lack of financial resources and qualified staff. To increase overall financing of the sector, DEPA should identify and propose new approaches that would allow for a diversification of financing sources (non-state resources) and encourage private-public partnerships for the management of drinking water systems. Such an approach would help strengthenthe existing systems and improve water supply services. Conclusionsand Outlook 95. The Public ExpenditureReview has analyzed a smallbut essential part of the challenges the Government faces to implement its new development strategy, the MAP, in particular in the areas of macro-economic management, public finance and service delivery in selected sectors. It confirms that the MAP is very ambitious and that the achievement of its objectives requires a "quantum leap" mobilizationof both public and private sectors. 96. The number of "issues" identified in the four volumes of this review is substantial, and would raise questions of reform focus, prioritization and sequencing for every government, also in the developed world. The intention of the report is not to outline what does not work in Madagascar but to provide a holistic analysis that constructively contributes to refining the reform strategy and to better implementation of the MAP. 97. The findings of this Public Expenditure Review expand and further deepen existing knowledge about the public finance system in Madagascar and its contribution to the delivery of services in specific sectors. The findings acknowledge government efforts to improve the system of public finance, but at the same time confirm significantweaknesses in allocating and executing public resources at the sectoral and cross-sectoral levels. They also indicate that the mechanisms to systematically monitor and evaluate implementation of government policies are inadequate; it is therefore difficult to clearly establish status, impact and implementation problems of ongoing or intended activities.As a result, political decision-makingis based on insufficient information. 98. .The findings and recommendations of the report will be the basis for a comprehensive and continuing dialogue with all relevant government services and with the development partners. This dialogue is aimed at raising awareness of implementation problems and bottlenecks. The dialogue also intends to increase the understanding about the issues and challenges of the various stakeholders, in particular the Ministry of Finance and Budget, the sector ministries, and the development partners. It is hoped that the dialogue contributes to the development of joint strategies to overcome existing problems and bottlenecks, and assists the Government in achievingthe ambitious objectives of the MAP. 99. The Government and the World Bank have agreed to continue to conduct a public expenditure review on a regular basis. These reviews will focus on assessing budgetary implementationagainst policy objectives outlined in the MAP, and on reviewing the use of public resources in selected sectors.