Document of The World Bank FOR OFFICIAL USE ONLY FILE COpy Report No. 2898-MAG MADAGASCAR FIRST AGRICULTURAL CREDIT PROJECT STAFF APPRAISAL REPORT July 7, 1980 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Malagasy Francs (FMG) US$1.00 = FMG 210 1/ FMG 100 = US$0.48 WEIGHTS AND MEASURES Metric System Metric British/US Equivalents 1 meter (m) 3 3.3 feet 1 cubic meter (m ) = 35.31 cubic feet I cubic meter per second (m /sec) = 35.31 cubic feet per second 1 hectare (ha) = 100 acres = 2.47 acres 1 kilometer (km) 2 0.62 mile 1 square kilometer (km ) = 0.39 square mile (sq. mi.) 1 kilogram (kg) = 2.20 pounds (lb) 1 liter (1) = 0.26 U.S. gallon (gal) 0.22 British gallon (imp. gal) 1 metric ton (m ton or t) = 2,204 pounds (lb) ABBREVIATIONS AND GLOSSARY BCSP Bureau de Commercialisation et de Stabilisation des Prix du Poivre (Marketing and Pepper Prices Stabilization Bureau) BNM National Development Bank for Madagascar (Banque Nationale Malgache de developpement) BFV Commercial Bank (Banky Fampandrosoana NY) BNI Industrial Development Bank (Bankin Ny Indostria) BTM National Rural Development Bank (Bankin' Ny Tantsaha Mpamokatra) CSPC Caisse de Stabilisation des Prix du Cafe (Coffee Prices Stabilization Fund) CSPG Caisse de Stabilisation des Prix du Girofle (Clove Prices Stabilization Fund) CSPV Caisse de Stabilisation des Prix de la Vanille (Vanilla Prices Stabilization Fund) FMR Rural Credit Program (Financement du Monde Rural) FOFIFA/CENRADERU Center for Agricultural Research and Rural Development HASYMA Cotton Company MDRRA Ministry of Rural Development and Agrarian Reform (Ministere d Developpement Rural et de la Reforme Agraire) OCP Operation Cafe Poivre (Coffee and Pepper Organization) PCA Small Agricultural Credits (Petits Credits Agricoles) URER Unite Regionale dExpansion Rurale Fokonolona, Institutions: Fokonolona and Fokantany = village level local government Firaissam-pokantany = second tier local government (former canton) Fivondronan-pokonolona third tier local government (at former sub-prefecture level) Faritany = fourth tier local government (at former province level) FISCAL YEAR (Government and BTM) January 1 - December 31 1/ Exchange Rate prevailing at the time of appraisal. FOR OFFICIAL USE ONLY MADAGASCAR APPRAISAL OF THE FIRST AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. I. PROJECT BACKGROUND ..................................1...... II. THE AGRICULTURAL SECTOR ........................... ...... 2 A. General ............................................. 2 B. Government Strategy ....................... ......... 4 C. Government Services .........** *.................... 5 D. Production, Processing and Marketing of Principal Crops ...........** o ............................. 7 III. AGRICULTURAL CREDIT AND THE NATIONAL BANK FOR RURAL DEVELOPMENT - BTM ............................... .......... 16 A. Credit Sources and Policies in Madagascar ............. 16 B. The National Bank for Rural Development (BTM) ......... 17 C. Rural Credit Program (FMR) ................... ........ 24 IV. THE PROJECT .............................................. 27 A. Objectives and Strategy ................................. 27 B. General Description ..................................... 28 C. Detailed Features ........................................ 28 D. Project Costs ............................................ 32 E. Financing ............................................ 33 F. Procurement ............................................. 34 G. Disbursement ............................................. 34 H. Accounts and Audit ....................................... 35 V. PROJECT IMPLEMENTATION .......................... ........ 35 A. Project Implementation and BTM Staffing ........ 35 B. Project Lending Policies and Procedures ............... 36 C. Technical Supervision (Extension) ..................... 39 D. Monitoring and Evaluation, and Reporting .............. 40 This report is based on the findings of an appraisal mission which visited Madagascar in August-September, 1979, composed of D. Lallement, R. Egli, H. Morice, and F. Donahue (IDA), and H. Vieilhescaze (Consultant). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - TABLE OF CONTENTS (Continued) Page No. VI. PRODUCTION, MARKETING, AND PROCESSING ..................... 40 A. Technical Features of Production .................... 40 B. Farm Models .............................. ....... 42 C. Production Estimates ........................... ...... 42 D. Marketing ................................................ 42 E. Prices ................................................... 43 VII. BENEFITS, RISKS, AND JUSTIFICATION ................ ........ 43 A. Producers- and Social Benefits ...................... 43 B. BTM Financial Position .................... ........... 44 C. Government Benefits ................................... 45 D. Economic Analysis ........................................ 45 E. Risks .................................................... 46 VIII. SUMMARY OF AGREEMENTS REACHED DURING NEGOTIATIONS ......... 47 SUPPORTING TABLES AND CHARTS Table 1. Summary of Annual Project Costs Table 2. Estimated Schedule of Disbursements Table 3. Schedule of Participating Farmers by Category of Loan Table 4. Proposed Lending Terms and Corresponding Interest Rates Table 5. BTM-Sources and Uses of Funds Table 6. BTM-Projected Balance Sheets Table 7. BTM-Projected Profit and Loss Accounts Table 8. BTM-Net Increase in Project Lending Table 9. BTM-Financial Autonomy Ratio Table 10. BTM-Expenses and Income Compared to Working Assets Table 11. Project Economic Analysis Chart 1. BTM-Organization Chart Chart 2. BTM-Headquarters Organization Chart LIST OF MATERIALS AVAILABLE IN IMPLEMENTATION VOLUME MAP: Madagascar-First Agricultural Credit Project - IBRD 14922 MADAGASCAR APPRAISAL OF THE FIRST AGRICULTURAL CREDIT PROJECT I. PROJECT BACKGROUND 1.01 The Government of Madagascar formally requested in July, 1978 that the Bank Group finance an agricultural credit project through the National Bank for Rural Development: Bankin'ny Tantsaha Mpamokatra (BTM). The proposed Project would be the first agricultural credit project financed by the Bank Group in Madagascar. The Project proposal was prepared by BTM with extensive assistance from RMEA. The Project preparation report was transmitted to IDA with a request for financing in July, 1979. This report is based on the findings of an appraisal mission which visited Madagascar in August/September 1979, composed of D. Lallement, R. Egli, H. Morice, and F. Donahue (IDA), and H. Vieilhescaze (consultant). No major changes in Project objectives or design were recommended following appraisal. However, the Project description was modified in several respects following the appraisal mission and a full analysis of data collected in the field. These changes are as follows: a) The computer component was deleted from the Project descrip- tion. BTM had ordered a new computer and additional software for its head- quarters prior to appraisal; the terms and description of the contract were not made fully available to the mission. BTM made full provision for the purchase of this computer from its profits for 1978, with the approval of its Management Committee. The mission concluded that although BTM's computer selection for headquarters was justified, since BTM did not follow Bank/IDA guidelines and in the absence of a financing gap, the computer purchase should not be considered as a Project cost; b) The financing of rain-fed cotton cultivation was eliminated from the Project description. From informa- tion currently available, it appears that the structure of the cotton sector and the input-output, technical, and price ratios under rain-fed conditions are not adequate to justify agricultural credit to small farmers; and c) The recommended level of commissions to be paid by sub-borrowers to BTM is some- what higher than proposed in the preparation report. 1.02 To date, the Bank Group has financed six agricultural development Projects in Madagascar. Two loans and credits are fully disbursed: the Lac Alaotra Irrigation Project (US$5.0 million), and the Beef Cattle Develop- ment Project (US$2.8 million). Four other projects are under implementation: the First Forestry Project (US$13 million) which is almost completed; the Morondava Irrigation Project (US$15.3 million); the Village Livestock and Rural Development Project (US$9.6); and the Mangoky Agricultural Development Project (US$12.0 million). Several other projects are under preparation in the forestry, livestock, irrigation, and crop production sub-sectors. A technical assistance project for the development of the Plain of Antananarivo, and a Second Forestry Project have been appraised. Experience with past projects has been mixed. The Beef Cattle Development Project encountered very serious problems, mostly managerial, while the Lac Alaotra project has been generally quite successful, although the performance of SOMALAC, the Project implementation agency for the Lake Alaotra Project has deteriorated consider- ably since the completion of the Project Performance Audit Report. The Morondava Project has also encountered serious managerial problems, while implementation of the First Forestry Project has been quite successful. The - 2 - Village Livestock Project encountered serious problems at first, but implemen- tation is now proceeding quite satisfactorily. The Mangoky project is still at an early stage of implementation. II. THE AGRICULTURAL SECTOR A. GENERAL 2.01 Madagascar is an overwhelmingly rural country, with 85% of the roughly 8.3 million population living in the rural areas. Agriculture contributes about 40% of GDP, 80% of export earnings, and2supports more than 80% of the 2national labor force. An estimated 369,000 km or 62% of the 592,000 km total land area of Madagascar has some agri'ultural potentil. The average population de2sity is relatively low, 14 inhabitants per km nationally, and 23 per km on agricultural land. In most parts of the central plateau (para 2.04) the population has probably reached saturation level but large areas in the south and the west could accommodate larger populations if more land were brought into production. Performance of the Agricultural Sector 2.02 The growth of Madagascar's agricultural production over the past 10-15 years has been disappointing, with an average rate of increase somewhat less than the population growth rate of 3% a year. Production figures for selected crops since 1972 highlight a stagnation of rice production in parti- cular, a decline in groundnut tobacco, and vanilla production, while cassava, sugarcane, cotton and clove production increased substantially. Cotton production appears to have stagnated in recent years. Production figures for selected crops are summarized below ('000 tons): 1/ Food Crops 1972 1973 1974 1975 1976 1977 1978 Paddy 1,924 1,913 2,013 1,972 2,043 2,150 1,980 Cassava 1,210 1,170 1,260 1,300 1,370 1,410 1,500 Groundnuts 49 38 40 42 54 47 34 Industrial Crops Sugarcane 850 1,040 1,320 1,380 1,290 1,350 1,370 Cotton 24 31 33 31 35 37 33 Tobacco 5 6 4 4 5 2 3 Export Crops Coffee (green) 69.0 74.0 81.0 84.0 79.0 89.0 78.0 Cloves 6.0 4.0 18.0 5.0 13.0 14.0 15.0 Vanilla (dry) 1.9 1.8 1.4 1.8 1.6 1.0 1.4 Pepper 2.0 3.0 3.0 3.0 5.0 3.0 5.0 1/ Sources: INSREE, MDRRA, Stabilization Funds, and HASYMA. - 3 - 2.03 The generally weak performance of the agricultural sector as a whole can largely be attributed to the low rate of growth of food crops and to the stagnation of livestock production. Madagascar was a net exporter of rice in the past but rice imports exceeded 190,000 t in 1978, while the volume oi mneaL exports has stagnated and even declined in recent years. However, the stagnation of agricultural production has been compensated in terms of total value by favorable commodity prices for major exports (coffee, cloves). Reasons for the slow growth of agriculture are complex, but among the key contributing factors are (a) serious problems in the organization of marketing services; (b) pricing policies; (c) a poor communication network which hinders the provision of extension services, supply of inputs, and collection of crops; (d) lack of agricultural credit, and (e) the profusion of institutions with responsibility for extension and agricultural development, which have limited staff, funds, and poorly defined policies. These problems and the sector's disappointing performance should not, however, obscure the fact that Madagascar's potential for agricultural development is very substantial. Many commodities now being produced offer excellent scope for expansion. Intensi- fication of production in virtually all parts of Madagascar could signi- ficantly increase output, and new lands could be brought under cultivation, particularly on the west coast where large areas of undeveloped fertile land are available. In many cases the technical base for expansion or intensifi- cation has been established, as a result of past intensive research and trials. In other areas, notably rice, applied research on promising new varieties is required. Land Use 2.04 Madagascar has several distinct geographical regions, with sharp contrasts in climate, topography and soils, and as a result, in land use and production systems (para 2.05). Though the sector is striking in its diversity, five major agricultural regions can be distinguished corresponding more to zones of homogeneous production systems than to administrative boundaries in most cases (Map IBRD No. 14922). The central plateau, which includes highlands extending north-south in the center of the island, bisected by small valleys and a few larger basins, is hilly. Climate ranges from sub-tropical to temperate. The north has a tropical climate, and a relatively varied topography. Many export crops are concentrated in this region. The east coast is a high rainfall area, composed of a narrow strip of lowlands bordered by a steep escarpment. Population is relatively dense and a wide range of crops are cultivated. The west coast is a vast area of plains and extensive river valleys. Although rainfall is generally below 1,000 mm a year, rainfed cultivation is possible in most areas. The region offers excellent natural pastures while the valleys have a rich potential for irrigated crops or cultivation on the flood plains, but most areas remain relatively underdeveloped and the population is sparse. The south is Madagascar's least developed region; the climate is relatively arid and the agricultural potential is limited by the soils and topography. The population depends largely on traditional cattle rearing for their livelihood. Farming and Production Systems 2.05 Agricultural production systems vary from sophisticated, mechanized operations, for example on the large sugar cane and cotton estates in the northwest, to very simple subsistence techniques. Traditional production systems, based on rice as the staple food, are the most widespread among the estimated 1.5 million farm families. Subsistence farming involves an estimated 83% of the total rural labor force, while modern farms and plantations (includ- ing State Farms) account for slightly more than 2% of it; the remaining 15% represent inL-mediate and casual employment. Farming techniques for small- holders vary quite widely among regions, and within zones, according to crop. For rice, they range from relatively sophisticated rice cultivation techniques, involving elaborate terracing and water control systems in the valleys of the highlands, to slash and burn cultivation on the hillsides (tanety); both techniques may be used by the same farmer, especially on the Central Plateau where lowlands and water are scarce. Livestock techniques are mainly based on semi-nomadic cattle husbandry, but some beef and pig fattening is practiced around the main cities. Production systems for cash crops also vary; coffee is grown mostly in smallholder plantations, often in association with vanilla, pepper or cocoa; cultivation of cloves, on the less fertile coastal upland soils, is limited to picking. 2.06 Private enterprise dominated agricultural production in the past, but the Government is now playing an increasingly active role. The only remaining large private estates are in the northwest; they grow mostly cotton and tobacco. Important recent moves are the nationalization of the sugar industry in December 1976, and the Government's assumption of responsibility for marketing of rice, other foodcrops and cattle, and for meat processing and exports. The Malagasy government is emphasizing the role of state farms under the Ministry of Rural Development, and is encouraging village govern- ments to establish production cooperatives. To date, however, the progress of collective farming has been much slower than stated objectives; about 40 cooperatives only have been created, representing a tiny fraction of farm facilities. Newly-formed cooperatives and state farms do not yet play a significant role in total agricultural production. B. Government Strategy 2.07 The Government of Madagascar's broad objectives for rural develop- ment are articulated in a Development Plan approved in November-December 1977. The plan includes a long-term strategy for the period 1978-2000, a three year plan for 1978-80, and an investment plan for 1978. In essence, Madagascar's stated objectives for the year 2000 are to transform the society along socialist lines and to develop a strong and self-sufficient basis for development. The period 1978-84 is seen as the period to lay the foundations, 1985-92 for consolidation, while 1993-2000 are to be years of expansion and growth. In the long-term plan, three goals are emphasized: (a) attainment of self-sufficiency in food and development of basic industries, largely supplied by the agricultural sector; (b) decentralization of all economic activities, through the fokonolona system (para 2.09), and a more active and direct Government role in the economy; and (c) narrowing the gap in distribution of incomes, and promoting more balanced growth among regions. Agriculture is to represent the basis of all developments, and will receive a major share of investments. The plan emphasizes the linkage of Madagascar's economic, -5- political, social, and cultural development to the establishment of a social- ist regime. For agriculture, the major proposed changes entail promotion of an agrarian revolution and creation of socialist cooperatives; they would involve Government control of cultivated land. In particular, estates or plantations which have been lying idle for some time, or newly-developed land, would be attributed only to socialist cooperatives. The plan foresees Govern- ment control over basic industries, particularly those related to agriculture, and states that at a later stage the fokonolona institutions and the socialist cooperatives should manage these industries. 