Documentof The World Bank FOROFFICIAL USEONLY ReportNo: 41885-MG PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHE AMOUNT OFSDR24.3 MILLION (US$40 MILLIONEQUIVALENT) TO THE REPUBLICOFMADAGASCAR FORA SECOND GOVERNANCEAND INSTITUTIONALDEVELOPMENTPROJECT April 22,2008 PublicSector Reform& CapacityBuildingUnit (AFTPR) Country Department1(AFCS1) 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 Bankauthorization. CURRENCY EQUIVALENTS (ExchangeRateEffectiveApril 3,2008) CurrencyUnit = MalagasyAriary (Ar) Ar1790 = US$1 U S $ 1 = SDR0.6075 FISCALYEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AfDB African Development Bank IGE Inspection Gdndrale de 1'Etat (General ANSA African Network o f Social Government Inspectorate) Accountability IGF Inspection Gdndrale des Finances ARMP Autoritd de Rdgulation des Marchds (General Internal Control) Publics (Procurement Oversight IMF InternationalMonetary Fund Authorip) INSTAT Institut National des Statistiques (National BADEA BanqueArabepour le Ddveloppement Statistics Institute) Economique en Afrique (Arab Bank for ISR Implementation Status Report Economic Development inAfrica) LOLF Loi Organiqueportant Loi des Finances BdG Bureau de Gestion (Organic Finance Law) BIANCO Bureau Inddpendant Anti-Corruption MAP Madagascar Action Plan (Independent Anticorruption Agency) M C A Millennium Challenge Account CAS Country Assistance Strategy M C C Millenium Challenge Corporation CDE ContrGledes DdpensesEngagdes MDGs Millennium Development Goals (Commitment Control) M E C I Ministsre de l'Economie, du Commerceet CDMAP Capacity DevelopmentManagement de 1'Industrie (Ministryo f Economy, Action Plan Trade and Industry) CFAA Country Financial Accountability MIGA Multilateral Investment Guarantee Assessment Agency CG Coordonnateur Gdndral M o f Ministryo fFinance CNFA Centre Nationale deFormation NGO Non Governmental Organization Administrative (National Center for N C B National Competitive Bidding Administrative Training) NLIM National Leadership Institute o f cos Madagascar Conseil d 'Orientation et de Suivi PAP Priority Action Plan (Oversight Committee) PCU Project CoordinationUnit CPAR Country Procurement Assessment PEFA Public Expenditureand Financial Review Accountability CQ Consultant Qualification PER Public ExpenditureReview CSI Comite'pour la Sauvegarde de PGDI Programme de Gouvernance et 1'Intdgritd Ddveloppement Institutionnel (Governance CSLCC Conseil Supdrieur de Lutte contre la and Institutional Development Program) Corruption PIC P61e IntCgrt de Croissance (Integrated GrowthPoles) FOROFFICIAL USE ONLY ENAM Ecole Nationale d 'Administrationde PREA Programme des Rdformes pour 1'EfJicacitd Madagascar (National School o f de I'Administration (Reform Programfor Administration) the Efficiency of the Administration) ENMG Ecole Nationale de la Magistrature PRSC Poverty Reduction Support Credit et des Greffes (National School for PRSP Poverty Reduction Strategy Paper Magistrates and Clerks o f the Court) QCBS Quality and Cost Based Selection EU European Union R C U ReformCoordinationUnit at the Ministry FA0 Food and Agriculture Organization o f Finance FDL Fonds deDdveloppement Local (Local ROSC IMFReport onthe Observance of DevelopmentFund) Standards and codes FID Fonds d 'Intervention pour le SBD Standard BiddingDocument Ddveloppement (Local Development SME Small and MediumEnterprises Fund) FM Financial Management SIGFP SystdmeIntdgrd de Gestion des Finances FMRs Financial Monitoring Reports Publiques (Integrated Financial GDLN Global DevelopmentLearning Management Information System) Network sss Single Source Selection GDP Gross Domestic Product TI Transparency International IC International Consultant UNDP UnitedNations Development Program ICB International Competitive Bidding UNICEF UnitedNations Children's Fund IDASA Institute for Democracy in South WFP World Food Program Africa WHO World Health Organization IFAD International Fundfor Agricultural Development IFR Interim Financial Report Vice President: Obiageli K.Ezekwesili Acting Country Director: DirkReinennann Country Manager Robert Blake Sector Manager: h a n d Rajaram Task Team Leader: Guenter Heidenhof This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. MADAGASCAR GovernanceandInstitutionalDevelopmentProjectI1 TABLE OF CONTENTS Page I STRATEGICCONTEXTANDRATIONALE . ................................................................. 1 A. Country and sector issues.................................................................................................... 1 B.Rationale for Bank involvement......................................................................................... 7 C.Higher level objectives to which the project contributes.................................................... 8 I1. PROJECTDESCRIPTION ............................................................................................. 8 A. Lendinginstrument............................................................................................................. 8 B. Project development objective andkey indicators.,............................................................ 8 C. Project components ............................................................................................................. 9 D. Lessons learned and reflected inthe project desi........................................................... 12 E. Alternatives considered and reasons for rejection............................................................ 13 I11 . IMPLEMENTATION .................................................................................................... 13 A. Institutional and implementation arrangements................................................................ 13 B. Monitoring and evaluation o f outcomeshesults ................................................................ 14 C. Sustainability..................................................................................................................... * . . 14 D. Critical risks andpossible controversial aspects.,............................................................. 15 E. Credit conditions and covenants ....................................................................................... 17 I V . APPRAISAL SUMMARY ............................................................................................. 17 A. Economic and financial analyses...................................................................................... 17 B. Technical........................................................................................................................... 18 C. Institutional: ...................................................................................................................... 18 D Fiduciary ........................................................................................................................... . 19 E. Social................................................................................................................................. 19 F. Environment...................................................................................................................... 20 G. Safeguard policies............................................................................................................. 21 H PolicyExceptions andReadiness.,.................................................................................... . 21 Annex 1: Country and Sector or Program Background ......................................................... 22 Annex 2: Major Related Projects Financedby the Bank and/or other Agencies .................30 Annex 3: Results Framework and Monitoring ........................................................................ 32 Annex 4: DetailedProject Description ...................................................................................... 40 Annex 5: Program Description .................................................................................................. 57 Annex 6: Implementation Arrangements ................................................................................. 77 Annex 7: Financial Management and DisbursementArrangements ..................................... 79 Annex 8: Procurement Arrangements ...................................................................................... 91 Annex 9: Economic and Financial Analysis ............................................................................. 97 Annex 10: Safeguard Policy Issues .......................................................................................... 102 Annex 11: Project Preparation and Supervision ................................................................... 103 Annex 12: Documents inthe Project File ............................................................................... 105 Annex 13: Statement of Loans and Credits ............................................................................ 107 Annex 14: Country at a Glance ............................................................................................... 109 Annex 15: Map .......................................................................................................................... 111 Map IBRD33439 MADAGASCAR SECOND GOVERNANCE AND INSTITUTIONALDEVELOPMENT PROJECT PROJECT APPRAISAL DOCUMENT AFRICA AFTPR Date: April 22, 2008 Team Leader: Guenter Heidenhof Acting Country Director: DirkReinermann Sectors: General public administration sector Sector Manager: Anand Rajaram (90%); Law andjustice (10%) Themes: Public expenditure, financial management and procurement (P);Macroeconomic management (S);Tax policy and administration (S);Managing for development results (S);Access to law and justice (S) Project ID: P103950 Environmental screening category: Not Required LendingInstrument: Technical Assistance Credit [ ]Loan [XI Credit [ ]Grant [ 3 Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 40.00 million Proposed terms: Standard IDA terms with a 40 year maturity including a 10 year grace period International Development Association 20.00 20.00 40.00 (IDA) Total: 22.00 22.00 44.00 Borrower: Government o f Madagascar Responsible Agency: Programme de Rkformes pour 1'Efficacitk de 1'Administration(PREA), Bureau de Gestion Lot I1LA, RueAndriamahajonoro Ankadivato Madagascar Tel: 261-20-2220911 pdgi@moov.mg www-prea-mg.org I Project implementation period: Start September 1,2008 End: August 31,2012 Expected effectiveness date: September 1,2008 Expected closing date: August 31, 2012 Does the project depart from the CAS incontent or other significant respects? Re$ PAD I.C. [ ]Yes [XINO Does the project require any exceptions from Bank policies? Re$ PAD IKG. [ ]Yes [XINO Have these been approved by Bankmanagement? [[ ]Yes [XINO ]Yes [ IN0 [s approval for any policy exception sought from the Board? Does the project include any critical risks rated"substantial" or "high"? Re$ PAD III.E. [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? Re$ PAD IKG. [XIYes [ ]No Project development objective Re$ PAD II.C., TechnicalAnnex 3 The development objective o f the project i s to improve the efficiency and transparency o f government and selected public services inMadagascar inline with the Madagascar Action Plan (MAP). Project description[one-sentence summary of each component] Re$ PAD II.D., Technical Annex 4 The project will enhance and firther deepenprevious reforms initiated under the first Governance and InstitutionalDevelopment Project (PGDI I) is scheduled to close in which September 2009. The project (US$40.0 million IDA) would be implementedover a period o f four years and consists o fthe following six components: (a) Improvement o fPublic Expenditure Management (US$lS.O million IDA: Fundingunder this component willbeprovided for the further improvement o fthe budgetpreparationand executionprocesses, including the further roll-out o f the integrated financial management system (Systbme IntCgrC de Gestion des Finances Publiques, SIGFP) to the regional capitals andthe strengtheningo fthe operational efficiency o fthe relevant control mechanisms. The project will continue to support the procurement reforms initiated in2004 through comprehensive training and capacity buildingactivities. It will provide assistanceto the Government to implementthe comprehensive reforms o f the revenue agencies (customs and tax directorates). (b) Strengtheningthe Efficiency o f Government Operations (US$9.0 millionIDA:The objective of this component i s to support the change management and institutional development processes inthe context o f the implementationo fthe Government's development strategy, the Madagascar Action Plan (MAP). (c) Ruleo fLaw and FightAgainst Corruption (US$3.0 millionIDA:Project assistancewill focus on improving the operational efficiency o f thejudiciary, on supporting anti-corruption and conflict-of-interest activities, and on strengthening oversight by the Auditor General and by Parliament over State affairs. (d) Monitoring & evaluation (US$S.O million IDA): The project will support the restructuring o f the National Statistics Office andthe World Bank contribution to a new population census. (e) Transparency and Social Accountability (US$4.0 millionIDA): The component aims at fostering increased implication o fcivil society inState affairs and at improving "social accountability" which are key objectives o f the MAP. (0 ProgramCoordination (US$3.0 million IDA): The objective o f this component i s to support the management and implementation o fthe PGDI11. This will include assistance to the MinistryofFinance to set up andmanage abasket fundfor public expendituremanagement reforms. Additional assistancewill focus on the Bureau de Gestion (BdG) o f the Reform Program for the Efficiency of the Administration (Programme de Reformes pour 1'Efficacite de l'Administration, PREA) which was set up by the Government in2005 to coordinate all governance related activities. (g) Unallocated(US$2.0 millionIDA): This amount has been set aside to cover price contingencies and to respond flexibly to additional demands emergingduringthe implementation o fthe project. Which safeguard policies are triggered, if any? Re$ PAD I KF., TechnicalAnnex 10 No safeguard policies are triggered Significant, non-standard conditions, if any, for: Re$ PAD III.F. Boardpresentation: (i) Standard conditions. (ii) kndingwillincludethefinancingofalimitednumberofgovernmentstaff salaries Project untilDecember 31,2009, mainlyto recruit trainers for localtraining institutions andtechnical specialists into the President's Office, the Prime Minister's Office, the Economic Crimes Unit andfor theNational Statistics Institute. These expenditures are inline with the requirementso f recurrent cost financing parameters as specified inBP 6.00 o f April 2004 and the relevant Guidelineso fApril 16,2004. World Bank support would allow the Government to gradually integrate these recurrent expenditures into subsequent budget years. (iii) projectwillincludetheretroactivefinancingofspecificactivities(refinementand The deployment o fthe integrated financial managementsystem, strengthening o fthe internal and external controls o f the public finance system, implementation ofthe reforms inthe customs and tax directorates including related training and capacity building activities, and coordination o f the reforms inthe Ministry o f Finance and Budget). These expenditures, which do not exceed US$l.O million andwill be subject to the application o frelevant World Bankprocurement guidelines, are inline with the requirementso f the eligibility criteria for Bank financing as specified inOP 6.00 o fApril 2004. Loadcredit effectiveness: The following credit effectiveness conditions have beenagreed with the borrower: (a) The Governmenthas adopted the Project Implementation Manual, inform and substance satisfactory to the Association. (b) The Government has employed the independent external auditors referredto inSection 4.09 (b) of the General Conditions. (c) The Government has established a Reform Coordination Unit with form and functions satisfactory to the Association and causedthe Reform CoordinationUnit to employ the following staff with qualifications and experience satisfactory to the Association: a reform coordinator and at least two dedicated technical officers. The following disbursement conditions have been agreed upon with the Government: (i) Disbursement o fthe Social Accountability Grants will be subject to the recruitment o f a non- state Social Accountability Grant Administrator acceptable to IDA; (ii)Payments made on or after January 1,2008 for the refinement and deployment o fthe integrated financial management system including related training and capacity building activities, for the strengtheningof the internal and external controls o fthe public finance system including related training and capacity building activities, for the implementation o fthe reforms inthe customs andtax directorates includingrelated training andcapacity buildingactivities, and for the coordination of the reforms inthe Ministry o fFinance and Budget, are eligible for fundingunder the Project, provided the total amount does not exceed US$l.O million. Covenants applicable to project implementation: Standard financial covenants as stated inthe Financing Agreement Schedule 2, Section I1(B) on Financial Management, FinancialReports and Audits and Section4.09 o f the General Conditions. I. STRATEGICCONTEXTANDRATIONALE A. Country and sector issues 1. In the 1960s Madagascar was among the better-off African countries; it had an educated elite, strong institutions, good infrastructure, and an income per capita above the developing country average. But it lost this position after several decades of economic mismanagement. From the 1970s until the second half o f the 1990s annual growth o f Gross Domestic Product (GDP) averaged only 0.5 percent compared with population growth o f about 2.8 percent. Per capita income declined from US$473 in 1970 to US$280 in 2006, placing Madagascar among the world's poorest countries. 2. Since the government o f President Marc Ravalomanana took charge in 2002, it has embarked on an ambitious transformation path that has brought improvements in social, economic and governance indicators. The economy grew at an average o f 5 percent per year andpoverty has declined to 69 percent from its peak 80 percent in2002. More children are in school today than ever before, with net primary enrolment rates above 90 percent, up from 70 percent in 2002.' The country increased its literacy rate to 70 percent in 2005, above the 61 percent average for Sub-Saharan Africa. Child mortality rates declined significantly, from 159 deaths per 1,000 live births in 1997 to 94 in 2004, and today more women give birth in health centers than ever before.* Immunization rates improved from 46 percent in 1997 to 61 percent in 2004. Rural access to safe drinking water also improved from 12 percent in 2003 to 16 percent in 2005. These positive developments offer hopehl signs that Madagascar has stepped firmly onto a path to sustained development, breaking with the history o f economic mismanagement and periodic crises that impoverished the people. In December 2006 President Ravalomanana was reelected for a second term in office by a large majority o f the votes. 3. Inlate 2006 Madagascar launched a new poverty reduction strategy, the Madagascar Action Plan (MAP). The new development strategy outlines priorities and actions aimed at achieving the national vision and the MillenniumDevelopment Goals (MDGs). The M A P i s based on a set o f practical actions identified as "challenges" and clustered around eight "commitments" that constitute the overall development framework. The "commitments" are based on defined goals and translated into specific projects and activities to ensure that the plan is operational. These activities are linked to clearly identified results and benchmarks. The MAP also assigns specific implementation responsibility for each activity which facilitates monitoring and evaluation. 4. The M A P sets out an ambitious agenda. The overall goal o f the MAP is to reduce the level o f poverty to 50 percent between 2007 and 2012 based on economic growth rates accelerating from 7 percent in 2008 to 10 percent in 2011 with the objective of achieving annual per capita GDP of USD 476 by 2012. The MAP aims at the same time to significantly improve the provision o f basic public services to the population. In primary The Malagasy social data are not fully reliable. Different sources give different numbers.However, all sources confirm the positive trends. *The rate o f prenatal consultation was 80 percent in 2004, ranging from 78 percent in rural areas to 91 percent in large urban centers. 1 education, the completion rate i s projected to be 85 percent (compared to 57 percent in2006) through an improvement in the pupil/teacher ratio from 52:l to 40:l and other quality measures. In public health, the new development strategy aims to reduce infant mortality from 94 today to 47 in 2012 (per 1,000 births) through improved vaccination coverage (100 percent instead o f the current 80 percent). Safe water service coverage will be increased from the current 31 percent to 65 percent by 2012. Finally, 64 percent o f municipalities (compared to the current 35 percent) will be accessible for the entire year by road by 2012. 5. The achievement o f the MAP objectives will require significantly higher levels of investment financed by higher levels o f external assistance and domestic revenue mobilization, and private sector participation. The recent investment decision by Dynatec/Sherritt to invest over US$2.5-3 billion over the next three years innickel mining i s already transforming the economic and social context. Significant investments are also expected in the tourism sector. As a result, the IMF growth rates for the medium term have been revised upward to 7 4 % for 2007-2009 and 9-10% for 2010-2011. Investment rate estimates have also been revised up sharply to 30-35% o f GDP for 2007-09 versus 22-23% previously. Over the longer term (2010-1l), the investmentrate is projected to be around 25- 27%. While this new development will boost growth and investment in the economy, the extent to which this growth translates into broader and more inclusive benefits for the people o f Madagascar will depend critically on the level o f government revenues generated for the Treasury, and the transparent, effective and equitable use o f public resources for improved service delivery. 6. In2007, the Government sensitized further key actors as regards the MAP objectives. MAP meetings were held in each of the 22 regions of the country, where the regions and various stakeholders then launched preparation o f their own regional M A P based on their local priorities. All stakeholders were invited to identify key constraints to attainment o f the M A P commitments through the Presidential Dialogues held in late-2007 involving the participation ofthe key ministries,private sector, civil society and donors. 7. The institutional structure for managing the overall implementation o f the MAP i s currently being strengthened. This involves developing action plans for key sectors that link the activities to the MAP goals, strengthening capacity to implement these plans and identifying intermediate indicators to monitor progress toward these goals. Four technical working groups were created to mentor each M A P commitment and develop the result matrix framework and sector policy notes with the key ministries. However the quality o f these notes varies amongst sectors. The government i s currently finalizing the costing o f the various strategic commitments in line with sector policies. The main weakness o f the exercise i s a consistent macroeconomic and budgeting framework which takes into account the associatedresource requirements. Two keynew institutions have also beenput inplace to support M A P implementation - the Economic Development Board o f Madagascar to facilitate and promote domestic and foreign investment and the National Leadership Institute o f Madagascar to build capacity in Government and other sectors o f society. Finally, a new monitoring and evaluation institutional system (National Integrated System o f monitoring and Evaluation or (SNISE) has been developed to ensure a timely assessment o f progress in implementation. The institutional structure o f this new system however still needs hrther refinementto clarify roles and competencies of Government entities. 2 8. The reform process launched by the Government o f President Ravalomanana has opened up space for political and economic changes. However, there are substantial challenges ahead. A vibrant civil society that actively links associational life to the political sphere is critical to the deepening o f democracy, normalization o f political competition, expansion o f popular voice and participation in reforms, and broadening o f economic benefits; in Madagascar civil society can be described as nascent at best. Mechanisms for accountability, especially o f the Executive, are still weak. Government institutions remain subservient to their leaders instead o f growing regularized processes and the rule o f law. The majority o f the Malagasy population i s not satisfied with incremental change that brings elections without broader governmental effectiveness efficiency and personal freedoms. Rather, it supports institutional reforms that ensure government accountability and that extend political and civic space for personal freedoms. Key challengesfor successfulMAP implementation 9. Improving good governance. While recent progress on governance has been encouraging the agenda ahead i s still huge. Over the years, Madagascar's governance ranking has improved according to several sources. The World Bank Institute's governance indicators, which are used by the Government to measure progress o f governance reforms, place Madagascar ahead o f most low-income countries, especially on controlling corruption. Madagascar's good standing i s also confirmed by its 2007 Country Policy and Institutional Assessment scores: its overall score i s 3.7, with the quality o f public administration, accountability and transparency in the public sector rated 3.5. According to the 2007 Transparency International Corruption Perception Index, which the Government uses to assess the effectiveness o f anti-corruption efforts, Madagascar's rating is 3.2, ranking it 94th o f 179 countries. This is an improvement over the 2005 rating o f 2.8. 10. These governance improvements are the result o f the government's efforts to fight corruption and improve transparency since 2002. The country passed anticorruption and anti- money laundering legislation, adopted clear rules for public sector recruitment, and requires elected and public officials to declare their assets. It also created an independent Anti- corruption Commission and an anticorruption agency, Bureau Indkpendant Anti-Corruption (BIANCO), which has investigated allegations o f cmruption by public officials and spearheaded audits o f large investment programs such as education and transport. 11. However, governance gains remain fragile, and the challenges ahead are formidable, especially innatural and mineral resources, where reform efforts are sometimes undermined by powerful vested interests. Also, despite recent progress, pockets of corruption remain in customs, natural resources management and some other areas. Transparency o f government operations remains inadequate, and the accountability relationships between service providers, local officials and citizens remains weak. Culturally, hierarchical relationships remain predominant, particularly at the commune/local level, and thus the shift required for civil servants and elected officials to render account downwards and to disclose key information such as budgets i s significant. Perceptions about potential conflicts o f interest, inparticular among elected officials, reflect negatively onMadagascar. 3 12. Improving public expenditure management. The modernization o f the public expenditure management systemhas been a cornerstone o f the Government's overall reform program. Under this program the Government introduced a modem budget framework with the annual budget for the year 2005. While this new framework still requires further consolidation, the revised Organic Finance Law (LOLF) emphasizes for the first time the concept o f program budgeting that i s meant to improve the link between policies and the budget as well as improve performance monitoring. In addition, simplified expenditure management procedures have reduced red tape and discretionary decision making. A modem integrated financial management system, deployed in main treasuries, captures about 80 percent o f government expenditures. As a consequence of the introduction o f the new system budget execution rates have gone up substantively to over 90 percent in 2006. In 2004, Madagascar also put in place a new procurement code that follows international standards. Audits of four sector ministries that was conducted in 2006 and 2008 6revealed, however, that the new regulations are not yet sufficiently applied. A main reason is that the procurement units in the sector ministries and the procurement oversight authority do not have the requiredcapacity. 13. The 2006 and 2008 Public Expenditure and Financial Accountability (PEFA) assessments confirm improvements in the capacity o f the Ministry o f Finance and advances in setting the needed legal framework, but it also points to a broad agenda ahead. This includes the improvement o f treasury management based on improvement o f treasury management notably at the sub-national level, andproper internal and external controls. 14. Increasing State revenues. Madagascar has one o f the lowest levels o f fiscal revenues in sub-Saharan Africa. With a tax/GDP ratio o f less than 11 percent (compared to 18 percent for sub-Saharan Africa), Madagascar has enormous scope for improving its fiscal inflows. Efforts to improve fiscal revenue face two main challenges: establishing an incentive-driven fiscal framework to promote investments and reducing tariffs to adhere to regional integration agreements. The M A P sets itself a tax/GDP ratio benchmark o f 15 percent to finance its M A P "commitments". The achievement o f this goal requires fundamental reforms o f revenue policies and administration. To date, customs has developed a consistent reform strategy, which has been implemented for the last two years. This strategy is focusing mainly on modernizing the customs administration and combating fraud and corruption. The tax administration i s inthe process o f refining its reform strategy; it has started to address efficiency and corruption issues by replacing part o f its staff and enforcing tight internal controls. 15. Mobilizing the public administration. Although the Malagasy civil service i s relatively small by African standards (it employs only about 0.8 percent o f the country's population or 146,000 agents in 2004), its composition, centralization and management severely compromise its performance. There is little focus on performance, and job descriptions and performance indicators are lacking or outdated. Separate personnel and payroll databases exist but no systematic reconciliation i s carried out. The last payroll audit was completed in 1999. Work ethics continue to be low due to low remuneration and lacking career prospects. Government has made significant efforts to strengthen administrative efficiency: it has improved coordination, streamlined procedures, delegated more responsibilities to sub-national levels and replaced inefficient public sector managers. In 4 2006/7 it subjected all Permanent Secretaries and Director Generals in the civil service to a competitive recruitment process which resultedin the replacement o f over 50 percent o f the management personnel. To date, the government has put a priority on buttressing the technical capacity o f the Ministry o f Finance and priority sector ministries, such as transportation, education, and health. Significant efforts are under way to improve the government's policymaking capacity. Concerns remain, however, that concentrating power in the presidential administration has led to weak mandates in line ministries. Rebalancing power between the Office o f the President and the ministries would strengthen the capacity o f ministries, enabling them to support the development and implementation o f national and local agendas. 16. Strengthening legal and judicial reforms. Laws and proceedings are generally transparent and accessible to the public, but there i s sometimes inconsistency and unpredictability in policy implementation and application o f the law, which undermines the investment climate. Access to justice i s difficult and costly, especially for the poor. Corruption continues to negatively impact the efficiency o f the judiciary. The impact o f recent government reforms inthe judiciary has been mixed: on the positive side, the backlog o f cases at the lower courts was reduced in Antananarivo and in some other jurisdictions. However, little overall progress has been made with the enforcement o f service standards. Also, efforts at dealing with corruption in the judiciary through the disciplinary commission inthe MinistryofJustice have beennot very effective. A keyproblemremains the resistance to change within the judiciary, as well as the lack o f a consistent and credible reform strategy which i s supported by all relevant stakeholders. 17. Improving (decentralized) service delivery. To improve the state's capacity to deliver services, there is a need to allocate a greater role and resources to the local governments, and increase the voice and demand for accountability on the part o f local communities. Despite the early 1990s decentralization reform effort to empower communes3, Madagascar remains a highly centralized country, both administratively and fiscally. Commune competencies are limitedto the basic function o f administrative services and waste management and some co-financing o f social services through conditional grants. Local governments manage directly only 3 percent o f total public resources. Their authority to raise taxes i s limited. Since 2002, the Government has begunto systematically strengthen the sub-national levels o f government, in particular the 22 regions, which were created in 2004. The 2007 budget increased the share o f certain taxes in favor o f communes; in addition, the budget law 2008 has allocated for the first time investment resources to the regions. At the same time the Government is working on the refinement o f the legal and institutional framework for decentralization. This will include the clarification o f core competencies at the different levels o f government and the assignment o f revenue and expenditureresponsibilities. 18. Improving social accountability. Increasing the transparency o f government operations and the delivery o f public services needs to go hand in hand with efforts to strengthen both, ability and capacity o f civil society to hold government accountable. External (citizens, civil society) mechanisms o f accountability can complement or even Territorial administrationinMadagascar comprises four main levels: regions, districts, communesand villages. 5 compensate for shortcomings o f (internal) government accountability mechanisms, and both should be mutually reinforcing. Civil engagement provides important inputs for the improvement o f local government services and for resource allocations, which are more responsive to local preferences. The Madagascar Action Plan highlights responsible (local) governance as a central commitment - as well as the important role o f involving civil society as "strong players ina participatory bottom-up process" to support Government inits "supply side" (fiscal, administrative, legal) reform efforts. The World Bank, other development partnersand NGOs have supported the piloting o f selected tools and methods aimedto foster social accountability (e.g. community score cards and participatory budgeting at the commune level). While the results are encouraging, downwards accountability in Madagascar remains weak bothbecause o f cultural traditions (deference towards authority, a tendency to avoid the state), and a lack o f information about citizens' rights, fear o f legal retribution for demanding services or information, paucity o f systems which create space for public feedback and information disclosure (for example budgetary procedures), and a relatively nascent civil society sector. Building a culture o f social accountability through systematic civil society engagement (including more transparency and inclusive decision making) i s a gradual process that requires a concerted effort o f all relevant stakeholders (civil society actors, citizens associations, NGOs, media, Government, and development partners). 19. Scaling-up capacity building. The implementation o f the governance reforms will require major investments in human resources development and professional training - the institutions that are at the center o f the reform process will need continuing assistance to manage and implement the complex change processes triggeredby the various reforms. The focus o f the Government i s therefore to strengthen the ability o f key institutions that are tasked to effectively manage institutional change and governance reforms, in particular the President's Office, the Prime Minister's Office, the Ministries o f Finance, Justice and Economic Planning. In addition, many sector ministries lack systematic training inthe areas o f development planning, public finance as well as monitoring & evaluation. Similar problems exist at the sub-national levels o f Government. Ideally, the bulk o f the training should be delivered locally for reasons o f efficiency. Local training institutions, however, continue to be weak andrequire significant upgrading. To reduce Madagascar's dependency on costly overseas training the Government has begunto upgrade some o f the key institutions and to enhance their capacity. These activities supported primarily the National School for Magistrates and Clerks o f the Court (Ecole Nationale de la Magistrature et des Greffes, ENMG) the National School of Administration (Ecole Nationale d'Administration de Madagascar, ENAM), which focuses on training o f higher level staff for the public sector, and the National Center for Administrative Training (Centre National de Formation Administrative, CNFA), which i s responsible for the training o f middle level staff for the public sector. To complement the work o f these training institutions the Government has also established a National Leadership Institute o f Madagascar (NLIM) that focuses primarily on behavioral changes and management support. 