2.08 The 1978-80 plan includes specific objectives for agriculture. Average growth rate of value added is expected to be 4.3%, less than other sectors (rates for mines and energy and industry are estimated at 8.8% and 10.7% respectively). Value added of processed-agricultural products such as rice, sugar, fats, and textiles is forecast to grow at higher average rates than the sector as a whole. In 1980 individual farms are expected to con- tribute about 80% to value added generated in agriculture, cooperatives 10%, and socialist enterprises 2.5%. About 15% of total investments in real terms are assumed to be allocated to agriculture, most of it by the Government. The plan recognizes that, in spite of the growth rates assumed for production, employment possibilities in agriculture will increase very little, reaching about 3.9 million in 1980, including subsistence farmers. Industrialization is considered the only feasible long-term solution for the problem of unemploy- ment. The Plan aims at improving rural living conditions to try to limit migration to the cities. C. Government Services 2.09 Fokonolona Institutions: Since 1972 the Malagasy Government has undertaken a major reorganization of local administration and government. This reform involves the establishment of representative institutions at four levels, replacing the territorial administration of provinces, prefectures, sub-prefectures and cantons. The "fokonolona" system reflects an effort to associate traditional institutions and practices with a more representative and responsive local government, and to provide a vehicle for decentralization of power as part of Madagascar's socialist revolution. The reform has been implemented gradually, and many details of the new system, notably regarding local finance, the role of cooperatives within the fokonolona system, and the role of fokonolona institutions in the control of industry and parastatals, are still being considered by the Government. However, the new entities are assuming important responsibilities, notably for agricultural credit (para 3.27), for marketing of rice and other agricultural products, and planning and implementation of small-scale development projects. The hierarchy of fokonolona institutions comprises the Fokontany, which coincide roughly with traditional village units (about 11,400 in all), the Firaissam-pokonolona, at the former canton level (about 1,250), the Fivondronan-pokonolona, at the former sub-prefecture level (about 110), and six Faritany, at the former province level. The Ministries of the Interior and of Information and Ideo- logy have primary responsibility for supporting the fokonolona institutions. - 6 - 2.10 Ministry of Rural Development and Agrarian Reform: The Ministry of Rural Development and Agrarian Reform (MDRRA) is the central institution for rural development programs. Up to 1979, the Ministry had four major operating departments, which functioned quite autonomously and were organized separately at a regional level. In 1979, a far-reaching reorganization of MDRRA was introduced, with the principle objective of providing better support to the fokonolona institutions through decentralization. At the central level, only two departments remain: the Department of Studies and Planning, responsible for general planning and project preparation, and the Department of Rural Development which will regroup four former operating departments plus the Department of Agrarian Reform. Within the new Department of Rural Develop- ment, seven services have responsibility for defining general policies; the most important are crop production, animal production and irrigation. The first stage of the decentralization process involves increased responsibili- ties for the local services of MDRRA at the Faritany (province) level; the Director of the Provincial Service now has full authority over the operating services of MDRRA. Budgetary procedures are to be decentralized to the local level in the future. Operating services are eventually to be completely decentralized to the Fivondronan level, with the objective of using MDRRA staff to support the new socialist structures, fokonolona institutions, state farms, and cooperatives more intensively. The reorganization of MDRRA began effectively in mid-1979 with the reorganization of the central levels and is now progressively expanding to provincial structures. The Ministry of Finance has insisted to date that the reorganization involve no hiring of new staff. Substantial staff changes from one service to another, and from Antananarivo to field assignments, have resulted in some uncertainty and confusion. 2.11 Extension Services: MDRRA has overall responsibility for extension services. To date, its role has been relatively limited and restricted to subsistence crops, partly because numerous other agencies are involved in the complex arrangements for extension which vary from region to region and by crop. The performance of extension services for crops has been mixed; for coffee and pepper they are good, while others are inadequate and in the case of vanilla, completely absent. Livestock extension services are limited, being particularly constrained by lack of adequate staff as well as by the general constraints on the subsector. ODEMO, a development agency for the mid-west and seven URERs (Unites regionales d'expansion rurale) provide services to farmers in their areas of activity as does a UNDP rural develop- ment program in the south. The URERs have concentrated their efforts on foodcrops, particularly rice in the highlands, and have had generally good results when inputs are available. Elsewhere extension services for rice growers are the direct responsibility of MDRRA but their performance has been constrained by lack of staff, logistical support, and inputs, particularly fertilizer. Extension for other specific crops is usually the responsibility of the appropriate parastatal operating under the aegis of MDRRA. Operation Cafe Poivre (OCP), for instance, is responsible for major tree crops (coffee, cloves, pepper and cocoa). It is constrained by delays in Government budgetary allocations but, since its establishment in 1969, has been fairly successful. The Office Malgache des Tabacs (OFMATA) has had a similarly good record with its services to tobacco growers. HASYMA (formerly CFDT - para 2.29) is particularly well-organized and effective in the cotton subsector. - 7 - Extension services for sugarcane are divided between the Caisse de Stabilisation du Prix de la Canne a Sucre (CSPCS) and MDRRA: CSPCS's service seems adequate but MDRRA is hampered by lack of personnel and inputs. 2.12 Research: Before 1972, agricultural resarch was carried out by a large number of semi-autonomous agencies, most managed by external (largely French) institutions. All research now comes under the Ministry of Higher Education and Scientific Research and the research institutes have been regrouped under one organization, CENRADERU (Center for Agricultural Research for Rural Development) or FOFIFA. This is a semi-autonomous body responsible for all agricultural research, including socio-economic analysis. It has few formal links with extension services, as it comes under the central research authority. It carries out a number of research schemes with direct support from the Government budget; other projects are implemented on a contractual basis. FOFIFA has been severely over-burdened with the wide range of respon- sibilities and activities it has inherited, and suffers from a severe lack of qualified staff and funds. Another important problem facing FOFIFA is the lack of communication with international research organizations. 2.13 Training of agricultural staff to the secondary level is the responsibility of the MDRRA, which is considering plans for rapid expansion of facilities ranging from farmer training centers to agricultural secondary schools. The Ministry of Higher Education and Scientific Research is respon- sible for university level training and here also rapid expansion programs are under review. Staff from certain specialized disciplines, notably agricul- tural engineers and veterinarians, receive training abroad. D. Production, Processing and Marketing of Principal Crops Foodcrops - Rice 2.14 Production. Rice, grown throughout Madagascar on about 50% of permanently cultivated land, is the staple food; per capita rice consumption (over 150 kg per year) is among the highest in the world. Since 1960, produc- tion has increased on average by less than 3% a year; total production appears to have stagnated since 1976 at around 2.0 million t of paddy a year; yields average 1.8 t per hectare. Due to a growing deficit in domestic production and severe marketing problems (para 2.15), imports have increased from a neglible tonnage in 1970 to over 160,000 t a year in 1978 and 1979; this represented about FMG 11.7 billion (US$56 million) or 15% of the total value of exports, and more than 40% of export earnings from coffee. Rice cultivation is mostly concentrated on the central plateau and in the north west. Family rice fields are generally terraced, located on valley floors, and range in size from a few ares to 5 ha, the average being about 1 ha and often less in heavily populated zones. Most farmers produce a single crop per year, relying almost exclusively on traditional production techniques and water control systems. Average yields on the plateaux are about 1.5-2.0 t/ha. Some increases in cultivated area have been achieved by bringing less suitable hillsides ("tanety") into cultivation, generally under a slash-and-burn pattern; initial yields are about 1 t/ha but they decrease rapidly unless fertilizer is applied. Organized irrigation schemes developed or supported by - 8 - the Government account for 20 to 30% of land under rice. These schemes vary in size, complexity, organization and systems of land tenure. In general, however, the effectiveness of these schemes is seriously impaired by poor maintenance, inadequate irrigation and drainage systems, and serious land tenure problems; land is underutilized and yields are little above those of traditional rice areas. In the more sophisticated schemes, two crops of rice a year are produced and yields per crop exceed 2.5 t/ha but could easily reach 4-5 t/ha with appropriate management. The largest and most productive irriga- tion schemes are in the Lac Alaotra basin and in the Betsiboka valley around Marovoay, south of Majunga. .2.15 Marketing and Processing. Most rice produced is consumed by farm families; surpluses are sold only in good harvest years. The bulk of marketed production, and all luxury long-grain rice still sold in export markets (1,100 t), comes from a few large irrigation schemes. Rice marketing and processing were in the hands of private traders until the 1972 revolution; rice marketing has since been nationalized. From 1973-77, the Societe d'Interet National des Produits Agricoles (SINPA), a parastatal company, had a monopoly on marketing, collection, imports, processing and distribution of all agricultural products including rice. SINPA's marketing operations encountered serious problems, however, and in 1977, the Government assumed direct responsibility for rice marketing. Under the current system, Madagascar is divided into 12 marketing regions. Different agencies have responsibility for rice marketing in these regions under the general guidance of a marketing committee which also organizes storage or shipment of rice to deficit regions. SINPA retains responsibility for the largest area, but recently-nationalized trading firms and other parastatal agencies have been assigned marketing responsibilities. SINPA is also in charge of carrying out the rice import operations negotiated by the Government; it sells rice to customers directly or through licensed traders at the Fokontany level. The fokonolona institu- tions have primary responsibility for collecting paddy within their territorial jurisdiction, selling it to the authorized marketing agency and receiving a commission (FMG 2/kg paddy). The rice marketing system is far from satis- factory; weak management, 1/ lack of trucks, bad roads, and poor operation of the port and railway facilities have made the supply of rice to deficit areas unreliable and Government and the Army are increasingly involved in basic food marketing and distribution. The total quantity of paddy marketed through official channels ranged between 217,000 and 309,000 t in the years 1970-1978, representing an estimated 11% to 16% of total production. The Ministry of Economy and Commerce estimates that about 40% of all marketed paddy now goes through unofficial channels; prices vary widely but are well above official levels. Numerous paddy mills are scattered throughout Madagascar, many of which have been nationalized and are operated by SINPA or other parastatals, while others are still operated by private traders, with charges fixed by the Government. There is excess capacity in existing mills for the current volume of marketed production. 1/ The value of physical losses of paddy and rice by SINPA was estimated for 1977 at FMG I billion for paddy collection and FMG 0.4 billion for rice distribution, corresponding to 26,000 t paddy and 7,000 t rice respec- tively. - 9 - 2.16 Prices and Subsidies. The Government fixes paddy and rice prices at the producer and retail levels as well as margins for marketing, processing and wholesale transactions. The producer price of paddy is currently FMG 38/kg and the retail price of rice is FMG 55/kg; these prices apply throughout Madagascar, and involve a direct subsidy to customers of about FMG 25 to 30/kg on locally produced rice. Only FMG 15/kg is reimbursed to marketing agencies from an equalization fund (Fonds de Perequation) managed by the Ministry of Finance and Planning, which pools resources from crop specific stabilization funds. The Government is considering an increase in producer and consumer prices in the near future. Groundnuts 2.17 Groundnuts are grown throughout Madagascar, generally on compara- tively poor soils. Cultivation methods, on individual lots averaging 0.3 ha, remain mostly traditional and yields are around 1.0 t/ha. Production is expected to increase to about 40,000 t in 1979 after a sharp decline from an average 45,000 t from 1972-1977 to 34,000 t in 1978. Traditional private marketing circuits have been replaced in recent years by government-owned marketing companies (para 2.15) which face coordination problems. Very serious transport problems and an increase in on-farm consumption resulted in a steady decline of marketed volume to 24,000 t in 1978, of which 1,200 t was exported. Oil mills now face serious supply problems, and Madagascar is heavily dependent on imports of fats and oils, valued at FMC 2.2 billion in 1978 and FMG 2.3 billion (US$11 million) in the first six months of 1979. Producer prices for groundnuts and ex-factory prices for oil are fixed by the Government, currently at FMG 45/kg and FMG 278/kg respectively. With present low yields, producer prices do not provide an adequate incentive and Government plans for a sizeable increase in planted areas from 40,000 ha to 64,000 ha and for self-sufficiency in oil by 1990, will be difficult to achieve. Other Food and Subsistence Crops 2.18 The cultivated area under roots and tubers, particularly cassava, has been expanding in response to population growth. Yields, however, continue to be low, stagnating around 5t/ha. Production of cassava reached 1.6 million tons in 1978; the limited amounts marketed for industrial uses are sold for about FMG 15/kg dry cassava. Production in 1978 of other crops, which are mainly consumed on the farm, is summarized below: Crop Area Production (ha) (tons) Sweet Potatoes 59,000 265,000 Potatoes 24,000 115,000 Saonjo (Taro) 12,000 76,000 Maize 110,000 115,000 Beans (dry) 42,000 37,000 Butter Beans 25,000 8,000 Source: MDRRA. - 10 - It is estimated that 30% of maize production is used for animal feed. About 6,000 t of butter beans were exported in 1978 for a total FOB value of FMG 970 million (US$4.4 million). Export Crops - Coffee 2.19 Production and Exports. Coffee is Madagascar's foremost export commodity, accounting for about 36% of total export earnings in 1978. There are an estimated 350,000 coffee growers (10% of the rural labor force) cul- tivating 230,000 ha of coffee, and 30% of the rural active population is directly or indirectly involved in coffee production. Production rose at an annual rate of about 5.2% between 1970 and 1975, owing largely to the efforts of OCP, (para 2.12). About half of this increase was due to expansion of the area under coffee. Since 1975, the planted area has been steady at around 230,000 ha, and 1978 production of 78,000 t was slightly below the 1974 level. The domestic market, including on-farm consumption, accounted for 16,000 t in 1974, 25,000 t in 1977 and 30,000 t in 1978 with erratic year-to-year varia- tions. Arabica was the first variety introduced during the 19th century; it was replaced in the early 20th century by Robusta, but some attempts are being nade to re-introduce Arabica in some parts of the country. Coffee is grown mainly on the east coast, south of Vatomandry, where it is the most important cash crop, providing 35% to 50% of family cash revenues, and in the north where it is cultivated both on the east and west coasts. In this latter area, coffee accounts for 15% to 30% of family cash revenues and is under strong competition from financially more attractive cash crops such as cloves and vanilla. Coffee plots are generally small, averaging about 0.5 ha, and maintenance is limited; coffee is most often grown in association with pepper, vanilla or cocoa. Use of inputs such as fertilizers is limited. Average yields now stand around 0.35 t/ha, and are likely to decrease on existing plantations unless a strong regeneration effort is made. 2.20 Marketing. Marketing channels are characterized by the coexistence and interpenetration of parastatals (para 2.15) and traditional systems, based on bush collectors and private trading firms. The Government's policy is to strengthen the role of cooperatives, local government entities and parastatals in the marketing channels; new regulations were published in July 1978 but they have not yet resulted in any effective changes. In most cases, bush collectors handle primary collection and transport coffee to a primary storage point accessible, at least in the dry season, by road. They generally collect other crops and act as general merchandise traders for the trading company; their average charge of FMG 5/kg may climb to FMG 50/kg under exceptionally difficult transport conditions. With a few regional exceptions, farmers hand-pound dry cherries and sell green coffee. Trading companies pick up coffee at primary storage points, transport it to their stores and arrange for export. Most companies must rely on independent transporters, or even on the Army for transport, because of the deteriorating road network and the reluctance of transporters to accept official tariffs. Export con- tracts are negotiated at the central Government level through the Caisse de Stabilisation des Prix du Cafe (CSPC), a price stabilization fund. Export operations are a monopoly of parastatals, which pay the difference between the realized FOB price and the official price guaranteed to exporters to CSPC. The CSPC determines the margins for losses, transport, storage and processing costs, and special discounts to fokonolona institutions. - 11 - 2.21 Official producer prices are FMG 100/kg for dry cherries and 185/kg for coffee beans (plus a systematic quality premium of FMG 5/kg), but actual prices are often slightly higher. The guaranteed export price for export companies is FMG 275/kg (with slight variations according to port) which, after deduction of various taxes and lovies, pfovid , CSIC with a considerable margin (about FMG 300/kg at current export prices). At present, official producer prices do not make coffee competitive with cloves or vanilla for which producers receive a greater share of world market prices (paras 2.23 and 2.25); this and harvest collection problems have discouraged regeneration of old plantations and new planting in recent years and resulted in stagnation of production. However, natural conditions and foreign demand for Malagasy coffee are both favorable to an increase in production. Cloves 2.22 With a 20% contribution to total export earnings, cloves are Madagascar's second most important export crop. Production is concentrated on the east coast, north of Tamatave. Most plantations are small (under 1 ha) and have traditionally been concentrated on less fertile upland soils, but have been recently extended onto more fertile plots formerly under other cash crops. Total planted area was 45,000 ha in 1978. Production varies widely from year to year but has shown a general upward trend (para 2.02); in 1978 it reached 15,000 t, of which 13,000 t was exported; 1,000 t of leaf distillate was also exported. Picking of cloves takes place only in favorable years (about once every three years for a given tree); it relies largely on seasonal labor, often coming from neighboring cities like Toamasina, with a traditional sharing of the crop between growers and pickers. Marketing and export channels and procedures are similar to those for coffee, with the Caisse de Stabilisation des Prix du Girofle (CSPG) playing the same role as the CSPC (para 2.20). 2.23 The official producer price is FMG 340/kg. The guaranteed export price (FMG 455/kg) takes into account collection costs by bush collectors and the discounts to fokonolona institutions; even after deduction of taxes and levies, CSPG posts a very substantial margin (about FMG 600/kg of exported cloves at current world market prices). Little work is needed for cultivation and growers find the producer price satisfactory. Planted areas are expanding steadily, with cloves being cultivated in association with coffee or even replacing it. Prospects for export markets are good in the short term, due in particular to the steady expansion of the Indonesian market. However, since the production of existing plantations will probably reach 20,000 t by 1985 further expansion of the planted area should be considered cautiously. Vanilla 2.24 Production. Vanilla is grown on the northeast coast, north of Maroantsetra, in particular in the region of Antalaha, by an estimated 70% of farmers of that area. It is often cultivated in association with other cash crops, namely coffee, and cloves. Average growers have about 1,000 plants on 0.50 ha, producing 150 kg of green vanilla a year. Total production has been following a general downward trend since 1972 and was estimated at about 5,000 t green vanilla in 1978. This decrease in production is largely attributable to the low level of official producer prices, and also to the destruction of some of the plantations by cyclones in 1973 and 1977. - 12 - 2.25 Although marketing channels are organized along the same lines as for other crops, private traders and processors continue to play an important role because the quantities involved are small and must be processed almost immediately after picking, which calls for operational flexibility. About 60% of production is dried by growers, who sell it as bulk dry vanilla. The remaining 40% is processed by about 15 private processor-storers who cure, sort out and pack vanilla for export, using mostly traditional processing techniques. Export procedures are similar to those for other crops except that no export monopoly exists; contracts are signed at the Government level through the Caisse de Stabilisation des Prix de la Vanille (CSPV), with potential buyers proposed by private exporters. Official producer prices are FMG 500/kg green vanilla and FMG 2,811/kg dry vanilla (conversion rate 1 kg dry vanilla to 4.6 kg green vanilla). However, due to the high level of present world market prices triggered by the general shortage of natural vanilla, trade operators were prepared to pay much higher producer prices for the 1979 crop, up to 1,000 FMG/kg green vanilla and 5,000 FMG/kg dry vanilla. This is above the guaranteed export price (FMG 3,725/kg) but a wide margin will still remain between guaranteed and actual export prices, as current FOB export prices for first quality dry vanilla are above US$45/kg (FMG 9,450). World market prospects are generally viewed as good. Provided long-term credit is made available for new planting, promising possibilities therefore exist for redeveloping vanilla production. Pepper 2.26 Production. Pepper is generally grown in the same zones as coffee, and major producing regions are the East Coast, the Sambirano delta in the northeast and Nosy Be. Except for a few large plantations (e.g. the 400 ha estate in Nosy Be), plots are small, 0.1 to 0.2 ha, and pepper is mostly cultivated in association with coffee. Although planted areas have been decreasing in recent years, average yields have increased to over 700 kg/ha. Total production has also shown a slight increase, reaching 5,200 t in 1978, for a planted area of 7,200 ha. Research remains limited, and no solution has yet been found for collar rot problems affecting pepper plants in the north- east, in particular in Nosy Be. Barring these problems, prospects for pepper production are promising. 2.27 Marketing channels for black pepper are similar to those for other export crops, with a monopoly for export operations granted to parastatals. Parastatals' operations on primary markets already account for about 60% of total collections. The Bureau de Commercialisation et de Stabilisation des Prix du Poivre (BCSP) is the pepper stabilization fund. Statistical informa- tion received from BCSP appears rather unreliable, e.g., authorized exports in 1978 (about 1,570 t) were well under quantities collected (2,310 t). Current FOB export prices for black pepper (about US$2.0/kg or FMG 420/kg) are well above the guaranteed export price (FMG 296/kg) and the official producer price (FMG 200/kg). The pepper production is increasingly processed and marketed as green pepper, the exports of which reached 1,370 t in 1978. Producer and export prices of green pepper are not subject to rigid regulation and are considered by growers as more attractive than for black pepper. Four private traders and the Vohimasina state farm operate on the export market; BCSP controls their operations only through the issue of export licences, and the collection of levies. - 13 - Cocoa 2.28 Production. Cocoa production is limited to the northwest coast in the Sambirano delta and the Itasy valley; total planted area is estimated at about 5,000 ha, and production at about 2,000 t of dry cocoa. The development of cocoa as a smallholder crop dates only from the mid-sixties; it is esti- mated that 2,000 smallholders grow no more than 500 ha in total, mostly in association with coffee. Due to the high quality of soils and suitable climate, natural conditions for cocoa are exceptionally favorable in the producing areas. Marketing channels are similar to those for coffee with a dominant role played by parastatals. About 500 t are delivered to the Robert chocolate mill in Antananarivo; the remainder of marketed production is exported. Official producer prices (FMG 85/kg for fresh beans, and FMG 230/kg for dry beans) are well below guaranteed export prices (FMG 417/kg). Prospects for world prices are good; the development of smallholder cocoa production depends mainly on the provision of seedlings and long-term credit. Industrial Crops - Cotton 2.29 Cotton is produced almost exclusively on the west coast, on flood plains as water recedes, under rainfed conditions, and with full irrigation. Cotton production increased rapidly during the past decade, from about 9,000 t in 1967 to 37,000 t in 1977. However, production has since then been declining and reached 30,000 t in 1979. HASYMA estimates that they will only collect about 25,000 t from its 1980/81 cropping season. Total planted area is about 18,000 ha; yields range from 1.0 t/ha on dry land to 2.5 t/ha on irrigated or on regularly flooded area. Private companies, operating princi- pally in the northwest, still contribute nearly 50% of total cotton production, but their share is declining. The share of state farms has also diminished to about 12%; smallholders produced 42% of cotton in 1977, compared to about 28% in 1971. Smallholder cotton has predominated in the southwest, around Tulear and Ihosy, mainly under rainfed conditions. The "Compagnie Francaise pour le Developpement des Fibres Textiles" (CFDT) has played a major role in the development of cotton production in Madagascar since 1956; CFDT-Madagascar was established in 1973, as a Malagasy corporation with principal responsibility for seed multiplication and distribution and for marketing, including purchase of all seed cotton and ginning, as well as sale of fiber and seeds to local manufacturers. It also organized distribution of inputs and aerial crop treatments, provided seasonal credit, organized extension services to small farmers, and directly managed two Government farms. Inputs and services are advanced to farmers, charges and interest are deducted from payments for seed cotton. CFDT - Madagascar was replaced in 1978 by a mixed capital company (owned 70% by the Government and 30% by CFDT) known as HASYMA, which has continued to provide the same services. In Tulear Faritany, extension and marketing for cotton was undertaken, up to 1979, by FIFATO, a regional devel- opment parastatal, but as FIFATO's performance was poor, leading to sharp declines in production, HASYMA assumed its responsibilities for cotton in 1979. 2.30 HASYMA is entirely responsible for seed cotton marketing, exporting of cotton fiber 1/, and processing production in its own gins located in 1/ These were minimal during the past few years (920 t in 1978); imports of cotton fiber for Madagascar's textile industry also remained limited (820 t in 1978). - 14 - Majunga, Ambahikely, Tulear, Ambilobe and Morondava. The capacity of HASYMA's gins is about 48,000 t of seed cotton per year; they were operating at about 75% of capacity in 1978 when fiber yield was 38%, or 14,300 t. Cotton fiber is processed by three major textile companies (SOTEMA, COTONA and SOMACO): an important new mill in Tulear (SOMATEX) with a capacity of 18,000 t of fiber per year, is to begin operation in 1980. Most textile products are sold locally but the share of exports in textile production increased sharply from 15% to 25% over the past three years. Cotton seeds are processed in five oil mills; aging equipment and use of an outdated technical process which yields under 10% of oil are major constraints. 2.31 The purchase price of seed-cotton is fixed by the Government, normally on an annual basis, after consultation with HASYMA and the textile producers. The 1979/80 price was fixed at FMG 91/kg for seed cotton of first quality delivered to the ginnery. The price paid for first-quality cotton fiber ex-factory is FMG 268/kg. Cotton seeds ex-factory are currently sold to oil mills at FMG 22/kg, out of which FMG 4/kg is for HASYMA charges and FMG 18/kg for the Cotton Stabilization Fund, which also receives a levy of FMG 30/kg cotton fiber from the textile companies; its total revenues are used to provide a discount, currently set at 50%, on the cost of inputs to small- holders cultivating less than 5 ha. The development of cotton planting has been due to the efficiency of the marketing and service network, and to the timely cash payments granted by HASYMA; the analysis of farm budgets, however, suggests that producer prices are currently too low to generate reasonable cash incomes under dryland smallholder farming conditions. In addition, a shift towards more profitable crops (such as tobacco in the Mampikony area) is taking place in some regions; moreover, political uncertainties have restrained investments on large private plantations. The Government objective of substan- tial increases in cotton planting (7,200 ha in six years) to support the expansion of the textile industry will be very difficult to achieve unless additional incentives are provided to farmers. It also appears that a full review of the sector is required before further investments are undertaken. A review of the cotton subsector has been initiated by IDA. This issue was further discussed during Credit negotiations. Sugar 2.32 Production of sugarcane is centered around four sugar mills located in the northwest, at Ambilobe, Namahia and Nosy Be, and on the east coast (Brikaville); total planted area is 37,000 ha. Production has stagnated since 1974; in 1978, it was 1,370,000 t of sugarcane, with an average yield of about 37 t/ha, and 115,000 t of sugar. About 85% of production is from the Government-controlled companies which operate the sugar mills. The remaining 170,000 t of cane are produced by about 1,700 smallholders, 1,500 of whom are located around the SIRAMA 1/ mill in Ambilobe. In addition, an estimated 170,000 t tons of cane are grown on scattered tiny plots for direct consumption or artisanal processing as raw sugar or as Betsabetsa, a local beverage. Large government-owned estates such as SIRAMA use modern cultivation techniques, often under irrigation. Smallholder cultivation remains mostly traditional, with limited use of irrigation and inputs such as selected varieties and 1/ SIRAMA is Madagascar's largest sugar company. - 15 - fertilizers. Modernization has so far been hampered mostly by lack of agricultural credit. Government-owned companies provide outgrowers with a limited supply of selected plants but there is no definite planning for cutting and transport of smallholder production and this results in serious organizational and management problems both for outgrowers and the mills. 2.33 Sugar companies purchase cane from outgrowers and sell sugar to parastatals for marketing. The price structure, which takes account of quality differentials, is set and controlled by the CSPCS. Revenues from ex-mill sugar sales are shared between the mills (one-third) and the growers (two-thirds); molasses and other by-products are kept by the mills for extra revenues. Ex-mill prices for refined white sugar in 1978 were between * FMG 71.5/kg and FMG 80.5/kg, according to quality, with corresponding retail prices of FMG 115/kg and FMG 125/kg. Except for a 10,000 t quota to the EEC, quantities available for export are sold at world market prices. Producer prices in 1978, varying with sugar content of cane, were abou, FMG 4,100/t in Ambilobe, of which an average of FMG 1,800/t was earmarked for cane cutting and for transport to the mill. Producer prices are viewed as attrac- tive and growers are eager to increase planted area and production. Domestic consumption of sugar, now over 90,000 t a year, is steadily increasing by 7% a year and quantities available for export are therefore declining. Medium-term export prospects are good, and the Government objective of increasing produc- tion is sound, provided the efficiency of processing industries is maintained. Possibilities for production increases are good in smallholdings, where yields are still low and can be improved through the modernization of cultivation techniques. Livestock 2.34 Cattle are the traditional symbol of Madagascar and much of the population is heavily dependent on livestock production. Madagascar has important natural advantages for livestock production; the animal health situation is comparatively good and there are vast areas of natural pasture, especially in the south east and middle west regions. The national cattle herd, currently estimated at about 10.1 million head is virtually all raised on an extensive basis, and is mostly owned by traditional herders who use almost no modern techniques and make minimal cash investments in livestock. Steer stall fattening is practised ("boeufs de fosse") generally around major cities; there is a serious shortage of cut fodder, and animal feeding is based on farm by-products. Cattle form an integral part of traditional farming methods in many areas of Madagascar, notably on the central plateau and the east coast. Due to the lack of a clear national livestock program and low quality of the genetic stock, herd productivity remains low, and total meat production is probably stagnating. There is excellent potential for other forms of livestock production, which are still underdeveloped, in parts of Madagascar, notably pigs, poultry and dairy; the Middle West region, west of Tananarive, in particular, offers good potential for mixed farming. 2.35 A major part of meat consumption takes place during traditional family festivities, and only a small part of the herd enters commercial channels (perhaps 3-4% a year). While marketed supplies remain fixed, domestic demand has increased rapidly causing exports to traditional markets to decline. Madagascar has a quota for duty-free exports to the EEC under - 16 - the Lome Convention. Draft oxen constitute an important share in livestock trade, and are generally available on the market. In addition, complex traditional arrangements exist between livestock-owners and farmers for seasonal rental of draft oxen and steers, e.g., for the stamping of rice fields. Government's recent investments in the livestock subsector have focused on export slaughterhouses, and three large new plants are now operating (Tananarive, Morondava and Majunga), often well below their nominal capacity. III. AGRICULTURAL CREDIT AND THE NATIONAL BANK FOR RURAL DEVELOPMENT - BTM A. Credit Sources and Policies in Madagascar Reorganization of the Banking Sector and Credit Policies 3.01 Historically, the banking sector in Madagascar was dominated by four commercial, largely foreign-owned banks, a national development Bank, the Banque Nationale Malgache de Developpement (BNM) and the Central Bank of Madagascar. The four commercial banks were nationalized in 1975, and the banking sector was substantially reorganized beginning in 1977 (under provi- sions of a law of December 27, 1976). Under the new system, which is now largely operational, the Central Bank retains its dominant role, and the five banks have been reorganized as three specialized, wholly government-owned banks for three principal economic sectors: agriculture, industry, and commerce. These are the National Bank for Rural Development (BTM), for agriculture, the Industrial Development Bank (BNI) for industry, and the Commercial Bank (BFV). A general Orientation Council for the Banking and Financial Sector (Conseil d'Orientation du Sector Bancaire et Financier) is to be established to provide general policy guidance for banking operations. The reorganization of the banks is still underway, and the three banks still operate in all three sectors; the general institutions called for in the law (notably the Orientation Council, and the regional credit committees) are not yet fully operational. 3.02 National credit policies are in principle established by the Central Bank. They consist largely of limitations on credit targets for each bank, ceilings on rediscounting facilities, requirements for advance Central Bank authorization for loans in excess of FMG 100 million, a mandatory allocation of 6.5% of short-term resources to finance medium-term credit, a mandatory allocation of 15% of short-term resources to finance Malagasy nationals, and regulation of interest rates. It is expected that the Orientation Council for the Banking and Financial Sector, when it is established, will play an import- ant role in the definition and monitoring of credit policies. Agricultural Credit 3.03 Traditionally, formal credit for agricultural development in Madagascar has been largely restricted to the modern agricultural sector; the well-developed commercial banking system has provided development and seasonal credit for large farms and commercial enterprises. Credit for small - 17 - farmers, however, has been very limited, with the exception of certain regional development projects where smallholder credit has been a specific objective. Farmers have traditionally sought credit from private money lenders, and while it has been quite widely available, effective fees and interest rates are generally very high. Government efforts to provide agricultural credit for smallholder agricultural date from the early 1950's, and from 1963 most programs were focused through BNM, which lent both to regional develop- ment agencies and to farmers' associations. However, the Government has attempted since 1977, to increase the availability of credit to small farmers and local government institutions which represent them, notably through the creation of the BTM and the rapid expansion of its recent lending for small- holder agriculture (paras 3.26). 3.04 Government policy on such issues as conditions on lending to individuals, cooperatives and local governments, and on default and guarantee procedures are still being reviewed at all levels. There is pressure to expand credit availability rapidly, with the risk of high default and loss levels, and to ease lending criteria, namely to smallholder farmers and agricultural cooperatives. There is debate over whether to increase lending to new institutions, notably the new socialists enterprises and cooperatives, while their viability is still untested. These issues have been discussed with Government officials and were further discussed during credit negotia- tions. BTM has been deeply involved in this national debate on credit policies, and has come under some pressure from the Government to expand its portfolio rapidly, to establish large numbers of new branches, and until recently to ease its lending criteria. However, BTM has been quite successful in coping with these pressures. B. The National Bank for Rural Development - BTM Institutional Aspects 3.05 BTM was established on January 1, 1977 by Ordinance 76-046 published on December 27, 1976 which enacted the reorganization of Madagascar's banking system (para 3.01). BTM took over the physical facilities of the Banque Malgache d'Escompte et de Credit (BAMES) and the loan and investment portfolio of the Agricultural Credit Directorate of the former BNM. Its mandate is to promote rural development and to favor the mobilization of national savings; it is a socialist enterprise regulated by the Charter on Socialist Enterprises. BTM's statutes were approved by Decree 76-440 published on December 27, 1976 of the Ministry for Finance and Planning. By law, the share-capital of BTM can be subscribed by the Government, fokonolona institutions (para 2.09), socialist institutions, Government institutions and enterprises. The Govern- ment must hold a minimum of 51% of the shares. At present, BTM's share capital of FMG 2 billion (US$9.5 million) is owned by the Government (90%) and the Central Bank (10%) and is divided into 200,000 shares of FMG 10,000. BTM's share-capital can be increased either by capitalizing its reserves or by issuing new shares. In the latter case, priority would be given to new shareholders. Any capital increase must be approved by the Orientation Council for the Banking and Financial Sector (para. 3.01) by a two-thirds majority of the votes. On balance, BTM is a sound, well-managed financial - 18 - institution. During the current period of rapid transition, BTM has maintained the well-defined lending policies, standards, and procedures developed by BNM, as well as a high quality portfolio; this can be expected to continue in the future. 