20. Coordination of reforms, monitoring & evaluation. Reforms are mainly coordinated by the Presidency which has assumed a significant role in "supervising" the ministries, departments and agencies. The Government i s working on building an effective monitoring & evaluation system for the implementationofthe MAP. This includes the development of a coherent strategy under which policy planning, service delivery and management o f public 6 resources are matched with adequate policy analysis, evaluation, data collection, reporting and dissemination. A key element o f this strategy i s the new National Strategy for Statistical Development which has been prepared by the Government. This strategy includes the development o f a revised regulatory and procedural framework for government statistics, integrating and coordinating all relevant government activities. Monitoring & evaluation needs, however, remain substantial. Many government institutions lack knowledge and capacity to adequately monitor and evaluate the implementation o f their policies and programs. Government also intends to systematically update its key economic and social data based on a new population census. The last population census was completed in 1993; the economic, social, and administrative structure o f Madagascar has profoundly changed since then. As a consequence, many of the existing baseline data i s outdated. B. Rationalefor Bankinvolvement 21. The World Bank has provided support to the governance and institutional PRSP (2003-06) and now the Madagascar Action Plan (MAP) - through various instruments, development reforms inthe context o f the Government's development strategy - initially the in particular the PRSCs and the first Governance and Institutional Development Project (PGDI). The project was approved bythe Board on October 22,2003, and declared effective on March 3,2004. It i s scheduled to close on June 30,2009. The reforms are also supported by other development partners including the European Commission, African Development Bank, France, Norway, Germany, M C A and UNDP. The IDA contribution is a SDR 25.3 million credit (including the additional financing approved in FY07) o f which SDR 21.3 million (85% of the original credit) has been disbursed by April 2008. The remaining funds are hlly committed. Additional Financing o f $5 million was provided in FY07 to allow for greater support to the M&E agenda. 22. The first PGDI has been a key instrument to assist Government with the implementation o f the governance and institutional development agenda. Since its inception, the PGDI has consistently been rated "satisfactory" both with regard to implementation progress and to achieving the development objectives. It has also met all relevant World Bank disbursement, procurement and fiduciary obligations. The 2007 QEA review o f the additional financing for the project emphasized that strong political backing and government ownership o f the reform process, combined with Bank responsiveness, was the strongest contextual aspect o f the additional financing and the project itself. This was reflected, among other things, inthe highconsistency o f the project objectives with the country strategy. 23. The achievements o f the PGDI are summarized in Annex 1. They include: the deployment o f an integrated financial management system to improve transparency and accountability of government operations, the strengthening o f the system o f internal and external control o f the government machinery, the design o f a new procedural and institutional framework for public procurement, change management support for the key decision-makers within government and comprehensive training and capacity building activities in the areas o f development planning, public financial management and procurement. Moreover, the project supported the development o f a regulatory and institutional framework to improve governance andto fight corruption. 7 24. Given the successful implementation experience with the PGDI to date, the Government has requested the Bank's support for a second governance and institutional development project during this critical stage o f the implementation o f the MAP. The new PGDI should enhance and further deepen the first generation o f reforms under the first project; it should also assist the Government to address some additional cross-cutting issues which are considered critical for the MAP implementation, in particular the proposed complementary support for decentralization, for the development o f a public sector pay and incentive system and for the population census. C. Higherlevel objectives to which the projectcontributes 25. The proposed project i s inline with the FY07-11 Country Assistance Strategy (CAS) for Madagascar which emphasizes the importance o f responsible governance and accountability as key systemic elements to create an enabling environment for growth and investment, as well as to improve services to the people. The CAS, which was presentedto the Board in April 2007, also emphasizes the need to improve the monitoring & evaluation system o fthe Government because o f the results-based nature o f boththe CAS and the MAP and because o f the critical role o f monitoring & evaluation in ensuring successful implementation o f the MAP. 26. The substantial capacity building efforts under the project that include both "supply" and "demand" side, are also inline with the Capacity Development Management Action Plan (CDMAP) o fthe Africa Action Plan. 27. World Bank assistance to Madagascar in the area o f governance and institutional development i s aligned with that o f other donors to provide a joint package o f coordinated support around the government's MAP. The project preparation was closely coordinated with other partners to facilitate harmonization and synergy with other donors, in particular the European Commission, the African Development Bank, France, Germany, Norway and the US. 11. PROJECTDESCRIPTION A. Lendinginstrument 28. The project has been designed as a Technical Assistance Credit to reflect the key objective o f the project which centers around institutional development, capacity building and policy development and implementation. The Credit complements ongoing assistance under the current PRSC series which supports the implementation o f the MAP and has a heavy emphasis on governance reforms (expenditure management, revenue generation, anti- corruption and decentralization). B. Projectdevelopment objectiveand key indicators 29. The development objective o f the project i s to improve the efficiency and transparency o f government and selected public services in Madagascar in line with the 8 Madagascar Action Plan (MAP). A detailed description o f the project components i s provided inannex 4; the Results Framework i s attached inannex 3. C. Projectcomponents 30. The project will enhance and further deepen previous reforms initiated under the first Governance and Institutional Development Project (PGDI I), i s scheduled to close in which June 2009. It builds on significant analytical work, in particular the PEFA reports o f 2005, 2006 and 2008, as well as the Public Expenditure reviews in 2005 and 2007 which provide recommendations on the public expenditure reform agenda and specific recommendations for the transport, education, environment, health, nutrition and water and sanitation sectors. Additional analysis which contributed to the development o f the project include the Investment Climate Assessment, and the land tenure review -both completed in FY06-, as well as the Local Development Fund(FDL) feasibility study, ledby the Government. 31. The project SDR 24.3 million (IDA US$40.0 million) would be implementedover a period o f four years and consists o fthe following five components: (a) Component 1: Improvement of Public Expenditure Management - SDR 8.51 million(IDA US$14.0 million) The objective o f this component is to continue to support in a holistic manner the reform o f the public expenditure management systeminMadagascar. The reference point for the reform i s the Priority Action Plan (PAP) which i s developed by the Ministry o f Finance since 2004 on an annual basis and supported by the development partners including the World Bank. The PAP consolidates all reform activities under the oversight o f the Ministry o f Finance. The implementation progress o f this plan i s evaluated regularly and jointly by the donors and the Ministry o f Finance. Funding under this component will focus on the further improvement o f the budget preparation and execution processes, including the further roll-out o f the integrated financial management system (Systbme LntCgre de Gestion des Finances Publiques, SIGFP) to the regional capitals and the strengthening o f the operational efficiency o f the relevant control mechanisms. Funding will also be provided to rationalize the public investment process, which constitutes an important element o f the public finance reform agenda. The project will continue to support the procurement reforms initiated in 2004 through comprehensive training and capacity building activities. It will provide assistance to the Government to implement the intended comprehensive reforms o f the revenue agencies (customs and tax directorates). Project funding will be provided for goods and equipment, consulting services, rehabilitation and maintenance o f offices, some operating costs as well as for training and capacity building activities. 9 (b) Component 2: Strengtheningthe Efficiencyof GovernmentOperations - SDR 4.86 million(IDAUS$S.O million) The objective o f this component i s to support the change management and institutional development processes in the context o f the implementation o f the Government's development strategy, the Madagascar Action Plan (MAP). Itbuilds on activities piloted under the first PGDIandwill include leadership training and development for senior government officials to manage and implement far-reaching reforms. Support will also include an upgrading of local training institutions (Ecole Nationale de 1'Administration Malgache, ENAM, Centre National de Formation Administrative, CNFA, Ecole Nationale de la Magistrature et des Greffes, ENMG), as well as the support for the operation o f a Global Development Learning Center (GDLN) and of the National Leadership Institute o f Madagascar (NLIM). In addition, this component will provide limited complementary support for some cross- cutting reforms and activities which are considered important for the M A P implementation. Such reforms include the support for the development o f a consistent institutional framework for decentralization, and the reform o f the public sector pay and incentive system. Project funding will be provided for goods and equipment, consulting services, rehabilitation and maintenance o f offices and training institutions, some operating costs as well as for training and capacity building activities. (c) Component 3: Rule of Law and Fight Against Corruption SDR1.52 - million(IDA US$2.50million) The objective o f the component is to assist Government in promoting transparency, accountability and good governance; and in particular, in reducing corruption. Project assistance will build on the activities initiated under the first PGDIand mainly focus on improving the operational efficiency o f the judiciary, on supporting anti-corruption and conflict-of-interest activities, and on strengthening oversight by the Auditor General and by Parliament over State affairs. This will also include support for a liberalization o f public disclosure regulations, a pre-condition for some o f the social accountability initiatives, and assistance to establish an Economic Crimes Unit4,which i s considered important to complement activities o f the Anti-Corruption Bureau. Project funding will be provided for goods and equipment, consulting services, rehabilitation and maintenance o f offices, some operating costs as well as for training and capacity building activities. 4The main function of the Economic Crimes Unit (Service de RenseignementFinancier), which does not have the right to prosecute or to investigate, is to collect information and advising other government services and the judiciary on money launderingissues. It is independentfrom the Government andreportsto the Anti-CorruptionCommission. 10 (d) Component 4: Transparency and Social Accountability - SDR 2.43 million(IDA US$4.0million) The component aims at fostering increased implication o f civil society in State affairs and at improving "social accountability" which are key objectives of the MAP. The support will focus on activities that are destinedto strengthen civil society's capacity to play a meaningful role inmonitoring and providing feedback on government activities. This will include activities to improve both distribution o f and access to information about key activities o f the Government. The project will support activities that are aimed at fostering an enabling environment for the involvement o f civil society by developing processes that could eventually be replicated for more systemic use, primarily through pilots and discussions. A grant funding mechanism will be set up that would finance innovative governance activities by non-state actors that are related to the objectives o f the project. These Social Accountability Grants will pilot, develop and scale up approaches that are focused on supporting civil society to monitor and provide oversight, inparticular in key areas such as natural resource management, local service delivery, and public financial management. Project funding will be provided for technical assistance, workshops, training and for the Social Accountability Grants. It also include some operating costs for the institutionthat manages the grant mechanism. (e) Component 5: Monitoring & evaluation - SDR 4.25 million (IDA US$7.0million) The component will support Government's efforts to strengthen the monitoring & evaluation system that underpins the MAP. This support will focus on the improvement o f the operational efficiency o f the National Statistics Office (INSTAT), in particular institutional restructuring and capacity building. Additional support will be provided for the modernization o f the procedural and institutional framework for monitoring & evaluation in Madagascar, inparticular the strengtheningo f relevant activities at the level o f the sector ministries and inthe Prime Minister's Office. To establish baseline data and reference points for the improvement o f public services the project will support a new population census which aims at consolidating and further deepening existing statistical data which i s vital for both public and private sector needs. The last census was conducted in 1993. The total costs for the census are presently estimated at well above US$20.0 million (or approximately US$l.OO per inhabitant) and will be funded by contributions from Government and development partners. In case the Government i s not able to raise sufficient funding for a comprehensive census from the donor community it i s envisaged to use the World Bank funding to conduct a partial census that would cover roughly 10percent o f the country. 11 Project funding will be provided for goods and equipment, consulting services, rehabilitation o f offices, operating costs as well as for training and capacity buildingactivities. (f) Component 6: Program Coordination - SDR 1.52 million (IDA US$2.5 million) The objective o f this component is to support the management and implementation o f the PGDI 11. This will include assistance to the Ministry of Finance to effectively manage donor and government funds committed to financing public expenditure management reforms. Additional assistance will focus on the Bureau de Gestion (BdG) o f the Reform Program for the Efficiency o f the Administration (Programme de Reformes pour 1'Efficacitk de l'Administration, P E A ) which was set up by the Government in 2005 to coordinate all governance related activities. Project funding will be provided for goods and equipment, consulting services, rehabilitation and maintenance o f offices, operating costs as well as for training and capacity buildingactivities. (g) Unallocated-SDR 1.22 million(IDA US$2.0 million) The unallocated amount will be used to cover price contingencies and to respond flexibly to additional demands emerging during the implementation o fthe project activities. D. Lessons learnedandreflectedinthe projectdesign 32. The project design incorporates the lessons learnt under the implementation of first PGDIwhich has been executed satisfactorily. These lessons include: 0 Significant capacity building and institutional development support i s necessary to ensure that key reforms, in particular in the area o f public finance and public procurement are not only adequately designed but also fully institutionalized within the Malagasy public administration. As a consequence, comprehensive training and capacity buildingactivities are an integral part o fthe various project components. 0 Inview o f the existing capacity constraints harmonizationo f the reform agenda with other development partners i s critical to ensure implementationprogress. The project i s therefore closely coordinated with other development partners. Inthe area o fpublic expenditure management the project support i s linked the Priority Action Plan (PAP) o f the Government which i s the key instrument for the coordination o f the reforms and for the related donor support to the Ministryo f Finance. Government ownership i s critical to ensure that reforms, in particular in sensitive areas, are adequately designed and implemented. As a consequence the project foresees significant investments in analytical work to complement ongoing reforms, 12 e.g. with regard to pay policy reforms and anti-corruption activities. Given past experience under the first PGDI the new project will strengthen dialogue with all relevant (internal and external) stakeholders to improve broad-based buy-in for the intendedreforms. 0 InMadagascar, the combination between the existing PGDI and the budget support operations has created a lot o f synergies; it has enabled the Government to respond to policy/reform changes and upcoming demands in a flexible and constructive manner. The proposed lending instrument (Technical Assistance Credit) should therefore continue to support the implementation o fthe policy agenda outlined by the PRSCs. E. Alternatives considered andreasonsfor rejection 33. An additional financing or scaling up of the first PGDI was considered. It was felt, however, that a new project would be better suited to reflect the significant changes with regardto the implementation arrangements (see annex 6 for details) and to the scope o f the project. A new project i s also better suited to provide meaningful support to the Government inrefiningandsuccessfully implementingits ambitious reform agenda. 111. IMPLEMENTATION A. Institutionalandimplementationarrangements 34. Project oversight: Policy guidance and overall project oversight will be the responsibility o f the Oversight Committee (Conseil d'orientation et de Suivi - COS) consisting o f all Permanent Secretaries o f the Government and o f representatives from civil society, from the private sector, from the regions and communes, and from the donor community. The Oversight Committee which i s led by the Secretary of Planning meets once a year and approves the annual work plan for the project. Keypolicy decisions are submitted by the OversightCommittee to the Council o fMinisters. 35. Project coordination and implementation: The project would have three executing agencies: i)the Ministry o f Finance (MoF) through its Reform Coordination Unit (RCU), in charge o f the implementation o f the component 1; ii)the National Statistics Office (INSTAT), responsible for the implementation o f the population census which is supported by component 5 o f the project; iii)the Office o f the President, through PREA/BdG (current PGDI), responsible for the implementation o f all other components except for component 4 whose administration will be entrusted to an Administrator (see paragraph 37 below). However, due to weak experience o f the R C U and INSTAT in managing donor funds, the financial management and procurement aspects o f the entire project will be entrusted to PREA/BdG until RCU and INSTAT have satisfactory financial management and procurement capacity. For this purpose PRENBdG will be responsible for: i)consolidation o f the work programs and budgets; ii)maintenance o f records and accounts for all transactions to be financed under the credit; iii)preparation o f the project annual financial statements and quarterly IFRs (Interim Financial Reports), in compliance with international accounting standards and IDA requirements; iv) management o f disbursements and 13 replenishment applications for the Account; and v) monitoring and evaluation o f the various activities related to components under its responsibility. 36. R C U and INSTAT responsibilities will include: implementation o f activities/components under their respective responsibilities (components 1 and 5), monitoring/evaluation o f these activities/components, and production o f all information (basic, technical, financial) on components 1 and 5 as requiredby PREA. To strengthen the financial management capacity o f the RCU and INSTAT in managing/monitoring donor funds, one or two accountants from these entities will be integrated into the PREA/BdG structure for one/two years and work closely with PGDI accounting staff to get themselves acquainted with donor requirements inaccounting, reporting and disbursements procedures. 37. The transfer o f the financial management and procurement aspects o f the components 1and 5 to RCU and INSTAT is envisaged until December 31, 2009; it will be subject to an IDA assessment o f the financial management and procurement capacity of the relevant institution. Untilthat time, financial management and procurement activities will be handled by PREA/BdG. 38. For the civil society fund under component 4, administration o f the find will be contracted through a competitive process to an independent administrator (NGO or other), which will report to a special committee set up for this component composed of representatives from civil society and government. A consultative process will be carried out with civil society groups to identify appropriate candidates for this committee, including representatives o fbothnational and local level associations, NGOs and the media. B. Monitoring and evaluation of outcomes/results 39. The results framework for the project i s summarized inAnnex 3. Expectedoutcomes include: (i)an increase in the number o f indicators under the Public Expenditure and Financial Accountability Assessment (PEFA) which are rated `Byand above; (ii) an increase in the percentage of population reporting an improvement in service delivery for selected public services, (iii) an increase inthe number o f social accountability initiatives successfilly implementedwith the participation o f civil society organizations, and (iv) the completion of thepopulationcensus. C. Sustainability 40. The Government i s committed to sustain the reforms also after the funding provided by the project is coming to an end. A significant part o f the government budgethas been set aside to maintain and further expandthe new integrated financial management system, which the Government considers critical to improve accountability and transparency. Similarly, the training and capacity buildingactivities that are developed and fundedby the project will be used to update the curricula of local training institutions and will, thus systematically be integrated into future training activities. The Government i s also working on a fund raising strategy for the local training institutions, which would ensure the continuation of key training activities after the closure o f the project. 14 41. The goals and objectives supported by the project are based on a comprehensive national dialogue in the context o f the development of the MAP. This dialogue integrated all levels o f society and a broad range o f different stakeholders. The social accountability activities support by the project (component 4) were identified and discussed in workshops and focus group discussions, inter alia in the context o f a nation-wide social accountability workshop inFebruary 2008. D. Critical risksand possiblecontroversialaspects 42. Some o f the key benefits o f the project include: (i)increased transparency and accountability o f government operations based on comprehensive public financial management and procurement reforms; (ii) transformation o f the annual budget into a management instrument that supports timely and accurate tracking o f implementation o f government policies; (iii)increased capacity at the level o f civil society groups and organizations to provide meaningful input and feedback to government activities, and (iv) significantly enhanced government capacity in the areas o f development planning, public financial management, procurement, and monitoring & evaluation. The project also contributes to simplifying complex administrative proceedings and to rationalizing the institutional framework within which the public administration operates. It encourages innovative methodologies (e.g. leadership development, rapid results) to improve operational efficiency o fthe administration. 43. The project builds on the reforms initiated under the first PGDI which has benefited from a strong sense o f government ownership and a close affiliation with the Government's core agenda. This has mitigated the risk o f pursuing such a comprehensive and challenging set o f governance reforms. The first project has had very satisfactory project implementation with strong ownership built across the Government. Continued ownership o f and commitment to the project i s expected becauseo f its importance and its wide-ranging impact. However, there i s still a risk o fpotential resistance to change within the administration. As a consequence, the project carries moderate risk: its implementationposes some challenges for the Government because o f the complexity o f the changes supported by the project activities and the substantive capacity building needs to ensure success and sustainability of the reforms. To mitigate existing risks a comprehensive project monitoring and evaluation framework (see annex 3) has been developed that will serve as a reference point for the implementation o f the reform program. In addition, independent quality assurance mechanisms have been put inplace to evaluate reform implementation on a regular basis and to provide regular feedback about implementation bottlenecks. Finally, the project sets out results indicators that are specific, measurable, achievable, relevant, and time-bound to ensure timely assessment o f effectiveness. I I I I Risks RiskMitigationMeasures Residual Risk Rating Political commitment to implement the Continued dialogue with N MAP and the underlying reform Government to reconfirm program i s not maintained commitment 15 Risks RiskMitigation Measures Residual Risk Rating To componentresults Stakeholders and public sector agencies Build internal and external support N are not responsive to changes; they do for change process through not sufficiently collaborate comprehensive training and capacity building; scale-up change management support ifneeded Delays endanger the implementation o f Integrate significant sensitization M the reforms; compliance with changes to and change management support institutional and procedural framework into the reform process; review i s low compliance on a regular basis through independent assessments Capacity (managerial, organizational, Build into the reform program M institutional, technical) to implement comprehensive training, capacity complex reforms i s not adequate building, coaching and technical assistance; provide incentives for staff and managers who can act as multipliers, strengthen quality and capacity o f local training institutions Resistance with regard to the Build into the reforms significant M implementation of social accountability mobilization and awareness creation activities activities to ensure broad support for increased implication o f non-state actors Overall riskrating Modest 44. The lifetime of the project will go beyond the current mandate of the Government. It is, however, unlikely that a change in government would trigger substantive change to the intended governance and institutional reforms as the relevant agenda was developed based on a broadparticipatory dialogue inthe context of the MAP. 45. The progressive implication of civil society in State affairs, which is an important element o f the project, might encounter some resistance from public or elected officials that consider such an approach a threat to their (vested) interest. Significant mobilization and awareness creation has therefore been built into the project to ensure broad support from all relevant stakeholders to the project activities. Inaddition, the administrationofthe fundto support civil society demand side governance initiatives will be delegated outside o f PREA. 46. D u e to weak capacity o f the accounting profession in Madagascar and o f the Auditor General's Office, financials audit may not b e conducted properly in compliance with international auditing standards. To mitigate this risk, the audit o f the project financial statements will b e carried out by an international accounting firm, acceptable to IDA in accordance with International Standards of Auditing. The reinforcement of the accounting profession will be addressed through reforms recommended in the ROSC report to b e 16 submittedto the Government at the end of the FY 08. The capacity problems of the Supreme Audit Institution are being addressed through the ongoing public finance reform program which i s supported by the World Bank and other development partners. E. Credit conditions andcovenants 47. The following credit effectiveness conditions have been agreed with the Government (a) The Government has adopted the Project ImplementationManual, in form and substance satisfactory to the Association. (b) The Government has employed the independent external auditors referred to inSection4.09 (b) o fthe General Conditions. (c) The Government has established a Reform Coordination Unit inthe Ministry o f Finance with form and fimctions satisfactory to the Association and caused the Reform Coordination Unit to employ the following staff with qualifications and experience satisfactory to the Association: a reform coordinator and at least two dedicated technical officers. 48. The disbursement o f the Social Accountability Grants will be subject to the recruitment o f a non-state Social Accountability Grant Administrator, acceptable to IDA; 49. Financial covenants are the standard ones as stated in the Financing Agreement Schedule 2, Section I1 (B) on Financial Management, Financial Reports and Audits and Section 4.09 o fthe General Conditions. IV. APPRAISAL SUMMARY 50. The project is expected to significantly improve economic management in Madagascar by (i)further deploying an integrated financial management system, which allows for compilation o f timely and reliable information on budget allocation, commitment and actual expenditures; (ii)consolidating public procurement reforms, (iii)reinforcing external (citizens/civil society) oversight over government operations, in particular with regard to more inclusive decision making and adequate use o f public resources; (iv) strengthening coordination, monitoring and evaluation capacity to enable the consistent implementation o f Government policies; and (v) building capacity o f key institutions to effectively manage and implement complex change processes. 51. The project is expected to have a positive fiscal impact. The introduction o f the new integrated financial management system will strengthen public financial management and control; these interventions would ultimately result in better use o f public resources. The reform o f the public procurement system focuses inter alia on generating more value for (public) money. Increased external oversight would ensure better public scrutiny o f government activities. These activities would enable the Government to make more resources available for the provision o f key social services in line with the strategic goals and 17 objectives o f the MAP. In addition, the project would increase transparency and accountability o f government operations and thus, ultimately contribute to more effective control o f government activities. B. Technical 52. The proposed project design, in particular the design o f public finance reforms corresponds to financial management, ICT- and public sector standards developed in similar projects all over the world. The project also builds on significant analytical work, in particular the Public Expenditure Reviews 2005 and 2007 as well as the PEFA assessments in2006 and2008. C. Institutional: 53. responsibility o f the Oversight Committee (Conseil d'orientation et de Suivi - COS) Project oversight: Policy guidance and overall project oversight will be the consisting o f all Permanent Secretaries o f the Government and o f representatives from civil society, from the private sector, from the regions and communes, and from the donor community. The Oversight Committee which i s led by the Secretary General o f Planning in the President's Office meets once a year and approves the annual work plan for the project. Keypolicy decisions are submitted bythe Oversight Committee to the Council o fMinisters. 54. Project coordination and implementation: The project would have three implementation units: i)the Reform Coordination Unit (RCU) inthe Ministry o f Finance will be in charge o f the implementation o f the component 1; ii)the National Statistics Office (INSTAT) will be responsible for the implementation o f the population census which is supported by component 5; iii)the Project Bureau (Bureau de Gestion, BdG) o f the Reform Program for the Efficiency o f the Administration (Programme de Rkformes pour 1'Efficacite de l'Administration, PREA) in the Office o f the President will be responsible for the implementation o f all other components except for component 4 which will be entrusted to an independent Administrator. PREA i s headedby a National Coordinator. (a) PREA/BdGwill be responsible for: i)consolidation o f the work programs and budgets; ii)maintenance o f records and accounts for transactions related to all components; iii)preparation andproductionofconsolidated annual financial statements and quarterly IFRs, in compliance with international accounting standards and IDA requirements; iv) management o f disbursements for all components and replenishment applications for the designated account; and v) monitoring and evaluation o f the various activities under its responsibility. (b) The R C U and INSTAT will assure the implementation o f activities/components under their respective responsibilities (components 1 and 9, monitoring/evaluation of all activities under their responsibilities, and production o f all information (basic, technical, financial) on components 1 and 5 as requiredby PREA. The transfer o f the financial management and procurement aspects o f the components 1 and 5 to the R C U and INSTAT i s envisaged until December 31, 2009; it will be subject to an IDA assessment o f the financial 18 management capacity o f the relevant institution. Untilthat time, the PRENBdG will ensure financial management andprocurement for the project. 55. The administration o f the Social Accountability Grants under component 4 will be entrusted to an independent Grant Administrator (NGO or other) to be recruited through a competitive selection process. D. Fiduciary 56. PREA/BdGis at present responsible for the implementationofthe first PGDIand will continue to handle the financial management aspects o f the new project (PGDI 2). In accordance with Bank policy and procedures, the financial management arrangements o f PRENBdGhave been reviewed to determine whether they are acceptable to the Bank. The main conclusion o f this review i s that PREA/BdG continues to maintain an adequate financial management system. The financial management risk i s assessed as beingmoderate. However, the PREA chart o f accounts needs to be reviewed to reflect the components/activities to be financed under PGDI I1and satisfy reporting requirements. The procedures manual o f the PGDI will be consequently updated to include the new chart o f accounts and models o f IFRs.The content and formats o f financial statements and IFRswere determined during the appraisal mission and agreed at negotiations. The review o f the Chart o f accounts as well as the update o f the accounting manual o f procedures are currently underway and will be completed prior to credit effectiveness . 