3.06 Management. Until the Orientation Council for the Balking and Financial Sector is established, BTM will be managed, as it has been since 1977, by a Management Committee common to all three banks, BTM, BNI and BFV (para. 3.01) which appears to have functioned satisfactorily in the transition period since the reorganization of the banking sector. The Committee is chaired by the Minister for Finance and Planning. Its members, nominated by Cabinet Decree, include the Director General and the Director for Finance of the Central Bank. When a separate Management Committee for BTM is established, it should include representatives of the Government, elected delegates of BTM's staff, and appointed representatives of shareholders other than the Government. The Management Committee currently meets on an ad hoc basis to act on BTM's most important lending operations, and members meet frequently with BTM's senior management. 3.07 A General Manager, nominated by Decree of the Prime Minister, is reponsible for BTM's day-to-day management. He is accountable to the Committee for the administrative, financial, technical, and commercial performance of the bank. He has discretionary powers to authorize loans up to FMG 100 million (para 3.16). The General Manager is assisted by two deputies: one for administration and one for studies and planning. Under the law establishing BTM, Credit Committees at the various levels of the fokonolona system, including representatives of the fokonolona institutions, socialist cooperatives and bank staff members are to play an important part in BTM activities, but this has not yet been clearly defined. 3.08 BTM Organization. BTM is largely decentralized, reflecting its rural vocation and its recent expansion into new areas. Its infrastructures, inherited from predecessor institutions, are widely distributed through the country (Map IBRD 14922). BTM is the bank most widely represented in Madagas- car. Although offices are scattered throughout the country, the central plateau and the east coast tend to be best served (see Map). BTM's structure (Chart 1) comprises its headquarters in Antananarivo, six Groups (one in each faritany), 41 branches, and 26 field offices. The headquarters and the Groups assume administrative and control responsibilities, while the branches and field offices perform operational activities. The difference between the latter two is largely a function of their volume of business. The field office is the smallest unit. It performs all banking activities but is above all responsible for the rural credit program - FMR (para. 3.26). Its staff is usually limited to three officers: a director, a field officer, and an accountant, plus a cashier and secretary. The branch normally includes four departments: cashier, loans, accounting, and administration. In the larger branches the portfolio is managed as a separate department, and when trans- actions with foreign countries are substantial they are managed by a separate department (mostly in Antananarivo). Branch staff can be as many as 30-35 officers. The Group has no operational responsibilities. It supervises some of the branches activities and has some decision-making power in credit approvals which speeds up the processing cycle. Its staff ranges from three to eight officers, of whom one or two controllers supervise the processing of the branches' accounts and assist them when needed. - 19 - 3.09 BTM headquarters in Antananarivo are currently organized into three departments: Operations, Administration and Accounting, and Studies and Planning (Chart 2). The Operations Department was until recently under the responsibility of the Deputy Manager for Studies and Planning but has recently been placed directly under the responsibility of the General Manager. It comprises three Credit Divisions, each headed by a Director. Each Credit Division is responsible for following the operations of two of the six Groups and, in particular, for monitoring the branches' cash flows and outstanding loans, and for indentifying new clients. The Administration and Accounting Department comprises five divisions: Personnel, Accounting, Data Processing, Financial Control, the Bursar's Office and Archives. The Studies and Planning Department includes two divisions in addition to the Studies and Planning division: the Treasurer's Office and the Claims and Information Office. The terms of reference for the Studies and Planning Division need to be clarified (para 5.02). 3.10 Staffing and Staff Training. BTM has been able to attract and retain qualified staff; in 1979 it had about 1,230 officers, including senior managers. About 150 officers were at headquarters, 40 in the Group offices, and about 1,030 in the branches and field offices. Staff increased by 2% a year in 1979 and is expected to continue at that rate in the coming years. In general, the professional competence of BTM staff has been satisfactory for the level and type of activities it has maintained since it was established. The majority of senior and mid-level managers are well trained and/or have a long practical experience in banking. About half of these officers are at headquarters or at BTM's main branch in Antananarivo. Other support staff include a large number of officers well-versed in the routine handling of bank operations. At the time of the transfer of personnel from BAMES and BNM, most staff were offered refresher courses. BTM management is nonetheless aware of the need to strengthen its staff if they are to expand the Bank's activities. BTM is recruiting some agricultural engineers to assist with the appraisal of its agricultural portfolio. It also needs to strengthen its capacity in financial analysis, financial controls, and data processing. Refresher training for middle-management staff, especially in agricultural and rural credit, ranging from credit appraisal to credit administration and accounting, is required. BTM has initiated a limited staff training program which consists of refresher courses at the National Vocational Training Center, overseas scholarships in credit, financial analysis and data processing and specialized training with its foreign correspondents, and in-house seminars by senior management. This program, however, does not appear to have been systematic- ally designed, and assistance in this area is proposed under the Project (para 4.11). 3.11 Infrastructure and Logistical Support. BTM inherited the well developed buildings of BAMES and part of BNM's offices. Field offices are generally well located and equipped. Management appears to have a sound and pragmatic approach to expansion, and has resisted recommendations for more rapid growth of physical infrastructure. Rural branches are modest and accessible to the rural clientele. Transport is generally available for field staff, although motorbikes are not always sufficient, in particular in the newer areas of activity where distances to cover are great, and security, at times, a problem. For such cases, the mobile banks included in the Project - 20 - proposal (para 4.12) appear to be a judicious solution. BTM's present data processing equipment is limited. The IBM 3/15, used to process all accounts and financial statements has proved too small for the volume of work of the much larger BTM. BTM has now ordered an IBM 4331/J1 to be installed at headquarters by the end of 1980. BTM is considering decentralizing its data processing capacity. This would be premature, as the configuration of the 4331/J1 will give it excess capacity for at least two to three years and in many areas, energy sources are not always reliable, and servicing facilities are very limited. Prior to any decentralization, an in-depth study should be carried out to determine where local conditions would be suitable for new data processing equipment; assistance in this area is proposed under the Project (para 4.13). BTM Lending Policies and Procedures 3.12 New Credit Regulations (Reglement de Credit) called for in BTM's statutes have not yet been issued, and BTM continues to apply many operating procedures of its predecessors (para 3.05), which are, in general, satis- factory. However, the procedures, role, and responsibilities of the Credit Committees require clarification (para. 5.04). 3.13 BTM classifies its credit operations in six categories: agricul- ture, public sector lending, industry and commerce, consumer credit, housing, and handicrafts. Agriculture, including livestock and fisheries, is to be BTM's main area of lending, and it can finance: (a) all seasonal inputs; (b) all investments leading to an increase in agricultural production in the medium-term; and (c) marketing, processing, and conditioning and export of agricultural products. Except for public lending, BTM's credit operations from its own resources are subdivided into "General Clientele" and smallholder loans; the General Clientele category includes all loans over FMG 200,000 (US$950), and the smallholder category includes all loans under FMG 200,000. Joint lending operations are undertaken by the three banks for particularly large operations (for example, financing of rice marketing). BTM normally acts as lead bank for agricultural activities. BTM also carries out special lending operations on behalf of the Government with earmarked funds (Fonds Affectes). Such operations often involve unusual risks or activities outside of BTM's normal areas of lending. Although in theory such operations are entirely financed with Government funds an analysis of BTM's operations suggests that it has financed some such activities from its own funds. Some clarification of appropriate fees is also required (para 5.05). 3.14 Borrowers. BTM's borrowers can include Government enterprises or institutions, parastatal companies, fokonolona institutions, cooperatives, private enterprises or individuals. There is no minimum income requirement. BTM can lend to foreigners as well as to nationals, but general banking regulations stipulate that BTM must extend at least 15% of its total lending to nationals. 3.15 Loan appraisal. All General Clientele loan applications (para 3.13) are individually analyzed and managed in accordance with satisfactory banking standards. Loan applications for private enterprises and individuals are analyzed by the branches, usually on the basis of the documentation giving information on the borrowers assets and liabilities, operating results, and repayment capacity, and on documents justifying the object and amount of - 21 - financing applied for. These applications can be processed at the branch level or by headquarters, depending on the amounts requested. In addition, BTM branch or Group management carry out random field cross-checks of borrowers. Loan applications for Government enterprises or parastatal companies are processed at headquarters only. Smallholder loans below FMG 200,000 are appraised in accordance with specific criteria for sub-groups of loans (e.g. housing or small equipment) in order to simplify their management; applications are processed entirely at the branches. Procedures for appraisal of small agricultural loans are described in paras 3.29-3.30. 3.16 Loan approval. Loan applications are processed for approval at the level of the branch, the Group, or headquarters (General Manager) depending on the amount and the type of security. Loans secured with tangible assets up to FMG 3.0 million can be approved by a branch director, from FMG 3.0 million to FMG 10.0 million by a Group director, and from FMG 10.0 million to FMG 100.0 million by BTM's General Manager. If secured by other types of guarantees, loans up to FMG 1.0 million can be approved by a branch director, from FMG 1.0 million to FMG 5.0 million by a Group director, and from FMG 5.0 million to FMG 20.0 million by the General Manager. In addition, the General Manager has authority to approve loan renewals of less than FMG 300 million provided this amount does not exceed 30% of previous commitments. Loan applications exceeding FMG 100 million (if secured with tangible assets) or FMG 20 million (if secured with other types of guarantees), must be submitted for approval to BTM's Management Committee. Loans exceeding FMG 100 million must in addition be submitted for the prior approval of the Central Bank. Lending Terms 3.17 General Maturities: Average maturities on short-term loans are twelve months, but small seasonal loans can extend to eighteen months. Medium-term loans range from two to five years, and long-term loans from six to ten years. BTM could exceed the 10-year maturity for long-term loans if it had access to long-term assets. Repayments for agricultural loans are generally timed with crop harvests. Repayments of annuities on term loans are set at either June 30, July 31, August 31, or September 30. Loan amounts: There is no ceiling for General Clientele loans. However, total loans to a single borrower cannot exceed 10% of BTM's outstanding portfolio. In addition, BTM's total outstanding portfolio is controlled through the ceiling of its rediscounting facility with the Central Bank (currently FMG 4,600 million). The ceiling on loan amounts for small seasonal loans is FMG 500,000. An equity contribution is required for General Clientele loans. For agriculture, 10% is required for seasonal and marketing loans and 33% for investment loans and bridge financing, and the required equity contribution ranges from 10 to 45% in other sectors, depending on the sector and the loan amount. No equity contribution is required for housing loans below FMG 500,000 and for consumer loans. Security: BTM lends on a secured basis. Tangible guarantees include mortgages on the borrowers assets (land, buildings, stocks, and equipment). BTM normally insists that securities be insured. In some cases, BTM has secured loans against personal guarantees, Government guarantees, or guarantee funds, with detailed repayment procedures ensuring that amounts falling due are automatically repaid. BTM has subscribed to a group life insurance policy for medium and long-term borrowers and charges a fee accordingly. - 22 - 3.18 Interest Rates and Commissions. Interest rates and fees are estab- lished by the Central Bank for all three banks (BTM, BNI, and BFV). For General Clientele operations, interest rates on short-term loans range from 8 to 10% a year; in addition a fee of 1% a year is charged on current account overdrafts. On discounted short-term claims (advances on merchandise, produce, stabilization funds contracts) interest rates range from 6.75 to 9.50%. In- terest rates on medium-term loans range from 6.25 to 7.50% for rediscountable loans, and from 6.75 to 9.75% on non-rediscountable loans. In both cases, a fee of 0.50 to 0.625% per six month period is applied. Interest rates for long-term loans normally range from 7 to 7.50%, and a commitment fee of 1% is added. Within the ceilings allowed for each bank, the Central Bank's redis- counting facilities are as follows: short-term loans, 5.50%; loans for foreign transactions, 4%; loans on stabilization funds, 4.74%; advances, from 6.5 to 8%; medium-term loans, 5%; and long-term loans, 6% (although BTM does not presently have such a rediscounting facility). For small loans, interest rates calculated pro rata temporis are replaced by a fixed fee. This fee is applied on the loan principal for the total duration of the loan; as a result, the actual interest rate to the borrower is higher than the nominal rate. For small loans for equipment, this fee is set at 1% a month. Interest rates and charges for smallholder agricultural loans are discussed in para 3.32. On deposits, interest rates paid are 3%. For the first two years of BTM's opera- tions, the interest rate structure appears to have been adequate. The rate of inflation was maintained at 7-8% a year, and the cost of BTM's resources has remained low, about 3% of its working assets. However, these interest rates are low in relation to projected inflation rates of 12% a year on aver- age for the next three to four years. At appraisal, the Government informed IDA that the entire question of interest rates was being reviewed and that senior officials are aware of the need to raise interest rates, both on loans and on deposits, in this inflationary period. There are also, however, pressures to lower interest rates to small-holders (para 3.04). This issue was further reviewed during negotiations (para 5.08). Loan Recovery Procedures 3.19 At the end of each fiscal year, BTM analyses the outstanding amounts falling due and classifies arrears as doubtful debts, debts in litigation, and bad debts. The latter are provisioned at 100%, and recovered from provisions. Doubtful debts and debts in litigation are covered by proportionate provisions depending on the probability of repayment. The branches send their annual statement of bad debts to BTM headquarters where it is decided which recovery procedure to use. In the profit and loss accounts, debt recovery is entered as a profit on previous year's operations. Accounting and Audit :3.20 The processing of BTM's accounts is centralized at headquarters. Accounts are established in accordance with the Accounting Plan for financial institutions designed by the Bank Control Commission of the Ministry of Finance. This accounting plan does not permit a full analysis of the Bank's portfolio or financial ratios. The accounting system is manual for small- holder agricultural and equipment loans; all other accounts are computer- ized at headquarters. Accounting and individual accounts statements are kept manually by the field offices which dispatch them to the branch on which they - 23 - depend. The branch classifies these accounting statements, processes them mechanically, and establishes a consolidated statement; the ledger is sent daily to headquarters for computer processing. Headquarters accounts are processed in the same way as those of the branches. BTM's consolidated financial statements showing each branch separately are issued monthly. These statements are used by the treasurer's office to analyze the branches' and the Bank's overall cash flow position. The accounts of most branches are pro- cessed with very serious lags, in particular for the branches located in the least accessible parts of the country. Another reason for delays in proces- sing accounts is the current overload of BTM's computer (para. 3.11). 3.21 Audit. Internal audit of BTM's operations is carried out by six controllers, each responsible for a group and one of the headquarters depart- ments. They are too few for the task and usually work as a team to analyze thoroughly the accounting, financial, and managerial performance of the branches. They are far from achieving the objective of auditing each agency once a year; for example, in the first six months of 1979, only three branches were audited. The external audit of BTM's operations is presently carried out by two "Commissaires aux comptes" who formerly verified BAMES's accounts. To date, no audit of BTM accounts had been undertaken by an independent audit firm. When the Orientation Council for the Banking and Financial Sector is established, this system will change, and BTM will be subject to the external control requirements for socialist enterprises. The Council will appoint a controller to review all services and operations of the bank; he will report to the Management Committee and to the Orientation Council. The Central Bank also oversees BTM through checks of monthly documentation for the rediscount- ing facility; it can also review samples of the operations financed through the rediscounting facility. BTM Financial Structure 3.22 Sources of Funds. BTM's paid-in capital was FMG 2,000 million at December 31, 1978; the Government owns 90% of the shares and the Central Bank, 10%. Capital, reserves and endowments were FMG 6,783 million. Total equity of FMG 4,973 million was about 11% of total resources reported at FMG 45,552 million. Its long-term resources were FMG 1,522 million or 3% of its resources; medium-term resources, FMG 2,625 million, or 6%; and short-term resources, FMG 36,432 million, or 80%. BTM's capital structure is not typical of a development bank, which would normally be expected to have mainly medium- and long-term funds. BTM funds its operations, even some of its medium-term loans, with short-term funds, mainly demand and short-term deposits. Long- term resources currently available to BTM include loans from the CCCE, the Swiss Government, and the African Development Bank. 3.23 Financial Ratios. The ratio of total assets to total liabilities was 1.11:1 in 1978, virtually unchanged from 1977. This ratio shows that, if BTM were to liquidate its portfolio, the proceeds from the liquidation would exceed BTM's debt by about 11%. The Central Bank sets minimum liquidity and capitalization requirements for lending institutions under its supervision. In 1978 BTM did better than those requirements. 3.24 Loan Portfolio. Total loans outstanding increased by 37% from FMG 47.8 billion (US$228.0 million) in 1977 to FMG 65.3 billion (US$311.0 - 24 - million) in 1978. The following table shows the distribution of loans in BTM's portfolio by sector: 1977 % 1978 % (FMG million) (FMG million) Agriculture 14,314 30 25,219 39 Commerce and Industry 31,805 66 33,504 51 Pers;onal 1,705 4 6,558 10 47,824 100 65,281 100 In 1978, of BTM's total number of loans, 30% were in Antananarivo faritany, 19% in Diego-Suarez faritany, 17% in Mahajunga faritany, 13% each in Tamatave and Tulear faritanys, and 8% in Fianararantsoa. A 75% increase in agricultural loans and a threefold increase in personal loans were the main factors in the overall portfolio growth. At fiscal year 1978, about 80% of all outstanding loans were short-term, and the remaining 20%, medium-term. Short-term loans, however, represented 96% of the total portfolio amount, because most large credits were short-term (largely marketing loans). 3.25 Operating Results. BTM has had very satisfactory operating results. Income before taxes increased 69% from FMG 461 million in 1977 to FMG 782 million in 1978, largely as a result of portfolio growth. Income as a percentage of average portfolio increased from 1.6% in 1977 to 2.1% in 1978. The main reason for this improvement in profitability is that BTM has managed to maintain the rate of growth of its administrative and financial charges below the rate of growth of its portfolio. C. Rural Credit Program - FMR 3.26 The Rural Credit Program (Financement du monde rural or FMR), is the principal vehicle for BTM lending to small farmers. It is a vital part of BTM's activities, and all lending under the proposed Project would form part of this broad scheme. The program was initiated by BNM prior to the creation of BTM. Between 1972 and 1976, BNM made loans for smallholder agriculture totalling FMG 2,315 million, or 23% of its total agricultural loans; the total number of smallholder borrowers during this period was estimated at 113,000. BNM's smallholder loan program has been continued by its successor, BTM, and the general smallholder lending scheme has been known as the FMR since 1977. Since the creation of BTM, the number of small agricultural loans as well as the amount extended under the FMR has expanded rapidly. 3.27 The FMR program includes all BTM lending for smallholder agricul- ture; all loans are for less than FMG 200,000. The administration of loans under the FMR program differs markedly from normal BTM lending operations, and it represents an innovative effort to develop an efficient, cost-effective system for providing credit to large numbers of small farmers throughout Madagascar. The stated objective is also to promote the development of local - 25 - government institutions and socialist cooperatives and other forms of collective endeavor. The basic principle of the program is that loans are made, largely to individuals, within the context of the local government (fokonolona) institutions. Loan agreements must be approved by a credit committee represent- ing the fokonolona institutions, by BTM, and by the individual farmer; the farmer is responsible individually to BTM but the fokonolona institution provides a moral guarantee. The fokonolona institutions have a major respon- sibility for all aspects of administration of the credit program. BTM can, and does, halt all lending activities in an area where individual repayment performance under the program has been poor. 3.28 Smallholder lending operations in recent years may be summarized as follows: BNM and BTM Smallholder Agricultural Loans 1974-78 % of Total Number % of Amount Lending of of Loans Total Loans (FMG Million) BNM or BTM 1974 (BNM) 5,181 26 121 1 1975 (BNM) 15,517 52 645 4 1976 (BNM) 22,061 53 808 5 1977 (BTM) 59,088 82 2,385 5 1978 (BTM) 56,325 59 2,319 4 3.29 The administration of BTM's Rural Credit Program involves close collaboration between BTM field staff, technical staff of the Ministry of Rural Development and Agrarian Reform (MDRRA), and the fokonolona institu- tions. Smallholder loans are extended in theory in the context of a general agreement (Protocole d'Accord) between BTM and the MDRRA. To date no formal agreement has been signed, but a draft agreement was reviewed during appraisal and negotiations (para. 5.04). This agreement defines lending policies, financing plans, and the responsibilities of extension and other services of the Ministry; it also includes technical information on crops to be financed. The agreements can be modified each year. On the basis of this agreement, BTM regional officers prepare "Basic Instructions", reflecting the general scope of the agreement but adapted to the specific requirements of each region, for example describing crops to be developed. Before each cropping season, a credit committee composed of administrative and technical services of the faritany and fivondronana and of BTM meets and defines the credit objectives and amounts for the cropping season. BTM has in fact gained experience with all the crops proposed for the short-term lending operations under the project. This document must be approved by the Presidents of the faritany and fivondronana. BTM then prepares operating instructions based on this document. The responsibilities of the fokonolona institutions in small- holder credit administration include: (a) definition of development prior- ities; (b) informing farmers about credit conditions; (c) preparation of loan applications; (d) selection of applications for submission to the Fokontany credit committee; and (e) credit administration, including record-keeping, - 26 - disbursement of funds, credit recovery, and supervision of loan utilization. MDRRA extension services and BTM assist the Fokontany with preparation of technical documents, extension work with farmers, supervision of provision of goods under loans, participation in credit committees, and general assistance in the execution of development programs. The Fokontany receiveS in compensa- tion for its services one sixth of commissions collected if loan recovery is 100%. In selecting areas for concentrated credit programs, BTM applies the following criteria: (a) level of recovery from previous lending; (b) the caliber of the local Fokontany in previous lending or collective investment projects; (c) the caliber and representativeness of Fokontany officers; and (d) the level of commissions collected and debts under Fokontany marketing operations. 3.30 In order to obtain a loan, a farmer fills out forms prepared by BTM staff, submitting them for the preliminary review of a credit committee at the Firaissam level. The committee, in a public session, examines a series of loan applications simultaneously. It explains loan contracts to benefi- ciaries and these are signed by the committee president, Fokontany authori- ties, borrowers and BTM. Funds can be disbursed immediately following loan signature, either in cash (for example for purchase of draft animals) or in kind (as for purchase of fertilizer, plows, etc.). Cash disbursements are paid to a Fokontany account and beneficiaries withdraw funds according to a disbursement schedule, on presentation of verification by extension services. BTM pays directly suppliers for inputs, at the request of the Fokontany, again with the authorization of the extension agent. 3.31 Recovery of loans is principally the responsibility of the Fokontany, supported by the BTM and the extension services at all levels. The Fokontany make loan repayments to BTM, presenting a status report on recoveries, with a copy to local authorities and to the extension service. Fokontany accounts are charged interest for late payment at a rate of 1% of overdue amounts. Unpaid debts for small agricultural loans are provisioned at 100%; branches report annually on unrecoverable loans with recommendations on treatment. In the past, the record of loan recovery has been good, with a general average of 98%. However, in 1978 smallholder loan recoveries were only 77%, the result, in large part, of a poor crop year. BTM has taken strong action in several cases where recovery has been poor, notably in closing to all future credit operation Fokontanys where unpaid loans are outstanding; this has notably been the case in Tulear Faritany and parts of the Middle West. 3.32 Lending Terms. The maximum loan to an individual farmer is FMG 200,000, and ceilings are established for various crops and activities. BTM charges include insurance, commitment fees, and taxes; the fee is currently 1% a month, for a maximum of 10% a year for short-term loans, 6% a year for medium-term loans, and 4% for long-term loans. The fee is applied on the loan principal for the total duration of the loan. The level of actual interest rates is therefore higher than the level of fees, depending on repayment terms (para 3.18). Loans have the moral guarantee of the Fokontany, which must open a deposit account with BTM prior to obtaining credit for its members. The Fokontany provides a further guarantee for loan operations by earmarking 10% of marketing fees, which the Fokonolonas collect, and which is maintained in a separate blocked account. BTM can in theory attach these funds if repayments from fokonolona members are not forthcoming. - 27 - 3.33 Performance of the Rural Credit Program. The experience under BTM's smallholder lending program has varied widely from region to region; detailed analysis is difficult because available data have not been compiled systemati- cally. The credit procedures described above work well in some areas, while in others, neither the fokonolona institutions nor the local extension services are sufficiently developed to provide needed support for the program. BTM has rapidly increased both the number of smallholder loans and the total volume of lending; it is apparent that in some areas this credit expansion has been well managed, with loans being used for productive ends. Elsewhere the experience has been less favorable. The experience with recoveries has also been mixed, although the generally high level of recovery should be emphasized. It is apparent that arrears on smallholder loans increased significantly first in 1977-78, and again in 1978-79. Climatic factors explain these problems in part, but it appears that other more complex factors have also played a role, such as some political pressures to prevent firm action by BTM to recover loans. However, BTM is now reporting a major improvement in loan recovery for the 1979-80 cropping season (para 5.10). The collective guarantee of the fokonolona institutions apparently works well in some regions, while elsewhere it has been very difficult to apply. Measures to improve the recovery position are under review, and BTM has consistently used the means at its disposal, notably closing Fokontany to further loans, to improve recovery levels. In general, the FMR procedures are soundly conceived, and should as they develop result in significant savings for BTM in loan appraisal, supervision and recovery. The drawbacks of the system are: (a) the political nature of the credit committees, which may result in non-financial and non-technical criteria being applied in credit selection at the Fokontany level; and (b) limited direct technical supervision of loans by BTM. The scope for expansion of the smallholder credit program may however be constrained by the limited capacity of extension services for foodcrops in particular. IV. THE PROJECT A. Objectives and Strategy 4.01 The main objectives of the Project would be to strengthen BTM's managerial and financial capacity as a rural development bank; to increase smallholder production on the major export, industrial, and food crops; and to improve smallholders- incomes throughout Madagascar. The proposed Project would be the first IDA-financed Credit Project in Madagascar. If successful, it could be followed by other credit projects. The proposed Project would support the Government's policy of extending credit for development in the rural areas, with BTM as the principal intermediary. It would be the con- tinuation of an on-going smallholder credit program (FMR - Financement du Monde Rural) (para 3.26) which BTM initiated in 1977; potential participants in the program as borrowers from BTM are the present 1.5 million smallholder families of Madagascar. - 28 - B. General Description 4..02 The Project would be implemented over an estimated period of three years and would comprise the following components: (a) Seasonal credit, for the maintenance of existing plantations of coffee, cloves, and vanilla, along the northeastern and western coasts; for the maintenance of sugar cane plantations, mainly in Mahajunga faritany; and for the cultivation of foodcrops (paddy, maize, and groundnuts) mainly on the central plateau; (b) Medium-term credit for the regeneration of old coffee plantations, the establishment of new sugar plantations, and the purchase of draft animals; (c) Long-term credit for the establishment of new plantations of coffee, vanilla, pepper and cocoa. (d) Experimental credit (short, medium and long-term) to small- holders or village-level cooperatives for various agricultural activities, e.g., vineyard establishment, steer stall-fattening, and small-scale pig fattening; (e) Staff training for BTM in financial, managerial, and computer disciplines; (f) Logistical support to BTM, notably vehicles to expand its net- work of mobile banks; and (g) Consultant services to prepare a feasibility study to introduce a Data Base Management system in BTM. 4.03 BTM would be responsible for Project implementation. BTM would coordinate with fokonolona institutions and with MDRRA for credit admin- istration, and with relevant institutions for crop extension services: OCP (para 2.11) for coffee, cocoa, vanilla, pepper, and cloves, with the principal sugar company and the Sugar Stabilization Fund for sugar cane, and with MDRRA and development parastatals for subsistence crops. 4.04 Project lending activities would be carried out throughout Madagascar, but their distribution would be largely determined by regional cropping patterns: coffee and pepper, mostly along the northwestern and eastern coasts, from Vohimarina to Fenoarivo; vanilla, along the eastern coast from Vohimarina to Antalaha; sugar cane around Vohibinany, Ambilobe, and at Nosy Be; and foodcrops on the central plateau (Map 14922). C. Detailed Features Smallholder CreJit 4.05 The Project includes all incremental investments foreseen by BTM under the Rural Credit Program for the three-year period starting with the - 29 - 1980-81 planting season, which have been evaluated as financially and econo- mically viable and which are consistent with Government rural development goals. BTM would finance the current level of lending to smallholders from the roll-over of funds from FMR lending since its inception. The credit categories are present estimates, but depending on demand, prices, and other factors such as the availability of inputs, the relative distribution of credit operations may change during implementation and other crops be included. Given the prevailing production systems (para 2.05), BTM would lend to the same farmer for several different farm activities, e.g., coffee and cocoa cultivation. Cotton was excluded from the crops eligible for financing under the Project, as the information currently available suggests that (i) the financial and economic viability of smallholder cotton production under rainfed conditions is at best marginal at present price levels (para 2.31); and (ii) there are some major structural problems in the cotton sub-sector from production through processing. Project costs include the farm investment costs for crops to be financed by BTM, including hired labor. All short-term loans for plantation maintenance would be available three consecutive years. 