57. To mitigate risks raised by the limited capacity o f the Auditor General (Cour des Comptes) the audit o f the PGDII1financial statements for the first three years will be carried out by an international auditing firm acceptable to IDA. This audit will be conducted in accordance with International Standards o f Auditing. The auditors should be recruited prior to credit effectiveness. To strengthen their capacity, the auditors from the "Cour des Comptes" can participate inthis audit assignment. The audit report will be submittedto IDA no later than six months after the end o f each fiscal year. With regard to the audit o f the closing period, the project may use the service o f the Auditor General if its capacity i s deemed adequate following IDA assessment.Regarding Madagascar, no significant problems have been encountered so far in terms o f audit covenants: all audit reports related to Bank financed projects have been received indue time. 58. All procurement activities under the project will be initially carried out by PREAPGDI. The capacity o f the P R E M G D I and the quality o f the procurement staff i s deemed sufficient to implement the new project. The overall project risk for procurement i s moderate. E. Social 59. The project has several potential social benefits. Greater focus on transparency and social accountability should improve the flow o f resources to the local level in areas where specific pilots are being implemented; the combination o f support for demand-side accountability mechanism with supply side efforts (improved budget systems for example) should lead to improvements in the quality o f specific public services, as was seen in the 19 health sector pilot community scorecard processes. Also, building the capacity o f civil society groups to engage in extracting accountability, should improve the ability o f civic groups to participate in monitoring service delivery and budget execution. Finally, the successful implementation o f social accountability activities can go hand-in-hand with increased legitimacy and credibility o f government actors, provided they are responsive to civil society demands for greater transparency and better delivery o f services. 60. Although considered to be low risk, potential social risks that the project will need to mitigate against include: the risk that specific benefits are captured by only a small number o f civil society groups; the risk o f repercussions if social accountability initiatives do not go hand-in-hand with the creation o f a protective regulatory framework for NGOs, the media and other non-state actors; the risk that some o f the decentralization reforms adversely affect the equity o f investments or the degree o f voice that some less visible groups may have if traditional or bureaucratic forms o f local governance continue; the risk that citizen's expectations are raised to unrealistic levels; the risk that civic education i s not well targeted, or not combined with specific interventions; and, finally, the risk that the enabling environment which encourages civic involvement in monitoring government services changes or becomes more hostile. 61. Inorder to avoid those risks, social accountability interventionswill promote greater government buy-in by piloting initiatives in conjunctions with government internal supporters o f "demand side" accountability. With a view to avoiding repercussions, it will be important to ensure that adequate "safeguards" such as a legal framework protecting freedom o f information and o f association are in place, and to carefully monitor these aspects of the pilots. Also, facilitators will be trained to proactively engage vulnerable and marginalized groups to minimize the risk o f elite capture. In addition, the design o f social accountability initiatives will emphasize both citizen's rights as well as responsibilities, also to help civil society engage in a dialogue with government to develop a realistic understanding o f the existing constraints. Finally, the use o f professional mediators can help minimize the risk of conflict. F. Environment 62. Not applicable; the project i s environmental category C. 20 G. Safeguardpolicies Safeguard Policies Triggered by the Project Yes N o Environmental Asscssmcnt (OP/BP 4.01) [I [XI NaturalHabitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI PhysicalCultural Resources (OPIBP 4.11) [I [XI InvoluntaryResettlement (OP/BP 4.12) [I [XI Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP 7.60). [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI 63. The project will involve some minor rehabilitation o f existing buildings, which does not require an environmental assessment. H. PolicyExceptions andReadiness 64. Project funding for components 1, 2, 3 and 5 will include the financing o f a limited number of government staff salaries untilDecember 31, 2009, mainly to recruit trainers for local training institutions and technical specialists into the President's Office, the Prime Minister's Office, the Economic Crimes Unit and for the National Statistics Institute. These expenditures are in line with the requirements o f recurrent cost financing parameters as specified in BP 6.00 o f April 2004 and the relevant Guidelines o f April 16, 2004. World Bank support would allow the Government to gradually integrate these recurrent expenditures into subsequent budget years. 65. To facilitate the transition from the existing PGDI Ithe project will include the retroactive financing of specific activities (refinement and deployment o f the integrated financial management system, strengthening o f the internal and external controls o f the public finance system, implementation o f the reforms in the customs and tax directorates including related training and capacity buildingactivities, and coordination of the reforms in the Ministryo fFinance and Budget). These expenditures, which must be incurred on or after January 1, 2008 do not exceed US$l.O million and will be subject to the application o f relevant World Bank procurement guidelines, are in line with the requirements o f the eligibility criteria for Bank financing as specified inOP/BP 6.00 o fApril 2004. 66. The Project ImplementationandProcurement Plans have been appraised and found to berealistic and o f satisfactory quality. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determination of theparties' claims on the disputed areas 21 Annex 1: Countryand Sector or ProgramBackground MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 67. Good governance and institutional development are key elements o f the Government's reform agenda as spelled out in the main development strategy, the Madagascar Action Plan (MAP)and its annual implementation plans (Politique GCnCrale de 1'Etat). Government of Madagascar TheEight Commitments of the MAP The MAP is afive-yearplanthat lays out the directionandpriorities for Madagascarfor the period2007-2012. It outlines :ight strategic commitmentswith strategies andactionsthat will ignite rapid growth, leadto the reductionof povertyand :nsure that the countrydevelops inresponseto the challengesof globalizationandinaccordance with thenationalvision- MadagascarNaturally - andthe MDGs. The eight commitmentsof the MAP are as follows: ResponsibleGovernance-the goal is to create aGovernmentthat every citizenand the internationalcommunitycan trust and to build acivil servicethat will have integrity, be efficient andact totally professionalinall its activities. The specific :hallenges of this Commitment are to (i) providesufficient security to protectpeopleandproperty;(ii)strengthenthe rule of law; (iii) reducecorruption; (iv) establishan efficient and effectiveGovernmentbudgetaryprocess; (v) strengthenthe provisionofpublic services; (vi) decentralizethe Government administrationand (vii) become alearningnation. ConnectedInfrastructure-this commitment emphasizesthat infrastructureis essentialfor the countryto achieverapid development,facilitate businessandtrade, enable communication and ensure that the standard ofliving andthe access to resourcesand globalknowledge improvesfor all. The challengesare to (i) prioritize infrastructuredevelopment for key growth areas; (ii) efficiently move goods andpeople from one place to another; (iii) improveaccess to transport services nationwide; (iv) ensure accessible and adequateenergysupply at affordableand competitivecost; (v) ensure efficient and affordable communicationsystem; (vi) carry out betterweather forecasting andwarnings of potentialdisasterssuch as cyclones; and (substantiallyimprove access to drinking water and sanitation. EducationalTransformation-the goal is to create an education systemwith world class standardsinquality and effectiveness which providesMadagascar with the necessaryhumanresourcesto become a competitivenationanda successfulplayer inthe world economy. This would be achievedthrough(i)ensuringaccess of all childrento developmentalopportunitiesbefore official schoolentry; (ii)creating a successfulprimaryeducationsystem; (iii)creating a successfullower secondaryeducationsystem; (iv) improvingupper secondaryschool anddevelopingvocationaltraining; (v) transforminghigher education; (vi) endingilliteracy; and (vii) developingcapacities andmindsets of young peoplethrough sportsand civic participation. Rural Developmentand a GreenRevolution-the MAP recognizesthat dynamicrural development throughincreased agriculturalproductionis at the core ofthe Government's endeavors and that better infrastructureand communication networks are essentialto meet this goal. The specific activities are to (i)secure landtenure; (ii)improveaccessto affordable rural financing; (iii) launch asustainablegreen revolution;(iv) promote market oriented activities; (v) diversify rural activities; and(vi) increase the agriculturalvalue-addedandpromote agri-business. Health, Family Planningand the FightAgainst HIV/AIDS -the challengehere is to ensurethat the Malagachepeople are healthyandcan contributeproductivelyto the development of the country. This commitment focuses on (i) providing qualityhealthservicesto all; (ii)eradicatingmajordiseases(malaria, TB, STIs); (iii) fighting HIVIAIDS; (iv) implementing a highly successful family planningstrategy; (v) reducinginfant mortality; (vi) reducingmaternalandneonatalmortality; (vii) improving nutrition andfood security; and (viii) providing safe water andwidespreaduse of hygienic practices. High Growth Economy-the goal is to reachgrowthratesbetween7-10% by 2012 through ensuringadiversifiedand strongprivatesector drivenby local andinternationalinvestmentandtrade. This challengenaturallycovers many activities focusedon the following: (i) ensure a stable macroeconomic environment; (ii) increase foreigndirect investment; (iii) promotefull employment; (iv) reformthe bankingandfinancial system; (v) strengthendomestic enterprises, SMEs and handicraftindustry; (vi) enhance internationaltrade competitiveness; (vii) intensivelydevelopthe mining sector; (viii) intensivelypromote anddevelopthe tourismsector; (ix) intensivelyexploitregionalopportunities; and (x) through diplomacy,strengtheneconomic synergies. 22 Cherishthe Environment-this commitment lays out the goal for Madagascarto become aworld leader inthe development and implementationof environmentalbestpractice, to become a green islandand to cherish andprotect its extraordinary environment. Local communitieswill be active participantsandindustries such as eco-tourismandorganic agri-businesswill developto minimizebiodiversitydamage andmaximizebenefitsto the countryandpeople. The activities focus on (i) increasingthe protectedareas for the conservationof land, lake, marineandcoastalbiodiversity;(ii) reducing the naturalresource degradationprocess; (iii) developingthe environmentalreflex at all levels;and (iv) strengtheningthe effectivenessof forest management. NationalSolidarity-the goal is to continueto forge a strong andunified nationalidentity that promotesparticipationand partnership, allowspeopleto beproudandto take full and sharedresponsibilityfor guidingthe nation into the future. The specific challengesare to (i) celebrateculturaldiversity, understandingandrespect; (ii) build socialtrust andpromotecivic participation; (iii) promotesolidarityandpride; (iv) improve support for the very poor andvulnerable populations;and (v) promote gender equalityandempowermentofwomen. Source: Madagascar Action Plan 2007-2012 68. The new project intends to support the implementation o f the government reform strategy in a holistic manner by focusing on key reform areas that would constitute a sound system o f good governance inMadagascar. These reform areas, which are derived from the Government's own development strategy (theMAP) are summarized below: 69. Improving good governance. When the Government took over power in 2002 corruption was pervasive: in the Transparency International (TI) Perception Index o f 2002 Madagascar was rated 98 out o f 102 countries. The TI ratings have improved since that time but implementation progress is slower than expected. Government strategy has focused on three areas (i) development o f an anti-corruption strategy which i s supported by a broad the coalition o f relevant stakeholders, (ii) the improvement o f the regulatory framework to combat corruption, and (iii)the establishment o f an independent anti-corruption agency which will coordinate the fight against corruption. 70. Progress has been substantial in all areas. The first phase o f the program (until early 2006) focused on establishing an effective regulatory and institutional framework to fight corruption and to improve governance. In this context, an independent Anti-Corruption commission (Conseil SupCrieur Lutte Contre la Corruption, CSLCC, later renamed ComitC pour la Sauvegarde de l'IntCgritC, CSI) and an independent Anti-Corruption Bureau (Bureau IndCpendantAnti-corruption, BIANCO) were set up andmade operational. The Commission subsequently put forward a comprehensive anti-corruption legislation, which includes a declaration o f assets o f public and elected officials, and regulations to improve both investigation and prosecution o f corruption cases. A specialized court (Chaine PCnale Anti- corruption) was established to deal with corruption cases. Additional activities focused on regulating the recruitment into the public sector, which (under the previous regime) was a key source for corruption and conflict-of-interest. In 2005, the Commission also organized with assistance from WBI an anti-corruption survey to establish baseline data and to raise public awareness about the incidence o f corruption. This survey confirmed major governance problems in key services such as the police, the land titling administration and the revenue agencies. With assistance under the first PGDI the Government has begun to address these sectoral governance issues. In parallel, BIANCO investigated a significant number o f corruption cases over the last few years. The Bureau also organized independent reviews in sensitive areas such as land titling and customs and procurement audits o f investment activities. Later reforms focused on hrther strengthening the regulatory framework, in 23 particular with regard to whistleblower protection. Several attempts by the Commission to address conflict-of-interest o f public and elected officials have been less successful, mainly due to lack o f commitment and understanding. Similarly, the initially high rate of participation in the declaration o f assets (over 90 percent) has constantly declined and i s currently below 50 percent. Moreover, the anti-corruption survey has not triggered a larger- scale mobilization o f the population inthe fight against corruption, mainly due to weaknesses in communicating the results and in designing an effective mobilization strategy. As a consequence, the main challenge i s to consolidate the credibility o f the previous reforms by addressing "grand corruption" as well as conflict-of-interest issues. It will also be important to better mobilize non-state actors from civil society and the private sector inthe fight against corruption. 71. Improving public expenditure management. When the Government o f President Marc Ravalomanana came into power in 2002, it inherited a largely unfinished and non- prioritized reform agenda. While previous reforms had some impact, overall efficiency, transparency and accountability o f the public finance system remained low. Key problems include complex, non-transparent, outdated and time consuming procedural arrangements with often unclear or overlapping roles and institutional responsibilities, lack o f capacity as well as weak internal and external control mechanisms. Incollaboration with all key donors the Government developed a priority action plans for public finance reforms between 2004 and 2008. These plans prioritize and sequence reforms that are aimed at strengtheningthe treasury system, the internal and external controls, the regulatory and procedural framework as well as the budget preparation process. Two independent PEFA assessments and two Public Expenditure Reviews, which were conducted jointly with the Government, provided the analyticalunderpinningfor the reforms. 72. Reforms are currently well under way. Modern public finance regulations have been put inplace and a strong linkbetweenthe MAP and the annual budget has beenestablished. The budget preparation process was revamped to allow for more time to discuss the budget and its strategic priorities. A Medium-Term Expenditure Framework was introduced to provide a forward vision o f the budget. A budget framework paper was introduced in 2006 to improve decision making at the Cabinet level and quality o f budget preparation by the sector ministries. Budget execution was streamlined based on the introduction o f a modem computerized integrated financial management system. The new system has beendeployed to all six main treasuries and all key sector ministries; it presently captures about 80 percent o f government spending. The Treasury Department has been restructured and strengthened. As a consequence, budget execution rates have improved significantly. A new internal control service (Brigade de Verification et d'hspection du Trksor) i s now operational in the Treasury. The operational effectiveness o f other internal and external controls such as the General Inspection Directorate (Inspection Gknkrale de l'Etat), the Auditor General's Office, and the Finance Commissions o f Parliament has also been improved. At the same time, the effectiveness o f the commitment control system (ContrGle des Dkpenses Engagks, CDE) remains weak, despite Government efforts to address existing problems. An independent audit o f the CDE was conducted in2007 to provide impetusto the reform process. 73. Inthe areaofpublic procurement, newprocurement regulations have beenintroduced which are in line with internally recognized standards. The institutional framework for public 24 procurement has been modernized and a new procurement oversight authority (Autorite de Rkgulation des Marches Publics, ARMP) has been set up. Significant training and capacity buildingactivities have beenundertaken to ensure that the new systemis adequately usedand institutionalized. ARMP is monitoring the compliance with the new regulations regularly based on independent audits. 74. The preliminary findings o f the recently completed 2008 PEFA assessment confirm the positive impact o f the reform activities: since the last assessment in 2006 the number of PEFA indicators which are rated `Byand above increased to 13 (from 10 in 2006) and the numbero f indicators which are rated `D' decreased to 6 (from 13 in2006). Main challenges include (i) the consolidation o f public finance reforms in the area o f budget execution (and reporting), (ii) the strengthening o f the internal and external control institutions, (iii) the further institutionalization o f the reforms at the level o f the sector ministries (both national and sub-national levels), and (iii) the overall absorptive capacity for reform inthe Ministryo f Finance and the sector ministries. 75. Increasing State revenues. Revenue generation i s among the lowest in Sub-Saharan Africa. With a tax/GDP ratio o f less than 11 percent (compared to 18 percent for sub- Saharan Africa), Madagascar has enormous scope for improving its fiscal inflows. To improve revenue generation at the level o f the customs directorate and to reduce endemic corruption a comprehensive customs reform action plan i s now under implementation. Customs operations in key customs offices (e.g. Tamatave and Antananarivo) have been fundamentally reorganized and modernized based on the deployment o f an automated data processing system (SYDONIA ++). Pre-shipment inspections by a private company have been introduced to improve transparency and reduce discretionary authority. The internationally recognized customs management system TRADENET has recently been introduced in the customs office in Antananarivo. Customs regulations have been modernized and the tariff structure has been simplified. In addition, the Government launched in 2007 with assistance from the IMF a tax reform program. This program focuses on simplifying and rationalizing the tax system and on minimizing tax exemptions. The Finance Law 2008 abolished a number of low performing taxes. In parallel, tax administration reforms are ongoing to improve the operational efficiency o f the tax directorate. The majority o f senior level staff has been replaced to address endemic corruption and to demonstrate a new beginning for the tax administration. Main challenge i s to consolidate the ongoing reforms and to sustain the achievements through further modernizationand capacity building. 76. Mobilizing the public administration. The public sector i s relatively small but extremely centralized andhierarchicalwith little or no service delivery or performance focus. Procedural arrangements are bureaucratic and overly complex. Separate personnel and payroll databases exist but no systematic reconciliation between these databases i s carried out. The last payroll audit was carried out in 1999. Ethical standards exist but are not enforced. The public sector composition is based on an outdated "model" that overemphasizes the role o f support staff (nearly 30 percent o f the civil servants) over technical staff. Available data also indicate that the average age structure inthe public sector is relatively high. Salaries inthe public sector are relatively low although management inthe public sector receive significant allowances which (if consolidated) amount to a significant 25 salary. Support staff inthe public sector i s paid better than the support staff inthe (informal) private sector. With assistance from the World Bank the Government has begun to address some o f these issues. A baseline study for the development o f a comprehensive reform o f the public sector pay and incentive system has been launched and i s expected to be completed in 2009. In addition, some government services are in the process o f modernization (e.g. land titling) and the rules and procedures for the delivery of government services (e.g. tax collection at the local level) have been systematically strengthened. Innovative techniques such as the rapid results methodology have been usedto accelerate reforms. Work i s ongoing to reinforce discipline and ethical standards throughout the administration. 77. Main challenges include (i) development o f a credible strategy for the reform o f the the public sector, including a reform o f the public sector wage and incentive system (ii) the establishment o f a technical cadre (middle level specialist) that i s typically a backbone o f a good civil service, (iii) the introduction o f service standards and performance orientation in specific services, and (iv) the enforcement o f ethical standards. 78. Strengthening legal andjudicial reforms. When the Government came into power in 2002, the credibility of the justice system was seriously undermined by significant corruption and inefficiencies. The judiciary was unable to provide adequate and timely services in areas that are important for the private sector; the efficiency o f the courts was hampered by outdated procedures and lack o f adequate resources. To address these issues, the government strategy has focused on five broad priority areas: (i) fight against corruption, (ii) expedition o f legal proceedings, (iii) reform o f business laws, (iv) rehabilitation o f court and prison infrastructure, and (v) humanization o f detention facilities. 79. Progress has been mixed: while the backlog o f cases at the level o f the lower courts has been substantially reduced (from more than 60,000 in 2005 to almost zero in 2008) and legal proceedings have been streamlined significant corruption (confirmed by an independent anti-corruption survey) and interference by the executive continue to negatively impact the judiciary. The Government has also modernized commercial proceedings and i s in the process o f establishing a specialized commercial court in the capital Antananarivo. Administrative and financial tribunals were set up to speedup the treatment o f relevant cases. New service standards have been introduced at the lower courts and the monitoring & evaluation system to assess the performance o f the jurisdictions has been significantly strengthened. However, it appears that the compliance with the new standards i s low. Main challenge i s to address the prevailing corruption in the judiciary and to improve ethical standards and behavior throughout thejudicial system. 80. Improving (decentralized) service delivery. Public services remain centralized with most public resources (both financial and human) managed by the central government. At the same time, service delivery at the local levels i s weak and lacks adequate resources. In health and education services some responsibilities have been shifted to administrative entities outside the capital - as a result a significant improvement o f services could be observed. Scope and focus o f potential de-concentration and decentralization i s controversial. Similarly, the roles and responsibilities at the various levels o f government (central, regional and commune level) remain unclear. The Government has strengthenedthe role o f the regions in sub-national development since 2004. It considers the regions the 26 principle entry point for sustainable commune development. At the same time it intends to shift more responsibilities to the commune and village levels. Main challenges include (i) the limited capacity o f the newly created regions which are not filly functional, (ii) the reluctance o f the central government machinery to "let go", (iii) capacity constraints at the the commune and village levels to plan and to provide services, (iv) the lack o f availability of resources in particular for the communes and the villages, (v) the absence o f a consistent regulatory framework for administrative and fiscal decentralization, and (vi) the diffuse relationship between central government, regions, and communes. 81. Scaling-up capacity building. The implementation o f the governance reforms will require major investments in human resources development and professional training. This includes traditional areas such as development planning, public financial management, procurement and monitoring & evaluation. With assistance from the first PGDI the Government has launched comprehensive training programs in these areas, including activities to strengthen the ability o f local institutions to deliver such training. The support under the first PGDI has yielded significant results: the operational effectiveness and the quality o f existing.local training institutions have been improved; the targeted institutions include the National School o f Administration (Ecole Nationale d'Administration de Madagascar, ENAM), which focuses on training o f higher level staff for the public sector, and the National Center for Administrative Training (Centre National de Formation Administrative, CNFA), which i s responsible for the training o f middle level staff for the public sector. These institutions have organized and successfully implemented ambitious training programs primarily in the areas o f public finance and procurement to enable the sector ministries to adequately institutionalize the far-reaching reforms. Similarly, the National School for Magistrates and Clerks o f the Court (Ecole Nationale de la Magistrature et des Greffes, ENMG) trained a significant number o f new magistrates and justice personnel, which has broadened the base o f a new generation o fjustice personnel. Regular independent assessment confirmed the overall positive impact o f the capacity building activities. The main challenge i s to further deepen these capacity building activities as ministries, departments and agencies continue to require assistance with the institutionalization o f governance reforms. With the intended progressive de-concentration and decentralization o f government activities the training activities will also need to focus on the sub-national levels o f government, inparticular the regions and communes. 82. Past capacity building in Madagascar also comprised non-traditional activities, in particular leadership development and managing change. Under the first PGDI significant assistance has beenprovided to some key institutions to strengthen their ability to effectively manage institutional change and governance reforms, in particular to the President's Office, the Prime Minister's Office, the Ministries o f Finance, Justice and Economic Planning. These activities have resulted in the establishment o f a core team o f change agents who are the main drivers o f the governance reform process. A key output from the team o f change agents i s the new development strategy (MAP) that has a clear results focus. A recently completed independent assessment o f the leadership program in Madagascar confirmed the highimpact ofthese training activities on the functioning ofthe government machinery. With assistance from the first PGDI the Government has also established a National Leadership Institute o f Madagascar (NLIM) that focuses primarily on behavioral changes and management support. This institute has organized a series o f training events that are destined 27 to improve understanding about the complexity o f the change process initiated by the MAP, and that target specifically the senior levels in the public administration at the national and sub-national levels. Main challenge i s to scale-up and further deepen these activities throughout the administration as (change) management capacity remains weak and uneven. 83. Improving social accountability. Civil engagement in achieving "responsible governance" i s one o f the core principles firmly anchored in the MAP. There i s little consolidated information about the total number and the activities o f civil society organization in Madagascar; estimates quote between 4,000 and 6,000 groups and associations, or one per 12,700 persons - low by regional standards as it compares to one per 3,400 persons inKenya or one per 6,200 persons inUganda. Further, there is a bifurcationo f these organizations into atomized narrowly-focused rural-based groups (the country i s 78% rural) which have no national representation and no role inpolicy dialogue or oversight, and urban based groups which often have no links to the grassroots and also tend to cater to donor interests rather then focusing on specific advocacy. Thus, overall, the capacity o f these organizations and their willingness to hold Government accountable i s very weak if compared to other countries. There i s no functional legal framework inplace that governs the creation o f civil society organizations. The Government's development strategy identifies key governance challenges and foresees a number o f related activities that require active involvement o f civil society. They include among others (i)the reduction o f corruption, which assigns an important watchdog and whistleblower role to civil society; (ii)the establishment o f an efficient and effective government budgetaryprocess, which entails the dissemination o f public finance information as well as inclusion o f civil society in resource allocation, (iii) the strengthening o f the provision o f public services, which requires that service providers will have to meet service users' expectations, and (iv) the development of a "learning nation", which aims to develop "mechanisms for citizen training and participation inthe governance oftheir local, regional andnational communities". 84. While the Government appears to be committed to creating an enabling environment for the proactive involvement o f civil society there i s still limited experience with bottom up social accountability mechanism in Madagascar. Based on Government request the first PGDIprovided some fundingto conduct pilot citizens score card exercises for a few selected health centers. These activities have led to an improved delivery o f services in the selected centers, and more transparency around issues o f drug pricing and the allocation o f existing commune subsidies to health centers. The first PGDI i s also providing technical support for activities that are aimed at improving transparency and accountability such as the participatory budgeting in the communes around Fort Dauphin (a center for mining activities), which will ensure more inclusive and transparency allocation and use o f public resources and local level tracking o f mining revenues. Inmany ways the results from these activities are generating a new level o f collaboration between civil society on the one hand and public or elected officials on the other hand. The initial pilots in the health sector, for example, have now earned the Ministryo f Health's agreement to expand the pilots to provide bottom up feedback that will complement the Ministry's own quality enhancement program (supply side reform). As a consequence, the Government intends to scale-up social accountability activities, in particular in areas with high level o f investment (such as Fort Dauphin and Nosy Be) or in sectors with significant governance problems (such as forestry) to complement other ongoing reforms. 28 85. Coordination of reforms, monitoring & evaluation. Governance reforms are coordinated by the Presidency which has assumed a significant role in "supervising" the ministries, departments and agencies. Inthis context, the relevance o f the Prime Minister's Office, which i s legally in charge o f controlling the administration, i s at question. The Government will need to clearly define the relationship betweenthe Presidency (= defining policies and issuing broad directives), the Prime Minister's Office (= coordinating the implementation o f the policies), and the sector ministries (= implementingpolicies) to avoid frictions and coordinationproblems. 86. With support by the first PGDI the government has launched the development of a monitoring & evaluation framework including a plan for the political and administrative coordination o f governance reforms. A National Strategy for Statistical Development has recently been approved by the Government, which provides the procedural and institutional framework for all statistical activities in the country. Activities are also ongoing to strengthen the operational efficiency o f the National Statistics Office. With assistance from the World Bank and other donors the Government i s presently conducting a cartographic survey. This survey would establish key information about the population distribution in Madagascar. Key challenges include the update and the consolidation o f the statistical data on Madagascar as the current data base i s outdated (the last population census was conducted in1993). 29 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 87. The proposed project i s a core element o f the Bank's CAS and its governance agenda i s one o f the main pillars o f other donors' programs in Madagascar. The project builds on considerable Bank and donor-supported programs and seeks to integrate these initiatives as well as to complement ongoing activities in the areas of private sector development and decentralization. 88. RelevantWorld Bankprojects include: The Integrated Growth Poles Project (US$129.8 million, FY2005) i s a joint IDA, IFC, Foreign Investment Advisory Service, and Multilateral Investment Guarantee Agency effort that aims to stimulate growth in three geographical regions with high potential by addressing the key bottlenecks to investment. The three poles are: Nosy B e for tourism- led growth, Fort Dauphin for mining and tourism-led growth, and Antananarivo- Antsirabe for export-led growth. The implementation status of the project i s rated `satisfactory'. PGDII1will provide complementary assistance to strengthen the capacity o fregional administrations and to improve social accountability. The Mineral Resources Governance Project (US$32.0 million, FY2004, additional financing US$8.0 million, FY2007) aims at strengthening the accountability and transparency in the mining sector, at promoting key institutional reforms for the decentralized management o f mineral resources and at fostering private investments. The implementation status o f the project i s rated `satisfactory'. PGDI I1 will provide complementary assistance to strengthen the capacity o f regional administrations and to improve social accountability. The Bank has supported through a Community Development Project (Fonds d'Intewention pour le De`veloppement - FID, US$llO.O million initially, FY2001) in Madagascar for almost 15 years. The FID has evolved from a primarily demand driven social infrastructure project into a project that has adapted a comprehensive vision o f participatory development empowering communities. The first PGDI has provided complementary capacity building assistance, in particular to the sub-national levels o f government. The FIDproject i s expected to close inFY2009. The Local Development and Decentralization Support Project (US$15.O million, FY2009) aims at improving public service delivery through the financing o f basic infrastructure and the provision o f capacity building at local level. The project seeks to enhance the capacity of local authorities to utilize participatory and transparent planning, budgeting, implementation, and monitoring systems and to strengthen the capacity o f service providers. PGDI I1will complement the project by strengthening the regional administrations in core competence areas (e.g. public financial management, procurement) and by supporting the consolidation and the refinement o f the regulatory and institutional framework for decentralization. 30 89. In the area of governance and institutional development Madagascar's principle development partners are the European Commission, the International Monetary Fund, the African Development Bank, UNDP, France, Germany, Norway and the United States. Donor coordination has been significantly strengthened over the past years with the introduction o f a Memorandum o fUnderstanding(Cadre de Partenariat) in2006. Since then, the Ministry o f Finance and the development partners that are providing budget support are better coordinating their activities and reviewing progress in the context of joint donor missions. The recommendations from these missions are used to update the reform action plansof the Government. 90. The table below provides an overview about the support to the governance and institutional development agendaby other development partners. Governance and MULTILATERALDONORS BILATERAL Institutional DONORS Budget Support H H H H Governance H M H H M L L M M Macro Management H H L M M H L 31 Annex 3: ResultsFrameworkandMonitoring MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 91. The Project Results Framework and the Results Monitoring Matrix are summarized below. The annex i s based on comprehensive discussions with the Government and was finalized inthe context o f a workshop organized inJanuary 2008. ProjectDevelopment To improve the efficiency and transparency o f government and selected Objective public services inMadagascar inline with the Madagascar Action Plan (MAP) PDO Outcome OutcomeIndicators Use of results information Improved public expenditure Information will be usedto management 1. Number o f Indicators under the Public Expenditure and Financial guide the implementation o f the Accountability Assessment (PEFA) Government's public finance rated `B' and above reforms and to determine technical assistance and capacity buildingneeds Revenue agencies' Information will be used to performance (customs, tax 2. Percentage increase intadGDP monitor the performance o f administration) increased ratio revenue collecting agencies to ensure that they achieve their targets Improved quality o f public 3. Percentage o fpopulationsatisfied Information will be used to service provision inselected with the quality o f services provided assess the performance o fpubic public institutions by selectedprioritized public services inorder to target non- institutions. compliant services and to improve overall service delivery Improved public 4. 4 Number o f corruption cases Demonstrate the effectiveness accountability and effectively adjudicated by the o f measures deployed to transparency judiciary or through administrative improve accountability and procedures transparency 32 IntermediateResults ResultsIndicatorsfor EachComponent Use of ResultsInformation per Component Component 1: Improvement t of public expenditure management Budget preparation and 1.1 Numbero f PEFA budget preparation execution improved and execution indicators (indicators Demonstrate that public 1through 17) rated `B' and above institutions adhere to established financial management protocols and Internal control mechanisms 1.2. Number o fPEFA indicators systems strengthened measuring the efficiency of internal control mechanisms and budget reporting (indicators 18 through 25) rated "B" and above Compliance withpublic 1.3. Number o fbids awarded under open Show ifbidding o f goods and procurement regulations competition services i s based on the new improved biddingpolicyldocuments ComDonent 2: Strengtheningthe efficiency 1 of governmentoperations Change management capacity 2.4. Percentage o f sector ministries that Information will be usedto and leadership quality meet 100%o f their annual work monitor the performance o f improved plans targets under the PGE. ministries Local training institutions 2.5 Number o f students successfully Demonstrate that the training (NLIM,ENAM,CNFA, completing training courses (at institutions are graduating ENMG, GDLN) strengthened NLIM,ENAM,CNFA, ENMG, students with the right core GDLN) competencies for public institutions Monitoring & evaluation 2.6. Percentage o f sector ministries Information will be usedto framework for M A P timely submitting reports for refine the implementation of implementation clarified incorporation into the M A P progress the M A P and to assess report efficiency o f reform management Improvedrevenue collection 2.7. Percentage increase inrevenue Determine effective revenue and fiscal management at generationthrough improvement in generation and management at decentralized levels fiscal management inthe Region o f decentralized levels ANOSY 33 IntermediateResults 1ResultsIndicatorsfor Each Component Use of ResultsInformation per Component I Component3: Rule of Law I and fight againstcorruption Quality o f legal andjudicial 8. Reduction o f the average days Assess turn around time o f the services inselected areas required to process a case at the lower courts inorder to initiate improved level o f lower courts corrective measures Regulatory and institutional 9a. Frequency o f bribes paid byusers to Use information to further framework and strategy for obtain licenses and permits improve the strategy for fighting corruption further combating corruption refined and implemented 9b. Proportion o f average expenditure paid by households as bribes for accessing public services 10. Number o fPEFA indicators External controls strengthened measuring the external control Demonstrate that public mechanisms (indicators 26 through institutions adhere to 28) rated `B' and above established financial management protocols and systems Component 4: Transparency and social accountability Increasedinvolvement o f civil ,11. Number o f social accountability Information will be used to society inthe development and activities (e.g. community score refine the implementation o f monitoring o f policies and cards, participatory budgeting) the MAP and to refine the programs completed development strategy for Madagascar Increasedsatisfaction o f ,12. Percentage o fusers that are satisfied U s e information to further citizens with the delivery o f with selectedpublic services (health, improve delivery o fpublic public services (health, education) inthe region o f ANOSY service education) inpilot communes and DIANA Component 5: Monitoring& evaluation Information will be used to refine the development strategy Improved quality and -13. Population census 2010 completed for Madagascar, and to improve availability o f demographic and data published. strategic planning inthe public data for Madagascar and the private sectors 34 Intermediate Results ResultsIndicatorsfor Each Component Use of ResultsInformation per Component Component 6: Program Coordination Program o freforms timely and 6.14a. Timely submission o f progress Information will be used to effectively implemented reports identifyprogramdelays and bottlenecks, and to adjust 6.14b. Satisfactoryrating o f annual program implementation implementation progress by the strategy World Bank and the Malagasy Government 35 c 4 i\ 0 g m 3 c 2 2 ru i g8 N W + 0 i 1 I cc t g N I + 2 I .M I .M Y P 1 I i 0 # 3 2 2 1 I DFi 3 g?c g8 iD g+ N I C c0 3 f\ 0 De, 0 0 s ? N 2 h 2 F 0 0 v N 3 3 0 5 B 3E! 3 4 4 0 z y N z. z. 0 ' 3 E.' V t-r E.E. 0 N 2 m z y E o " t3 m b 0 0 N o m - 3 3 3' 3 m z ? k. 6 . . . E,' u t-r s 3 00 m tiao! m 6 N r3 3 0 N Q\ 0 to 00 m 0 b 0 W n 8 \o c! E vl Annex 4: DetailedProjectDescription MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 92. The implementation status of the governance reform program of the Government i s summarized in annex 1. The PGDI I1will continue to support this reform program. It will be closely linkedto the new development strategy o f the Government, the Madagascar Action Plan (MAP). The new project will build on the existing support under the first PGDI; the achievements andlessons learnt are summarized below: Box 1:PGDII Achievements & lessonslearnt - Major Outputs Impact LessonsLearnt Establishment o f a reform More transparent, timely and Complementary analytical work .eforms coordination unit inthe Ministryo f accurate reporting and more fully owned by the government Finance and Budget effective internal control. critical to inform the reforms Development o f an integrated More time i s needed to financial management system and Increased capacity inpublic consolidate the reforms deployment o f the system to all key financial management Significant complementary treasuries and sector ministries capacity building and Organizational restructuring o f the institutional development support Treasury required for the key sectors to Establishment o f an internal control institutionalize the reforms cadre for the Treasury (Brigade de Harmonization o f the reform VCrification et d'hspection duTresor) agenda should be improved; Institutional strengthening o f other reform agenda should have a internal and external control clear medium-term horizon mechanisms (e.g. Inspection GenCrale supported by all key de I'Etat, Auditor General, Finance development partners Commissions o f Parliament) Improved reform coordination at Comprehensive training and capacity the level of the Ministryof building support to institutionalize Finance critical D u b k finance reforms at the level o f the sector ministries Procurement reforms New procurement regulations Madagascar procurement Needto consolidate the approved by Parliament regulations are in line with application of procurement New procurement oversight authority international standards regulations inthe sectors established and operational Institutional framework should Comprehensive training and capacity Increased capacity inpublic be further strengthened building to institutionalize procurement (oversight institution, ministry procurement reforms at the sector and department level including ministries' level deconcentrated services) Revenue agency Customs reform action plan developed More transparent and efficient Bank role was critical to trigger reform and implemented. Plan focuses inter customs operations meeting comprehensive customs reforms alia on modernizing customs revenue targets outlined inthe Project was drawn into ongoing operations and on addressing annual budget debate about revenue agency corruption inthe customs service reforms 40 r Major Outputs Impact LessonsLearnt Fight against * Modem regulatory framework inthe Entirelynew framework for Framework needs to be further corruption fight against corruptiondevelopedthat :hefight against corruption developed, inparticular with includes anti-corruption framework put inplace which is regarded regardto economic crimeand legislation, asset declaration, i s an efficient instrument to conflict-of-interest issues strengtheningof investigative iddress corruption inthe Continuedbenchmarkingof authority, establishment of a public sector impact of anti-corruption specializedinvestigative unit to activities important to inform prepare court proceedings etc. reformprocess Anti-corruption Commission and Anti-corruption Bureauset up and operational Anti-corruption survey(s) conducted andpublished Strengtheningof Capacity of local training institutions More high quality training Training and capacitybuilding in local training significantly enhancedto deliver can be organized and the areas of development institutions training inhigh priority areas such as conductedlocally planning, public financial developmentplanning, public management including financial managementand procurementand monitoring & procurement evaluation i s critical to sustain National LeadershipInstitute governmentreforms established and operational Capacity of local training Global Development Learning Center institutions i s still insufficient to under construction to integrate meet the demand Madagascar into the global distance learningnetwork Gaps Project was drawn into social accountability activities to improve efficiency ofBank operations, inparticular PIC Project was usedto improve operational efficiency of the President's andPrime Minister's Offices Project providedcomplementary support to decentralization activities, inparticular for regionaldevelopment 93. The new project will enhance and further deepen the first generation reforms under the PGDI Iin the areas o f public finance, the strengthening of capacity and the improvement of public sector service delivery, the reinforcement o f the rule o f law and the fight against corruption, and the improvement o f transparency and social accountability. It can build on significant analytical work, in particular in the area o f public expenditure management (PERs, PEFAs). 94. With a lending amount of US$40.0 million IDA PGDI I1 will have the following components: 41 Project Component 1 - Improvement of public expenditure management (US$14 million IDA) 95. The objective of this component is to continue to support in a holistic manner the reform o fthe public expenditure management system inMadagascar. The reference point for the reform is the Priority Action Plan (PAP) which is developed by the Ministry o f Finance on an annual basis and supported by a number o f development partners including the World Bank. The PAP consolidates all reform activities under the oversight o f the Ministry o f Finance. The implementation progress o f this plan i s jointly evaluated by the donors and the Ministry of Finance on a regular basis. The support under this component reflects the Government request to incorporate revenue agency reforms and comprehensive capacity building activities at the sector ministry level into the reform agenda. It draws upon the World Bank implementation experience with public finance reforms since 1998, in particular the need to increase assistance for the institutionalization o f public finance reforms at the level o f the Malagasy public administration. The intended support under the new project will be closely linked to the PAP; the Ministry o f Financewill be responsible for the implementationo fthis component. 96. The component comprises the following sub-components: (a) Improving the budget preparation and execution processes (US$6.0 million IDA). Support will focus on further facilitating the introduction o f program budgets and on simplifying budgetary procedures. It will also strengthen the capacity of sector ministries to plan, monitor and evaluate the annual budget. Further assistance will focus on the harmonization o f the existing dual budget system with the ultimate goal to fully integrate the budget preparation and execution procedures. The sub- component will continue to finance the deployment o f the integrated financial management system (Systkme Integrk de Gestion des Finances Publiques, SIGFP) which was initiated under the first PGDI. The new system provides timely, accurate and up-to-date information on budget allocations, commitment and actual expenditures. The system i s currently installed in all six main treasuries in the country; all key sector ministries are connected to the system. The system captures about 80 percent o f government expenditures. With the so-called `regionalization of the budget' (the delegation o f budgetary authority to the 22 new regions) the government intends to build the public finance capacity o f the regional administrations and to deploy the SIGFP to the regional capitals and other important centers. This new strategy will be supported by the PGDI 11. Fundingwill also be provided to rationalize the public investmentprocess, which constitutes an important element o fthe public finance reform agenda. Project funding under this sub-component will focus on goods and equipment, in particular soft and hardware costs including the installation o f a wide-area network, consulting services including specialized training and project management, rehabilitation and maintenance o f offices, operating costs as well as for training and capacity buildingactivities. (b) Strengthening internal control mechanisms (US$l.0 million IDA). Buildingon ongoing assistance provided under the PGDI Ithe new project will continue to 42 support government reforms destined to improve the operational efficiency o f the institutions that provide fiduciary oversight and control. These institutions include: the General Government Inspectorate (Inspection GenCrale de 1'Etat - IGE), the Commitment Control (ContrGle des Depenses EngagCes - CDE), the internal control cadre o f the Treasury (Brigade de Verification et d'hspection du Tresor), and the general internal control cadre (Inspection Genkrale des Finances - IGF) that i s not yet operational. Previous reforms helpedthe Government to establish an internal control cadre for the Treasury (Brigade Verification et d'hspection du Tresor) and improved the operational effectiveness o f both IGE and CDE. At the same time, the 2006/2008 PEFA assessments and relevant analytical work revealed substantial weaknesses o f the internal control system, in particular at the level o f CDE. The new project will therefore continue to provide support for the internal control system, inparticular the modernization o f operations and capacity building activities. It i s also envisaged to provide support to the Budget Discipline Commission (Conseil de Discipline Financibre et BudgCtaire) which i s tasked to enforce fiscal and budgetary discipline butis presently non-operational. Project funding under this sub-component will focus on goods and equipment, consulting services; rehabilitation and maintenance o f offices, as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, in particular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision o f travel costs. (c) Institutionalizing public procurement reforms (US2.0 million IDA). The first PGDI supported Government to design new procurement regulations and a new institutional framework in line with international standards. This comprehensive reform has fundamentally changed the way public procurement was managed. A new procurement oversight institution has been established and sector ministries have begun to work with the new regulations. To further institutionalize these reforms it will be necessary to continue training, change management and capacity building activities which have already been launched under the first PGDI. These activities are mainly delivered by local training institutions. To assess impact o f the procurement reforms it i s envisaged to review the compliance with the new regulatory and institutional framework on a regular basis. These evaluations will be funded under the new project. In addition, the project will include assistance for the new procurement oversight institution as well as for procurement entities in the sector ministries. Project support will also focus on improving transparency and accountability o f public procurement processes, e.g. through the publication o f business opportunities and procurement decisions, and through improved monitoring by civil society, media andParliament. Project funding under this sub-component will be provided for goods and equipment, consulting services; rehabilitation and maintenance o f offices, as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, in particular through the work o f civil servants, through the 43 provision o f office space and other material, as well as through the provision o f travel costs. (d) Increasing performance of revenue agencies (US$S.O million IDA). To generate more resources for the implementation o f the M A P increased revenue performance has become a top priority o f the Government. The strategy initially focused primarily on the customs directorate which received assistance to modernize its operations, to streamline its procedures and institutional set-up. These reforms which were supported by a number o f development partners yielded tangible results as customs revenues and operational efficiency increased as evidenced for example by reduced time for customs clearance processes. The new project will provide assistanceto consolidate these reforms, inparticular provide further assistance for the modernization o f customs offices, the integration o f the new customs management systemTRADENET with the SIGFP, as well as training and capacity building. This would complement ongoing assistance by other development partners, in particular the IMF, France and the World Customs Union. At the same time, the new project will provide support for a fundamental reform o f the tax directorate. With assistance from the IMF the Government has launched a comprehensive reform o f this directorate which includes policy, regulatory and institutional changes as well as related capacity buildingactivities. To simplify the existing tax regulations a number o f taxes have been abolished and the activities o f the tax directorate have been refocused on areas with a high revenue potential such as the large enterprise unit. In an effort to improve its efficiency, the tax directorate has recently replaced the majority o f its senior staff and introduced control measures to address corruption and low performance. The Government i s in the process o f developing a medium-term reform action planwhich will be integrated into the overall reform plan (PAP) o f the Ministry of Finance. The new project will support the implementation of the tax policy and tax administration reforms which will include modernization o f equipment, rehabilitation o f buildings as well as training and capacity building activities. Support under the project will also include the mobilization o f (external) quality assurance which will assist Government inmonitoring progress o f the reform process. Project funding under this sub-component will be provided for goods and equipment, consulting services; rehabilitation and maintenance o f offices, as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, in particular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision o f travel costs. Project Component 2 - Strengthening the efficiency of government operations (US$S.O millionIDA) 97. The objective o f this component i s to support the change management and institutional development processes in the context o f the implementation o f the Government's development strategy, the Madagascar Action Plan (MAP). This will include leadership training and 44 development for senior government officials to manage and implement far-reaching reforms. Support will also include an upgrading o f local training institutions as well as the support for the operation o f a Global Development Learning Center (GDLN) and o f the National Leadership Institute o f Madagascar (NLIM). Inaddition, this component will support cross-cutting reforms and activities which are considered important for the M A P implementation. Such reforms include the support for the development o f a consistent regulatory and institutional framework for decentralization, and the reform o f the public sector pay and incentive system. 98. The component comprises the following sub-components: (a) Improving change management capacity and leadership quality (US$3.0 million IDA). The project will continue to support change management processes in the context of the implementationo f the MAP,inparticular inthe President's Office, in the Prime Minister's Office and in priority ministries such as education, health, transport and public works. This support will build on the experiences with the leadership and change management support under the first PGDI which provided significant assistance to building relevant capacity. The institutions supported by the first PGDIhave established change management teams which design and monitor the implementation o f reforms. These teams are typically attached to the Permanent Secretary o f the relevant institution and include staff with competence inkey areas, in particular development planning and monitoring & evaluation. These teams have developed sectoral strategies and implementationplans that are monitored both at the sectoral and cross-sectoral level (Presidency, Prime Minister's Office). The new PGDIintends to take these activities a step further and include the management levels below the Permanent Secretaries within the public administration into the change management and leadership development activities. Assistance will include leadership support (coaching and advising) o f government officials by the Center for Public Leadership o f Harvard University, Kennedy School o f Government, in the United States. The program will focus on key leadership challenges both at the institutional and individual levels to ensure consistency and to improve efficiency of the administration. Support will also include funding for innovative change management methodologies such as the "rapid results" approach6 to accelerate reform implementation and to assist the Government to overcome existing procedural and institutional constraints that hamper the effective implementation o f the reform program. The majority o f this support will be channeled through the National Leadership Institute o f Madagascar (NLIM)which was created in 2006 as a training institution and center-of-excellence for leadership development. The institute will receive funding for strengtheningits operations, for the development o f a fundraising strategy as well as curricula and training programs, and for the organization o f Originally developed by the private sector, the rapid results methodology has over the last few years increasingly been used in the development context, as a tool for governments to implement their policies and strategies. Rapid results initiatives are typically small projects designed to - inthe short term - mirror more comprehensive activities. Under these initiates cross-sectoral team are established to solve specific problems. They set themselves ambitious, achievable, concrete goals which they strive to achieve in short periods (typically 50, 100, 150 days). A detailed timetable i s used to monitor results. Madagascar has been a pilot country for rapid results activities which have generated a lot o f traction inareas such as primary health care, local revenue generationand rice production. See for details: A Leadership Approach to Achieving Change inthe Public Sector: The case o f Madagascar, WBI 2007. 45 workshops that are aimed at discussing the leadership challenges inthe context o f the MAPimplementation.The institutecomplements technical training which isprovided by other local training institutions. Project funding under this sub-component will be provided for goods and equipment, consulting services; rehabilitation and maintenance o f offices, some operating costs for NLIM as well as for training and capacity building activities. Government contributions would be primarilyprovided in-kind, in particular through the work o f civil servants and other government consultants, through the provision o f office space and other material, as well as through the provision o ftravel costs. (b) Strengthening management capacity in selected public institutions (US$I.Omillion IDA). The project will provide targeted support to selected public sector institutions (Ministries o f Planning, Education, Health, Transport, Public Works, and Agriculture) to adequately manage and decisively implement the reforms outlined in the Madagascar Action Plan (MAP). This support builds on the experience with the implementation o f governance reforms under the first PGDI, which has shown that sector ministries need specialized technical assistance that i s tailored to their specific needs. This assistance will include set up and support for dedicated technical teams in the targeted institutions that are tasked to monitor the reform activities. Additional assistance will be provided in the area o f institutional andproceduraldevelopment. Project finding under this sub-component will be provided for goods and equipment,, rehabilitation and maintenance o f offices, consulting services as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, in particular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision o f travel costs. (c) Strengthening of local training institutions (US$2.0 million IDA). Local training institutions play a major role in the provision o f capacity building required under this project. Under the first PGDIlocal training institutions have received some support, mainly to modernize their curricula and training facilities. The new project will continue to provide support inthis direction to enable local training institutions to deliver high-quality training and capacity building, in particular in the areas o f public finance management, public procurement, general administration, monitoring & evaluation, legal and judicial reforms. Support will be provided to the following institutions: National School o f Administration (Ecole Nationale de 1'Administration Malgache, ENAM) and National Center for Administrative Training (Centre National de Formation Administrative, CNFA). The ENAM i s mainly responsible for the (basic) training o f higher level staff for the civil service while the CNFA focuses on capacity building activities for middle level staff. World Bank support will be provided for the refinement of curricula and of training 46 material, as well as for the further qualification o f trainers. Support will also include some equipment to increase the capacity o f the two training institutions and to modernize their training facilities. 0 National School for Magistrates and Clerks o f the Court (Ecole Nationale de la Magistrature et des Greffes, ENMG). The project will continue to support ENMG capacity building activities to complement the legayjudicial reforms initiated by the Government. The support will focus on the provision o f high-quality training o f magistrates and other justice personnel, on some equipment and minor rehabilitation o f training facilities. 0 Global Development Learning Center (GDLN). The GDLN establishment has been support by the first PGDI.The main objective o f the GDLNi s to use modem technology to deliver high-quality training in key development areas for all relevant stakeholders (Government, NGOs, private sectors). The new project will continue to provide assistance to the new center, inparticular the development o f training programs. Project funding under this sub-component will be provided for goods and equipment, consulting services; rehabilitation and maintenance o f offices, some operating costs for the GDLN as well as for training and capacity buildingactivities. Operating costs for the GDLN will be financed on a decreasing basis. The first year, the project will cover 80% o f the center's operating costs. This will be reduced by 20 percent for each o f the following years. Government contributions would be primarily provided in- kind, inparticular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision of travel costs. (d) Supporting cross-cutting reforms. (US$2.0 million IDA). Financing under this component would focus on two main areas: (i)complementary support for decentralization, and (ii) the reform o f the public sector pay and incentive system: 0 With regardto decentralization the Government has continued to strengthen the role o f the regions by progressively integrating deconcentrated services o f the public administration under the authority o f the regional Chiefs. The objective i s to harmonize all sectoral activities in a specific region and to establish integrated regional development plans. To improve the delivery o f public services the Government has also strengthenedthe role o f the villages (fokotany) by formally recognizing their important administrative role. A recent constitutional amendment abolished the six autonomous provinces. To improve the availability o f financial resources at the level o f the local levels the Government increased the share o f certain taxes (impat synthetique, impat foncier) in favor o f the communes on the basis o f the Finance Law 2007. The Government will also make operational a Local Development Fund(FDL) that would integrate financial support to the local government levels both by the Government and by the donor community under a single mechanism with harmonized procedural and institutional arrangements. However, the existing regulatory and institutional 47 framework for administrative and fiscal decentralization requires major adjustments to ensure that local governments are able to effectively fulfill their functions. The project would complement ongoing activities under the FDL and would provide some limited technical assistance for the review and the adjustment o f this framework. It would also provide support for the regions to establish an adequate administrative and procedural framework that would integrate the relevant de-concentrated services o f central government ministries with the regional administration. Additional support will be provided under component 4 to build capacity o f civil society groups to improve interaction with the regional and local administrations as well as to implicate civil society proactively inpolicy design and implementation at the local level. With regard to the public sector the pay and incentive system the Government has requested World Bank support to develop a comprehensive strategy to reform the existing pay and incentive system for the public sector. This strategy (a formal ESW) will be prepared inFY 2009. The existing pay and incentive system i s insufficient to attract skilled staff, especially at the technical levels. In some sectors, e.g. education service agents are employed on contract outside the civil service salary scale (teachers paid by parents' associations). Some crucial services are understaffed (e.g. tax administration, policy management). The public sector wage bill represents only 5.3% o f GDP (2007 after 5.0 percent in 2006) which i s very low compared to other countries in the region. Project support will include some limited technical assistance for the development o f reform options and for the evaluation ofthe macro-economic impact ofintendedreforms. Funding under this sub-component will be provided for equipment, consulting services, workshops; as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, inparticular through the work o fcivil servants. ProjectComponent3 Ruleof law andfight against corruption(US$2.5 millionIDA) - 99. The objective o f the component is to assist Government in promoting transparency, accountability and good governance; and inparticular, inreducing corruption. Project assistance will build on the activities initiated under the first PGDI and mainly focus on improving the operational efficiency o f thejudiciary, supporting anti-corruption activities, and on strengthening oversight by the Auditor General and by Parliament over State affairs. The activities will be closely coordinated with other development partners, inparticular the EU, France and Norway. 100. The component comprises the following sub-components: (a) Improving the quality of legal and judicial services (US$l.O million IDA). Project support will be provided to assist the Ministry o f Justice to further deploy and enforce service standards within the court system. These standards were introduced in 2007 and are aimed at improving individual and institutional performance throughout the judiciary. Additional support will focus on enhancing the program o f "model courts" which the Government introduced in 2006. Under this program a 48 small number (four) o f courts were modernized and their procedures streamlined to facilitate access to the judicial system and to improve operational efficiency. This will include support for the reduction of the backlog of cases. Inaddition, the project will assist the Ministry o f Justice to firther strengthen internal control and oversight. Complementary support will be provided under component 4 to foster civil society oversight and monitoring o f these reforms. Project funding under this sub-component will be provided for goods and equipment, consulting services; rehabilitation and maintenance of offices, as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, in particular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision o f travel costs. (b) Strengthening the regulatory and institutional framework to fight corruption (US$I.O million IDA). The project will continue to provide assistance to the Anti- Corruption Bureau (BIANCO) and the Anti-Comption Commission which were established in 2002 as key instruments o f the Government to reduce corruption. Support includes technical advisory services as well as support for surveys and other instruments that establish and track baseline information about the incidence o f corruption. The project will finance activities that are destined to improve the mobilization o f non-state actors in the fight against corruption. Additional support will be provided to establish branch offices o f the Anti-Corruption Bureau in the regions and to introduce a comprehensive procedural and institutional framework to address conflict-of-interest in the public sector and at the level o f elected officials. This will also include a comprehensive review and a liberalization o f public disclosure policy and regulations. Finally, the project will help Government establish an Economic Crimes Unit (Service de Renseignement Financier). The main function o f the unit, which does not have the right to prosecute or to investigate, i s to collect information and advising other government service and the judiciary on money laundering issues. It i s independent from the Government and reports to the Anti- Corruption Commission. Inaddition, funding will be provided for the development o f an adequate legal framework to strengthen monitoring roles and watchdog functions o f non-state actors. Project funding under this sub-component will be provided for goods and equipment, consulting services; rehabilitation and maintenance o f offices, some operating costs for the BIANCO and the Economic Crimes Unit, as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, inparticular through the work of civil servants, through the provision of office space and other material, as well as through the provision o ftravel costs. (c) Strengthening external oversight (US$O.S million IDA). Project support will focus on enhancing the capacity of external oversight mechanisms, inparticular of the Auditor General and o f Parliament. Government has made significant efforts to improve the operational effectiveness o f the national audit office (Court des 49 Comptes). These efforts mainly focused on the preparation o f timely public accounts and are starting to show concrete results. The final accounts for the years 1998 to 2005 have been prepared by the Auditor General. The draft budget execution laws for 2002, 2003 and 2004 have been submitted to Parliament and the 2005 budget execution law was validated by Parliament in 2007. It i s expected that the draft budget execution law for 2006 will be for the first time submittedwithin the statutory timeframe to Parliament. Project support will be provided to assist the Auditor General to address existing weaknesses identified by the PEFA, in particular with regardto the methodology and the coverage of the external controls. Inaddition, the finance commissions o f the two chambers o f Parliament (National Assembly and Senate) will received further support, in particular, to scrutinize the work o f the Auditor General and to strengthen its role as an external oversight institution (analyze the reports o f the Auditor General and to initiate a Parliamentary debate about the findings). Assistance will be provided for training and capacity building o f the membersofthe Public Finance Committees, some basic equipmentto enable research and preparation o f reports as well as for some funds to commission studies and evaluations inthe areas o fpublic finance. Project funding under this sub-component will be provided for goods and equipment, consulting services; rehabilitation and maintenance o f offices, as well as for training and capacity building activities. Government contributions would be primarily provided in-kind, in particular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision o f travel costs. Project Component 4 -Transparencyand social accountability(US$4.0 millionIDA) 101. The main objective o f this component i s to create synergy between government reforms and civil society by complementing, (mutually) reinforcing and addressing shortcomings o f "supply side" reforms supported by the PGDI I1aimed to increase transparency, accountability, improve public services and curb corruption. It is also envisaged to pilot test and scale up successful interventions aimed to address potential inequality by ensuring that civil society i s able to express priorities and to demand accountability. The project will provide support to institutionalize social accountability interventions in Government activities with a view to increasing support and ownership by both civil society and Government. This will include the creation o f an enabling environment to foster civil society engagement in social accountability initiatives. 