4.06 Credit for Export Crops. BTM would provide credit to smallholders for the following five export crops: coffee, cocoa, pepper, cloves and vanilla. Short-term credit would be made available for the improvement of existing coffee, vanilla, and clove plantations, medium-term credit for the regeneration of coffee plantations only, and long-term credit for the estab- lishment of new plantations of coffee, vanilla, pepper and cocoa. No credit would be made available to establish new clove plantations: the present clove-tree plantations of Madagascar are sufficient to guarantee the country s volume of exports (para 2.23). Farmers would use the credit to purchase technical inputs (fertilizer, pesticides, planting material, tools) and to pay for technical services (land preparation, tree trimming) and hired labor. Since the majority of farmers cultivate several crops, usually subsistence crops and coffee and another export crop, each farmer would receive a loan combining short-term and medium-term credit, or short-term and long-term credit, depending on his cropping system. It is assumed that credit would be used to finance all the farm expenditures for export crops; the farmers' own contribution would be family labor. The technical features for the production of these crops are given in Chapter VI. It is estimated that during the Project period, BTM would extend credit to an estimated 25,000 farmers for export crops, for a total amount of about FMG 678 million (US$3.23 million). These loans would be used for the maintenance, regeneration and establishment of 9,400 ha of coffee plantations, the maintenance of 5,000 ha of cloves, the maintenance and establishment of 2,400 ha of vanilla, 300 ha of cocoa, and the establishment of 300 ha of pepper plantations. Average loan amounts would be FMG 9,000 (US$45) for short-term loans, FMG 15,000 (US$70) for medium-term loans, and FMG 47,000 (US$220) for long-term loans. An indicative distribution of loans by crop and type of credit is summarized below: - 30 - Short-term Medium-term Long-term Credit Credit Credit Amount % Coffee no. of loans 19,500 4,800 2,400 Amount (FMG million) 192.85 69.36 105.54 367.75 55 Cloves no. of loans 7,500 Amount (FMG million) 55.28 - - 55.28 8 Vanilla no. of loans 2,400 - 2,400 - - Amount (FMG million) 21.12 - 148.97 170.09 25 Pepper no. of loans 1,200 Amount (FMG million) - 62.30 62.30 9 Cocoa no. of loans - - 1,200 - - Amount (FMG million) - - 22.34 22.34 3 Total no. of loans 29,400 4,800 7,200 41,400 - Amount (FMG million) 269.25 69.36 339.15 677.76 100 % 40 10 50 100 4.07 Credit for Industrial Crops. Under the proposed Project, BTM would limit smallholder credit for industrial crops to sugar cane. Short-term credit would be provided for the maintenance of existing plantations, and medium-term credit for the establisment of new ones. Farmers would use the credit to purchase technical inputs, namely fertilizer, planting materials, and tools, and to pay for technical services, principally mechanical ploughing and transport, and for hired labor. It is assumed that credit would be used by the farmers to finance all expenditures for sugar cultivation while the farmers' contribution would be in terms of family labor. The technical features of sugar cane cultivation are given in Chapter VI. As in the case of export crops, it was assumed that farmers cultivate subsistence crops in addition to sugar cane. It is estimated that during the Project period BTM would extent credit to some 1,200 farmers for sugar cultivation, for a total amount of about FMG 250 million, of which about 40% for existing planta- tions and 60% to establish new plantations. Average loan amounts would be FMG 82,000 (US$390) for short-term loans, and FMG 128,000 (US$611) for medium-term loans. An indicative distribution of credit between short- and medium-term is given below: Short-term Medium-term Total Credit Credit Amount % Improvement of No. of loans 1,200 - existing plantations Amount (FMG million) 99.0 99.0 40 Establishment of No. of loans 1,200 - - new plantations Amount (FMG million) 154.0 154.0 60 Total No. of loans 1,200 1,200 2,400 100 Amount 99.0 154.0 (FMG million) 253.0 100 - 31 - 4.08 Credit for Subsistence Crops. Under the proposed Project, BTM would extend credit for subsistence crops, namely irrigated or rainfed rice in the lowlands, and maize and groundnuts on the hills (tanety). Short-term credit would be provided for seasonal inputs, principally seeds and fertilizer, and medium-term credit for the purchase of draft oxen, ploughs and carts. Farmers would use the credit to finance all these investments; their own contribution would be in terms of family labor. The technical features of subsistence crops cultivation are given in Chapter VI. It is estimated that during the Project period BTM would extend credit to some 6,000 farmers for subsistence crop cultivation, in a total amount of about FMG 1,300 million. Average loan amounts would be FMG 69,000 (US$330) for short-term loans, and FMG 143,000 (US$680) for medium-term loans. An indicative distribution of credit between short and medium-term for each category of investments is summarized below: Short-term Medium-term Total Credit Credit Amount % -------------FMG million---------- Rice 300 300 24 Maize 114 - 114 9 Draft animals and equipment 860 860 67 Amount 414 860 1,274 100 Experimental Credit 4.09 The objective of this component would be to gain experience with the financing of certain activities which are currently practised on a relatively small scale, and with the financing of certain types of borrowers. The results from this experimental credit component would be used by BTM in the design of its future lending activities in rural areas. Activities already identified include vineyard establishment in Fianarantsoa Faritany, steer stall-feeding in the central plateau, and possibly smallholder dairying and pig fattening. It is anticipated that the majority of borrowers for these activities would be smallholder farmers. BTM would also extend some experi- mental credit to other types of borrowers, namely village level producer cooperatives, which are being established in several parts of the country. No large-scale cooperatives would, however, be eligible for financing under the IDA Credit. They are complex institutions whose managerial and financial capacity would require an in depth assessment which BTM could not perform within the proposed experimental credit component. BTM would extend the proposed experimental credit on a case by case basis after a careful review of the technical justification of the proposed activities, and of the managerial and financial viability in the case of village level cooperatives. An amount of FMG 107 million has been included in Project costs for this component. Staff Training 4.10 Under the Project, BTM would carry out a training program for its managerial and financial staff, and for the staff of its computer services department. For the managerial and financial staff, the objective would be to establish an in-house training program, and offer refresher and professional - 32 - training possibilities for all staff levels from headquarters and field offices. Emphasis would be put on accounting, simple financial analysis, and banking administration and management. To design and establish the program, BTM would hire consulting services. Additional practical training could be offered abroad, preferably Tith other agricultural development banks in French speaking African countries. FMG 63 million have been earmarked for these training activities, including 24 months of consultants' services, didactic material, and scholarships for practical training abroad. The monthly costs of consultants' service have been estimated at US$10,000 including fees, living allowance, housing allowance, and international travel. 4.11 For the computer staff, the objective would be to complete the training of the existing staff with the new computer, and to expand BTM's staff capacity for various services; analysts, programmers, 14 operators, and an operations manager would be trained. The latter, plus four operators would be later appointed to the first computer regional centers (para 3.11). The program would be contracted to IBM; part of the training would be given in Europe and part of it in Madagascar. The principal investments would include the cost of courses, including international travel and living allowances, and didactic materials. FMG 30.5 million have been included in Project costs for these training activities. Logistical Support to BTM 4.12 Under the Project, BTM would establish seven itinerant banks in order to extend its activities in rural areas where the volume of business is not yet sufficient to justify the establishment of a permanent field office. These itinerant banks, with four-wheel drive vehicles especially equipped for such banking operations, would operate from the branches. The principal investments would be the purchase and equipping of these vehicles. Consultant Services and Studies 4.13 BTM would hire consultant services to prepare a feasibility study to establish a Data Base Management System. The study would investigate the existing banking programs on IBM computers which are available on the inter- national market and activities of other foreign banks with operations similar to BTM's. The study would also propose a detailed implementation schedule for the introduction of a Data Base Management System, including a detailed staff training program. The feasibility study would be carried out with three man-months of consultants' services, at a total cost of US$40,000 equivalent; the man-month cost of such consultants' services have been estimated at about US$13,300 including fees, documentation, international transport, and living allowances. D. Project Costs 4.14 Total Project costs are estimated at about FMG 2,982 million (US$14.2 million), of which about US$5.8 million or 40% represent foreign exchange costs. Project costs are summarized in the following table: - 33 - Local Foreign Total Local Foreign Total % of Total Project Component (FMG Million) ----(US$ million)---- Base Costs (a) Seasonal Credit 365 417 782 1.74 1.99 3.73 32 (b) Medium Term Credit 708 375 1,083 3.37 1.79 5.16 45 (c) Long Term Credit 298 41 339 1.40 0.20 1.60 14 (d) Experimental Credit 67 40 107 0.32 0.19 0.51 4 (e) Staff Training - 94 94 - 0.45 0.45 4 (f) Logistic Support - 19 19 - 0.09 0.09 1 (g) Consultant Services - 8 8 - 0.04 0.04 - Total Base Costs 1,438 994 2,432 6.83 4.75 11.58 100 Contingency Allowances Price 330 220 550 1.57 1.05 2.62 Total Project Costs 1 76 1,2 2,982 8.40 5.80 14.20 Project costs are estimated at prices of April 1980. Price contingencies were calculated on a cumulative basis, at a weighted average rate for domestic and international inflation of 12% for 1980 and 1981, and 10% thereafter. Project costs for the credit components were calculated on the basis of estimates of the number of loans that BTM would make for each type of farming activity, based on experience gained to date with the smallholder credit program (para 3.26). The allocation of credit funds is thought to be realistic in terms of the returns expected from the various activities. The actual number of loans made in any single category will, however, depend on the relative attractiveness of these activities at a given time. Except for taxes on salaries, fuel and vehicles which are not significant, Project costs do not include any taxes or duties. Table 1 provides additional details on annual Project costs. E. Financing 4.15 Financing of Project costs would be shared as follows: FMG Million US$ Million % of Total Costs IDA 2,415 11.50 81 BTM 567 2.70 19 Total 22982 14.20 100 4.16 The proposed IDA Credit of SDR 8.7 million (US$11.5 million equiva- lent) would be to the Government of Madagascar on standard IDA terms. The Credit would finance about 81% of total costs, of which 100% of the foreign exchange costs and about US$5.7 million or 68% of local costs. To give BTM a greater financial autonomy than it has at present (para 3.22) and to develop its capital structure as that of a development bank and therefore increase its - 34 - long-term resources, the Government would pass on the proceeds of the Credit to BTM as equity. The Government would assume the foreign exchange risk. The amount withdrawn from the Credit account would be capitalized every year. Amounts equivalent to repayment of sub loans, including principal and interest, would be earmarked every year by BTM for lending to smallholders under the rural credit program. Assurances were obtained at negotiations from Government on the above terms and conditions for relending the proceeds of IDA Credit to BTM, and for BTM's use of funds obtained from subborrowers' loan repayments. These conditions would be reflected in a subsidiary loan agreement between the Government and BTM; signature of an agreement approved by IDA would be a condition of credit effectiveness. F. Procurement 4.17 The items to be financed under the Project are varied and would not be suitable for bulk procurement through international competitive bidding, except for the vehicles that BTM will purchase as itinerant banks. However, there is adequate competition, both international and national, in offering goods through the normal supply channels which buyers would use. Fertilizer is the largest single item to be procured under the Project. For export crops and sugar, the extension organizations and the companies procure their fertil- izer through international bidding. For foodcrops, part of the fertilizer made available to the MDRRA extension services is obtained by the Government from bilateral donors, and some of the parastatal companies also operating in the fertilizer trade obtain it through international bidding, following Government procedures which are satisfactory to the Association. Procurement of most other items to be financed under the Project would be through normal commercial channels. Draft animals, implements, and tools would be obtained from local sources. Seeds and planting material would be obtained from OCP for export crops, from sugar companies for sugar cane, and from MDRRA extension services for foodcrops. G. Disbursement 4.18 The Project commitment period is for three years (October 1, 1980 - September 30, 1983) and BTM's estimated disbursements to sub-borrowers would be in accordance with the estimated credit demand for the various activities financed. The proceeds of the Credit would be disbursed on the following basis: (a) 80% of incremental amounts disbursed by BTM under short, medium, and long-term sub-loans for coffee, vanilla, cloves, pepper, cocoa, sugar, and foodcrops (including draft animals); (b) 80% of the amounts disbursed under the experimental credit scheme; and (c) 100% of foreign expenditures and 95% of local expenditures for technical assistance, training, consulting services and vehicles. - 35 - Disbursement against (a) would be against statements of expenditures certified by BTM's financial manager or his authorized representative. Disbursement against (b) would also be against statements of expenditures, supported by the detailed proposals for utilization of experimental credit funds (para 5.07). The documentation for the statements of expenditures would be retained by BTM for review by IDA supervision missions. Disbursements against (c) would be fully documented. An estimated schedule of disbursements is included as Table 2. H. Accounts and Audit 4.19 BTM's accounts are fully computerized, and with the expansion of its computer capacity (para. 3.11), it is expected that BTM will be in a position to obtain monthly position statements for all its field offices, and con- solidated quarterly balance sheets and financial statements for all its operations. To date, BTM's accounts have been verified by a "Commissaire aux comptes", but the Government has agreed that in the future, BTM accounts will be audited by independent auditors acceptable to IDA. This would be com- patible with the new external control procedures proposed for socialist enterprises (para 3.21). Assurances were obtained at negotiations from Government and BTM that (a) BTM's accounting plan (para 3.20) would be parti- ally redesigned before September 1 1981 to allow for a rational analysis of its agricultural loan portfolio and financial ratios; (b) that BTM would maintain separate accounts adequate to show utilization of Project funds, and (c) that BTM's accounts would be audited by independent auditors acceptable to IDA, and submitted to IDA within six months of the close of each fiscal year. The auditors should pay particular attention to the procedures followed by BTM for disbursing against statements of expenditures. It was a condition of Board Presentation that the 1978 accounts had been audited; during negotia- tions, the auditors' report has been submitted to, and has been found accept- able by, IDA. V. PROJECT IMPLEMENTATION A. Project Implementation and BTM Staffing General 5.01 The Project would be carried out by BTM. Overall supervision of Project implementation by the Government would be ensured through the Manage- ment Committee common to all three Banks which is chaired by the Minister of Finance (para 3.06). BTM would extend credit through its branches and field offices for Project investments, and would maintain its existing monitoring and evaluation system (para 5.12). Sub-borrowers would execute the individual investments financed by BTM loans. The selection and field supervision for technical performance and loan repayment would continue to be jointly executed by BTM, the fokonolona institutions and the extension services or development organizations, in accordance with the existing procedures for the FMR Program (para. 3.27). Technical assistance to farmers for Project investments would be provided by the various extension agencies (Chapter II) for the various - 36 - crops, which are generally satisfactory for the number of Project beneficiaries envisaged. During the Project period, BTM plans to limit its expansion of new agencies and branches but to operate seven new mobile banks. 5.02 BTM is a sound, well managed financial institution, and it has performed well under the difficult conditions that have resulted from the reorganization of Madagascar's banking sector. However, the development of BTM is still at a relatively early stage, and some uncertainties still exist about the future development of the institution, both regarding its management structure and its basic operating procedures. In particular, some aspects of the laws under which BTM was established have yet to be fully elaborated and applied. Therefore, assurances were obtained during negotiations that the Government would seek IDA's approval prior to instituting any significant changes in BTM's current management structure, in its basic operating proce- dures and policies, or in its statutes. Assurances were also obtained that the Government would inform IDA in advance of other significant changes, such as the establishment of the Orientation Council for the Banking and Financial sector provided for under the law (para 3.01) or for the establishment of a new, separate management committee for BTM, rather than the joint committee which now serves the BTM, BNI and BFV (para 3.06). In addition, several outstanding issues affecting BTM's current management were reviewed during negotiations to clarify proposed changes tentatively agreed upon during the appraisal mission. These include notably the terms of reference for the Studies and Planning Department, the position of the Operations Department within BTM's overall organization, and the role and staffing of BTM's Internal Audit Division. BTM's organizational structure was reviewed during negotia- tions and a new organization agreed upon (Chart 1). 5.03 In general, BTM has adequate numbers of staff to handle its current volume of operations and to accommodate a modest expansion of its activities. Nevertheless, BTM staff development plans call for the recruitment of about 110 additional technical staff over the next four years, or about 25 to 30 new staff members a year. This appears reasonable taking into account the projec- ted expansion in BTM's operations. BTM requires some additional expertise in specialized areas, in addition to the training needs defined above (para 4.10). Therefore, assurances were obtained during negotiations that BTM would engage a qualified financial analyst to serve at BTM headquarters, as well as data processing staff, as outlined in para 4.11. Assurances were obtained at negotiations that the terms of reference and conditions of employment of the consultants for the training program (para 4.10), and the Data base Management system study (para 4.13) would be submitted to IDA for approval. B. Project Lending Policies and Procedures Lending Policies 5.04 Project lending for export, industrial and food crop activities would be administered under the Rural Credit Program (FMR), described above in paras 3.26-3.33. Although the detailed application of lending procedures under this program has not yet been precisely defined, the system works well in parts of Madagascar and BTM and the Government are engaged in a - 37 - continuing, pragmatic effort to improve its administration by clarifying and modifying procedures and by strengthening the capacity of fokonolona institu- tions to fulfill their role in credit administration. Further, BTM intends during the Project period to concentrate its lending activities in those areas where both the level of development of local fokonolona institutions and the interest of farmers in specific agricultural activities are most promising for successful lending operations. The basic objectives, procedures, lending terms and conditions for BTM smallholder loans, the role of the fokonolona institutions and credit committees in credit administration, and the role of the extension services of the Ministry of Rural Development and Agrarian Reform would be defined in an agreement (Protocole d'Accord) on administration of the FMR Program. A draft agreement was prepared by BTM and was reviewed during appraisal; a final draft was discussed during negotiations, and it would be a condition of credit effectiveness that the agreement had been signed. Assurances were obtained during negotiations that during the Project implementation period the Government and BTM would consult with IDA prior to (i) modifying the agreement; and (ii) introducing any significant change in the design or operating procedures of the FMR program. 5.05 BTM is required under its statutes to undertake certain activities on behalf of the Government, the fokonolona institutions, or socialist coop- eratives which fall outside of its normal commercial and agricultural lending activities. However, no clear procedures defining the type of services to be provided, the level of remuneration for BTM, or control and reporting proce- dures have yet been defined. It is expected that such activities will be regulated under a specific agreement between BTM and the Government, but given the many uncertainties regarding BTM's potential activities with socialist cooperatives or socialist enterprises, it seems unlikely that this general regulation will be finalized in the immediate future. Nevertheless, it is essential that the principle be established that for all activities, whether financed with BTM's own funds or on behalf of the Government with earmarked funds, i) BTM would apply objective standards in appraisal of the credit-worthi- ness of potential clients and the viability of loan proposals, and (ii) BTM would receive an adequate remuneration to cover its administrative expenses for operations on account of third parties. Assurances to this effect were obtained during the negotiations. Lending Procedures 5.06 The quality of extension services for farmers varies widely among the different regions of Madagascar (para 2.11), and in many areas these services are not always sufficiently developed to support an intensive small- holder credit project. Further, given the wide variation in geographic conditions among the regions of Madagascar, the widely differing systems of production and state of the road network, and the possible changes in relative prices over time, a careful evaluation of the viability of different crops and farming systems for each region is essential. This problem is particularly serious for food crops, where the differences in the quality and intensity of available extension services is most marked, although adequate services exist in a large number of Fokontany. BTM has already indicated that they intend in the future to concentrate their lending activities in those areas where appropriate services to farmers are available. Assurances were obtained during negotiations that BTM would carefully assess, for the firaisam where - 38 - concentrated lending for food crops is proposed, the financial and economic viability of proposed farm investments for food crops as well as the avail- ability of appropriate extension services and technical inputs, and would only extend loans where the viability of investments can be demonstrated. 5.07 BTM would undertake under the Project a series of experimental credit activities designed to test the viability of new crops and production system as well as new institutional arrangements such as socialist village- level cooperatives (para 4.09). It is expected that this program would be adapted during Project implementation according to operating experience. BTM will prepare detailed proposals for the design and administration of this program in consultation with IDA, and would seek to ensure that the same criteria would apply for these activities as for other BTM lending operations in terms of the viability of investments. It would be a condition of dis- bursement for experimental credit activities for each crop season that detailed proposals for these activities would be approved by IDA prior to the beginning of the credit season. Terms of BTM Lending 5.08 In general, BTM's interest rate structure, which is established by the Central Bank, has been appropriate to assure the institution's financial viability (para 3.18). However, rates of inflation in Madagascar have in- creased in the past years and are projected to continue at an average rate of about 12% a year during most of the Project implementation period. Therefore, some revision of interest rates applicable for proposed Project lending activities would be appropriate. In determining the levels of proposed fees and the actual interest rate charged to farmers, all loan administration charges have been taken into account (para 3.18), with the objective of ensuring that the equivalent interest rate for BTM's FMR portfolio as a whole would not be less than 12%. This is in line with the interest rate structure being prepared by the government in the context of its negotiations with the International Monetary Fund, which aims at positive interest rates. The proposed interest rates structure is summarized below and in Table 4. Assur- ances were obtained during negotiations regarding these proposals, and that the level of interest rates for activities under the Project would be reviewed at least once a year between the Government, RjT and IDA. (a) On short-term credit BTM would charge a commission of 1% a month corresponding to an annual interest rate of 12%. The maturity of the loans would vary with the crop, ranging from three to nine months. Disbursement schedules and repayment dates for loans would be established according to the crop and the regional cultivation patterns. (b) On medium-term credit BTM would charge a fee of 1% a month on the original loan amount, corresponding to the equivalent of an average annual interest rate of at least 12%. The loan maturity, grace period and number of disbursement tranches would vary according to the crop or activity and are summarized below: - 39 - Maturity Grace Period No. of Disbursement (years) (years) Tranches Regeneration of Coffee Plantations 5 2 3 New Sugarcane Plantation 4 2 1 Purchase of Draft Animals 5 2 1 These terms reflect not only the cost of lending for BTM, but also the tech- nical characteristics of each crop. After trimming, regenerated coffee plantations only start producing after two years and regain full production after three years. New sugarcane plantations start producing after twelve months, but reach full production after two years. Draft animals are used mostly for the expansion of the area under cultivation which only reaches full development after three years; draft animals must be replaced after five years. On long-term credit, BTM would charge a commission of 1% a month, corresponding to the equivalent of an average annual interest rate of over 12%. As for medium-term credit, the loan maturity, grace period and number of disbursement tranches would vary according to the crop; they are summarized below: Maturity Grace Period No. of Disbursement (years) (years) Tranches New Coffee Plantation 7 4 3 New Vanilla Plantation 7 3 4 New Pepper Plantation 9 4 4 New Cocoa Plantation 9 5 5 Again, these terms not only reflect the cost of lending for BTM, but also the technical characteristics for each crop. New coffee plantations start producing after three years and reach full production after five years, and new vanilla plantations start producing after three years, but their production is immediately substantial. Cocoa plantations yield their first financial benefits more slowly C. Technical Supervision (Extension) 5.09 The current organization of services for the agricultural activities under the Project is generally adequate to support the proposed development activities, subject to the reservations for food crops outlined in para 5.06 above. However, at present there is no effective extension organization for vanilla (para 2.11), and the current responsibilities for extension for smallholders producing sugarcane are divided between the MDRRA and the Sugar Stabilization Fund (para 2.11). It would be a condition of effectiveness - 40 - that the Government had made arrangements to ensure that the OCP would provide appropriate extension services for vanilla growers, and that services for sugarcane growers would be provided by the SIRAMA in the Ambilobe area, and the Sugar Stabilization Fund in the Brickaville area. 5.10 Rescheduling of Arrears. BTM has experienced difficulty with recovery of loans under the FMR Program in recent years (para 3.33). In general, BTM has adopted a sound policy towards loan recovery, requiring a clear discipline through its policy of barring further lending activities in fokantany where repayments of previous loans has been unsatisfactory. However, given the climatic variations to which Madagascar is subject, it would seem appropriate to institute an appropriate system for debt resched- uling and refinancing. A careful review of this problem took place during negotiations. On the basis of this document and an ongoing Government review of alternatives for insurance or rescheduling schemes, appropriate measures were discussed during negotiations. D. Monitoring and Evaluation, and Reporting 5.11 BTM would establish a simple monitoring and evaluation system of the rural credit program under the Project. This would be one of the respon- sibilities of the Studies and Planning Department. The objective of the system would be to provide clearer information on lending operations by region by crop, and type of borrower, to assist BTM in planning for future lending activities. In designing this system, a sample of borrowers would be designed, which would reflect a range of regions, types of cropping patterns, farm size, and type of loans. Assurances were obtained during negotiations that the proposed monitoring system would be discussed with IDA not later than June 30, 1981. The Studies and Planning Department would also prepare the Completion Report. Assurances were obtained during negotiations that the Government would submit the completion report to IDA not later than six months following the Credit closing date. 5.12 BTM would submit regular reports to the Government and to IDA, for each quarter. These reports should include the results of monitoring studies, and would be prepared by the Studies and Planning Department. VI. PRODUCTION, MARKETING, AND PRICES A. Technical Features of Production 6.01 The Project would be based on the promotion of well-known and tested cultivation techniques, involving mainly the use of selected varieties, the increased use of fertilizers and pesticides and improved techniques for maintenance of existing plantations. 6.02 Existing coffee plantations would benefit from improved weeding, shade and pruning techniques and from the application of fertilizer; yields - 41 - would be expected to increase from 300 kg/ha to 800 kg/ha. A similar increase in yields would be achieved by regenerating older plantations, including stump- ing trees and applying fertilizer. New plantations would be established using selected plants and fertilizers; yields would be expected to reach 900 kg/ha cloves, Project activities would be limited to promoting better maintenance techniques on existing plantations; it is estimated that this would be suffi- cient to boost yields from their present level of 300 kg/ha to 500 kg/ha after three years. For vanilla, regular weeding of existing plantations (1,500 plants/ha) and vine guidance should be sufficient to increase yields from 300 kg/ha for green vanilla to 500 kg/ha. New plantations would be established with optimum spacing (2,500 plants/ha) and the stakes would be regularly pruned; with careful weeding and training of vines, yields should reach 500 kg/ha after four years and 1,000 kg/ha after six years. New pepper plantations would be established under conditions similar to vanilla; expected yields would be 1,000 kg/ha for black pepper after six years. New cocoa plantations would also be set up using selected plants and modern techniques under a pattern similar to the one used for coffee. Production would begin four years after planting, and yields would be expected to reach 800 kg/ha dry beans after seven years. Existing sugarcane plantations would be improved through the provision of fertilizers allowing an estimated increase of yields from 30 t/ha to 40 t/ha. New plantations would be established after improved soil preparation and fertilization, with selected varieties capable of yields up to 50 t/ha. The crop yields mentioned above for export crops and sugar cane are normally obtained by those local farmers who maintain their planta- tion properly. Tree crops respond well to improved maintenance such as weeding, adequate shading and pruning; response to small doses of fertilizers, especially nitrogen, is exceptionally good. Higher yields than those assumed are often obtained by progressive farmers, namely 1,000 kg/ha for regenerated coffee, 1,200 kg/ha for well kept new coffee plantations, 600 kg/ha for vanilla inter-planted with either crops, 1,200 kg/ha for pure stand vanilla with correctly pruned support trees, 1,500 kg/ha for a uniformly planted cacao plantation and 1,800 kg/ha for a uniform pepper plantation with adequate support trees. 6.03 For foodcrops, no specific improvement package would be introduced on the farms which would benefit from Project investments in export or indus- trial crops. Yields would therefore probably remain about 1,200 kg/ha. On the central plateaux, the Project would support a comprehensive agronomic package for foodcrops, consisting of the introduction of selected varieties, improvement of seeding and transplanting techniques and provision of fertilizers for irrigated rice. Average yields would be expected to increase from 1.5 t/ha to 3.5 t/ha of paddy after three years. The standards of rice cultivation are generally better in the highlands than on the coast where rice is grown by smallholders only for home-consumption, and this only since the marketing system for rice has failed to supply consumer markets regularly. In the highlands well kept transplanted paddy yields about 2 t/ha without fertilizer use; in Fianarantsoa and Antananarivo faritanys, average paddy yields in recent years were about 2.5 t/ha, and 3.1 t/ha for transplanted paddy. As soon as fertilizers are applied the yield double. In the lowlands small farmers could also obtain high yields with better care and the use of fertilizers but they do not consider rice as a cash crop and pay little attention to it. This may change in the future, but for the purpose of the farm models no yield increase for paddy has been assumed. Animal traction - 42 - would be introduced and two oxen purchased for each farm, together with the necessary equipment and the provision of veterinary services. Animal traction would also be used for new planting of maize and groundnuts on "tanety" land; this would be coupled with adequate anti-erosion measures, namely contour line planting, terrassing, and adequate fallow. B. Farm Models 6.04 Eight simple farm models have been developed to represent the types of crops to be developed under the Project. Six models are based on export crops; the assumption is of a 1.6 ha holding with 0.5 ha devoted to rice and 0.3 ha to fruit and vegetables which would not benefit from any specific investments. For the two models based on coffee or cloves regeneration, the total planted area would remain unchanged; for the other models it would increase to 1.6 ha through new planting of 0.25 ha (pepper, cocoa) or 0.5 ha (coffee, vanilla). One model is based on industrial crops, with sugarcane as the cash crop; it includes the extension of the area planted under sugarcane, from 1 ha to 2 ha, with the provision of inputs and improved cultivation techniques on existing and new plantations. One model is based on foodcrops in the central plateau area; it includes intensification of rice cultivation on 0.9 ha of existing rice fields, the new planting of 0.8 ha of maize and 0.8 ha of groundnuts on "tanety" land, together with the intro- duction of animal traction on the total surface of 3.0 ha, slightly more than twice the pre-Project figure. These projected increases in cultivated area are based on observation of farmers who have already had access to credit facilities. C. Production Estimates 6.05 At full development, incremental production of export crops result- ing from Project activities is expected to amount to about 5,200 t of coffee, 1,000 t of cloves, 1,400 t of vanilla, 300 t of pepper and 250 t of cocoa, representing between 6% (coffee, cloves, pepper) and 25% (vanilla) of present production. Incremental sugarcane production would amount to about 80,000 t, or 6% of present national production. Foodcrop production would also be expected to increase by about 11,000 t of paddy, 14,000 t of maize and 9,000 t of groundnuts; compared to present total production, this increase would be significant for maize (10%) and groundnuts (20%); compared to the total production figure of 2.0 million t paddy, the impact of the Project on paddy production appears limited; however, this impact would be concentrated on the central plateau where supply problems for foodcrops, mainly rice, are most critical. D. Marketing 6.06 The incremental production of export crops would be marketed through the existing channels, involving mainly parastatal trading companies (Chapter II). The quantities involved would remain limited, and they are not expect.d - 43 - to place substantial additional burdens on existing structures. The zones assisted under the Project would be chosen so as to minimize transport problems after harvest (para. 7.11). Sugarcane production would be handled by SIRAMA, under existing procedures, which would be improved by involving SIRAMA in the organization of outgrowers associations (paras. 2.11 and 2.32). 6.07 For foodcrops, existing channels, through the fokonolona and para- statal institutions, would be responsible for the marketing and processing of production. Their present operations are not completely satisfactory and this will require particular attention during Project implementation and supervision. In addition, should the present price structure for paddy be maintained by the Government, a substantial part of incremental paddy produc- tion is likely to continue to be marketed through unofficial channels. E. Prices 6.08 The Project financial analysis was based on the present price structure. Present producer prices would provide adequate revenues for sugarcane, cloves and vanilla provided that, for the latter, they remain at their actual level which is well above official prices. Although lending for coffee, pepper, cocoa and foodcrops would not require a change in the official prices, an increase of producer prices would make these crops more attractive to growers; such an increase is to be particularly recommended for paddy, since present official prices provide only marginal incentives to farmers for increasing their output beyond home consumption. The problem of agricultural prices will remain a major issue to be discussed in the framework of the general sector dialogue which has been initiated with the Government. Assurances were obtained at negotiations that Government and IDA would exchange views at least once a year on the price for the major crops to be financed under the Project. VII. BENEFITS, RISKS AND JUSTIFICATION A. Producers' and Social Benefits 7.01 The export crop component would benefit an estimated 25,000 families whose cash income would more than double on average; typical farmers with 0.5 ha of rice and 0.75 ha of cash crops would achieve a net income of about US$330 (FMG 70,000) to US$520 (FMG 110,000). Cash incomes for high value cash crops such as vanilla would be higher and could reach US$3,000 for a family cultivating one hectare of vanilla. 7.02 The industrial crop component would benefit a further 1,200 families approximately, inducing an expansion of 1,200 ha of the areas cultivated under sugarcane. The net cash income of sugarcane growers would more than double, reaching US$850 equivalent. - 44 - 7.03 About 6,000 families would benefit directly from the foodcrop component of the Project. Their production of paddy would nearly be tripled, maize and groundnuts cultivation would be introduced, and farmers would be able to switch to cultivation with draft animals. Net cash revenues, which are presently nr-existent ior all practical purposes, would reach about FMG 50,000 (US$240) a year per family. In addition, the availability of oxen for rental would allow other farmers to switch to draft cultivation and increase their productivity and their output. 