102. The activities under this component have been identified through a comprehensive participatory process: workshops and focus group discussions helped define and prioritize the different activities. A nation-wide social accountability workshop in February 2008 in Antananarivo contributedto refiningthe proposed interventions. 103. PGDI I1will complement, enhance and expand the activities supported by other World Bank-supported operations such as the Integrated Growth Poles Project, the Mineral Resources Governance Project, the Community Development Fund (FID), and the Local Development and Decentralization Support Project. It will play a key role vis-a-vis these other projects in 50 providing technical and capacity building support. In addition to leveraging World Bank- supported social accountability operations, the pilot activities will further create synergies with social accountability methods employed by other development partners, including bilateral and multilateral external assistance agencies, Government initiatives, international and local NGOs, and regional training institutions such as IDASA in South Africa and networks such as ANSA (African Network o f Social Accountability). 104. The component comprises the following sub-components: (a) Piloting social accountability interventions: Entry points for pilot activities will be areas, which are considered to have the greatest potential for state-civil society synergy with regard to improving local governance and maximizing positive social impact. These areas include in particular the zones with high level o f economic activities or investments such as Fort Dauphin, Moramanga and Nosy Be: (i)Strengthening the transparency in the allocation and use of local revenues generated by mining investments in Fort Dauphin and Moramanga. According to the MAP, the contribution o f mining activities to GDP i s expected to expand drastically from currently about 4% to at least 50% in 2011. Significant investments are being made in Fort Dauphin by Rio Tinto QMM,and DynatedSherrit recently decided to invest about $2.5 to 3 billion over the next three years in nickel mininginMoramanga. Putting inplace an effective social accountability mechanism i s a crucial step toward ensuring that the economic growth accruing from these investments translates into inclusive benefits especially for local populations directly impacted by the mining operations. In light o f the significant social impacts that are already manifesting themselves during the present construction phase in preparation for the actual mineral exploitation, civil society plays a critical role in ensuring the transparent and effective use o f those revenues for improved and equitable (social) service delivery. This pertains particularly to mitigating the risk o f increasing inequalities between local powerfbl and vulnerable population groups. Inorder to ensure that local citizens' priorities are taken into account in the allocation and use o f revenues from mining (and other major local industry) investments, participatory budgeting initiatives have been launched in 5 communities affected by the mining investments in Fort Dauphin, inclose cooperation with the SAHA initiative supported by the Swiss Government, as part o f the first PGDI and the Integrated Growth Poles Project. Participatory budgeting i s a social accountability method which allows citizens to actively participate in all phases o f the budget cycle: budget formulation, decision making, and monitoring o f budget executiodactual resource allocation. It i s envisaged to consolidate and scale up these activities under the PGDI 11. Participatory monitoring o f mine concession agreements will be carried out, in order to increase transparency about and compliance with the content o f these 51 agreements, especially with regard to environmental and social issues. Support under PGDI I1also includes creating an enabling environment to ensure that a meaningful dialogue between mining companies, local governments and civil society can take place. (ii) Strengthening the transparency in the allocation and use of local revenues generated by tourism investments in Nosy Be. According to the MAP,the Government i s "committed to aggressively developing and promoting tourism .., with public participation." While tourism can positively impact the local economy through increased local tax revenues, visitor trip spending, durable goods purchases, increased Government spending, andjob creation, it also involves significant risks interms of its potential for compromising the integrity and livelihoods o f local cultures by disrupting local customs, and for causing increased pollution, decline inbiodiversity, water shortage, inadequate sewage and waste disposal system, deforestation, and erosion o f beaches. Putting in place an effective social accountability mechanism i s crucial to ensuring that the priorities o f local populations are included in local budget formation and execution as well as in the management o f local natural resources. PDGI I1 would support pilot initiatives in the area o f participatory budgeting as well as build on social accountability mechanisms piloted by development partners (such as PACT) aimed to protect natural resources. (iii) Additional social accountability pilot activities will focus on improving local oversight in the environment sector, on improving the quality o f municipal services (e.g. solid waste and tax collection) and on monitoring the introduction o f service standards at the level o f the lower courts. It is also envisaged to continue to support independent monitoring & evaluation activities for the health and education sectors, which would capitalize on the experience with the community score cards under the first PGDI. Project funding under this sub-component will be provided for goods and equipment, consulting services, workshops, as well as for training and capacity building activities. (b) Fostering an enabling environment for social accountability practices. The above mentioned pilot activities would go hand in hand with measures that create/enhance an enabling environment for meaningful involvement o f civil society in monitoring local government performance. Cultural factors and fear of repercussions in the event o f the expression o f priorities, opinions and concerns hamper more effective civil society involvement, also due to the absence o f a protective legal and institutional fi-amework for civil society engagement. Critical elements o f such a framework include (i)regulations that govern the access to information, (ii) government policies that specify the distribution o f information to the general public in a way that can be commonly understood, and (iii) regulations 52 that protect the activities o f civil society groups and associations. The project will also finance a mapping exercise that would establish a comprehensive list o f non-state actors, and assess strengths and weaknesses, inparticular watchdog/advocacy groups at the national and local levels. Project funding under this sub-component will be provided for consulting services, workshops, as well as for training and capacity building activities. (c) Building the capacity of civil society and Government actors. In addition to an enabling environment fostering civil society engagement it will be critical to ensure that citizens and civil society groups have the necessary capacity for meaningful civil engagement. PDGI I1 will therefore support capacity building initiatives aimed to familiarize NGOs and civil society groups with the concept o f social accountability. Local NGOs and other civil society groups will be trained to be trainers and facilitators o f social accountability processes. Particular attention will be paid to training o f trainers and facilitators for groups that have less voice (such as women, youth, poor people, and persons with disabilities). PGDI I1will also include activities to train Government officials to work more effectively with civil society, i.e. to enhance communication, facilitation and group decision making skills. This will complement other "supply side" training activities carried out under different project components. Project funding under this sub-component will be provided for consulting services, workshops, as well as for training and capacity building activities. (d) Monitoring Social Accountability Activities. Because many o f the pilots being supported under this component are breakingnew ground, and carry some risk, it will be important to measure impact and monitor changes as they evolve. This sub- component will support complementary activities to measure the impact o f the various pilots including information audits to assess how access to information on budget resources or miningroyalties changes at the local level over the period o f the pilot, or targeted demand side governance baseline and follow-up surveys in geographic areas where multiplepilots may bebeingcarried out. Project funding under this sub-component will be provided for consulting services, workshops, as well as for training and capacity building activities. 105. A grant funding mechanism will be set up that would finance innovative governance activities by non-state actors that are related to the objectives o f the project. These Social Accountability Grants (US$I.65 million IDA) will pilot, develop and scale up approaches that are focused on supporting civil society to monitor and provide oversight, in particular in key areas such as natural resource management, local service delivery, and public financial management. During the first year o f the implementation o f the project a transparent set o f criteria will be developed for awarding these grants. This will include the identification o f the implementing agency for these grants which should be an independentnon-state actor. This non- state actor will be selected on a competitive basis in close collaboration with relevant civil 53 society organizations such as the National Council for Civic Participation (Conseil Nationalpour la Participation des Citoyens, CNPC). Project funding would be provided to cover the operating costs for the grant administrator. ProjectComponent5 -Monitoring& evaluation(US$7.0 millionIDA) 106. The component will support Government's efforts to strengthen the monitoring & evaluation system that underpins the MAP. It will build on the support provided under the first PGDI. This support focused on the development o f the National Strategy for Statistical Development,which has been approved by the Government in 2007. Additional assistance was provided for some key statistical baseline surveys, inparticular a cartographic survey that would establish key information about the population distribution in Madagascar and i s seen as the basis for a population census. This survey is ongoing and is expected to be completed in 2008. The support under the new project will focus on the improvement ofthe operational efficiency of the National Statistics Office (INSTAT), in particular institutional restructuring and capacity building. Additional support will be provided for the modernization o f the procedural and institutional framework for monitoring & evaluation in Madagascar, in particular the strengthening of relevant activities at the level o f the sector ministries and in the Prime Minister's Office. 107. The project will also support the design and implementation o f a new population census which aims at consolidating and further deepening existing statistical data which i s vital for both public andprivate sector needs. The last census was conducted in 1993. The new census will be prepared and implemented by the National Statistics Office (INSTAT) with assistance from UNFPA. It is envisaged to finalize the census in2009 with the objective o f publishingthe results in2010. The total costs for the census are presentlyestimated at well above US$20.0million(or approximately US$l.OO per inhabitant) and are expected to be funded by contributions from Government and development partners. In case the Government i s not able to raise sufficient funding for a comprehensive census from the donor communityit is envisaged to use the World Bank fundingto conduct a partial census that would cover roughly 10percent o f the country. 108. Project funding under this component would primarily focus on technical assistance required during the implementationof the above mentionedreforms, the modernization of the relevant government institutions, and on training and capacity building activities. It will include some operating costs for INSTAT to facilitate the census preparation and implementation. The funding for the census will include some goods and equipment.Government contributionswould be primarily provided in-kind, in particular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision o f travel costs. ProjectComponent6 -ProgramCoordination(US$2.5 millionIDA) 109. The objective o fthis component i s to support the managementand implementation o f the PGDII1: Leadership and overall coordination o f the reforms will be ensured by the Reform Program for the Efficiency o f the Administration (Programme de Rkformes pour 1'Efficacitk de l'Administration, PREA) which was set up by the Government in 2005 to coordinate all 54 governance related activities. The PREA i s headed by a National Coordinator who reports to the Secretary o f Planning in the President's Office. The National Coordination i s supported by a Bureau de Gestion (BdG) which i s responsible for the preparation of the annual work plan, for financial management, procurement andmonitoring & evaluation. Component 1 will be implemented by the Reform Coordination Unit in the Ministry of Finance. The unit consists o f a small team and i s headedby a Coordinator who reports to the Secretary General of the Ministry. The project will finance some recurrent costs (salaries and operation costs) o f the Reform Coordination Unit and other technical advisors who are deemed necessary to ensure adequate project implementation. The unit i s in the process of establishing a `basket fund' for public finance reforms which i s linkedto the overall annual reform action plan (PAP) o f the Ministry o f Finance. It i s envisaged that - over time - the majority o f the support by the development partners to the Ministry o f Finance will be channeled throughthe basket fund. The grant funding mechanism under component 4 (Social Accountability Grants) will be supervised by a non-state actor which will be identified based on a competitive selection process during the first year o f the implementation o f the project. The main role o f this entity i s to analyze, approve and monitor funding proposals for the Social Accountability Grant mechanism. The population census under component 5 will be implemented by the National Statistics Office (INSTAT) which i s in the process o f establishing a coordination unit to ensure adequate preparation and implementation o f the census. This unit will be supported by a technical advisor which will be provided byUNFPA. All other components o f the project will be administered and supervised by the Bureau de Gestion (BdG) o f PREA. This will include the identification of a non-state implementing agency for the Social Accountability Grants. The project will finance some recurrent costs (salaries and operation costs) o f the BdG including other technical advisors who are deemed necessary to ensure adequate project implementation. Funding will also include external auditing and accounting assistance (consultants). Additional short term consultants will be recruited for the assistance to the BdGduring the supervision o f the project, in particular for regular independent audits of implementation progress and impact assessments. The project will also fund additional equipment and relevant training o fthe BdGstaff. 110. US$2.0 million o f the project proceeds remain unallocated to cover price contingencies and to ensure that the project can respond flexibly to additional demands emerging during the implementationo fthe reform activities. 111. Project funding for components 1, 2, 3 and 5 will include the financing o f a limited number of government staffs salaries until December 31, 2009, mainly to recruit trainers for local training institutions and technical specialists into the President's Office, the Prime Minister's Office, the Economic Crimes Unit and the National Statistics Office. These expendituresare inline with the requirementso f recurrent cost financing parameters as specified in BP 6.00 of April 2004 and the relevant Guidelines of April 16, 2004. World Bank support would allow the Government to gradually integrate these recurrent expenditures into subsequent 55 budget years. Government contributions would be primarily provided in-kind, in particular through the work o f civil servants, through the provision o f office space and other material, as well as through the provision o f travel costs. 112. A summary o fthe cost o fthe program and the financing planis shownbelow: Table 1:ProjectComponents by FinancingSources *Estimates/projections 56 Annex 5: ProgramDescription MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 REPOBLIKAN'I MADAGASIKARA Tanindrazana- Fahafahana -Fandrosoana M I N I S T E R E DES FINANCES Antananarivo, le O 7 AVR 2008 ETDUBUDGET _ _ - _ _ - _ - L e Ministre des Finances et du Budget A Monsieur Robert B. ZOELLICK President Banque mondiale 1818HStreet NW WashingtonDC Monsieur le President, Madagascar a commenct la mise en Oeuvre de sa seconde gtntration de strategie de lutte contre la pauvrett depuis le debut de l'annte 2007. Dtnommte Madagascar Action Plan (MAP), cette nouvelle stratdgie capitalise sur une autre echelle les realisations du precedent Document de Strattgie de Reduction de la Pauvrete (DSRP) dont l a mise en euvre commencCe en 2003 s'est terminee en fin 2006. 2. Bien que le DSRP ait permis, entre autres, l a reduction du taux de la pauvrete de 70% en 2003 B 68% en 2006 grace B un taux de croissance Cconomique reel moyen annuel de 5,3 YO, l'ampleur de la pauvrete 21 Madagascar requiere un objectif netternent plus ambitieux pour atteindre les objectifs du Millenaire fixts par la communaute intemationale. Conp dans cette optique, le MAP prtvoit donc d'escalader un niveau superieur en fixant un taux moyen de croissance entre 8 % et 10% sur la periode 2008-2012 tout en poursuivant une politique monetaire et budgetaire trbs stricte afin de minimiser le taux d'inflation B une moyenne de 5% par an. Le but ultime est de reduire le taux de pauvrete a 50% a la fin de l'annee 201 1 et de garantir aux malgaches un revenu moyen de 450 US$. 3. L'atteinte de cet objectif ultime trks ambitieux necessite une rigueur stricte dans la gestion du pays. Conscient de cette exigence, le Gouvemement Malgache entend renforcer sa stratkgie de gouvemance lancee depuis cinq ans et dont le fondement a ete axe sur la performance, la transparence, la lutte contre la corruption, et la participation citoyenne. Outre l'engagement specifique dtclint dans le MAP, Gouvernance responsable (Engagement Nul), le gouvernement mettra en place des outils transversaux de gouvemance pour mieux assurer la realisation des sept autres engagements 4. La presente lettre resume les principes fondamentaux du renforcement envisage dans la gouvemance. Elle decrit en premier lieu les avancees atteintes durant les cinq demieres annees dans le domaine de la gouvemance. L a seconde partie detaillera les perspectives tconomiques de la periode de mise en muvre du MAP et les consequences exigees par cette perspective en rnatibre de gouvemance. L a troisikme partie presentera les elements essentiels de la strategie de renforcement que le gouvemement mettra en place dans les cinq ans B venir. 57 PARTIE I :LES ACQUIS DE LA GOUVERNANCE 5. La penode de mise en ceuvre du DSRP est marquee par trois faits majeurs : le renouveau de la gestion des finances publiques, la lutte effective contre la corruption et le lancement de la participation citoyenne. Ces changements constituent des toumants en la matibre dans I'histoire de la gouvemance a Madagascar. 6. Pour les finances publiques, la mise en place d'un nouveau cadre budgbtaire oriente vers le resultat est I'un des changements importants. La nouvelle Loi Organique sur la Loi des Finances (LOLF) adoptte enjuillet 2004 a t t t mise tout de suite en application en 2005. Son application reste cependant partielle car un certain nombre des dispositifs ntcessite une prtparation prealable. Des actions sont actuellement entrepnses pour permettre l'application inttgrale de ces dispositifs d'ici 2010. La recherche de rtsultats et la souplesse de gestion introduites par la LOLF, qui sont la force principale de ce nouveau cadre budgttaire, cadrent bien avec l'esprit du MAP qui a fixe des objectifs ambitieux. 7. Le Gouvernement a aussi mis en place un nouveau code de passation de marches publics ila meme date que la LOLF. Adoptant les meilleures pratiques et de standard international, le nouveaucode n'a ete non plus applique dans son integralit6 que vers I'annke 2006 A cause de la durte de periode ntcessaire pour installer les institutions et les textes d'application du code. L'application du nouveau code depuis un an a introduit beaucoup plus de concurrence et de transparence dans la proctdure de passation de marches publics et l e Gouvemement espere que son application totale permettra de faire une Bconomie importante dans les finances publiques. 8. Un des efforts dtployts par le Gouvemement pour assurer la transparence et I'efficacitC des finances publiques a porte sur la mise en place d'un Systeme Integrt de Gestion des Finances Publiques (SIGFP). Elabore depuis Avril2004, le SIGFP est censt capter plus des 80 % des operations financikres de l'administration centrale et couvre actuellement six localitts. La faiblesse des moyens de tClbcommunications et certaines imperfections dans l'architecture du systeme font que le SIGFP ne donnepaspleinementsonplein rendement actuellement 9. I1 faut mentionner qu'en plus de ces chantiers majeurs, le Gouvemement a entrepris des reformes importantes au sein des deux rtgies financihres (la Direction Gentrale des Douanes et celle des ImpBts). Ces reformes ont permis d'augmenter de manikre substantielle les recettesde I'Etat. Cette augmentation a ttt plusnotable pour l'annee 2007. 10.La mise en place des nouvelles institutions, le Comite pour la Sauvegarde1'Integritk (CSI) et l e Bureau Indipendant Anti-corruption (BIANCO), a marque un toumant decisif dans la lutte contre la corruption a Madagascar. Ces deux institutions mis en place en 2003 ont entrepris de rtnover le cadre ltgislatif et reglementaire existant pour sevir de maniere concrete la corruption. Outre le traitement des doleances sur les cas de corruption qui hisont parvenues, l e BIANCO a aussi men6 des audits sur les grands dossiers de passation de marches publics et des audits organisationnels des services publics les plus importants. Des resultats de cette reforme commencent A &re pergusmais ilest vrai qu'un long cheminreste 21 faire. 11.Parallelement a cette rtforme, le Gouvemement a engagebeaucoup d'actions pour assainir la Justice qui constitue toujours un domaine de preoccupation majeure. En plus de I'action de formation dispenske par 1'Ecole Nationale de la Magistrature et de Greffe (ENMG), un certain nombre d'experiences pilotes, mise en place de standard de services et I'informatisation des juridictions modtles, ont Ctt menees. Des actions pour lutter contre la - . ....^.. 58 corruption au sein de la Justice ont et6 aussi commenckes. Ici aussi, ilreste encore beaucoup de chemin it parcourir. 12. Conscient des limites desrkformes au sein de I'administration, le Gouvemement s'est engage depuis les cinq dernieres anntes imobiliser la societe civile pour developper une synergie avec cette demitre en matiere de veille et de vigilance contre la corruption et l'amelioration des services publics. Des actions ont Ctb ainsi developpees pour mettre en place des structures adtquates et de renfoncer les organisations non gouvernementales dans ce sens. Des actions pilotes de participation citoyenne, comme le citizen score card et des enquZtes d'opinons ont et8 mentes. PARTIE II :PERSPECTIVE ECONOMIQUE POUR LES ClNQ PROCHAINES ANNEES 13. Le gouvernement est convaincu que l'atteinte des objectifs ambitieux du MAP sera possible malgr6 l'importance du financement qu'il requitre et une conjoncture intemationale difficile. Plusieurs facteurs favorables soutiennent cet optimisme. Le premier facteur est la rtalisation prochaine des deux projets miniers qui vont jouer un rBle preponderant sur le rythme de la croissance Cconomique globale. L a contribution de I'activite de ces deux unites permettra en effet d'envisager un taux de croissance proche de la previsiondu MAP. 14. D'autre part, le gouvemement estime que les efforts dkployks ces demitres annkes pour favoriser la cooperation regionale et l'int6gration de 1'8conomie malgache dans l'economie mondiale Clargiront le dkbouche des produits malgaches sur un march6 plus remunerateur. Ceci entrahera I'augmentation de la production et la creation d'emplois. L`Bconomie malgache connaitra non seulement une am6lioration de son taux de croissance mais aussi une perspective de meilleure distribution de revenus. 15. Enfin, avec les efforts actuels de redressement du secteur 6nergie et de recherche p6troliere, Madagascar deviendra exckdentaire en matiere d'tnergie d'ici cinq ans. L'excedent tnergttique ne proviendra pas seulement des sources hydro-klectrique et Cventuellement pktrolikres mais aussi du bio carburant dont le pays pourrait &tre un producteur important. Cette situation ne presage pas seulement l'amilioration de la productionmanufactunere, qui a souffert ces trois demikres anntes, mais surtout I'exportation Cventuelle des produits exckdentaires contnbuant largement A l'acckltration de la croissance globale du Produit Inttrieur Brut. 16. Cependant ces perspectives ne changeront pas fondamentalement les caracttristiques de 1'6conomie malgache. En effet, bien qu'une croissance exceptionnelle (taux de croissance de 8 a 10 %) par rapport aux tendances historiques soit escomptke, 1'Cconomie malgache restera dependante des capitaux &angers et trbs peu diversifiee. L a dependance vis-a-vis des capitaux 6trangers affectera le secteur public qui a besoin de resources importantes pour rkaliser 1es infrastructures, notamment sociales, pour atteindre les objectifs du M A P rentrant dans le cadre des OMD. Mais la dependance affectera plus substantiellement le secteur pnvC pour mettre en place des unites de production capables de generer les activites de production constquentes aux objectifs de croissance Cconomiques. Aprts la concentration de la production manufacturibre sur les produits textiles, les produits miniers vont dominer la productionglobale du pays. 17. Deux points positifs sont toutefois escompt6s. L a demande globale engendree par l'ampleur des activitks dans les secteurs de production d'extraction et de transformation pourrait 59 stimuler la croissance de la production agricole (le milieurural occupe toujours plus de 70 YO de la Population) et garantira une meilleure rkpartition du fruit de la croissance. D'autre part, l'intensitk des activites Cconomiques intkrieures permettra de gknerer des ressources publiques inttrieures plus importantes pour suppleer le manque tt gaper sur les droits de douanes et d'importation qui vont diminuer substantiellement du fait des accords rkgionaux de commerce. L'autre source de recettes publiques sera constituee par l'exploitation miniere. 18. L'instauration de climat de confiance pour attirer les investissements surtout etrangers et une amklioration drastique de la gestion des finances publiques sont les deux conskquences majeures de ces perspectives sur le plan de la gouvemance, a la fois pour mieux gerer les ressources propres limitkes et pour renforcer la confiance des partenaires techniques et financiers. PARTIE 111 :STRATEGIE DE GOUVERNANCE POUR 2008-2012 19. L a politique de gouvemance sera renforcke dans quatre domaines (finances publiques, foumiture de services publics et gouvemance de proximite, la lutte contre la corruption, la redevabilite sociale) et autour de trois themes (efficacite, transparence et participation). L'efficacitk sera mesuree par les rksultats atteints et le Gouvemement entend faire de la recherche de resultats son cheval de bataille pour la realisation du MAP.L a transparence et la participation sont deux objectifs complementaires : la participation favorise la transparence et la transparence appelle la participation. L a mise B la disposition de la population d'informations completes, faciles 9 comprendre sera le moyen B mettre en ceuvre pour atteindre ces deux objectifs 20. Les finances publiques seront la prioritk de la strattgie de gouvemance du Gouvemement du fait qu'elles constituent l'instrument principal de mise en ceuvre du MAP. L'amelioration et le renforcement de la gestion des finances publiques seront le cceur m&me de la strategie gouvemementale. L'objectif dans le domaine est d'une part d'augmenter notablement les recettes pour faire face aux exigences financikres des objectifs ambitieux du MAP et de rationaliser la gestion des depenses pour avoir plus d'effcience et d'impact sur la fourniture de services a tous les niveaux, notamment au niveau local, et sur la reduction de la pauvrete. 21. A cause du choix du gouvemement de prendre avantage des alliances Cconomiques avec les pays de voisinage immkdiat, et surtout du fait de 1'Cvolution des pratiques commerciales intemationales, les recettes des douanes provenant des activitts commerciales internationales vont de plus en plus diminuer dans les annkes a venir. Madagascar se prepare des maintenant a ce phbnomene et se toume vers l'optimisation des ressources provenant des activites Cconomiques interieures. Comme la plupart des pays sous developpes, la Taxe sur la Valeur Ajout6e constitue principalement la source potentielle de recettes pour le futur. L a TVA ne reprbsente pas non seulement une resource importante mais la maitrise de sa collecte engendrera automatiquement la maitrise de la collecte d'autres impBts comme les imp& sur btnefices des sociCtts et les impbts sur revenus, qui representent a eux trois plus de 80 `70de rentrtes fiscales intbrieures de Madagascar. 22. Pour realiser cet objectif, le Gouvemement poursuivra l'effort de renforcement des regies financieres entrepris depuis trois ans. I1 s'agit donc en premier lieu de l'amtlioration des services de l a Direction GBnerale des Impbts. Apres les actions supplkmentaires visant la . . 60 rationalisation de la Direction de la Fiscalite des Grandes entreprises, l'effort va se concentrer sur le renforcement des directions regionales des entreprises, qui se focaliseront sur la collecte des imp8ts des entreprises ayant un chiffre d'affaires entre 200 millions et 1 milliard. L a priorit6 portera sur six Directions regionales localistes dans les ex-chefs lieux de province et Antsirabe. L e renforcement des autres directions regionales dependra du rythme de developpement des activitts economiques dans les regions concemkes. Outre la reorganisation de l'administration des services des DFLE, I'effort sera ax6 sur la modernisation des outils informatiques pour la gestion et suivi des entreprises. 23. Le renforcement des services de la Direction Gknerale des Douanes est egalement a poursuivre non seulement pour faciliter le commerce international mais surtout pour ce m2me objectif de collecte de la TVA. En effet, la rentree de marchandises aux frontieres constitue l'autre source de constitution de valeur ajoutee et le r81e des services des douanes sera dbormais focalise sur la collecte de la TVA et des taxes connexes. L e renforcement portera sur l'informatisation de la chaine de dedouanement pour assurer sa fluidite et surtout pour securiser les ressources. L'action va porter sur le deploiement de Gasynet deja operationnel h Toamasina et Antananarivo sur les Recettes de douanes importantes 24. Madagascar ne collecte actuellement que moins de 1% du PIB de recettes non fiscales alors que beaucoup de pays en voie de developpernent amvent A faire jusqu'a 4% du PIB. Ce domaine sera la seconde piste pour l'amelioration des recettes provenant des activites economiques interieures. L e gouvemement entend ainsi moderniser la collecte de recettes dans ce domaine, d'autant plus que l'exploitation des deux projets miniers et celle de nombreuses ressources naturelles vont s'intensifier. L'ensemble des textes rtgissant les taxes non fiscales sera ainsi revuet remis A jour pour consolider ces efforts et atteindre cet objectif. Mais la reforme la plus importante portera essentiellement sur la reorganisation de I'administrationde collectes de ce type de taxe afin d'en ameliorer le rendement. 25. L a realisation du MAP n'exige pas seulernent I'augmentation des ressources financieres mais ntcessite aussi une borne utilisation de ces ressources pour produire un impact reel sur la reduction de la pauvrett et la foumiture de services A la population. L a rationalisation des depenses qui constitue le second axe stratkgique de la reforme des finances publiques poursuivra un double objectif: respecter l'equilibre budgetaire dans le temps pour ne pas hypothequer la situation macro-economique du pays et assurer I'effcacite allocative et operationnelle des depenses. 26. Le respect de I'equilibre budgttaire sera dCveloppC a travers m e politique budgktaire prudente. L'effort du gouvemement pour ce faire portera essentiellement sur le renforcernent et I'amblioration de la prevision. Les experiences passees ont en effet demontrt que les derapages de l'execution budgetaire proviennent la plupart du temps des lacunes dans la prevision. Cette lacune porte non seulement sur la masse globale au moment de la preparation du budget mais aussi sur la faiblesse des outils de gestion au cours de son I'exkcution. Les actions que le gouvemement mettra en euvre en priorit6 seront le renforcement du cadrage macro-Cconomique et corolairement le cadre budgetaire a moyen terme aussi bien au niveau global que pour les secteurs les plus importants (education, santt, travaux publics et transport, agriculture et environnement). Ces actions seront completees par le developpement d'outils de gestion de la tresorerie, de la planification de la passation de marches et celle des engagements. 27. Le gouvernement est convaincu que la mise en euvre intkgrale des dispositions du nouveau cadre budgetaire, le budget programme, constitue le meilleur moyen pour garantir l'efficacitk 61 de l'allocation des ressources budgetaires et pour amkliorer les impacts operationnels des dCpenses publiques. C'est pourquoi le dkploiement effectif de ce cadre, qui est prtvu s'accomplir au plus tard d'ici deux ans, sera la priorite du gouvemement. Les actions relatives ice dkploiement porteront sur la rkvision de la nomenclature budgetaire dont une grande partie du travail a et6 faite, la definition d'une nouvelle chaine de l a depense conforme aux dispositions de la LOLF, y compris la revision du r6le et des institutions de contr6le interne, la definition des details d'application des dispositions du LOLF et eventuellement la revision de certaines de ses dispositions, qui pourraient entraver I'atteinte de resultats. 