7.04 Labor. In total, about 31,400 low income smallholder families would benefit from the Project, some of whom, namely foodcrop farmers, would have a regular cash income for the first time. In addition, 1,800,000 mandays of hired labor would be generated annually, corresponding to about 7,000 permanent jobs. These opportunities for hired labor would have a significant social impact since they involve mainly migrant workers; most of these migrants come from the southern region which is the poorest area of Madagascar, and where development opportunities are constrained by the lack of of natural resources. B. BTM Financial Position 7.05 Ten year financial projections with the Project show that BTM will operate profitably and its financial condition would continue to be satisfactory. At Project year 10, net income before taxes would be increased fivefold while the percentage of earning assets would have gradually increased from 1.2% in Project year 1 to 2.5%, indicating substantially improved profitability. After deducting taxes and dividends, BTM's earnings would increase from FMG 224 million in Project year 1 to FMG 1,103 million in Project year 10. The resulting increase in retained earnings would be reflected in an increase in equity funds from FMG 5,567 million to FMG 12,982 over the same period. If the Government agrees to increase BTM's share capital, as recommended, the ratio of equity to total assets would increase from 11% to 16% during the ten Project years. This would be closer to the target ratio of 30% which is considered adequate for a development bank with BTM's asset mix. The ratio at the end of the period would be further improved to about 22% if the Government did not collect any dividends from BTM. Liquidity as measured by total loans and investments over current liabilities would be satisfactory as that ratio would improve slightly from 1.04 in Project year 1 to 1.06 in Project year 10 and would exceed 1 each year. Working capital would be relatively high in Project years 3 through 7 and then decline gradually because long term debt would be also reduced. The financial projections show an annual funds deficit from Project year 2 through 5. The cumulative deficit is substantial and peaks in Project year 4 at FMG 8,465 million or 10.5% of total assets. It is, therefore, recommended that BTM increase its capital to FMG 6,000 million by the same year. This analysis is based on the critical assumption that BTM's loan portfolio, including Project operations, would double in ten years, as its agricultural loan volume would increase while commercial loan volume would decline. Tables 5-10 provide additional information on BTM's financial position. - 45 - Government Debt to BTM 7.06 BTM inherited an estimated FMG 1,400 million of bad debts from BNM and it has advanced about FMG 500 million from its own funds to finance special operations on behalf of the Government. Problems had arisen in the past because of a difference of view between the Government and BTM on the precise amount of this debt and on the arrangements for its liquidation. During negotiations, agreement was reached that, beginning in 1981, the Government would fully amortize its indebtedness to BTM in four equal annual installments. C. Government Benefits 7.07 Benefits directly resulting from the Project would mostly consist of increased production of export and industrial crops and foodcrops. Additional government expenditures would be minimal. Additional direct benefits to the Government would be obtained from BTM's profits and dividends paid to the Government, and from increased export revenues. At full develop- ment, in Project year 10, incremental gross revneues of the stabilization funds would be annually about FMG 520 million (US$2.5 million) from coffee exports, and about FMG 300 million (US$1.4 million) from clove exports; these estimates are based on projected world export prices and present guaranteed export prices. Indirect financial benefits might be derived from taxes on the processing industries resulting from increased production of paddy and sugar. Local fokonolona institutions would derive additional revenues through market- ing commissions on incremental agricultural production. Foreign exchange savings would result from increased exports (coffee, cloves, vanilla, pepper, cocoa, sugar) or reduced imports (rice). 7.08 Additional benefits, which would be felt beyond the immediate Project beneficiaries, would result from a better organization of extension services especially for vanilla, cocoa and sugarcane. The setting up of new plantations or the rehabilitation of existing ones using modern and efficient techniques is expected to have a substantial demonstration effect for all farmers in the Project areas. D. Economic Analysis 7.09 The economic rate of return from directly productive elements of the Project is estimated at about 60%. All direct Project investment costs were included in the analysis. Loan administration costs have been estimated at 10% of the outstanding balance of BTM loans. Costs of farm labor were included in the analysis; the opportunity cost of labor has been estimated at the average value of FMG 350/manday, close to the prevailing official wage rate. - 46 - Foreign exchange costs and benefits were valued at FMG 235/US$ 1/ to reflect more accurately the scarcity value of foreign exchange. Extension costs have not been included in incremental Project costs, since the arrangements sup- ported under the Project would involve a better use of existing resources rather than mobilization of new resources. Economic prices for agricultural goods were estimated on the basis of commodity price forecasts; .atest price data for Malagasy imports and exports have been taken into account, especially for certain high value crops such as cloves, vanilla or pepper. All benefits were systematically lagged by one year. Economic rates of return for indivi- dual crops and groups of crops were calculated. For export crops, the economic rate of return is estimated at about 88%, at about 27% for industrial crops, and at about 28% for foodcrops. Economic rates of return for individual crops range from more than 100% for vanilla to 13% for new pepper plantations. 7.10 The economic rate of return for the whole project was tested for sensitivity. If costs were to increase by 10 and 20%, the economic rate of return would decrease by 6 and 15 percentage points respectively. However, if crop prices or yields were to increase by 10 and 20%, the economic rate of return would increase by 7 and 12 percentage points respectively. The switch- ing values have been calculated at 190% for costs and 60% for benefits, using an opportunity cost of capital of 10%. Individual and groups crops were also tested for sensitivity. For export crops, under the combined assumption that production costs would increase by 20%, and yields decrease by 20% and production start with a two year delay, the economic rate of return would decrease by about 50 percentage points from 88% to 35%. For industrial and foodcrops, a 20% increase in production costs would lower the rate of returns from 27% to 15%, and from 28% to 20% respectively. The sensitivity analysis therefore highlights the general soundness of the investments proposed under the Project, even with major change in the structure of costs and benefits. E. Risks 7.11 The success of Project implementation would depend on three major factors. The first would be the provision of adequate extension services and the availability of inputs, mainly fertilizers and pesticides. This is a critical sector issue in Madagascar, and is a particularly acute problem for foodcrop producers; it would not be possible or advisable to address it in the limited context of the proposed Project, but steps have been taken to offset these risks: (a) OCP, which is an experienced extension agency, would be made responsible for extension and provision of inputs for all export crops includ- ing vanilla and cocoa; (b) experienced sugar companies such as SIRAMA would be put in charge of organizing and providing extension services to sugarcane outgrowers supported by the Project; and (c) in all cases, and particularly for foodcrops, loans would be granted only to fokontany where BTM is satisfied that extension services and inputs are available to farmers. 7.12 Another critical factor is related to producer prices and marketing. Although the Project is viable under the present structure of producer prices, 1/ The official exchange rate is FMG 210/US$. - 47 - increases in producer prices of coffee, pepper and paddy would undoubtedly improve its results. Difficult and complex problems are involved (para 6.08) and slow progress must be expected through a continuing dialogue with the Government. Marketing problems are also serious; risks would be reduced to a minimum by selecting Project areas in zones where easy road transportation is available; the responsibility for the availability of inputs and extension services would be specified under an agreement, the signature of which would be a condition of Credit effectiveness. 7.13 The performance of BTM as a development bank, and its relations with fokonolona institutions, would also be a critical factor in the success of the Project. Again, this risk is offset by the sound management of BTM in past years, but it would be essential that a continuing dialogue on BTM's management and procedures be maintained throughout the Project implementation period. VIII. SUMMARY OF AGREEMENTS REACHED DURING NEGOTIATIONS 8.01 The following assurances were obtained during negotiations: (a) Financing arrangements for the Project (para 4.16); (b) Regarding BTM accounts: (i) That BTM's accounting plan would be partially redesigned before September 1, 1981 to permit a rational analysis of the agricultural loan portfolio and financial ratios; (ii) That BTM would maintain separate accounts adequate to show the utilization of Project funds; and (iii) That BTM accounts would be audited by independent auditors acceptable to IDA and that the report would be submitted to IDA within six months of the close of each fiscal year (para 4.19); (c) That the Government would consult with IDA prior to making any significant change in BTM's management structure, basic operat- ing procedures, or statutes, and would inform IDA in advance of other significant proposed changes such as the establishment of an Orientation Council for the Banking and Financial Sector and a separate Management Committee for BTM (para 5.02); (d) Regarding staffing and training: (i) That BTM would engage a qualified financial analyst for its headquarters and additional data processing staff; - 48 - (ii) That the terms of reference and conditions of employment of the consultants for the training program and the Data Base Management System study would be submitted to IDA for approval (para 5.03); (e) That during the Project implementation period the Government would seek IDA's approval prior to: (i) modifying the agreement between BTM and MDRRA and the FMR program; and (ii) introducing any significant change in the design or operating procedures for the FMR program (para 5.04); (f) That BTM would carry out a full appraisal of all clients' creditworthiness and the viability of loan proposals for all its operations, and would receive an adequate remuneration to cover its administrative expenses for operations on account of third parties (para 5.05); (g) That BTM would carry out an in depth appraisal of the financial and economic viability of proposed investments for food crop development for each region where significant lending for such activities is to be undertaken and that BTM would lend for such activities only where their economic viability can be demonstrated, and where appropriate extension services exist and adequate supplies of required inputs are available (para 5.06); (h) Regarding BTM's interest rate structure as set out in para 5.08; and that the Government would consult with IDA on BTM interest rates for Project lending activities at least once a year (para 5.08); (i) That the Borrower would exchange views with IDA on BTM's monitoring and evaluation system for the smallholder credit scheme no later than June 30, 1981 (para 5.11); (j) That the Government would prepare a completion report on the Project and submit it to IDA no later than six months following the credit closing date (para 5.11); (k) That the Borrower would exchange views with IDA on the prices for the principal crops financed under the Project at least once a year (para 6.08); and (1) that the Government would fully amortize its indebtedness to BTM in four annual installments beginning in 1981 (para 7.06). 8.02 It would be a condition of Board Presentation that an audit report on BTM's 1978 accounts has been submitted to, and found acceptable by, IDA (para 4.19). - 49 - 8.03 Condition of credit effectiveness would be (i) that a subsidiary loan agreement between the Government and BTM, approved by IDA, had been signed (para 4.16); (ii) that a Protocole d'Accord had been signed between BTM and the MDRRA (para 5.04); arrangements for extension services for vanilla growers to be vested in the Operation Cafe Poivre (OCP) and for sugarcane growers with the major sugar companies such as SIRAMA (para 5.09) would be part of the Protocole d'Accord. 8.04 It would be a condition of credit disbursement for each year's program for experimental credit that a detailed program of activities had been approved by IDA prior to the beginning of the season (para 5.07). 8.05 Subject to the above assurances, the proposed Project would be suitable for an IDA Credit of SDR 8.7 million (US$11.5 million equivalent) to the Government of Madagascar on standard IDA terms. July 7, 1980 - 50 - Table/Tableau 1 MADAGASCAR FIRST AGRICULTURAL CREDIT PROJECT PREMIER PROJET DE CREDIT AGRICOLE Sumaarv of Annual Project Costs Recapitulatif des CoCts Annuels du Projet (F34 million) (en millions de FMG) Foreign Exchange/Devises ----- Year/Annee ---- Total Amount % 1 2 3 1-3 Montant Project Component Composante du Projet (a) Seasonal Credit (a) Crddit saisonnier Coffee 43.7 52.4 93.2 192.9 98.3 51 Cafd Cloves 11.0 16.5 27.8 55.3 - - Girofle Vanilla. * 6.3 14.8 21.1 - - Vanille Sugar Cana 94 29.2 60.5 99.0 85.8 87 Canne X Sucre Rica 56.7 89.8 153.6 300.1 156.6 52 Riz Groundnuts and Maize - 31 82.0 114.1 75.8 66 Arachide et Mats Sub-Total 124.4 226.3 431.9 782.5 416.5 53 Sous-total (b) Medium Term Credit (b) Crddit moyen-terme Coffee 7.2 18.9 43.3 69.4 37.8 54 Cafe' Sugar Cane 20.5 51.4 82.1 154.0 136.9 89 Canne a"Sucre Animal Traction 171.7 257.8 429.3 858.6 199.8 23 Traction animale Sub-Total 199.4 328.1 554.7 1,082.0 374.5 35 Sous-total (c) Long Term Credit (c) Cr4dit long-terme Coffee 18.3 31.2 56.1 105.5 20.7 20 Cafd Vanilla - 40.2 108.8 149.0 6.0 4 Vanille Pepper 10.3 18.5 33.5 62.3 8.3 13 Poivre Cocoa 3.7 6.6 12.0 22.3 6.5 29 Cacao Sub-Total 32.3 96.5 210.4 339.1 41.5 12 Sous-total (d) Experimental Credit 17 32 58 107.0 40.4 38 (d) Credit expe'rimental (e) Staff Training 44.2 45.2 44.2 93.6 93.6 100 (e) Formation du personnel (f) Logistic Support 10.9 8.2 - 19.1 19.1 100 'f) Appui logistique (g) Consultant Services - 8.3 - 8.3 8.3 100 (g) Services de consultants Total Base Project Costs 428.2 744.6 1,259.2 2,431.6 993.5 41 Totaldes cofits de base du Projet Contingenqy Allowances Provisions pour d9passement des Price 1! 25.7 139.4 385.2 550.3 220.1 40 prix a! Total Project Costs 453.9 884.0 1,644.4 2,981.6 1,214.0 41 Total Cou ts Projet I/ Price contingencies based on an average inflation a/ Impre'vus basis sur un taux d'inflationmoyen de 12% en CY 1980 et 1981, rate of 12% in CY 1980 and 1981, 10% in CY 1982. 10% en CY 1982. L/ Totals may not exactly coincide because of b/ Lea tayx peuvent ne pas coIncider exactement, lea chiffres rounding of figures. ayant ati arrondis. - 51 - Table/Tableau 2 MADAGASCAR FIRST AGRICULTURAL CREDIT PROJECT/PREMIER PROJET DE CREDIT AGRICOLE Estimated Disbursement Schedule Calendrier estimatif des d6caissements IDA Fiscal Year Cumulative Disbursement at and Quarter End of Quarter Exercise at Decaissements cumulatifs trimestre IDA (US$'000) 1980/81 1980/81 September 30, 1980 1/ 30 septembre 1980 1/ December 31, 1980 - 30 decembre 1980 March 31, 1981 - 31 mars 1981 June 30, 1981 500 30 juin 1981 1981/82 September 30, 1981 600 30 septembre 1981 December 31, 1981 1,400 31 decembre 1981 March 31, 1982 1,850 31 mars 1982 June 30, 1982 2,700 30 juin 1982 1982/83 September 30, 1982 3,550 30 septembre 1982 December 31, 1982 4,450 31 decembre 1982 March 31, 1983 5,550 31 mars 1983 June 30, 1983 6,700 30 juin 1983 1983/84 September 30, 1983 2/ 7,900 30 septembre 1983 2/ December 31, 1983 9,200 31 decembre 1983 March 31, 1984 3/ 10,500 31 mars 1984 3/ June 30, 1984 11,500 30 juin 1984 3/ 1/ Expected Date of Effectiveness January 31, 1981/ Date prevue pour entree en vigueur, le 31 janvier 1981. 2/ Expected Date of Completion, December 31, 1983/ Date prevue pour achivement du projet, 31 decembre 1983. 3/ Expected Closing Date, June 30, 1984/ Date de cl4ture, juin 30, 1984 April 7, 1980 Le 7 avril 1980 MADAGASCAR FIRST AGRICULTURAL CREDIT PR)JECT PREMIER PROJET DE CREDIT AGRICOLE Schedule of Participating Farmers by Category of Loan Schema d'entree des paysans par categorie de credit Farms Farms Farms Modele Farm Total No. entering in PY1 (1980) entering in PY2 (1981) entering in PY3 (1982) d'exploitation Model of Farms % of total Number % of total Number % of total Number Regenerated Coffee 4,800 20 960 30 1,440 50 2,400 Cafe regenere New Coffee 2,400 20 480 30 720 50 1,200 Cafe' nouveau Cloves 7,500 20 1,500 30 2,250 50 3,750 Girofle Vanilla 2,400 - - 30 720 70 1,680 Vanille Pepper 1,200 20 240 30 360 50 600 Poivre Cocoa 1,200 20 240 30 360 50 600 Cacao Sugar Cane 1,200 10 120 30 360 60 720 Canne a Sucre Foodcrops 6,000 20 1,200 30 1,800 50 3,000 Cultures vivrieres Total 26,700 18 4,740 30 8,010 52 13,950 Total Nombre % du total Nombre % du total Nombre % du total Nombre P total d'exploi- -------------------------- Exploitations entrant en -------------------- tations premiere annee du projet deuxieme annee du projet troisieme annee du projet (1980) (1981) (1982) March 10, 1980 le 10 mars, 1980 MADAGASCAR FIRST AGRICULTURAL CREDIT PROJECT Proposed Fees and Corresponding Interest Rates for BTM Commissions et taux d'intérêtséquivalentsproposés pour le. BTM Maturity Grace Period No. of Corresponding Interest Type of Loan (Years) Fee (Years) Tranches Rate on Principal Type de prêt Echéances Commission Différé No. de Taux d'intérêt équivalent (Années) (%) d'amortissement déblocages sur le montant principal (Années) (%) Short Term/Court terme 1 1% a month 0 1 12 Medium Term/Moyen terme Coffee regeneration/Régénération du café 5 " 2 3 15.1 Sugar cane planting/Plantation de la canne à sucre 4 " 2 1 13.4 Animal traction/Traction animale 5 " 2 1 14.2 Long terme/Long terme Vanilla plantation/plantation de vanille 7 " 3 4 15.2 Coffee plantation/plantation de café 7 " 4 3 14.1 Pepper plantation/plantation de poivre 9 " 4 4 14.7 Cocoa plantation/plantation de cacao 9 5 5 14.1 April 7, 1980 le 7 avril 1980 T..ble 5/Tab1eau 5 MDAGASCAR FLISI AGRICULTUIRI C1ADIT U PIOJECf P11NIER PBOJET DE CREDIT AGRICOLE S ... ad Usea Itndu lesaouret mlois Suppleaentamres (F.g million) (gMIlon 1979 1980 198! 1982 1913 1984 1985 1986 1987 1988 1989 slalCESRESStJURCES Profit alter la 1/ 447 183 532 1,010 1,368 1,723 1.718 1,942 2,033 2,115 2.202 Profit. apr.I. lmpåt 1/ Depreclallon 132 139 137 146 140 122 133 111 1i1 1(2 Ile A_rts..~eta Provlalona BTM 8 438 470 400 394 169 311 211 253 211 156 Provi.iona BTM PA Projet - 13 37 60 4 - - - - - - PCA Pr-j.t in Oepualta 4.498 5,167 5,234 5,833 6,591 5,730 6,301 6.933 6.863 7,481 8,154 Augeta tio dipsta anJ Ca.!h Certlfcateo Cafpfts . ve. Bon, da Galaa. Increase 1n 8orruwlnga Augmenaionaawrunta Medlu lera (7) (15) (8) (6) - (21) - - - - - mye trm long tenm I/ 2,035 322 (35) (43) (54) (63) (141) (139) (136) (124) (110) Long tre- Gouern,eet AloatlIon luc Alloation du Governe-ent pour CapIl 1 ucreaae 5/ - 258 534 1,076 - - - .- - aeuleaon de capill To-al s,orce, 7.111 6.505 6,901 8,4k6 8,443 7.660 8,322 9,058 9,124 9,785 10,503 Total R-a ~~urcee Supplaena1tace Loanio fiyting Sh.rt lur ./ 7,892 7,840 10,840 7.840 8,840 3.840 6,540 4,640 5,640 4.640 3.640 LourI lee exanI:, 3/ Eol dig eum te 4/ 613 600 1,037 1,120 33 31 31 30 29 32 33 t-oyen lama axiatant. 4/ Elallun Loug l.r 5 (59) (59) (75) (91) (107) (120) 44 28 12 - - Lang tma a.ltat.a 5/ Prjal loan, Augenation nutta erédita d, Projec Short len, - 124 226 432 43 (17) (249) (139) (90) - (66) Court te Mediua larm - 199 328 555 (62) (138) (209) (302) (107) - (26) m.yen ter4 Lot8 ler, - 32 97 210 91 77 (2) (121) (137) (128) (93) Lg tee- trw lmmobilzatiln - 107 322 170 - - 101 148 - - - oblIzationu nouvelle. DIv-ded, 7/ 223 91 266 505 684 861 859 971 1.016 1,057 1 101 Dividanda. 7/ la! U.s 3,669 8,934 13,041 10,741 9,522 4,534 7,415 5,255 6,363 5,601 4,589 Total Efplol. Spplécentalre Sorplus (efiett) 3.444 (2,429) (6,140) (2,265) (1,079) 3,126 907 3,803 2,761 4.164 5,914 E.cdent