28. L a rtalisation du MAP exige aussi que des economies soient rtalistes sur tous les domaines de depenses ob cela est possible .Pour nationaliser les dkpenses publiques, le Gouvernement a entrepris le processus de reforme de la gestion des btablissements publics nationaux. Une ttude est actuellement en cours pour faire le diagnostic de la gestion de ces ttablissements et unpland' action sera Clabore d' ici mi+in 2008 pour redresser la situation .Ce plandevra prkvoir la rtvision des statuts de ces ktablissements y compris la possibilitk de 1' integration de certains d' entre eux et la privatisation des certaines autres .Des tconomies sont aussi escomptCes avec la restructuration des deux caisses de retraite des fonctionnaires ( CRCM et CPR ) dont les Btudes ont et6 finalistes en 2007 .Unplan d' action est en cours d'elaboration pour cette restructuration , 29. L'amblioration de l'allocation et des impacts opCrationnels sur le terrain sera seulement thborique si la preparation et l'execution du budget ne se rapprochent pas des wagers. Ainsi, le Gouvernement poursuivra pour les cinq annees B venir sa politique de ddcentralisation et de dkconcentration aussi bien sur le plan administratif que budgetaire. Sur la decentralisation, le Gouvemement se concentrera sur la mise en place des rtgions dont l e r61e est d'impulser le developpement Cconomique. Sur leplan budgttaire, cette mesure va se traduire par la mise en place d'un veritable budget de regions et le renforcement de la capacite de cette entiti A formuler, prtparer et exCcuter le budget pour servir de catalyseur au developpement regional. L'objectif dans cette demarche est de se servir des regions comme un courroie de transmission de I'action du gouvernement central pour integrer la production dans la logique du marcht. 30. Dans la poursuite de cet objectif de rationalisation les impacts optrationnels du budget, le gouvernement mettra un accent particulier pour inciter une production mieux integree dans 1'Cconomie de marchb. Pour ce faire, ilmettra bient6t en aeuvre une nouvelle strategie pour rentabiliser les investissements publics. Cette strattgie qui completera la dtcentralisationet la dtconcentration, portera sur un meilleur ciblage des investissements publics de manitre i dtvelopper les Cconomies regionales. Ceci consiste d'abord de susciter une demande locale plus substantielle, par la gtnkration de revenu B partir des investissements publics, en vue de relancer l'offre au niveau des producteurs les plus pauvres. I1 faut ensuite h mettre en place, en mZme temps, les infrastructures pour crter un vkritable marche au niveau de chaque region en assurant la fluidit6 de circulation des produits. 31. L e renforcement du r61e de la region dans ce r6le de courroie de transmission sera amplifie par une dtconcentration plus pousske de I'extcution du Budget. En plus de l'effort entrepris depuis les deux demitres annees pour mettre en place des directions regionales des ministeres fournissant les services les plus demandts par la population (sante, education, eau potable..), le gouvemement a entamt dts cette annte, la dkconcentration des services financiers qui faciliteront I'extcution des budgets par les services deconcentrks cites plus hauts. L a dkconcentration des services du trtsor au niveau des regions sera achevee cette annee 2008 et la mise en place des circonscriptions financieres au niveau de chaque region sera entamte 62 vers la fin de cette annee pour se terminer en 2009. Le Gouvemement mettra aussi en Oeuvre un plan d'action pour assister les communes et notamment les communes rurales de 2e categoric dans l'exkcution de leurs budgets, et le suivi de leurs gestions financiires. 32. L'amtlioration des impacts operationnels des depenses publiques ne sera pas aussi possible qu'avec un systeme de contrble efficace de l'utilisation des fonds publics. Conscient de la faiblesse actuelle des institutions et des outils de contrble tant interne qu'exteme, le Gouvemement va lancer parallelement avec le renouvellement du circuit de la dkpense dans le cadre de la mise en Oeuvre de la LOLF (voir paragraphe ci-dessus), un plan d'actions pour redresser cette lacune importante. Ce plan se focalisera sur une redistribution de responsabilites le long de la chaine de maniere A alltger le contrble interne d'une part mais aussi assurer l'effectivite de ce contrble d'autre part. L'effort dans ce sens portera notamment sur la certificationde service fait. 33. En ce qui conceme le contrble exteme, les actions vont porter essentiellement sur le renforcement de la Cour de Comptes, l'organe statutaire design6 pour I'execution de ce contrble au niveau de l'exkcutif. L e detail de ce renforcement sera dbfini apres un audit organisationnel de la Cour qui en determinera le pland'actions a mettre en ceuvre. L'objectif est de permettre I la Cour d'assurer l'effectivite du contrde des comptables publics et un examen renforci des lois de reglement. 34. L'efficacite des d6penses publiques ne peut se realiser qu'avec des outils de suivi adequats et unreportage Blargi au grand public. L'objectif est I la fois de garantir une transparence totale dans la gestion de fonds publics et de disposer des outils permettant le redressement rapide des erreurs, le cas tchtant. Dans le cadre de ce double objectif le Gouvemement continuera sa politique d'amklioration de ses outils d'infonnation sur les finances publiques. L e SIGFP sera d'abord deploy6 dans le reste des vingt deux regions qui n'en sont pas encore pourvues. Ce dtploiement est programme pour &re ached d'ici deux ans au plus tard et son rythme sera determine par la disponibilit6 de capacit6 technique en matiere de t616communication. 35. L amodemisation du Centre d'optration (Network Operation Center) et du Centre de Base de Donntes sera entreprise dans le mbme cadre. Parallelement ces actions au niveau Cquipement, une attention particuliere sera apportee sur I'amelioration du support logiciel du systtme afin d'augmenter sa fonctionnalite et assurer la centralisation des donntes en temps rtel. 36. Les impacts opkrationnels des depenses publiques ne seront pas ressentis par la population si la foumiture des services sur le terrain n'est pas assurbe. Dans ce sens, le Gouvemement va deployer des instruments en complement des outils mentionnts plus haut. Afin d'ameliorer le service aux usagers, ilmettra en ceuvre des actions au niveau central et au niveau des regions. Avec I'appui des partenaires techniques et financiers, il entend renforcer la capacit6 managhiale des ministeres techniques pour garantir une allocation optimales des ressources , pour definir de normes et de standards de services demand& par la population. Cette action sera poursuivie surtout par la formation des cadres des ministkres par le biais du rtseau local de formation comme le NLIM, I'ENAM ou I'IMATEP. Ce renforcement des ministeres techniques sera aussi assure par la prestation d'assistants techniques ponctuels. 37. Mais le facteur principal d'un service adequat sur le terrain sera les ressources humaines, celles qui effectuent le travail. Pour mieux motiver le personnel de sa fonction publique, le Gouvemement envisage de revoir en profondeur son systtme de rbmuneration, qui est completement depasse, car ildate pratiquement de la periode coloniale. L e d6tail des actions pour cette revision sera determine par les resultats d'une etude en cours, qui seront 63 disponibles d'ici un an. Le plan d'actions y afferent couvrira une periode de cinq ans a partir du milieu de I'annee 2009. En plus de la remuneration, le plan determinera le systkme de recrutement, et I'evolution des carrikres ainsi que le systbme de recompense et de sanctions basees sur la performance. A la fin de la mise en place de ce plan, le Gouvemement espere disposer d'une fonction publique plus efficace grhce a une meilleure repartition des ressources humaines avec une meilleure remuneration qui tient compte des ressources financikres limitees du pays, 38. Le renforcement des institutions locales, notamment celles qui sont capables de suivre effectivement la foumiture des services sur le terrain est critique. C'est pourquoi le Gouvemement consacrera une attention particulibre pour le renforcement des communes. Un effort particulier sera entrepris pour augmenter les ressources financikres de ces dernieres. En effet outre la revision des ressources propres dkvolues aux communes, le Gouvernement mettra en place tres prochainement un Fonds de Developpement Local qui canalisera des ressources financikres pour permettre aux communes de financer les activites de dtveloppement prevues par la loi. 39. Le renforcement des communes portera aussi sur leur capacite technique par la formation et la mise en place de structure d'appui permanent A travers les services dkconcentrts traditionnels ou de structures specifiques. Les regions bkneficieront aussi d'appuis spkcifiques pour leur permettre de faire face a une responsabilitt accrue dans le cadre de la decentralisation et de la deconcentration. Ces appuis seront essentiellement axes a la fois sur un programme de renforcement de capacites et des assistances techniques de la part des services territoriaux decentralises (STD), selon I'axe 2 de la Politique de la Deconcentration et de Decentralisation. 40. L a lutte contre la corruption constitue un rempart supplementaire pour rationaliser les ressources publiques, donc pour la realisation du MAP.L'objectif du Gouvemement dans le domaine est de poursuivre les actions lanckes depuis 2002 pour minimiser le detournement des fonds publics aussi bien au niveau des recettes que des depenses ainsi que d'empscher les profits injustifits par l'occupation de position dans la fonction publique ou l'appareil d'Etat. L'objectif pour les cinq ans a venir sera d'abord de renforcer le cadre legislatif et institutionnel pour mieux lutter les formes de corruption non cemees dans I'actuel cadre. I1 s'agit notamment des dtlits financiers lies au blanchiment d'argent. L a strategie de lutte contre la corruption comprendra kgalement I'elimination de conflit d'interbt, qui permet A un haut responsable de la fonction publique de profiter de son poste pour realiser des profits injustifies ou de fausser la rkgle de la concurrence. 41. Les actions prkvues par le Gouvemement pour rdaliser ces objectifs seront d'apporter un appui technique et matQiel aux institutions de lutte contre la corruption comme le CSI et le BIANCO. Ce renforcement consistera adeployer au niveau des regions des Bureaux de la BIANCO et la finalisation de la mise en place de l'unitk SRF, une nouvelle unite pour lutter contre les crimes Cconomiques. L a strategie prevoit aussi l'appui aux organes non etatiques pour completer les actions de I'administration dans la lutte contre la corruption en jouant le r6le de gardien independant dans le domaine. D e plus, un effort particulier devrait Etre entrepris pour renforcer le r61e de watchdog (observation) de la societe civile, par des actions de renforcement des structures d'tchanges et de la capacite de la societe civile. 42. L e fonctionnement de la Justice doit aussi contribuer a un succts de la mise en a w r e du MAP, par l'instauration d'un climat rassurant qui incite les investisseurs tant nationaux qu'etrangers. Cet objectif sera poursuivi par la mise en place d'une ltgislation repondant aux . . 64 besoins du developpement rapide. afin d'ameliorer l'environnement juridique des affaires, la reforme des textes y afferents sera menee pour les rendre conformes aux instruments internationaux, aux exigences de la mondialisation et du developpement. 43. Le Gouvernement poursuivra aussi l'amelioration de l'efficacitk de la Justice par la mise B sa disposition d`un budget plus conskquent pour renforcer entre autre le fonctionnement de ses services d'inspection et de contrde. Cette efficacite se fera aussi par la simplification de l'acces de la population B la Justice et l e rapprochement de la Justice aux justiciables. Ceci s'effectuera par la crtation de nouveaux tribunaux, la mise en place de justice de proximitt intkgrant dans le processus les citoyens et les societes civiles et par le developpement des cliniques juridiques. L'accCICration de l'informatisation sera poursuivie pour completer ces actions. 44. Afin de maintenir la motivation permanente de la populationdans la mise en Oeuvre du MAP, la Justice doit aussi accroitre la confiance de cette derniere en renforgant l'integritt de son personnel pour garantir son &quiteet son impartialitt. Une premiere panoplie d'actions pour ce faire portera sur la simplification des procedures, la revision du rtgime des privileges et immunitbs des Clus et des acteurs de la justice, et I'elaboration de projet de loi sur la Haute Cour de Justice. Le Gouvemement veillera aussi a I'atteinte de cet objectif par le renforcement et le deploiement de I'application de standards de services, le developpement de I'aide juridictionnelle itla population et l'extension progressive sur toutes les juridictions des actions actuellement mentes dans lesjuridictions pilotes. 45. Enfin le Gouvernement va d6ployer un effort particulier pour developper des institutions indtpendantes de veille et de vigilance au sein de la societe civile pour I'aider 21 suivre, &valuer et baliser les actions de I'administration et leur impact sur le terrain. Dans ce cadre, il entend renforcer la synergie entre les reformes au niveau gouvernemental et celles de la societe civile pour mieux assurer la participation doyenne B I'tvaluation des actions publiques et l'amelioration des services publics. I1 est aussi envisage de piloter et perfectionner les interventions ayant connu du SUCC~S,qui sont axees sur la reduction des intgalitks, et ce, en assurant que la societe civile soit capable d'exprimer les priorites et la demande de redevabilite. 46. Les actions qui seront developpts dans le cadre de ces objectifs porteront d'abord sur la creation d'un environnement encourageant l'engagement de la societe civile et les initiatives de responsabilisation sociale, particulierement l'amelioration de la gouvemance locale et l'optimisation de I'impact positif social. Ensuite pour assurer que les citoyens et les organisations de societe civile aient les capacites nkcessaires pour un engagement civique positif, le gouvemement appuiera les initiatives de renforcement de capacites visant la familiarisation des ONG et organisations de la societe civile avec le concept de redevabilite sociale. 47. Les ONG locales et les autres organisations de la societt civile recevront des appuis fournis par l e Gouvernement pour acqutrir une assistance technique pour ce faire. Une attention particuliere sera prise en compte pour les groupes vulnkrables qui ont moins de voix (tels que femmes, jeunes, pauvres, les personnes handicapees). La formation dans ce domaine sera efficacement avec la societe civile, a savoir renforcer Ies capacites en communication, aussi dispensee aux autorites administratives afin que ces demiers puissent travailler plus faciliter la prise de decision en groupe. 65 48. L e MAP n'est pas un document figk, sa realisation sera ajustee selon l'tvolution de la situation. Dans ce cadre, la disponibilitk des informations fiables est incontournable. Conscient de 1'Ctat obsolbte des informations dkmographiques, le gouvemement a engage depuis deux ans la preparation d'un recensement general de la population et de l'habitat. I 1 compte entreprendre un recensement integral si le financement sera boucle avec l'aide des partenaires techniques et financiers. Sinon, unrecensementpartiel selon les fonds disponibles sera effectue. Les travaux de recensement proprement dits commenceront cette annee. L e demier recensement remonte en 1993 et les donnees de ce recensement ne sont plus utilisablespour faire de bonnes projections. 49. Par ailleurs, un outil specifique sera aussi dkveloppe pour mesurer l'evolution de la mise en ceuvre du MAP afin de permettre au Gouvernement de prendreA temps les actions correctives quand c'est necessaire et de mettre h jour les objectifs et les actions envisagkes. Ce systeme denomme, Systbme National d'htegre de Suivi et d'Evaluation (SNISE) a pour objectif d'instaurer des mecanismes et un processus de suivi et d'tvaluation du MAP aux niveaux central et rkgional. L'tlaboration du SNISE est en cours et comprend trois &tapes. La premiere etape consistera a faire le diagnostic de la situation existante, en termes de systbme d'information devant alimenter les indicateurs, ainsi que de cadre institutionnel et organisationnel. La seconde etape sera la conception du systeme lui-mbme. La demiere &ape sera I'klaboration du plan d'actions pour sa mise en muvre. On estime qu'il sera complbtement opdrationnel avant la fin de l'annee. 50. Enfin, ilest rappel6 que le Gouvemement a entrepris les demarchesnecessaires pour qualifier Madagascar dans I'Initiative sur la Transparence des Industries Extractives (EITI). L'engagement du Gouvernement d'entreprendre cette initiative est la garantie de son adhesion a une transparence totale dans la gestion des ressources du pays et en une bonne gouvernance sur tous les plans. 5 I.Les actions envisagees dans l e cadre de cette strategic seront mises en ceuvre avec l'appui des partenairestechniques et financiers que le gouvemement sollicitera particulibrement lors de la reunion prevue se tenir A Antananarivo au mois de Juin prochain. Le ances et du Budget 66 REPUBLIC OFMADAGASCAR MINISTRY OFFINANCE AND BUDGET MinisterofFinanceandBudget No. 29/08-M F B M Antananarivo,April 2,2008 Mr.RobertB.ZOELLICK President WorldBank 1818HStreetNW Washington,D.C Mr.President, Madagascar began implementation o f its second generation Poverty Reduction Strategy since early 2007. Knownas the Madagascar Action Plan (MAP), this new strategy builds on the achievements o f the earlier Poverty Reduction Strategy Paper (PRSP), the implementation o f which began in2003 and ended in2006, but takes it to another level. 2. Despite the fact that the PRSP facilitated, among other things, a reduction inpoverty from 70 percent in2003 to 68 percent in2006 as aresult of arealaverage annual economic growthrate of 5.3 percent, the scope o f poverty in Madagascar calls for a far more ambitious objective in order to attain the Millennium Goals establishedby the international community. Designed from this vantage point, the MAPtherefore makes provisionsto move to ahigher level by setting an average growthrate target of 8 percent to 10 percent for the period 2008-2012, in the context o f a very strict monetary and budgetary policy inorder to keep inflation at a low rate o f 5 percent a year, on average. The ultimate objective i s to reduce the poverty rate to 50 percent by end-2011 and to guarantee the Malagasy people an average annual income o f US$450. 3. Achievement o f this highly ambitious ultimate objective calls for a strict approach to managing the country. Cognizant o f this requirement, the Malagasy Government intends to strengthen its governance strategy launched five years ago, the foundation o f which was built around performance, transparency, combating corruption, and citizen participation. Inaddition to the specific commitment set forth inthe MAP,namely, responsible governance (Commitment No. l), the Government will put in place cross-cutting governance tools in order to boost the chances of achieving the seven other commitments, 4. This letter summarizes the fundamental principles projected to strengthen governance. The first part outlines the progress made in the past five years in the area o f governance. The second part provides detailed information on the economic outlook during the M A P implementation period and the 67 implications o f this outlook for governance. The third part presents the core elements o f the strategy that the Government will establish over the next five years in order to strengthen governance. PART I:ACHIEVEMENTSINTHE AREA OF GOVERNANCE 5. The PRSP implementation period was marked by three major events: resumption o f public finance management, effective efforts to combat corruption, and the start o f the process o f citizen participation. These changes mark turningpoints inthe history o f governance inMadagascar. 6. One o f the most important changes inthe area o f public finance was the introduction o f a new results- based budget framework. The new budget framework law [Loi Organique sur la Loi des Finances LOLF] was passed inJuly 2004 and took effect shortly thereafter (in2005). However, its application remains partial, given that a number o f provisions require advance preparation. Work i s currently being done so that these provisions can be applied intheir entirety by 2010. A results-based approach and the management flexibility introduced by the LOLF, which constitute the driving force behind this new budget framework, are fully consistent with the spirit o f the MAP, which has set ambitious objectives. 7. The Government also implemented a new public procurement code at the same time as the LOLF. The new code, which adopted best practices and international standards, was only fully applied around 2006, owing to the period required for the establishment o f new institutions and the implementingregulations to the code. Application o f the new code a year ago has ledto much greater competition and transparency in the public procurement process and the Government hopes that its full application will produce significant savings inthe area o fpublic finance. 8. One o f the measures adopted by the Government to ensure transparency and efficiency in public finance i s related to the implementation o f an integrated public finance management system [SystBme Integrk de Gestion des Finances Publiques SIGFP]. Prepared since April 2004, the SIGFP i s supposed to handle 80 percent o f the central government's financial transactions and currently covers six regions. As a result o f the lack o f telecommunications resources and a number o f flaws in the design o f the system, the SIGFP i s not currently operating at full capacity. 9. Mention should be made o f the fact that in addition to this major work, the Government has undertaken a number o f important reforms in two State finance agencies (the General Directorate o f Customs and the General Directorate o f Taxes). These reforms have led to a significant increase in government revenue. This increase was greater in2007. 10. The establishment o f such new institutions as the Committee for Preserving Integrity [Comitdpour la Sauvegurde 1'Intkgritd CSI] and the Independent Anti-Comption Office [Bureau Inddpendunt Anti- corruption BIANCO] marked a decisive turningpoint in efforts to combat corruption inMadagascar. These two institutions, established in 2003, have started to overhaul the current legislative and regulatory framework in order to clamp down, in a concrete manner, on corruption. In addition to handling the corruption-related complaints they receive, BIANCO has also conducted audits o f major public procurement documents as well as organizational audits o f the biggest public service entities. The results o f this reform effort are beginning to emerge; however, it i s true that much remains to be done. 68 11. Inparallel with this reform, the Government has undertaken many activities to clean up the justice system, which remains an area o f major concern. Inaddition to the training provided by the National School for Magistrates and Court Clerks [Ecole Nationale de la Magistrature et de Grefe ENMG], a number o f pilot activities, the establishment o f service standards, and the computerization o f operations in pilot jurisdictions have taken place. Efforts to root out corruption within the justice systemhave also begun. Here again, muchwork remains to be done. 12. Cognizant o f limits o f reforms within the administration, the Government made a commitment five years ago to mobilize civil society with a view to developing a collaborative relationship with it inthe area o f monitoring and oversight of corruption and improvement o fpublic services. Activities were therefore undertaken to establish appropriate entities and strengthen non- governmental organizations inthis regard. Citizen participationpilot activities such as the citizen scorecard and public opinion surveys were carried out. PART II: FIVE-YEAR ECONOMIC OUTLOOK 13. The Government i s confident that achievement o f the ambitious objectives o f the MAP will be possible, despite the sizeable financing required and the difficult international economic outlook. Several favorable factors provide reason for optimism. First, two mining projects will come on stream in the near future that will have a major impact on the pace o f overall economic growth. The contributiono f the activities carried out inthe context o f these two projects will in fact make it possible to project a growth rate that i s close to the MAP projection. 14. Second, it i s the Government's view that the efforts made in recent years to foster regional cooperation and the integration o f the Malagasy economy into the global economy will expand opportunities for Malagasy products to penetrate more lucrative markets, thereby increasing production and job creation. This will not only boost the growth rate o f the Malagasy economy but also prospects for better income distribution. 15. Third, the current efforts aimed at the recovery o f the energy sector and oil exploration will allow Madagascar to have an energy surplus in the next five years. The energy surplus will be attributable not only to hydroelectric and possibly petroleum sources, but also to biofuels, o f which the country could become a big producer. This situation bodes well not only for higher manufacturing output, which has been in the doldrums for the past three years, but in particular for the possible export o f surplus products, thereby making a big contribution to the acceleration o f overall GDP growth. 16. However, these prospects will not fundamentally alter the characteristics o f the Malagasy economy. In fact, although an exceptionally high growth rate (between 8 and 10 percent) compared to historical trends i s expected, the Malagasy economy will remain dependent on foreign capital, with a very low level o f diversification. Dependence on foreign capital will impact the public sector, which needs significant resources to carry out infrastructure work, particularly inthe social area, in order to attain the MAP objectives that fall within the scope o f the MDGs. However, this dependence will have a greater impact on the private sector's efforts to establish production units capable o f generating productive activities that are in keeping with economic growth objectives. Miningproducts will be the second most dominant area o f overall production inthe country, after the manufacture o f textiles. 69 17. However, two positive developments are expected. The first i s that overall demand, generated by the scope o f activities in the extractive and processing industries, could stimulate growth in the area o f agricultural production (more than 70 percent o f the population still lives in rural areas) and will guarantee a better distribution o f the fruits o f growth. The second i s that the intensity o f domestic economic activities will facilitate the generation o f greater domestic public resources to make up for the shortfall in import and customs fees, which will decline significantly as a result o f regional trade agreements. The other source of public revenue will come fiom mining activities. 18. The establishment o f a climate o f confidence aimed at attracting investment, particularly foreign investment, and a vast improvement inpublic finance management, are the two major effects o f these projections from the standpoint o f governance, with a view to better management o f the country's limited resources and buildingthe confidence o f technical and financial partners. PART 111: GOVERNANCE STRATEGY FOR 2008-2012 19. The governance policy will be strengthened infour areas (public finance, provision o f public services and local governance, combating corruption, and social accountability) and around three themes (effectiveness, transparency, and participation.) Effectiveness will be measured by the results achieved and the Government intends to make a results-oriented approach the centerpiece o f MAP execution. Transparency and participation are two complementary objectives: participation fosters transparency and transparency encourages participation. T o attain these two objectives, the public will have to be provided with informationthat is complete and easy to understand. 20. Public finance will be the priority o f the Government's governance strategy given that it is the main implementation instrument o f the MAP. Improving and strengthening public finance management will constitute the central thrust o f the Government's strategy. The objective inthis area i s to boost revenue significantly in order to meet the financial requirements o f the ambitious MAP objectives and to streamline the management o f expenditure in order to achieve greater efficiency and have an impact on the delivery of services at all levels, particularly at the local level, and on poverty reduction. 21. Given the choice made by the Government to take advantage o f economic alliances with Madagascar's immediate neighbors, and inparticular trends in international trade practices, customs revenue from international trade will trend steadily downward in the years ahead. Madagascar i s already preparing for this development and i s shifting toward optimization o f resources from domestic economic activities. As in most underdeveloped countries, the value added tax i s the main potential source o f future revenue. Not only i s VAT a significant source o f revenue, oversight o f its collection will automatically lead to more effective work in the area o f the collection o f other taxes such as corporate income tax and personal income tax, the three o f which alone account for more than 80 percent of the domestic taxes collected inMadagascar. 22. To achieve this objective, the Government will continue work that was started three years ago to strengthen State finance agencies. The first task to be tackled will be improving the units o f the General Directorate o f Customs. Following additional work aimed at streamlining the Directorate o f 70 Taxation and Major Enterprises [Direction de la Fiscalit6 des Grandes entreprises], efforts will shift to strengthening regional enterprise directorates, and will focus on the collection o f taxes from enterprises with a business turnover o f 200 million to 1billion. Priority will be given to six regional directorates located in the former provincial chef-lieu and Antsirabe. Improving the operations of other regional directorates will depend on the pace at which economic activities are carried out inthe regions concerned. Other than the reorganization o f management o f the DE'Sunits, work will focus on the modernization o f the computer tools usedin enterprise management and oversight. 23. Efforts to improve the services o f the General Directorate o f Customs will also continue, not only to facilitate international trade but also for purposes o f VAT collection once again. Infact, the entry of merchandise at the borders constitutes the other value added source and the role o f the customs service will now be focused on the collection o f VAT and related taxes. Improvements in this area will focus on the computerization o f the customs clearance process inorder to ensure that it proceeds smoothly and, inparticular, to make resources secure. Work will focus on the deployment o f Gasynet, which i s already operational in Toamasina and in Antananarivo, where significant amounts o f customs revenue are involved. 24. Currently, less than one percent o f Madagascar's GDP i s derived from non-tax revenue, compared to many developing countries where this figure i s as high as 4 percent o f GDP. This will be the second area o f focus for enhancing revenue derived from domestic economic activities. The Government intends to modernize revenue collection in this area, especially in view o f the fact that activities associated with execution o f two miningprojects and numerous natural resources will be stepped up. All the legal texts governing non-tax fees will therefore be reviewedand updated inorder to enhance this work and achieve this objective. However, the biggest reform pushwill be mainly inthe area of reorganization o f the administration that collects such fees in order to boost revenue. 25. Execution o f the MAP does not only require increasing these financial resources but also prudent use o f them in order to ensure a real impact on poverty reduction and the provision o f services to the population. Streamlining expenditure, the second strategic thrust o f public finance reform, will seek a dual objective, namely, to have a balanced budget over time so as not to jeopardize the country's macroeconomic situation and to ensure allocation and operational efficiency in the area o f expenditure. 26. Ensuring a balanced budget will be achieved through a prudent fiscal policy. The Government's work inthis area will focus largely on strengthening and improving forecasting. Past experience has in fact shown that most of the time, budget execution slippage is attributable to forecasting inaccuracies. These inaccuracies pertain not only to the global amount at the time o f budget preparation, but also to deficiencies in the management tools used during execution. The Government will accord priority to strengthening the macroeconomic framework and, consequently, the medium-term budget framework at the global level and for the most important sectors (education, health, public works and transport, agriculture, and the environment). These activities will be supplementedby the development o f cash flow management, procurement planning, and commitment tools. 27. The Government i s confidentthat comprehensive implementationo f the provisions o fthe new budget framework-the programmatic budget-offers the best path to guarantee the effective allocation o f budget resources and enhance the operational impact o f public expenditure. For this reason, effective 71 implementationo f this framework, which i s projected to be completed within two years at the latest, will be the Government's priority. Implementation-related activities will focus on the review o f budget nomenclature where a great deal o f work has been done, outlining the new expenditure chain inaccordance with the provisions ofthe LOLF, includingreview ofthe role ofinternaloversight and o f the institutions exercising this oversight, outlining the details for application o f the LOLF and possibly reviewing a number o f its provisionsthat could impede the achievement o f results. 28. M A P execution also calls for savings in all possible areas o f expenditure. With a view to nationalizing public expenditure, the Government has undertaken a management reform process of national public entities. A study i s currently being conducted with the aim o f assessing the management o f these entities and an action plan will be drafted by mid-June o f 2008 to address the situation. This plan should make provisions for changing the status o f these establishments, including the possibility o f merging a number o f them and privatizing others. Savings are also expected to be derived from the restructuring o f two civil service pension funds (CRCM and CPR), the studies of which were completed in 2007. An action plan i s currently being prepared with a view to this restructuring. 29. Improving allocation and the operational impact on the ground will amount to a mere theoretical exercise if the budget preparation and execution process i s not brought closer to users. Over the next five years, the Government will therefore continue its decentralization and deconcentration policy in both the administrative and budgetary areas. In the area o f decentralization, the Government will focus on identifying the regions to be assigned the role o f stimulatingeconomic development. From a budgetary standpoint, this approach will be reflected in the establishment o f a true regional budget entity and buildingthe capacity o f this entity to formulate, prepare, and execute the budget in order to serve as a catalyst for regional development. The objective o f this procedure i s to use the regions as a conduit for transmitting the actions o f the central Government with a view to integrating production into the market approach. 30. Inpursuing this objective o f streamlining the operational impact o f the budget, the Government will place special emphasis on encouraging better integration into the market economy. To this end, it will soon implement a new strategy aimed at makingpublic investments profitable. This strategy will supplement decentralization and deconcentration and will focus on better targeting public investment in such a way as to develop regional economies. This will first entail creating greater local demand by generating revenue through public investments, with a view to stimulating supply at the level of the poorest producers once again. Inparallel, the infrastructure needed to create a real market ineach region, thereby ensuring the unfettered circulation o fproducts, will have to be put inplace. 31. Strengthening the regional role in this transmission chain will be bolstered by a more far-reaching deconcentration o f budget execution. In addition to the work done over the past two years to implement regional ministerial directorates providing the services most sought after by the people (health, education, drinking water, etc.), the Government started the process o f deconcentration o f financial services this year, which will facilitate budget execution by the deconcentrated units mentioned above. Deconcentration o f the treasury units at the regional level will be completed in 2008 and the establishment o f financial districts in each region will be started toward the end o f this year, with a completion date set for 2009. The Government will also implement an action plan to assist communes, particularly rural second-tier communes, with the execution o f their budgets and the monitoring o ftheir financialmanagement. 72 32. Improvement o f the operational impact o f public expenditure will be possible only with an efficient system to oversee the use o f public funds. Cognizant o f the current deficiencies o f institutions and both internal and external oversight tools, the Government will launch, in parallel with the introduction o f the new expenditure chain in the context o f LOLF implementation (see paragraph above), an action plan to address this major deficiency. This plan will focus on a redistribution of responsibilities throughout the chain so as to ease internal oversight on the one hand, but also to ensure the effectiveness o f this oversight, on the other. Work in this area will focus in particular on certification o f the service provided. 33. Inthe area o f external oversight, activities will focus mainly on strengthening the Audit Office, the statutory body appointed to carry out this oversight at the executive level. The details o f this process will be provided following an organizational audit o f the Audit Office, which will set forth the action plan to be implemented. The objective i s to permit the Audit Office to oversee effectively the public accounting system and to conduct a more probing review o f implementing regulations. 34. Effective public expenditure can take place only with appropriate monitoring tools and the provision o f more information to the public at large. The objective i s to guarantee full transparency in the management o f public funds and to acquire the tools that permit errors to be corrected quickly, where necessary. Given this dual objective, the Government will forge ahead with its policy o f improving its public finance computer tools. The SIGFP will first be deployed in the remaining 22 regions where it has not yet been introduced. This deployment i s scheduled to be completed within two years at the latest, and the pace o f deployment will be determined by the availability o f technical expertise inthe area oftelecommunications. 35. The modernization o f the Network Operation Center and the Database Center will take place as part o f the same exercise. Inparallel with this hardware-related work, special attention will be paid to improving the system's software support, with a view to enhancing its functioning and ensuring the centralization o f data inreal time. 36. The operational impact of public expenditure will not be felt by the people without the guaranteed provision o f services on the ground. In this regard, the Government will use instruments to complement the tools mentioned earlier. In order to improve service to users, the Government will take action at both the central and regional levels. With the assistance o f technical and financial partners, it intends to build the managerial capacity o f the technical ministries in order to guarantee the optimal allocation of resources and to outline norms and service standards sought by the population. This action will take place largely by training senior staff in ministries through the local training network such as the NLIM, ENAM, or IMATEP. Capacity building in technical ministries will take place through the provision o f specific technical assistance. 37. However, the main factor required for the provision o f proper services on the ground will be human resources who, in effect, carry out the work. In order to motivate its civil service staff, the Government plans to conduct an in-depthreview o f its remuneration system, which i s completely out o f date, given that it dates back to the colonial era. Details related to this review exercise will be worked out based on the findings o f a study currently inprogress, which will be available inone year. The relevant action plan will cover a five-year period, starting in mid-2009. In addition to remuneration, the plan will determine the system o f recruitment, career paths, and performance-based remuneration and sanctions. Once this plan has been established, the Government hopes that the civil 73 service will be more efficient and will have human resources who are better distributed and more highlypaid, taking into account the country's limitedresources. 38. Local institution building, particularly of those institutions capable o f effectively monitoring the provision o f services on the ground, i s o f critical importance. For this reason, the Government i s paying special attention to the strengthening o f communes. A special effort will be made to increase the financial resources o f these communes. In fact, in addition to own resources received by the communes, the Government will establish, in the very near future, a Local Development Fund that will serve as a conduit for financial resources in order to enable communes to finance those development activities provided for by the law. 39. Capacity building in communes will also focus on their technical capacity acquired through training and establishment o f a permanent support structure through the established deconcentrated units or specific entities. The regions will also receive specific assistance to permit them to handle greater responsibility in a decentralizatioddeconcentration context. This assistance will essentially revolve around both a capacity-building and technical assistance program offered by the decentralized territorial units (DTS), in accordance with the second thrust of the deconcentration and decentralization policy. 40. Combating corruption i s an additional tool for streamlining public resources, and thus for execution o f the MAP. The Government's objective in this area i s to continue the activities started since 2002 to minimize the misappropriation o f public funds in the areas o f revenue collection and expenditure and to prevent persons in the civil service or State apparatus from using their positions to secure ill- gotten gains. The objective over the next five years will be first to strengthen the legislative and institutional framework to better combat forms o f corruption that are not covered under the current framework. These entail, inparticular, financial crimes linked to money laundering. The strategy for combating corruption will also include the elimination o f conflicts o f interest, which allow senior officials to derive benefit from their public office to acquire ill-gotten gains or to bend the rules of competition. 41. The projected activities o f the Government to achieve these objectives will entail the provision of technical and material assistance to institutions to combat corruption, such as the CSI or BIANCO. This assistance will take the form o f setting up BIANCO offices at the regional level and finalizing implementation o f an ACE unit, a new unit entrusted with the mission o f combating financial crimes. The strategy also provides for assistance from non-State entities to supplement the Government's activities in combating corruption by playing the role o f independent watchdog in this area. In addition, a special effort should be made to strengthen the watchdog role o f civil society, through activities to strengthen information-sharing entities and civil society capacity. 42. The functioning o f the justice system should also contribute to the successful implementation o f the MAP, by creating a climate of confidence that is attractive to both national and foreign investors. This objective will be pursuedthrough the establishment o f legislation in keeping with the need for rapid development, in order to improve the legal business climate. The relevant legal texts will be amended to bring them in line with international instruments and globalization and development requirements. 43. The Government will also continue to enhance the efficiency o f the justice system by providing it with a more substantial budget in order to strengthen the functioning o f its inspection and oversight 74 services, among others. This efficiency will also be achieved by streamlining access by the population to the justice system and bringing the justice system closer to citizens. This will be done by creating new courts, institutingan accessiblejustice systemthat includes citizens and civil society, and by developing legal clinics. Expediting the computerization process will continue as a supplement to these activities. 44. In order to maintain the momentum in the population regarding MAP implementation, the justice system must also increase confidence placed in it by enhancing the integrity o f its staff in order to guarantee their equity and impartiality. To this end, an initial package o f measures will focus on streamlining procedures, reviewing the system o f privileges and immunities for elected officials and persons within the justice system, and preparing a draft law on the High Court o f Justice. The Government will also ensure achievement o f this objective by strengthening and applying service standards, organizing assistance for the people at the jurisdictional level, and the gradual extending to alljurisdictions the actions currently being carried out inpilotjurisdictions. 45, Lastly, the Government will make a special effort to develop independent watchdog and oversight institutions within civil society to help it monitor, evaluate, and track the actions o f the administration and their impact on the ground. Against this backdrop, it intends to enhance synergy between government and civil society reforms, with a view to better ensuring citizen participation in the assessment o fpublic activities and the improvement o fpublic services. Plans are also inplace to pilot and refine those interventions that have been successful and revolve around reducing inequalities, while ensuring that civil society i s capable o f articulating its priorities and seeking accountability. 46. The activities to be conducted in the context o f these objectives will focus, first and foremost, on creating an environment conducive to civil society participation and social accountability initiatives, in particular the improvement of local governance and optimization of the positive social impact. This will then be followed by Government support for capacity-building initiatives so that familiarity with NGOs and civil society organizations can be gained, along with the concept o f social accountability, in order to ensure that citizens and civil society organizations have the necessary capacity for positive civic engagement. 47. To this end, local NGOs and other civil society organizations will receive support from the Government to obtain the necessary technical assistance. Special attention will be paid to vulnerable groups who have less o f a voice in society (women, young people, the poor, and the disabled). Training inthis area will also be provided to the administrative authorities so that they can work more effectively with civil society by building communications slulls and facilitating group decisions. 48. The MAP i s not a static document; it will be modified as the situation evolves. In this context, the availability o f reliable information i s essential. The Government, cognizant o f the obsolete nature o f demographic information, started a general population and housing survey two years ago. It intends to do a comprehensive survey if funding i s tied in with assistance from technical and financial partners. Failing this, a partial survey will be done depending on available funds. Survey work inthe strict sense o f the term will begin this year. The most recent survey dates back to 1993 and the data from this survey can no longer be used to make reliableprojections. 49. Furthermore, a specific tool will also be developed for measuring trends related to MAP implementation, in order to permit the Government to take timely corrective action when necessary and to update planned objectives and actions. This system, called the Comprehensive National 75 Monitoring and Evaluation System [Systhze National d'Int6grd de Suivi et d 'Evaluation SNISE], i s aimed at introducing MAP mechanisms and a monitoring and evaluation process at the central and regional levels. The preparation o f the SNISE i s underway and includes three phases: the first will consist of assessing the current situation from the standpoint o f the information system to be used for indicators, as well as the institutional and organizational framework; the second will consist o f the actual system design; and the third will entail the drafting o f the action plan for its implementation. This systemis expectedto be fully operational beforethe end o fthe year. 50. Finally, it should be noted that the Government has taken the necessary steps to make Madagascar eligible for the Extractive Industries Transparency Initiative (EITI). The Government's commitment to participate in this initiative guarantees its complete commitment to total transparency in the management o f the country's resources and to good governance inevery respect. 51. The actions envisioned in the context o f this strategy will be implemented with assistance from technical and financial partners, which the Government will specifically request during the meeting scheduled to take place inAntananarivo next June. For the Minister o f Finance and Budget /si [MinistryStamp] 76 Annex 6: ImplementationArrangements MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 113. Leadership and coordination. To strengthen coordination o f governance related activities the Government created inNovember 2005 the Reform Program for the Efficiency of the Administration (Programme de RCfonnes pour 1'EfficacitC de 1'Administration, PREA) which i s the key instrument to monitor and implement the Government's Good Governance Program. The PREA i s headed by a National Coordinator (Coordonnateur GCnkral - CG) who reports to the Secretary General for the MAP (Skcretaire Gknkral A la Planification de la PrCsidence) in the President's Office. Political guidance and oversight i s provided by the Oversight Committee (Conseil d'orientation et de Suivi - COS) consisting o f all Permanent Secretaries o f the Government and o f representatives from civil society, from the private sector, from the regions and communes, and from the donor community. The Oversight Committee which i s led by the Secretary General for the MAP meets once a year and approves the annual work plan for the project. Key policy decisions are submitted by the Oversight Committee to the Council o fMinisters. 114. Implementing entities. The implementing agencies for the projects are the Ministry o f Finance, the National Statistics Office and the Office o fthe President: (a) The Reform Coordination Unit in the Ministry of Finance will be responsible for the day-to-day supervision o f the implementation o f annual work program for component 1 o f the project (improvement o f public expenditure management). The unit consists of a small team o f technical specialists and is headed by a Coordinator who reports to the Secretary General o f the Ministry. The Ministry o f Finance intends to establish a `basket fund' for public finance reforms which is linked to the overall annual reform action plan (PAP) o f the Ministry o f Finance. It i s envisaged that - over time - the majority o f the support by the development partners to the Ministry of Finance will be channeled through the basket fund. The Bank will support the establishment o f the fund and the identification o f adequate financial management and procurement arrangements through the PGDI11. (b) The National Statistics Office (INSTAT) will be responsible for the day-to-day supervision o f the implementation o f the annual work program for component 5 o f the project. INSTAT is in the process o f establishing a coordination unit to ensure adequate preparation and implementation o f the census. This unit will be supported by a technical advisor who will beprovidedbyUNFPA. (c) The National Coordinator PREA in the Office of the President i s responsible for the overall monitoring and coordination o f the reforms financed under the project, including component 1, 4 and 5. The Coordinator will also be in charge o f the implementation o f the remaining components o f the project (including initially the Social Accountability Grants). The National Coordinator i s supported by the Project Bureau (Bureau de Gestion, BdG) which will ensure overall coordination o f project activities and the day-to-day management o f the project. The BdG has implemented the first PGDI in a satisfactory manner; it has met all relevant disbursement, 77 procurement and fiduciary obligations. The BdG has a number o f technical staff in the areas o f monitoring & evaluation, procurement, financial management and communication. This unit is responsible for: (a) consolidation o f annual work programs and budget, (b) procurement, including all contracting o f works, goods and services; (b) project monitoring, reporting and evaluation; (c) the contractual relationship with IDA, and (d) financial record keeping, in particular the designated Account and disbursements. The BdG operates on the basis o f an annual work plan which i s validated by the above mentioned Oversight Committee. A Standing Committee (Comite Restreint - CR) i s available to advise the BdGon implementation issues. This Committee consists o f the Cabinet Secretary, and the Permanent Secretaries o f the Ministries o f Finance and Budget, Planning, Civil Service, Justice, Decentralization, Territorial Administration, and Communication. It i s led by the Secretary General for the M A P inthe President's Office and meets at least once every three months. 115. The transfer o f the financial management and procurement aspects o f the components 1 and 5 to RCU and INSTAT is envisaged untilDecember 31, 2009; it will be subject to an IDA assessment o f the financial management and procurement capacity o f the relevant institution. Untilthat time, financialmanagement andprocurement activitieswillbehandledbyPREA/BdG. 116. The implementation arrangements might be reviewed and changed once the planned basket funding mechanism for the Ministry o f Finance i s fully operational to ensure effective implementation of activities under component 1 in line with the support by other development partners. 117. During the first year o f the implementation o f the project a non-state actor will be identified as implementing agency for the Social Accountability Grants under component 4 of the project. These Social Accountability Grants will pilot, develop and scale up approaches that are focused on supporting civil society to monitor and provide oversight, in particular in key areas such as natural resource management, local service delivery, and public financial management. The financial management and procurement activities for the Social Accountability Grants will be ensured by the Bureau de Gestion o f PREA. Financial management and procurement authorities might be transferred to the Grant Administrator later on, provided hehas adequate capacity. 118. At the level o f the sector ministries and institutions that receive support fkom the project the implementation o f the reforms i s ensured by dedicated implementation teams. A key role o f the BdGis to support these implementation teams and to facilitate their work. The teams operate on the basis o fthe annual work plan. They report to the BdGon a regular basis. 78 Annex 7: FinancialManagementandDisbursementArrangements MADAGASCAR: Governance and Institutional Development Project I1 Introduction 119. Inaccordance with Bank policy andprocedures, the financial management arrangements o f PREA (Programme de Rkformes pour 1'Efficacite de l'Administration), o f the RCU and o f INSTAT have been reviewed to determine whether they are acceptable to the Bank. This review i s an update since the financial management systems o f PREA (Le. the Office o f the current PGDI) have already been assessed in the context o f the ongoing PGDI project (additional financing). The main conclusions o f the review are summarized in section N - D o f the Project Appraisal Document. 120. With regard to the RCU, the Reform Coordination Unit within the Ministry o f Finance, which i s in charge o f the implementation o f the first component (Improvement o f public expenditure management) and with regard to INSTAT (the National Statistics Office) which will supervise the implementation o f component 5 o f this project, no financial management assessments have been carried out at this stage since it was agreed that both institutions initially will not manage funds. The transfer o f the financial management aspects o f the components 1 and 5 to R C U and INSTAT i s envisaged until December 31, 2009; it will be subject to an IDA assessmento fthe financial management capacity o fthe relevant institutions. 121. The administration o f the Social Accountability Grants under component 4 will be ensured by an independent Grant Administrator (NGO or other) acceptable to IDA and to be selected through a competitive process. N o withdrawal shall be made for the Social Accountability Grant unless the Grant Administrator has been recruited. The TORS o f this Administrator are subject to IDA approval to ensure the adequacy o f the required profile, drawing special attention to the capacity o f the Administrator to manage funds o f this nature. The financial management capacity o fthe Grant Administrator will bereviewed inthe context o f the selection process. Social Accountability Grant should be made inaccordance with the criteria and on terms and conditions set forth or referred to inthe P I M and the provisions o f Section 1.D o f Schedule 2 o fthe financing Agreement. SummaryProjectDescription 122. The objective o f this project aims at improving the efficiency and transparency of government and public services inMadagascar in line with the Madagascar Action Plan (MAP). The proposed PGDII1includes the following components: i)Improvement o fpublic expenditure management; ii)strengtheningthe efficiency o f Government operations; iii)rule o f law and fight against corruption; iv) transparency and social accountability, v) monitoring and evaluation; and vi) program coordination. This project o f an amount of US$40 million (IDA) is expected to be completed over a period o f four years. 79 Countryissues 123. The World Bank's CFANCPAR, completed in2003, and some diagnostic works carried out over the last three years by the Bank and other donors, identified a range o f weaknesses and issues hampering the performance o f Madagascar's budget and expenditure management system. To address these issues, the government has developed in 2004, 2005, 2006 and 2007 in conjunctionwith all key development partners, a priority action plan for public finance reform. 124. While overall implementation progress o f the reform program i s encouraging, significant efforts remain to be done, including the followings: i)improvement o f budget execution rate in priority sectors; ii)reinforcement o f the capacity o f the line ministries in public financial management, especially in the implementation o f the new program budget structure; iii) strengthening o f cash management; iv) production o f the treasury accounts within the legal timeframe; v) lack o f adequate number o f skilled and experienced auditors at the "Chambre des comptes" commensurate with the complexity and increased number o f missions to be undertaken. To mitigate risks in public expenditure management, the World Bank, through the Governance and Institutional Development Program (PGDI), and a number o f donors continue to support Government's public finance reforms reflected inits annual priority actionplan. 125. Regarding the accounting profession, some positive developments have been noted over the last three years. However, a number o f local accounting firms continue to operate below the international standards. To improve the capacity and the competitiveness o f local auditing firms, the following measureshave beentaken while auditing Bank/IDA financed projects: i)obligation for local auditors to enter into partnership with international accounting firms; ii)effective participation o f the international accounting firm in audit fieldworks and submission o f audit reports jointly signed by the local and international audit firms. An accounting and auditing ROSC i s presently underway to identifyclearly both issues and actions to be taken to strengthen the capacity o fthe accounting professioninMadagascar. 126. The use o f country systems still remains risky for Madagascar due to some fiduciary weaknesses that require much more time for their solving. To address this issue, and after exchanges o f views with the borrower it was agreed to (i) entrust the FM aspects o f this project to PREA/BdG which has extensive experience from previous IDA project (ii) use partially the country system and (iii) establish transitional financial management system arrangements while the sectorhational fiduciary systems are being strengthened. Strengths,Weaknesses andAction Plan 127. The PRENBdG financial management i s strengthened by the following salient features: 0 existence o f qualified and skilled accounting staff very knowledgeable with Bank procedures; adequate internal control system including suitable authorizationprocedures, appropriate segregation o f duties and responsibilities, reliable budgeting system, and adequate measures for safeguarding assets; 80 use o f an accounting system incompliance with generally accounting standards and IDA requirements,andproviding reliable and timely information; appropriate documentation o f the policies and procedures applied by the project, covering management of finances, accounting, procurement and financial reporting; use o f an integrated computerized system facilitating the management o f project operations and capable o f producing in a timely manner all relevant information required for managing and monitoring project activities, and appraising project's overall progress towards the achievement o f its objectives. 128. The main deficiencies noted in PREABdG financial management systems are summarized inthe following table which also provides relevant measures to address them: Significantweaknesses Action Date Responsible due by 1- Chart o f accounts not Reviewlupdate o f the existing Chart o f Prior to updated yet to reflect accounts, accounting manual o f procedures credit RAF(PGDI) components/activitiesto be to reflect componentslactivities and satisfy effectiveness financed under PGDI 2. reporting requirements. date Absence o f acceptable Recruitment o f an auditing firm acceptable Prior to The Oversight arrangement inauditing. to IDA to carry out the annual audit o f credit Committee in project accounts. effectiveness collaboration date with the Project Coordinator InstitutionalandImplementationarrangements(seeparagraphs34 38) - Budgeting 129. Budgetingarrangements for PREABdG are clearly documented. Each executing agency will prepare its own budget and submit it to PRENBdG for discussioddecision-making and consolidation, with a defined calendar. The accounting software actually in place within PREABdG can adequately cater for the budgeting arrangements o fthe project. Accounting 130. The PREA/BdG accounting system i s appropriate and follows generally accepted accounting standards. It uses standard book accounts (journals, ledgers and trial balances) to enter and summarize transactions and operates on a double entry accrual principles. The books o f accounts will be maintained on a computerized system. To ensure proper monitoring o f 81 budgetary execution, PREA/BdG will provide the Budget Directorate o f the Ministry o f Finance with monthly statement o f commitment and payment drawn under the project credit lines. PREABdG will be in charge of timely production o f the project quarterly FMRs and annual financial statements. 131. To ensure better understandingand proper application o f policies and procedures by the project staff, the current accounting manual o f procedures used by PGDI will be updated to reflect the new chart o f accounts as well as the model o f IFRs to be produced. This procedures manual describes inter alia the outline o f the project accounting system, the accounting policies to be followed, the formats o f books and records, the Chart o f accounts, the financial reporting, and relevant information to facilitate record keeping and maintenance o f proper control over assets. The update o f this manual o f procedures should be completed prior to effectiveness date. To ensure timely production o f financial information required for managing and monitoring project activities, PGDIwill use the computerized systemacquired within the context o f PGDII. InternalControl 132. The PREA's accounting staff is qualified and has relevant experience to be completely successhl in carrying out his functions. To ensure efficient use of credit funds for the purposes intended and consistent application of procedures on procurement, financial management and disbursement, the IGF/IGEwill play the role o f internal auditors. They will report directly to the Office o f the President and the Minister o f Finance. All issues identified during internal audit should be addressedquickly to improve the project performance. 133. As indicated earlier, PREA/BdG has an adequate accounting procedures manual describing clearly the lines o f responsibilities and authority that exist as well as control procedures to be applied to ensure adequate internal controls. However this manual needs to be updated to include the new Chart o f accounts and models o f IFRs. 82 FundsFlow andDisbursementarrangements 134. The flow of funds from IDA is presented as follows: I WorldBanMDA (Credit) c PREA/BdG (Designated account) GrantAdministrator: (Bank account) Disbursementmechanisms 135. While disbursingproceeds from credit accounts, IDA may: i)reimburse the borrower for expenditures paid from the borrower's resources; ii)advance credit proceeds into a Designate account opened in a commercial bank acceptable to IDA. The accounting manual o f procedures describes in details the application steps and requirements for requesting a reimbursement, a direct payment for third party, and applying for a special commitment. DisbursementfromIDA credit 136. For the implementation o f PGDI 11, the following bank accounts will be opened in local commercial banks under conditions satisfactory to IDA: A Designated Account to be managed by PREABdG. Disbursements from the IDA credit will be deposited on this account to: i)finance goods hervices eligible under the credit as indicated in the Financing Agreement and; ii)replenish the bank account managed by the Grant Administrator to finance activities under sub component "Social Accountability Grants" (part o f Component 4). The Designated Account would be replenished on the basis o f quarterly IFRs (Interim Financial Reports) provided to IDA by PREABdG, justifying the payments of expenditures that are eligible for financing under the credit (see below Method of disbursement).All supporting documents will be retained by PREABdG and made available for review by periodic Bank supervision missions and intemal/extemal auditors. 83 A Grant bank account to be managed by the Grant Administrator. Denominated in local currency, disbursements from the designated account will be deposited on this account opened in a local commercial bank to ensure prompt payment o f activities eligible under the sub component "Social Accountability Grants". Methodof Disbursement Disbursement from theDesignatedAccount 137. The Project will use report-based disbursement arrangements. Under this disbursement method, a forecast o f program expenditures will be agreed between PREA/BdG/MoF and IDA, covering a period o f six months. Thereafter, the borrower may request an advance for an amount not exceeding this cash forecast. Supporting documentation for this disbursement (quarterlyIFR) will be submittedto IDA and reviewedby its staff to confirm eligible expenditures during the period covered by the IFRs. The cash request at the reporting date will be the amount required for the forecast period as shown inthe approved IFRsless the balance inthe Designated Account at the end o f the quarter. Subsequent disbursements will therefore be made inrespect o f this cash request. Detailed disbursement procedures will be described in the project accounting manual of procedures. Disbursement from grant bank account 138. The amount to be advanced in this account will be determined on the basis o f an annual work program and funding requirement for a period not exceeding six months. Subsequent payments will be based on submission o f acceptable documentation for previous releases. The Grant Administrator will submit quarterly the following documents: i)a bank account Activity Statement, a summary o f expenditures inrespect of contracts subject to prior review, a summary o f the use o f hnds by activity/category. All documents supporting expenditures will be retained by the Grant Administrator and made available for review by the PGDI staff, Bank supervision missions and the independentauditors as necessary. Detailed disbursement procedures as well as the access criteria for the Social Accountability Grants will be described indetails inthe project implementation manual (PIM). Withdrawal conditions 139. With regardto disbursement conditions, no withdrawal shall bemade: (a) for payments made prior to the date o f the Financing Agreement; except that withdrawals up to an aggregate amount not to exceed US$l.O million may be made for payments made prior to this date but on or after January 1, 2008, for eligible expenditures under category 1 and 3 o f Section IV A o f Schedule 2 o f the Financing Agreement; (b) from the Social Accountability Grant under component 4 o f the project unless (i) the Social Accountability Grant Administrator has been recruited and (ii) Social the Accountability Grant has been made in accordance with the criteria and on terms and 84 conditions set forth or referred to in the P I M and the provisions o f Section 1.C o f Schedule 2 to the FinancingAgreement. Financialreporting 140. To monitor project implementation, PRENBdG will produce the following reports in compliance with international accounting standards: (a) The projectfinancialstatements:i)Summary o f Sources and Uses o f Funds (by component/activities/credit category and showing all sources o f funds); ii)the Accounting Policies Adopted and Explanatory Notes; iii)a Management Assertion; (b) IFRs: The IFRsto be prepared by PREA/BdG, on a quarterly basis, will include financial reports, physical progress reports and procurement reports for all components. The project IFRs should be submittedto IDA within 45 days o f the end o f the reporting period. 141. The form and content o f IFRs and annual financial statements have been determined as part o f project appraisal and agreed at negotiations. Models o f these reports will be presentedin the project accounting manuals o fprocedures. InformationSystems 142. To ensure timely production o f financial information required for managing and monitoring project activities, PREA/BdGwill use the computerized system acquired within the context o f the ongoing governance project, which inparticular facilitates annual programming o f activities and project resources, record-keeping (general accounting and cost accounting), financial and budgetary management and preparation o f project financial statements including quarterlyIFRs. Auditing 143. The project financial statements related to the first three years o f project implementation will be audited by an international private accounting firm acceptable to IDA, inaccordance with International Standards o f Auditing. The auditors will berequired to: i)express an opinion on the project financial statements; ii) carry out a comprehensive review o f the internal control procedures and provide a management report outlining any recommendations for their improvement. The audit report as well as the management letter and management responses will be submitted to IDA not later than six months after the end o f each fiscal year. The auditors should be recruited prior to credit effectiveness, in conformity with the Bank procedures. The terms o f reference o f the audit will be reviewed by the financial management specialist o f the Bank/IDA to ensure the adequacy o fthe audit scope, drawing special attentionto particular risk areas identified during project preparation. The Project could use the service o f the Auditor General for the audit o f the closing period if its capacity i s deemed adequate following IDA assessment. 85 Audit Report DueDate 1- Project financial statements Within six months after the endof each financial year. SupervisionPlan 144. A supervision mission will be conducted at least once every year based on the risk assessment o f the project. The mission's objectives will include that o f ensuring that strong financial management systems are maintained for the project throughout its life. A review will be carried out regularly to ensure that expenditures incurred by the project remain eligible for IDA funding. The ImplementationStatus Report (ISR) will include a financial management rating for the component. Allocation of CreditProceeds 145. Table 2 provides an overview about the disbursement categories and the financing percentages: Table 2: Allocation of IDA CreditProceeds (US$ millionequivalent) ExpenditureCategory Allocationof IDA CreditProceeds US$ million Financing Percentage Goods, Works, Consultants' 33.63 100% Services andTraining Social Accountability Grants 1.65 100% Operating Costs incl. civil 2.72 85% servant salaries Unallocated 2.00 146. The proposed 100 percent financing o f selected credit proceeds i s in line with IDA policies under which Madagascar qualifies for such an adjustment (see the Country Financing Parameters, May 16, 2005, and updated in attachment 7 o f the 2007 CAS). Any taxes and duties that would be incurred as part o f the project are judged to be reasonable. The project financing parameters, which are specified in the table above, would respond to difficulties across the Madagascar portfolio in mobilizing sufficient counterpart funding in a timely manner which regularly causes project implementation delays. As the project i s financing activities that are considered critical for the implementation o f the overall government program (e.g. the public finance and the leadership activities) the proposed financing parameters would facilitate both a rapid and smooth implementation o f intended activities. It would also reduce the transaction costs for the government team and align the project with the other projects in the Madagascar portfolio which benefit from 100 percent financing. As a signal of its commitment the government proposes to maintain a counterpart funding element for the operating costs o f the project. 86 FinancialManagementRiskAssessment andMitigation 147. The following table identifies the key risks that the project management may face, and provides the measures to be taken to mitigate these risks: 87 E 0 z _- 3 00 00 .r( c c, m V a2 9 merl .I 13 P z c, U 8 a2 .I 5m E 8 aa U erl .e 9 L I9 .CI .I c, i; I Ti Q) c1 9 c c E E E E Annex 8: ProcurementArrangements MADAGASCAR: Governanceand InstitutionalDevelopmentProjectI1 A. General 148. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines:Procurement UnderIBRDLoans andIDACredits" dated May 2004, revised in October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, revisedinOctober 2006, and the provisions stipulated inthe Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements,and time frame are agreedbetween the Borrower and the Bank inthe Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 149. Procurement of Works: Works procured under this project would include rehabilitation o f offices and other rehabilitation activities under the public finance, the capacity building and the monitoring & evaluation components. The procurement will be done using Bank Standard BiddingDocuments (SBD) for all ICB and NCB andor agreed National SBD as outlined inthe Program Procurement Manual and which are consistent with IDA guidelines. 150. Procurement of Goods: Goods procured under this project would include information technology systems and related goods, vehicles, furniture and office equipment. The procurement will be done using the Bank's SBD for all ICB and National SBD agreed with or satisfactory to the Bank. Goods o f similar nature, to the extent possible, should be grouped in much larger packages to enable wider competition. All Procurement for goods and services will follow IDA Procurement Guidelines. Direct contracting (DC) may be employed with prior approval o f the Bank for purchase o f specific I T equipment and will be in accordance with paragraphs 3.6 o fthe Procurement Guidelines. 151. Procurement ofnon-consulting services: Procurement o f non-consulting services will be procured using acceptable SBD consistent with IDA guidelines. And will include various services relatedto the deployment o f informationtechnology systems 152. Selection of Consultants: Consultancy services required for the project would cover consultancies to: (i)support the implementation o f public finance reforms, (ii)support the ongoing implementation o f the procurement reform; (iii) support the initiation o frevenue agency reform; (iv) continue to support the leadership development and capacity buildingprograms; (v) strengthenlocal training institutions including the National Leadership Institute o f Madagascar; (vi) support the implementation o f legal andjudicial reforms as well as the strengthening o f the Rule of Law; (vii) support the implementation activities for key statistical surveys; (viii) design, draft bidding documents and supervision o f civil works under the project; (ix) provide complementary quality assurance to the various reform activities, and (x) establish a monitoring and evaluation system for the project and for the Madagascar Action Plan. All consulting services contracts costing more than US$lOO,OOO equivalent for firms will be awarded through Quality and Cost Based Selection (QCBS) method. Contract for specialized assignments to cost 91 less than US$lOO,OOO equivalent may be contracted through Consultant's Qualifications (CQ) method. Least Cost selection may be employed for selecting consultants for assignments o f a standard or routine nature (audits, engineeringdesign of noncomplex works, and so forth) where well-established practices and standards exist. Single Source Selection (SSS) may be employed with prior approval of the bank and will be in accordance with paragraphs 3.9 to 3.12 of consultant Guidelines. All services o f individual consultants will be procured under individual contracts in accordance with the provisions o f paragraphs 5.1 to 5.4 o f Consultant Guidelines. Short lists o f consultants for services estimated to cost less than $100,000 equivalent per contract maybe composed entirely o fnational consultants inaccordance with the provisions ofparagraph 2.7 o f the Consultant Guidelines. 153. Operating Costs: The operating costs for this project include the incremental expenses incurred by BdG, RCU, INSTAT, GDLN, the Economic Crimes Unit, the Anti-Corruption Bureau and the Grant Administrator on account of project implementation, management and monitoring, including office supplies, vehicles operation and maintenance, communication costs, rental expenses, utilities expenses, consumables, transport, travel and accommodation, per diem, supervision costs and salaries o f locally contracted staff, including - until December 3 1,2009 - salaries o f the civil servants o fthe Recipient. 154. The procurement procedures and SBDs to be used for each procurementmethod, as well as model contracts for works and goods procured, are presented in the Project Implementation Manual. Table 2: Thresholdsfor ProcurementMethods andPrior Review r Contract Value Expenditure Category Threshold ProcurementMethod Contracts Subjectto Prior Review (US$) (US$) 1.Works >500,000 <500,000 All Above US$200,000 I <50.000 None >200,000 2. Goods 50,000-200,000 NCB None <50,000 Shopping None Direct Contracting All 2. Services Firms >100,000 QCBS All Above US$lOO,OOO ~100,000 QCBS and CQ First contract LCS All Above US$lOO,OOO IndividualCons. >50,000 IC All <50,000 IC None sss All 92 B. Assessment of the agency's capacityto implementprocurement 155. Procurement activities will be carried out by PREAPGDI. The agency i s staffed by Project Coordinator, Accountant, M&E specialists and support staff; the procurement function i s staffed by two full time procurement officers and one full time procurement assistant. The procurement officers are fully dedicated to the management o f procurement activities fundedby the credit and possess a vast experience in handling Bank financed as well as Donor funded projects. Overall, the capacity o f the PREAPGDI and the quality o f the procurement staff i s deemed sufficient to continue to implement the new project. 156. Since the implementing Agency remain unchanged, an assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has not beencarried out. The organizational structure for implementing the project and the interaction between the project's staff responsible for procurement Officer and the Ministry's relevant central unit for administration and finance were found adequate for objectives o f the project. 157. The key issues and risks concerning procurement for implementation o f the project have been identified and found minor and do not need corrective measures. 158. The overall project risk for procurement is Moderate. C. ProcurementPlan 159. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower andthe Project Team on March 18, 2008 and i s available at PRENPGDI. It will also be available in'the project's database and inthe Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. D. FrequencyofProcurementSupervision 160. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f the Implementing Agency has recommended bi-annual supervision missions to visit the field to carry out post review o fprocurement actions. 93 E. Detailsofthe ProcurementArrangementsInvolvingInternationalCompetition 1. Goods,Works, andNonConsultingServices (a) List o f contract packages to be procured following ICB and direct contracting: 1 2 3 4 5 6 7 8 Ref. Contract Estimated Procurement P-Q Domestic Review Expected No. (Description) xCost Method Preference by Bank Bid- $1,000 (yedno) (Prior / Post) Opening Date A.11 Rehabilation 450 ICB No No Prior May 2009 duBBtiment de 1'ARMP A.12 MatCrielsIT 825 ICB No No Prior Jan.2009 SIGFP A.13 MatCrielsIT 225 DC No No Prior Nov.2009 SIGFP A.21 Groupes 950 ICB No No Prior Jan.2009 Clectrogknes (81 GE) D.21 Materiels I T 500 ICB No No Prior May 2009 ++ SYDONIA D.31 Materiels IT 1,000 ICB No No Prior July 2008 Centres fiscaux D.41 Materiels IT 700 ICB No No Prior Feb2009 (b) ICB contracts estimatedto cost above $500,000 for works and $250,000 for goods per contract and direct contracting will be subject to prior review by the Bank. 2. ConsultingServices (a) List of Consulting Assignments with short-list of internationalfirms. 2.1 Firms 1 2 3 4 5 6 7 8 ! Prior Submission Financial Ref Estimated and and Contract No. Description* Amount!§ Proposal Signature '000 Method Post Opening Opening Date Review Date(T) Date Appui au Bianco (renforcement de capacitts, 1 125 1QCBS 1 Prior 115/12/2008 115/1/2009 2/2//2009 1 1 1 94 2.2. IndividualConsultantsContract I l l 2 3 4 1 5 1 6 7 8 DC.l Douanes: Inttgration du TRADENET au SIGFP 200 sss Prior 2/3/2009 18/3/2009 DC-.2 Douanes: Deploiement SYDONIA++ 150 sss Prior 20/412009 4/5//2009 1 AC,211 Suivi de la mise en Oeuvre du 1 1 1 1 1 1 1 1 M A P (Prtsidence AT) 500 sss Prior 1O i lOl2008 27110/2008 AC.212 1 Vulgarisation des outils de leadership (RFU, IGL) 60 SSS Prior 71512009 181512009 Appui auNLIM: AC.231 Renforcement de capacitts (curricula, programmes, 750 SSSIIC Prior 15/1/2009 2/2/2009 II Appui a lartforme des I I I I BC.211 1IMListeres prioritaires dans le I I I I cadre de la mise en Oeuvre du 15/2/2009 2/3/2009 DC 231 Elaboration de la nouvelle politique salariale 50 sss Prior 12110/2008 2711012008 DC 241 RecensementGentral de la Population et de 1'Habitat 300 I C Prior 201612009 6/7/2009 95 (b) Prior review: (a) each contract estimated to cost more than US$lOO,OOO per contract for Firms and US$50,000 per contract for individuals consultants; (b) all single source selection; (c) all training; and (d) all amendments o f contracts raising the initial contract value by more than 15 percent o f original amount or above the prior review thresholds will be subject to IDA prior review mandatory in paragraphs 2 and 3 o f Annex 1o fthe Bank's Consultants selection Guidelines. (c) Short lists composed entirely of national consultants: Short lists o f consultants for services estimated to cost less than US$lOO,OOO equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o fthe Consultant Guidelines. (d) Post review: For each contracts for services not submitted to the prior review, the procurement documents will be submitted to IDA post review in accordance with the provisions of paragraph 4 o f Annex 1 o f the Bank's Consultant selection Guidelines. The post review will be based on a ratio o f at least 1 to 5 contracts. 96 Annex 9: Economic and FinancialAnalysis MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 161. The cost benefit analysis o f the second Governance and Institutional Development Project aims to assess the efficiency o f the project compared to the status quo. The benefits are defined as savings made from mitigating inadequate use or misuse o f public resources and lowering the cost paid by households and the private sector due to corruption. The estimated costs for implementing the project consist o f the initial investment and increasing recurrent cost o fthe targeted departments and agencies which benefit from the project. 162. The monetizing o f the benefits constitutes a challenge as most effects o f the projects are difficult to measure in financial terms (for example, the reforms inthejudiciary, the buildingof a monitoring and evaluation (M&E) framework for the implementation o f the MAP etc.). Some limited data on the misuse/misappropriation o f public resources i s available at the level o f the control institutions. However, in order to capture the benefits accruing from other activities o f the project, hypotheses were made o f other misuses o f public resources. Based on the total identified amount o f misused/misappropriated public resources, it was assumed that the intervention o f the project leads to an annual reduction o f 10 percent in a misuse/misappropriation o f Government's resources. The reduction in misuse represents the benefits o f the project. 163. The estimation o f the project costs, notably the incremental costs accruing to the government from maintaining the activities after the project closes, resents some difficulties. The bulko fthe cost assessmentis based onthe project investment cost. 164. To allow a comprehensive presentation o f all cost and benefits accruing from the project activities, the following analysis i s divided into two sections: (i)an assessment o f the benefits and cost that can be quantified and (ii)presentation o f the benefits and cost that could not be a quantified. I.Quantitativeassessmentofthebenefitsandcosts 165. The economic analysis comes to the conclusion that the benefits triggered by the project interventions outweigh the costs. Although it is not possible to quantify all benefits o f the proposed operation (see section II), analysis o f quantifiable factors confirms that planned the investments and other additional costs generated by implementation o f the project will be largely compensated over a period o f ten years bythe expected benefits o fthe project. 166. The quantifiable benefits accrued over ten years represent a net present value ofUS$446 million. These benefits are by-and-large indirect; the beneficiaries are households, private enterprises and the administration. The overall net present value o f the costs o f activities amounts intotal to US$ 21 million. 1.1. Identification/quantification of benefits 167. The activities under the project that provide for the most important quantifiable benefits comprise o f (i) continuous deployment o f the integrated financial management, (ii) the the 97 consolidation o f public procurement reforms, (iii) reinforcement o f internal and external the control functions of the public finance system, and (iv) the strengtheningo f the performance of the tax and custom administration. 168. The estimates o f the benefits are based on the average annual amount o f the misuse/inadequate use o f public resources which are estimated to be to approximately US$39 million per year (see table l a below). This figure i s based on data reported by the Brigade d'hspection et de Verification du TrCsor and by the Inspection GCnerale de 1'Etat (IGE) and i s complemented by estimates o f other misuses o f public resources. Further estimates are based on revenue information provided by the tax and custom administration (see table lb below). 2003 2004 2005 2006 Average Misuse reported by the IGE 4 356 171 26054 15014 11 399 Misuse reported by the Brigade Vtrification et d'Inspection du Trtsor 1421 305 1329 6303 2 339 Misuse inthe budget process' 7467 8744 7554 11475 8 810 Misuse through public procurement2 26399 49243 54373 64531 48636 Total 39642 58463 89310 97323 71 185 Total (in millionUS$) 32,O 31,3 44,5 44,6 39,O Table lb: Strengtheningof revenuecollection(inmillionUS$) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Incrementalrevenue ' 50.7 39.0 50.0 53.2 47.3 48.9 54.2 59.7 65.9 73.6 81.1 MBmo Incremental revenue 202,8 155,8 199,9 212,7 189,2 195,6 216,6 238,8 263,4 294,5 324,5 Tax revenues 999.4 1,155.2 1,355.1 1,567.8 1,757.0 1,952.6 2,169.2 2,408.0 2,671.4 2,965.9 3,290.4 Source: IMF This amount constitutes 25 percent of the annual supplemental revenue. It is assumed that the project activities contribute around 25 percent to the annual increase inrevenue. 169. The total benefits were calculated based on an annual reduction o f 10 percent o f the misuse/misappropriationo f public resources (table 1b) and the supplemental tax revenues are in accordance with the IMF program (table 2). It was also assumed that the reduction o f the misuse/misappropriation o f public resources will peak as o f year 5; the same assumption was applied regarding the projects contribution to the increase in revenues. Table 2 below summarizes the evolution o fbenefits until 2018. 98 andefficiencyof the publicfinancesystem(inUS$ million) Years Nominal Net Present Benefit Value') 2008 54,6 50,6 2009 46,8 40,l 2010 61,7 49,O 2011 6 8 3 50,6 2012 66,8 455 2013 66,8 42,l 2014 66,8 39,O 2015 66,8 36,l 2016 66,8 33,4 2017 663 30,9 2018 663 28,6 Total 699,4 4458 170. The total benefits generated by these activities will reach a net present value o f about U S $ 446 million over 10 years. A large share o f the benefits will be derived from continuing to reform the customs and tax administration (around US$340 million). It i s also expected that the further roll out o f the integrated financial management system and improvement o f the internal/external control mechanism will have an important impact on the use o f public resources. Though most treasuries are now in compliance with the law and regulations, the not yet f i l l computerizationo fthe treasuries still gives room for falsification o fpayment documents, false entries, and other misuse o f the budget. It i s expected that the modernization o f the system and improved controls will significantly further decrease misappropriation or misuse o f public resources. Procurement is another major source o f misuse of public resources. The incomplete implementation o f the new code has made corruption still present in the procurement process. The institutionalization o f the procurement reform will continue to strengthen the procurement oversight authority and the functioning o f the system. 171. These positive impacts will be reinforced by qualitative benefits; in particular improved transparency and accountability (see section 2). 1.2. Cost of activities 172. The net present vale o f the activities to enhance transparency and efficiency of the public finance systemwill be about US$21 million (see table 3 below). These costs will include notably the investment required to hrther roll out the integrated financial management system to the regional capitals as well as the increased recurrent costs for the operation o f such a system, procurement reforms and the investment necessary to strengthen internal/external control mechanism (initial investment and supplementary operating cost, increased staffing etc.). Another important share o f the cost constitutes the project investment cost related to the customs and tax administrationreforms. 99 Years Nominal Net Present cost Value 2008 226 294 2009 690 5 2 2010 596 4 s 2011 530 397 2012 237 199 2013 190 036 2014 190 096 2015 190 095 2016 039 095 2017 0,9 034 2018 039 0,4 Total 27.6 20.5 A deprecation of 8 percent per year was used for the calculation o f the NPV 11.Qualitative assessment of the project's benefits and costs 173. As mentioned above, the benefits o f several o f the project activities are difficult to quantify. These focus on the fight against corruption, capacity building and rendering Government more accountable, in particular through a meaningfid civil engagement and social inclusion. 174. More specifically, these activities include anti-corruption measures and conflict o f interest activities, improvement o f the operational efficiency o f the judicial system, capacity building and institutional development for the Ministryo f Justice, the support to the School o f Magistrates (Ecole National de la Magistrature et des Greffes (ENMG)), the reinforcement o f the regulatory and institutional framework to fight corruption as well strengthening external oversight. It i s anticipated that these activities will have a substantial impact on the misuse o f public resources, and thus result into savings and increases in investment. Important indirect benefits will be rendering the Government more accountable and improving the quality o f Government's services. These benefits are further reinforced by a range o f activities that support the building o f a monitoring and evaluation (M&E) framework for the implementation o f the MAP,the scaling up of capacitybuildingof keypublic institutions and sector ministries and the development o f an institutional framework for decentralizations. 175. Inaddition to the abovementioned activities, the project supports to a larger degree the reinforcement o f external (citizens/civil society) oversight over government operations, in particular with regard to more inclusive decision making and adequate use o f public resources. Given that the component seeks to support a range o f activities which are to some extent still at a pilot stage, the quantification o f benefits at this stage i s difficult. Generally speaking, it i s expected that the various activities will (i)increase the quality in the delivery o f local government services and (ii) allow a more efficient and equitable use o f resources at the local level. 100 176. The direct benefits depend on the specific nature o f the different activities. For example, in the case of mainstreaming community score cards, following improved delivery o f services, an increase in the utilization o f the selected health facilities i s expected as this occurred in the first stage o f pilots. These pilots also resulted in the perception o f improvements in the price o f drugs, most likely because o f more transparency around what drug prices should be (and thus reduction in irregular payments), increases in infrastructure, and a more efficient allocation o f existing commune resources devoted to health (as communities were made aware o f the earmarking o f commune subsidies for health care, and this therefore created an incentive for the mayor to use these resources accordingly). It i s also expected that supporting participatory budgeting will lead to transparency o f commune budgets and the utilization o f mine royalties and, inturn, will result inless leakage o fthese resources andbetter management o f local funds. 177. One o f the areas identifiedin the Governance and Anti-Corruption Survey as being most commonly subject to bribes for service delivery - will be addressed through the piloting o f citizen report cards for municipal services (such as land titling services, or solid waste services)- an area inneed o f much improvement. It i s expected that dissemination o f information on what fees should be combined with a published evaluation o f the service and supply side reforms (through the Growth Poles Project for example) will improve performance and reduce these types o f extrapayments. 178. Furthermore, these interventions will also generate social benefits such as income distribution effects at the local level. Inparticular participatory budgeting aims to achieve a more equitable and inclusive allocation and utilization o f local revenues. If a fair share o f the project benefits accrued to poor and other disadvantaged groups (in the form o f improved access to existing basic social, health and municipal services as well as education and economic opportunities) this would contribute toward achieving the poverty reduction objective o f the MAP. Other benefits generated by improved governance and service provision could include a greater sense o f popularity and public support for the government on the part o f citizens who are better informed and have more faith that public servants serve their interests. With the population seeing tangible evidence that their tax Aviary are beingput to good use, it i s also very likely that the beneficiary are more willing to pay taxes. 179. Though all the aforesaid benefits are difficult to quantify, it i s expected that they will largely exceed the costs which comprise mainly o f a small initial project cost (around US$16 million) and some incremental cost once the project i s closed. 101 Annex 10: Safeguard Policy Issues MADAGASCAR: Governance and InstitutionalDevelopmentProject I1 180. No safeguards policies are triggered; the environmental category i s `Cy.The project provides the opportunity for public access to environmental information and effective public consultations, in particular under the transparency and social accountability component. It does not involve any exception to Bankpolicies. 102 Annex 11:ProjectPreparationand Supervision MADAGASCAR: Governanceand InstitutionalDevelopmentProjectI1 Planned Actual PCNreview November 22,2007 November 21,2007 Initial PIDto PIC November 9,2007 November 9,2007 InitialISDS to PIC November 9,2007 November 9,2007 Appraisa1 March 19, 2008 March26,2008 Negotiations April 2/3, 2008 April 2/3,2008 Board/RVP approval May 29,2008 Planneddate of effectiveness September 1,2008 Planneddate ofmid-ternreview September 2010 Plannedclosing date August 31,2012 181. Key institutions responsiblefor preparation of the project. The technical team of the Government i s ledby the National Coordinator of the Programme de RCformes pour 1'EfficacitC de 1'Administration(PREA) who is supportedby the Bureaude Gestion. The bureaucoordinates the technical input from the sectors supported by the project. The work o f the technical team i s supervised by an Oversight Committee (Conseil d'orientation et de Suivi - COS) consisting of all Permanent Secretaries of the Government and or representatives from civil society, the private sector, and from regions and communes 182. Bank staff and consultants who worked on the project included: IAndrew Osei Asibey I270286 ISr Monitoring & Evaluation Spec. IAFTRL I Karen Cecilie Sjetnan 262330 Program Officer WBIGP Lanto Ramanankasina 259529 ProgramAssistant AFMMG Thomas Jeffrev Ramin 254337 Sr OPerations Off. AFTRL Specialist LazaRazafiarison 251095 ResearchAssistant AFTP1 Irina Luca 83564 Lead Procurement Specialist AFTPC Sarah Keener 22949 Senior Social Development AFTCS Specialist Philippe Auffret 21290 Sr Social Protection Specialist AFTH3 Jacques Morisset 21859 Lead Economist AFTP1 Dieudonne Randriamanampisoa 19048 Senior Economist AFTPR Wolfgang M.T. Chadab 15321 Senior Finance Officer LOAFC Suzanne Morris 10486. Senior Finance Officer LOAFC I Sahr Ktmndeh I 147957 Senior Public Sector Specialist AFTPR I ElisabethHuybens ~ 20635 Peer reviewer BhuvanBhatnagar 21464 Peer reviewer Jesko Hentschel 76414 Peer reviewer ECSHD Francesca Recanatini II84567 Peer reviewer PRMPS 183. Bank hndsexpendedto date onproject preparation: Bank resources: US$94,000 Trust funds: n/a Total: US$94,000 184. EstimatedApproval and Supervision costs: 0 Remaining costs to approval: US$lO,OOO 0 Estimated annual supervision cost: US$70,000 104 Annex 12: Documents in the ProjectFile MADAGASCAR: Governanceand InstitutionalDevelopmentProjectI1 1. World Bank Group Supported Transformational Leadership Program inMadagascar, Final Evaluation, January 2008, Kabell KonsultingAPS Denmark 2. Troisibme Recensement General de lapopulation et de l'habitat, Madagascar 2007-2011, Ministbre de l'Economie, des Finances et du Budget, Juillet 2006 3. 3 ans et demi de PGDI, 2004-2007, Presidence de la Republique,Octobre 2007 4. Strategie Nationale de Dkveloppement de la Statistique, Volumes I, 11,PGDI,Mission d'Appui a 1'Elaboration de la SNDS, Septembre et Decembre2007 5. Madagascar Action Plan2007-2012, Presidence.de la Republique 6. A Leadership Approach to Achieving Change inthe Public Sector : The Case o fMadagascar, World Bank Institute 2007 7. CSC effectues dans les regions de Boeny et de la Haute Matsiatra, Rapport final des suivis, Core Team CSC, Juin 2007 8. Third Poverty Reduction Support Operation, Program Document, International Development Association, June 14,2006 9. Madagascar -Revuede DCpenses Publiques -Rkalisation du Madagascar Action Plan : Analyse pour des resultats, cinq volumes, Banque Mondiale, 28 juin 2007 10. Mesure de la performance de la gestion des finances publiques en Republiquede Madagascar selon la methodologie PEFA, Rapport, Mai 2006 11. Mesure de laperformance de la gestion des finances publiques en Republiquede Madagascar selon lamethodologie PEFA, Rapport prelimhaire, Mars 2008 12. Madagascar -RestructuringandAdditional Financing of the Governance and Institutional DevelopmentProject, Project Paper, International DevelopmentAssociation, May 22,2007 13. Madagascar - Governance and Institutional Development Project (PGDI), MidtermReview, July 28,2006 14. Governance and Institutional Development Project, Project Appraisal Document, International Development Association, October 22,2003 15. Madagascar Structural Political Analysis as an Input for a Country Social Analysis and Country Assistance Strategy, Final Report, Prof. RichardR. Marcus andProf. Solofo Randrianja, June 30,2006 105 16. Eight Quality at EntryAssessment (QEA8), Fiscal Year 2006-2007, of the Additional Financing for the MadagascarGovernance and Institutional DevelopmentProject, December 10,2007 17. Madagascar Country Financial Accountability Assessment (CFAA), World Bank, European Union, African Development Bank, June 30,2003 18. World Bank's Country ProcurementAssessment Report (CPAR), Madagascar, December30, 2002, revised inMay and June 2003 19.Madagascar:Country Assistance Strategy (CAS), World Bank, March7,2007 20. Madagascar Investment Climate Assessment, World Bank, June 2005 21. Etudede faisabilitk de Dkveloppement Local, J. Habas, L.Andrianasolo, C. Majerowicz, L. Ramamonjisoa, A. RandrianasoloRazanakoto, May 2005 106 Annex 13: Statementof LoansandCredits MADAGASCAR: GovernanceandInstitutionalDevelopmentProjectI1 Differencebetween expected and actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd P103606 2007 MG-Sust. Health SystemDev. (FY07) 0.00 10.00 0.00 0.00 0.00 9.88 -0.65 0.00 PO95240 2007 MG-Pwr/Wtr Sect. Recovery and Restruct. 0.00 10.00 0.00 0.00 0.00 8.70 4.09 0.00 PO74086 2007 MG-Irrigation & Watershed Project (FY07) 0.00 30.00 0.00 0.00 0.00 29.50 2.01 0.00 PO90615 2006 MG-MultiSec STIIHIVIAIDS Prev I1 0.00 30.00 0.00 0.00 0.00 27.75 13.23 0.00 (FY06) PO83351 2006 MG-Integ GrowthPoles 0.00 129.80 0.00 0.00 0.00 80.83 10.77 0.00 PO82806 2004 MG-Transp Infrastr Invest P i (FY04) 0.00 150.00 0.00 0.00 0.00 63.96 33.42 30.88 PO74448 2004 MG-Gov & Inst Dev T A L (FY04) 0.00 30.00 0.00 0.00 0.00 8.68 -0.40 0.00 PO74236 2004 MG-GEF Env Prgm 3 (FY04) 0.00 0.00 0.00 9.00 0.00 3.40 6.33 0.00 PO74235 2004 MG-Env Prgm 3 (FY04) 0.00 0.00 0.00 0.00 0.00 19.19 7.45 0.00 PO73689 2003 MG-Rural Transp APL 2 (FY03) 0.00 80.00 0.00 0.00 0.00 33.65 10.64 2.36 PO76245 2003 MG-Mineral Res Gov SIL (FY03) 0.00 32.00 0.00 0.00 0.00 11.99 -4.25 0.00 PO72987 2002 MG-MultiSec STVHIViAIDS Prev I 0.00 20.00 0.00 0.00 0.00 1.23 -1.77 0.00 (FY02) PO72160 2002 MG-Priv Sec Dev 2 (FY02) 0.00 23.80 0.00 0.00 0.00 6.19 1.60 1.18 PO55166 2001 MG-Com Dev Fund SIL (FYO1) 0.00 110.00 0.00 0.00 0.00 11.18 -71.04 -21.04 PO51922 2001 MG-Rural Dev Supt SIL (FYO1) 0.00 89.05 0.00 0.00 1.23 14.12 2.14 2.14 PO51741 2000 MG-Health Sector Support I1(FYOO) 0.00 40.00 0.00 0.00 0.00 0.51 -18.59 -1.81 PO52186 1999 MG-Microfinance (FY99) 0.00 16.40 0.00 0.00 0.00 5.56 -0.34 0.82 PO01568 1998 MG-Community Nutrition I1(FY98) 0.00 27.60 0.00 0.00 0.00 10.51 -11.04 0.14 Total: 0.00 828.65 0.00 9.00 1.23 346.83 - 16.40 14.67 MADAGASCAR STATEMENT OF IFC's Held and DisbursedPortfolio InMillions ofU SDollars Committed Disbursed IFC IFC F Y Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1997 AEF GHM 0.46 0.00 0.00 0.00 0.46 0.00 0.00 0.00 1995 AEF Karibotel 0.19 0.00 0.00 0.00 0.19 0.00 0.00 0.00 BFV-SocGen 6.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 BNI 0.00 2.09 0.00 0.00 0.00 2.09 0.00 0.00 200s BNI 6.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 BOA-M 0.00 0.82 0.72 0.00 0.00 0.82 0.72 0.00 2004 BP Madagascar 0.00 3.51 0.00 0.00 0.00 0.00 0.00 0.00 CREDIT LYONNAISl 6.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total portfolio: 19.76 6.42 0.72 0.00 0.65 2.91 0.72 0.00 107 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 2001 Besalampy 0.02 0.00 0.00 0.00 2006 IDA-IFC PCG 0.01 0.00 0.00 0.00 Total pendingcommitment: 0.03 0.00 0.00 0.00 108 Annex 14: Country at a Glance MADAGASCAR: Governanceand InstitutionalDevelopmentProjectI1 Sub- POVERTY and SOCIAL Saharan Low- Madagascar Africa Income Development diamond. 2006 Population,mid-par (miilions) 8.1 770 2,403 GNIpercapita(Atiasmethod, US$) 260 642 650 1 Lifeexpectancy T GNI(Atlas method, US$ billions) 5.3 646 1562 Average annual growth, 2000.06 i Population (%j 2.7 2 4 19 Laborforce (4 3.2 2 6 2.3 GNI Gross per primary M o s t recent estlmate (latest year available, 2000-06) capita enrollment Poverty (%of populationbelownationalpavertyline) Urbanpopulation (%oftotalpopulation) 27 36 30 Lifeexpectancyat birth(pars) 58 47 59 1 Infant mortaiity(per lOOOlivebirThs) 74 96 75 Childmalnutrition (%ofchiidrenundar5) 42 30 Access to improvedwatersource Access to an improvedwatersource (%ofpopulation) 46 56 75 Literacy(%ofpopulation age rStJ 71 59 61 Gross primaryenrollment (%ofschooi-agepopuiation) 06 92 0 2 -Madagascar Male ldl 96 0 6 Lowincome group Female 06 66 96 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986 1986 2005 2006 Economic ratlos' GDP (US$ biiiions) 3.3 4.0 50 5.5 Gross capitalformation1GDP 9.0 116 22 5 24.6 Exports of goods andservicesIGDP Q.1 20.5 269 29.7 Trade Gross domestic savings1GDP 5.6 6.1 64 D.6 Gross nationalsavings1GDP 6.1 62 117 8.0 Current account balance1GDP -2.5 -5.0 -09 -8.6 InterestpaynentslGDP 15 05 06 Domestic +-t ' Capital Total debt1GDP 919 03.3 666 savings formation Total debt servicelexports 47.6 0 3 56 Present valueof debtIGDP 356 Present valueof debtlexports DO6 Indebtedness 1886-96 1996-06 2005 2006 2006-10 (averageannualgroMh) GDP 0.9 2.9 4.6 4.9 7.1 -Madagascar GDP percapita -2.0 0.0 16 2.2 5.1 Lomncomegroup Exports of goods andservices 4.6 0.6 4.4 23.6 4.6 STRUCTURE o f the ECONOMY 1986 1896 2005 2006 (%ofGDP) Growth of capital and GDP (Oh) Agnculture 36.6 27.2 26 2 27 5 100 T Industry Q.9 114 155 5 3 Manufactunng 0.6 9.7 140 0 4 50 Services 50.4 614 56 3 57 2 0 Householdfinal consumptionexpenditure 65.5 64.1 63 2 77 6 Genera gov't final consumptionexpenditure -50 6.6 9.6 64 6 6 Imports of goods andservices 15.5 26.0 410 40 9 I -GCF -GOP 1886.86 1886-06 2005 2006 (averageannualgmMh) Growth o f exports and imports ('A) Agriculture 2 0 2 0 3 0 22 50 Industry 0 7 26 2 5 2 7 25 Manufacturing 0 2 2 5 25 2 7 0 Services 10 2 9 56 7 0 -25 Household final consumptionexpenditure 0.6 2.6 2 6 -2 6 -50 Generalgov't final consumptionexpenditure -17 4.5 57 20 5 -75 Gross capitalformation 0 5 0.5 Q 6 151 Imports of goods and services 2 1 7.4 0 0 39 Note 2006data arepreliminaryestimates This tablewas producedfrom the Development Economics LDB database 'Thediamonds showfourkeyindicators inthecountv/(inbo1d)comparedwth its income-groupaverage fdata aremissing,thediamondwII beincomplete 109 Madagascar PRICES and GOVERNMENT FINANCE 1986 1996 2005 2006 Domestic prices (%change) Consumer pnces 14.5 19.6 8.5 x)6 Implicit GDP deflator 14.2 V.6 8.4 113 Government finance (%of GDP,includes currenf grants) Current revenue Q.4 a.1 117 P O Current budget balance 6.9 4.4 0.7 0 6 Overall surpiusldeficit 14 -114 -9.6 -9 4 -GDPdefiator -CPi TRADE jOrOl 1986 1996 2005 2006 (US$ millions) Export and Import levels (US$ mill.) Totaiexpolts (fob) 321 512 857 975 Coffee 25 63 32 41 Vanilla 46 20 48 57 1,500 Manufactures 51 3 8 696 728 Total imports (cif) 356 758 1652 1684 1,000 Food 52 60 Q l 91 Fuel and energy 56 TI6 287 377 5W Capital goods 94 8 4 367 225 0 Erport priceindex(2000=WO) a 3 89 a 4 17 W 01 02 03 04 05 08 Import priceindex(2000=WO) 76 111 141 8 1 BExports ~~lmports Terms of trade (2000-WO) Q5 80 74 73 BALANCE o f PAYMENTS 1986 1996 2005 2006 (US$ millions) Current account balance to GDP (%) Erports of goods andservices 396 796 1,356 1639 imports of goods and services 490 998 2,067 2.256 Resource balance -95 -202 -711 -6ff Net income -739 -156 -76 -60 Net current transfers 152 159 242 214 Current account balance -81 -201 -546 -464 Financing items (net) 147 335 549 5 6 Changes innet reserves -66 .a4 1 -32 Memo: Reserves includinggold (US%millions) 41 240 498 532 Conversion rate (DEC, local/US$) '35.3 8P.3 2,003.0 2.142 3 EXTERNAL DEBT and RESOURCE FLOWS 1986 1996 2005 2006 (US%millions) ICompositlon o f 2005 debt (US$ mlll.) Total debt outstandingand disbursed 2,994 4,P7 3,465 IBRD 31 7 0 0 IDA 422 1.147 2,298 636 Total debt service 211 83 78 IBRD 3 0 0 IDA 5 n5 29 28 Compositionofnet resource flows Official grants 68 202 760 Officialcreditors E4 98 2P Pnvate creditors -47 -5 -1 Foreign direct investment (net inflows) 14 a 29 Portfolio equity(net inflows) 0 0 0 World Bank program Commitments a 3 60 250 15 Disbursements 95 78 22i Q9 A E. Biiaterd B IDA -- IBRD D .Oths mltiiatad F. Private Pnncipalrepayments 2 Q li 6 C-IMF G- Short-1st Net flows 92 65 209 P3 Interest payments 6 9 l? P Net transfers 67 55 192 111 Note:This tabiewas producedfrom the Development Economics LDB database. 9/26/07 110 MAP SECTION IBRD 33439 45°E 50°E Antsiranana MADAGASCAR Mayotte (France) Ambilobe Ambilobe Vohimarina Ambanja ANTSIRANANAANTSIRANANA MaromokotroMaromokotro e l (2,876 m) (2,876 m) MassifMassif Sambava n n Tsaratanana saratanana h a Bealanana Bealanana 15°S C Antsohihy Andapa Andapa Antalaha 15°S q u e Sofia Befandriana Befandriana Maroantsetra b i Mahajanga Mandritsara Mandritsara m Mampikony Mampikony o v Mananara o z a Soalala MahajambaBemarivo a M g Besalampy Bongol a v a M A H A J A N G A n A Maevatanana Maevatanana of Betsiboka Andilamena Andilamena f Soanierana-Ivongo o Cliff LakeLake A Manambaho Kandreho Kandreho Fenoarivo-Atsinanana Andriamena Andriamena AlaotraAlaotra A C Maintirano Mahavavy SIN liff Vohidiala hidiala Ankazobe Ankazobe M A Toamasina Ambaravaranala Ambaravaranala ANTANANARIVOANTANANARIVO Antsalova ANTANANARIVOANTANANARIVO TO Moramanga Moramanga I N D I A N Soavinandriana Soavinandriana Tsiafajovona siafajovona (2,642 m) (2,642 m) Vatomandry Miandrivazo Miandrivazo a O C E A N Belo Tsiribihina Antanifotsy Antanifotsy Tsiribihina Mangoro Mahanoro 20°S AnkaratAntsirabe Antsirabe 20°S Morondava Malaimbandy Malaimbandy Mania Ambatofinan- Ambatofinan- drahana drahana Ambositra Ambositra Varika Mandabe Mandabe Ambohimahasoa Ambohimahasoa Manja Manja Fianarantsoa Fianarantsoa Mananjary 0 40 80 120 160 200 Kilometers Beroroha Beroroha Morombe Mangoky F I A N A R A N T S O A 0 40 80 120 Miles Manakara Ankazoabo Ankazoabo Ihosy Ihosy Pic Boby Pic Boby (2,658 m) (2,658 m) 50°E T O L I A R A Farafangana Toliara Fiherechana Sakaraha Sakaraha Mananara MADAGASCAR Betroka Betroka Onilahy SELECTED CITIES AND TOWNS Betioky Betioky Midongy- Midongy- Atsimo Atsimo PROVINCE (FARITANY) CAPITALS Tsivory ivor NATIONAL CAPITAL Berakete Berakete This map was produced by RIVERS the Map Design Unit of The World Bank. The boundaries, colors, denominations and Ampanihy Ampanihy Mandrave MAIN ROADS any other information shown PlateAmboasary au on this map do not imply, on Amboasar RAILROADS the part of The World Bank randra Androy Tolanaro 25°S Group, any judgment on the Androka Ambovombe Ambovombe PROVINCE (FARITANY) BOUNDARIES legal status of any territory, MenaBeloha Beloha or any endorsement or a c c e p t a n c e o f s u c h INTERNATIONAL BOUNDARIES boundaries. 45°E NOVEMBER 2004